Archive for September, 2008


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The frustrating thing about the executive pay discussion is that it is a complete distraction from the core issue of what we get for our money.  Without equity, we are complete suckers, as opposed to modest suckers who will recoup (through taxes and appreciation) most of what we send into the system.  Unfortunately, that seems to be a bit complicated for the former lawyers who sit on the various House and Senate committees.

With the leaks coming about the deal being done, let’s assume Obama and McCain will have their 10am photo op at the White House and then the deal will be announced.  And McCain will claim that he has been all mavericky by showing up and saying he wasn’t leaving until things were finished.  And people will believe him, because people are dumb.

And there’s even a basic explanation in the NYT, which you would think would be basic enough for Chris Dodd and Barney Frank to understand:


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Even More

As we draw even closer to the Democrats folding, some more views from across the spectrum.  Well, actually there isn’t much spectrum on this – it’s a lousy idea to bail folks out, a worse idea to do so according to this plan, and a downright moronic idea to rush into everything.


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This doesn’t even seem to have made the news:

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Phew.  Just when some Republicans were making sense, what with their objections to the Mother of All Bailouts, here comes the Republican Study Committee’s counterproposal to restore my faith and confidence that they are completely batsh!t crazy:


Few observations it is almost, but not quite, mean to point out (this is not Sarah Palin in a hypothetical press conference; they have staff and you might expect them to get this right):

You don’t pay capital gains taxes on capital losses.  Really.  That’s the whole “gains” bit.  So lowering the capital gains tax rate, while F4 on any good Republican keyboard, is unlikely to be helpful when dealing with massive losses and deleveraging.

Privatizing the GSEs and changing their mandate to “affordable housing only, not profit-making” is rather inconsistent.  Follow me here: if the goal is not to make a profit, how exactly is the private sector the best custodian?  Don’t we have a name for groups we put together to provide social services that we don’t want to worry about making money?  Rhymes with “shmovernment”…

The Humphrey-Hawkins Full Employment Act does set a target for long-term price stability; you will find that listed as the target for “inflation”.  So you might want to leave that part in if you are focused on, you know, long term price stability.

“Mark to market” accounting is used because silly free market Republicans once thought it was a bit presumptuous of a corporation to decide it knew better than the market what its securities were worth.  So rather than being something different from “true economic value”, the whole point is that the market determines the true economic value.  As opposed to Kommisar Paulson.  It’s probably only an aside to note that the problem here is hardly that banks have written down too much and impaired too much book equity – indeed, if there is something to be scared of it is that they haven’t written down nearly enough.

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Cram Down

I hear the loud noises coming from the Ben & Hank show, but can someone explain to me slowly and clearly why any money – $100bn, $700bn, $1tn, anything at all – needs to come from the taxpayer?  There is some debate about whether the government should get equity in the companies with whom it does business, or whether compensation should be capped, but isn’t there a much more obvious question: why should the debtholders of Goldman or Morgan make out whole?  If you lend money to, say, United Airlines, there is a substantial risk you will not get your money back.  For that risk, you get a higher current reward, and presumably you pay a lot of attention to what sort of security you really have (where you are in line to get repaid, whether you can attach an asset, etc).

Folks who have lent money to financial institutions did so with some risk.  For this assumption of risk, they have happily received at least the TED spread.  Now it would appear that some of the banks do not have the capacity to repay their obligations.  OK.  Why should the taxpayer step in here?

[Redacted] have argued for simply abrogating the credit default swap.  This may have some value – the US abrogated contracts with gold as a medium of exchange in the Depression, and indeed nationalized the gold inventory – but it seems far more simple to let that happen in the context of a workout for any company that fails.

$700bn could bring us awfully close to energy independence, and probably buy us significantly improved education and healthcare along the way.  My guess is that we have a much better country in five years if that is where we put our money, even at the cost of completely restructuring the financial system, than if we shovel the equivalent of the cost of the Iraq war to shore up some reckless derivatives traders.

Simple cram-down argument:

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Unfortunately, if someone can read this article he is probably too elite to matter:

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The world is really upside down when Gingrich is making sense.  Please, someone stop this (by the way, anyone else think the “bailing out foreign banks thing” was put in to get some Stamford-based pressure on Dodd – and, conveniently, funnel money to Phil Gramm):


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I’m not quite sure how the Democrats are falling for this, but it seems they will amazingly push for the Bush plan, letting the Republicans – especially McCain – have the wonderful situation of voting against it and getting all the benefits from it.  If it were to work – and, of course, it cannot, except in the modest way that shoveling a preposterous amount of money at a few banks will help those banks’ share prices – all credit would accrue to King Henry.  When its failure becomes obvious, McCain can say he was always against it, and those Washington insiders of the Bush Administration and Pelosi/Reid were in favor of it.

If the situation were reversed – if a Democratic president were asking for some massive boondoggle to enrich his friends (you have to go with the hypothetical that there could be a Democratic president, and that if there were he would use his political capital on something other than getting a hummer from the chubby girl in the office) – would the Republicans even hesitate to refuse to move?  They would filibuster until the bailout were amended to require CEOs to carry concealed automatic weapons and use those weapons to attack abortion clinics.  They would not try to take one for the team, and under no circumstances would they let themselves be photographed while the Secretary of the Treasury pleaded for it.


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The Bush Administration has specialized in telling people there isn’t enough time for a deliberative process and they should just put partisan politics aside and let the Administration get on with things.  The PATRIOT Act, the various stimulus packages, the whole invading Iraq thing.  Of course, when it’s not in Bush Administration’s interest to play along – say, when the Democratic Congress wanted to get out of Iraq – then every parliamentary trick in the book gets deployed to ensure Dubya gets his way (my favorite move there was just announcing that any Pentagon appropriations would just get spent in Iraq, so if the Congress wanted to get out it would have to shut the entire Department of Defense).

Anyway, now the people who brought us the couple-hour reaction time to 9/11, the seven-year fruitless hunt for famous terrorist on dialysis who keeps releasing tapes taunting us, the week-long inability to bring a rescue operation to the isolated area of New Orleans, the hundreds of billions of no-bid contracts in Iraq and the hundreds of millions of notes that quite literally went missing, no control over oil prices despite the fact that our military provides the security for half the world’s supply, and all of this while running deficits in good times and bad, these folks want a trillion dollars to not solve anything.

Maybe you had to be in California over the past few years, but the problem seems fairly basic: house prices have to reach a point where people can afford to buy houses.  When they reach this point, there will be a liquid market for houses, and we will know how much a house is worth, and therefore how much a mortgage for a house is worth.  Until then, we have no idea, and no amount of shoving money into the hands of people who currently own mortgages will solve our problems.  And if we were going to intervene between now and then, why not as part of a prepack where the government nationalizes any financial institution that fails?  Cram down the debt to the value at which we would have bought the paper, and claim the equity for the Feds.  Or, if that seems too nasty and requires the companies to fail, why not at least do things AIG-style and inject the money as preferred with warrants with a real coupon?

Pelosi and Reid have no backbone, so they will cave to Dubya as they have caved every time in the past.  But it won’t be because people didn’t warn them:


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