Posts Tagged ‘TARP’

The Importance of Differing Aptitudes:

Monday, March 23rd, 2009

by Brien Jackson

Examining his emotional response to the AIG bonus issue, Ezra writes:

That we even need a new raft of compensation regulations strains the boundaries of credulity. It makes you question the values of your countrymen. They were the principle beneficiaries of a decade-long bubble that they inflated. These Ivy League bundles of privilege were given every possible advantage and then took yet more than that. They took the advantages of high school seniors applying to college this year or entering the workforce next year. They took the advantages of seniors who had saved for retirement and parents who had invested to build their own business. And now they’re refusing to help defuse the bomb at the center of our economy unless we pay them retention bonuses. Worse, they’re threatening to flee the scene of the crime and make money off the carnage. That, it’s been argued, is why we need to keep paying meeting their demands: Because we need them working for us rather than against us. It’s chutzpah as the Yiddish define it: A child who kills his parents and then begs for lenience because he’s a pitiable orphan. It’s shameful.

There’s nothing I disagree with in that, and I imagine there’s not much of a difference in the way Ezra and I feel about the matter. In short, the bonuses are outrageous, should never have happened, should now be recouped as fully as possible, and are proof positive that the titans of the financial industry simply don’t live in this world. That said, it’s also not really a reason to crater the whole thing and, by extension, the “real economy” either.

But aside from that, I’m not sure it’s mere chutzpah in this respect, so much as the sentiment that we need these same people to fix things for us now is just inaccurate. Yglesias has been on this point for a week or so; the skill set and moral code that brought these people to where they were/are is decidedly not the skill set and moral code you need to get these institutions, and this economy, out of their present code. Having an executive class that wakes up wondering how they can make the most money possible every day might have its advantages in normal economic times (especially if you have a more sensible compensation regime that ties executive compensation more closely to the long term health of their firms), but these are not normal times, to say the least, and now “how can I make the most money” becomes “how can I pocket the most taxpayer money possible.” And beyond the moral bankruptcy of that attitude, I’m not really sure how it could dig the financial system out of a broad solvency crisis that can’t really be fixed with accounting gimmicks and cost deferring. Instead, it seems to me you really do have to wipe the current management groups out in favor of less ambitious, competent technocrats who are going to wake up everyday wondering how they can shore up both their firm and the larger economy, and be happy to take a limited, albeit well above average, salary to do so.

Disagreeing with Krugman

Monday, March 23rd, 2009

by Brien Jackson

One thing that tends to create problems for me in sorting through issues outside of my realms of expertise is my healthier-than-most respect for the expertise of others. It’s nice when there’s a consensus, at least amongst ideological brethren, on these matters, but when peole like Paul Krugman and Brad Delong are disagreeing on something, what am I to do?

Well, for starters, boil down the disagreement to matters more on my footing, if possible. And conveniently enough, this seems to be where most of the disagreement on the Geithner bank plan is. Delong thinks the assumptions policy makers are making are probably somewhat sound, and the plan they’ve developed fairly well constructed to address the problem as they see it. Krugman, on the other hand, thinks that they’ve misconstrued the problem, so any plan made on those assumptions must be flawed. But as far as I can tell, he thus far hasn’t contended that the plan is a bad one if the assumptions are accurate, which signals to me that the difference of opinion centers on these assumptions where, alas, you’ll have to find your own way, absent making silly judgments about which experts are better than others forever and always (as I think a lot of progressive bloggers have a tendancy to do with Krugman).

What’s more, Krugman seems to be basing a lot of his analysis on his estimation of the political variable in question. And, to put it as gently as I can, it’s important to remember that political calculations are certainly not Paul Krugman’s area of expertise. Indeed, for as good as he is with economics, he tends to be eqaully bad in matters of politics. His column today, for example, is mostly based around the fear that we won’t have the political will to undertake a different course of action should the Geithner plan fail, a fear that I simply don’t see any merit to. As A.L. explains:

I wouldn’t for a second presume to take issue with Krugman’s economic analysis (I’m just a lawyer), but to the extent his opinion is based on his assessment of the current political climate, I think he’s probably wrong. Saving the financial system isn’t like enacting health care reform. With something like health care, you may only get one shot. If the public sours on your idea, they have the status quo to fall back on and the odds are that nothing will get passed. But if the Geithner plan doesn’t work, the financial system is still going to need rescuing and nobody is going to be content to do nothing. Obama would likely pay a price politically, but everyone would still be clamoring for him to do whatever it takes to save the economy. And nationalization would be the obvious next option.

I think this is mostly correct and, from a political standpoint, nationalization is a much trickier proposition than from a policy standpoint. It will certainly help that if it is seen as a true measure of last resort, and if the necessary scale is as small as possible. So, with that in mind, I’d say the best case scenario for the Geithner scenario is that it shores up some less troubled institutions, leaving them in decent shape going forward, and as such weeds out the truly bad banks that will subsequently need to be nationalized. This would both minimize the investment necessary for nationalization and demonstrate that nationalizing is truly a measure of last resort, with no other options left on the table.

The Geithner Plan

Monday, March 23rd, 2009

by Brien Jackson

I’ve taken some time in getting around to writing about this because, at the risk of losing my blogger cred, I’m just not an expert on matters of finance. Shocking, I know. But having had some time to look over the plan and read various reactions to it, I think I’ve got a good enough sense of my thinking on the topic to blog about it.

First of all, I should reiterate that, all else being equal, I think some version of the Swedish plan would probably be the most effective method for dealing with our bad banks. That said, I’m not sure all else is, in fact, equal. For one, this plan would require a massive committment of resources up front and, ultimately, would leave the government holding onto an awful lot of debt and toxic assets for the foreseeable future. One issue I have with this plan, at the moment, is that I feel like a lot of its most ardent backers are really glossing over how much money it really will cost in the long run, and, in some cases, trying to give the impression that it will either be cost neutral in the long run, or even be profitable for the government over time. Secondly, as easily mockable as it may be, the United States really isn’t Sweden. Aside from having a populace that is generally more skeptical of any form of government spending, and particularly massive government intervention in the market, we’re also a much bigger country with a markedly larger economy and more, and bigger, banks, meaning that one would imagine it would be more costly to implement the Swedish plan here than in Sweden.

Secondly, on the underlying assumption of the Geithner plan, I think I come down more in the DeLong camp, namely, it seems to make a lot of intuitive sense that, if we realize that assets can be substantially overvalued in bubble period, it certainly makes sense that they can be undervalued in periods of extreme risk aversion. Of course, firms are highly averse for a reason, namely that not all of the assets are undervalued and some of them are, in fact, toxic. And while I think I tend to come down on what seems to be the consensus opinion that the largest flaw with the Geithner plan is that the government’s underwriting of potential losses on toxic assets will lead firms to overbid on assets, I’m not sure it’s as big of a problem as many make it out to be. To wit, I think that the firms in question would like to make some money, and as such will probably not throw out a lot of money over what they reason the asset’s value likely is. The idea that they will seems to be based upon the notion that, knowing the government is subsidizing any loss, banks will buy up the assets at any price just because. I take a rather more dim view, and imagine that banks won’t want to put that much effort into such a longshot prospect of making money. And, via Yglesias, Mark Thoma has a much more relateable analogy for the question:

Imagine a car lot that has 100 cars on it. However, some of these cars have problems. Half of them will have engine troubles that total the cars – the engines blow up and the cars are then worthless – and this will happen just after purchase. The other half are perfectly fine. Unfortunately, there is no way to tell prior to purchase which type of car you will get no matter how hard you try. Thus, half of the assets on the car dealer’s “balance sheet” – the cars on its lot – are toxic, and lack of transparency makes it impossible to tell which ones are bad prior to purchase.

If all the cars were in perfect shape, they would sell for $20,000 each. Thus, there are (50)*($20,000) = $1,000,000 in assets on the books according to one way of doing the accounting, but that doesn’t necessarily represent the true value of the cars on the lot.

The town where this dealership is located relies upon this business for jobs, it is essential, but, unfortunately, business has fallen off to nothing. Nobody is willing to risk losing $20,000 by purchasing a car that might die just after purchase, so the price has fallen. The expected value of a car is $10,000, but it’s an all or nothing proposition, the car runs or it dies, and since people are risk averse nobody is wiling to pay the $10,000 expected value. In fact, the highest price they are willing to pay, $6,000, is lower than the minimum price the dealer is willing to accept.

This seems like a pretty good description of the problem as I understand it, and given this situation I think a lot of the same economists advocating for the Swedish Plan would find the best course of action to be government guarantees against loss on the “toxic cars.” On the other hand, Krugman’s contention isn’t that this is a bad plan so much as the underlying assumption is wrong. In other words, he thinks that a lot more than half of the cars on the lot are toxic. But, while I generally hate to disagree too much with Paul Krugman, I don’t see how there’s enough information to make that contention on anything other than a guess. I might be being too optimistic here, but it seems as though I’m not necessarily alone in that optimism, such as it is, either. That’s not to say I think Geithner has worked out the best plan ever, but I think it’s a reasonably sound course of actions based on its assumptions about the nature of the problem, that disagreements on the matter basically boil down not so much to critiques of the mechanics of the plan so much as differing assumptions, and that, as such, Geithner’s plan has a much higher chance of being successful than a lot of people are allowing.



The Banks

Monday, March 9th, 2009

by Brien Jackson

Strictly speaking, I favor the nationalization approach to the banking system. It’s really hard to imagine a TARP-esque program working at this point, and it seems like a large scale receivership for teetering institutions is, if not the best, the least bad idea at this point. But, that said, I think many of the ideas proponents, most notably Krugman, are being a bit too sanguine about the downside, and the political difficulty, of such a plan. Kevin Drum sums up many of my worries:

Aside from the nitpicky point that the United States actually has one of the least oligopolistic banking sectors in the developed world, what’s being argued here?  That we should let the existing banks fail?  That we should temporarily nationalize them?  Which ones?  And if we do, how should we treat all their creditors and counterparties?  That’s the big question (not whether shareholders should get wiped out — of course they should, but they’re mostly wiped out already), and it doesn’t go away just because we nationalize TitanoBank instead of shoveling cash down its gaping maw in return for preferred shares.  In fact, it makes the question even more salient, since in a post-nationalization world Uncle Sam would be legally on the hook for all those claims.

As for the cost of all this, we might as well suck it up.  We’re way beyond the point of thinking we’ll get out of this mess without spending a trainload of taxpayer dough one way or another.  This debacle is going to cost us hundreds of billions of dollars no matter what we do.

I certainly respect guys like Atrios and Krugman as economists, but I think it’s important to remember that economists aren’t necessarily extremely well versed in the intracacies of the American financial system. At this point, I’m not really sure anyone is. Because of that, I think it’s worth reading everything with a bit of skepticism. And at this point, there’s really no way around the simple fact that whatever we do is going to suck. It’s going to be difficult, protracted, and it’s going to cost a lot of money. It’s not really a matter of Tim Geithner or Barack Obama simply declaring that we’re going to take over the banks and everything coming up roses. And the real downside to this scenario is that the government still winds up holding the bag on all of the toxic assets and other parts of the banks we can’t sell off, or, in other words, we’ll be nationalizing all of their debt.

Still, it does seem to be the least bad of all of the options on the table, and it seems important that the administration find a way to do it as soon as possible.

Leaving a Mark

Thursday, January 22nd, 2009

David Sirota projects mightily, writing about the House vote to block the payment of the remaining TARP money:

What’s great about this vote is its juxtaposition of true bipartisanship with Beltway buypartisanship. Indeed, as the roll call shows, the House vote for the resolution of disapproval forged a coalition of about a third of the Democratic caucus, and most of the Republican conference – all voting for a progressive cause: namely, preventing Wall Street from ripping off the American taxpayer. Though we are led by the media to believe that “centrism” means corporatism, this vote is the kind of populist bipartisan coalition that reflects the real centrism in the country at large – a centrism where the “center” is decidedly against letting big corporations raid the federal treasury.

But Nate Silver actually read the roll call:

 Occasionally, you’ll come across an issue that splits the political spectrum literally down the middle, with the most progressive members and the most conservative members of the House uniting on one direction on a measure, and moderates in both parties taking the other stance. Is the bailout one such issue?

No, it isn’t. On the contrary, this was a fairly conventional vote in which the more a Congressman tends to define themselves as liberal or progressive, the more likely they were to vote to extend the bailout. The Congressional Progressive Caucus voted in favor of continuing the bailout by a 49-15 margin; by contrast, the more conservative Blue Dog Democratic Caucus voted 27-17 to block the bailout. And nearly every Republican voted against the bailout.

So, for the record, David Sirota is on the side of the Blue Dogs and the GOP, opposed to the overwhelming majority of the Progressive Caucus.

David Sirota Needs A Drink

Saturday, January 17th, 2009

Admitting a bias against populism in general, I still have to address a certain strain of nonsense coming from David Sirota on the latest TARP vote. I’m sort of hesitant to do this, because I doubt it will really do much, but if no one else says it then Sirota’s view will tae hold for lack of a challenge. So consider this another installment of “Know Your Congress.”

Sirota’s problem this time is the handful of new Democratic Senators who voted to release the 2nd $350 billion in TARP money despite opposing the bailout money originally, which he views as some sort of proof that everyone wants to fake populism until they get to Washington until they jump on the “Let’s Screw David Sirota” bandwagon. Or something like that. Here’s Sirota in his own words:

The Senate today voted to give Wall Street another $350 billion today. The vote tells us a lot about the new Senate (you can see the full tally here – and remember, on this vote, a “yes” vote was a vote against releasing the $350 billion bailout tranche).

For instance, both Tom and Mark Udall (D-CO), who voted against the bailout in the House when running for the Senate, switched their votes to support the bailout. You may recall that Mark Udall said he was against the bailout not because he didn’t trust George Bush, but specifically because he was against voting for a bill that had no oversight measures. And yet now he’s voting for the same bailout that includes no new oversight measures. This suggests that the Udalls (like lots of political aristocracy) have absolutely no principles – that, in fact, they are the worst stereotype of politicians: The kind of people who go populist when facing election, and then goes corporatist when he’s comfortably insulated in Washington.

Now there’s not all that much here other than the framing of the outrage-du-jour, but it’s sort of interesting that Sirota chooses to lead off the column with a broad, unprovable, claim that “aristocracies” have no principle. I sure hope I don’t see Sirota approving of ay healthcare plans that look like anything Ted Kennedy or John Dingell have been pushing for the better part of half a century or anything. But the real meat of this comes when Sirota gets around to Jeff Merkley, whom Sirota was a particularly big backer off in the election:

Same thing for Jeff Merkley – he issued a very strong statement against the bailout as a candidate for Senate (again, not because he didn’t trust Bush, but because he said he was conceptually against giving away money to Wall Street), and then voted for the bailout today. Again, this suggests Merkley – who I was previously convinced was a principled working-class populist – is starting his Senate career epitomizing the worst kinds of images people have of politicians – those who sound like they’re for “the folks” at election time, and then who sell out “the folks” once in Washington.

So what we’ve learned is that lots of our new senators – even those who campaigned as populists – are already under the spell of “the most exclusive club in the world.” And frankly, I don’t care what their public explanations are. These are people who made airtight declarations against the bailout on a conceptual level – and then walked away from those declarations when it came time to vote. We’ve learned (once again) that if there’s not constant pressure on lawmakers to respect the most basic campaign declarations they made, they will sell us out.

Actually what we’ve “learned” (really we already knew it), is that David Sirota doesn’t understand parliamentary procedures whatsoever, nor does he understand deal making or leveraging. Apparently he thinks that you jst show up and cast a vote, majority wins. Or “Washington” wins, whatever the hell that means. But the more interesting development comes later, after Sirota talks to Merkely:

Merkley explained that because the bailout was legislatively engineered to let the president – sans a two-thirds veto override vote in Congress – effectively veto his way to whatever he wants,* he decided to back the bill and simultaneously exact a commitment out of the administration. Merkley said he’s been in constant contact with top administration officials and that they have committed to him – both verbally and in writing – that they will devote a substantial portion of the new bailout money to helping homeowners.

I don’t agree with Merkley’s rationale – I believe he told voters he was against the bailout, and then proceeded to vote for that very same bailout, and I think in doing that, he does what I said in my original post: he starts his Senate career looking like he “epitomizes the worst kinds of images people have of politicians – those who sound like they’re for “the folks” at election time, and then who sell out “the folks” once in Washington.” He also officially goes on record supporting very bad economic policy.

Catch that? Merkley outlined a very logical rationale for his vote, that Obama would (and has promised to) veto a bill blocking the money, at which point he would…get the money. But that would be more politically costly than just getting the money, so Merkley, seeing an opening, opposed the effort to block the money in exchange for a promise on foreclosure relief, a good policy in its own right, which he then went public with. That’s just good politics anyway you cut it. And while I actually agree that a bill would be preferrable regarding foreclosures, what Merkley did is better than nothing, which is what Sirota is arguing for. Because let’s face it, by any observable measure what Sirota is demanding Democrats do amounts to nothing. They vote for the bill, the bill gets vetoed, and Obama gets the TARP money, while Congressional liberals get nothing back from Obama. It just doesn’t make sense, but I suppose it makes David Sirota happy. But making David Sirota happy doesn’t help being losing their homes, now does it?

This, in a nutshell, is why the progressive movement isn’t taken more seriously.