Krugman on Bailout: No Deal

Paul Krugman says "No Deal" on the $700 billion bailout.

Not unless Treasury explains, very clearly, why this is supposed to work, other than through having taxpayers pay premium prices for lousy assets.

The Treasury Department's fact sheet on the bailout is here and as I mentioned in an earlier post, the text of the legislation is here. I'm an economically challenged type who has to struggle to understand complex financial things that don't involve crime. Marcy at Empty Wheel explains it in a way I can understand:


Here's all you need to know. Hank Paulson is asking for $700,000,000,000. That's $2,333 from every man, woman, and child in the United States.

In exchange for that money, Paulson is unwilling to accept any demands to make markets more transparent, limit executive compensation, or assist homeowners fighting foreclosure. The sole purpose of that $700,000,000,000 is to bail out Wall Street and only Wall Street, but not to fix it, or our larger economy. He is asking to be absolutely unbound by any law when he spends that money.

Atrios also points out this language in the deal:

"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

According to Bush, we have to do something and to prevent delays from congressional bickering, he wants no other strings attached to the money. Will this be like the Patriot Act, where Congress acts in haste and repents at leisure?

I don't look at it like I have to write a check for $2,333. Rather, it's that $2,333 of the money I already give the Government will go to this instead of something else.

My question is: Is this the right plan for right now? Or is it just putting a piece of tape over a hole in a tire to keep it from going totally flat -- when you remove the tape, the tire is still going to go flat. What would a better solution be? And do we need two solutions, one for right now and one for down the road, or should we wait to implement any fix until we get the single right solution?

Personally, I care less about assessing blame and going after corporate greedsters than I do making sure people don't go belly up and lose their retirement or life savings. What's the best way to accomplish that?

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    Your last paragraph is the key (5.00 / 3) (#1)
    by Cream City on Sat Sep 20, 2008 at 07:23:03 PM EST
    as I just read another blogger that explained well that the problem in this country's eoonomy built on consumption is that we, the consumers, have slowed down our consumption.  Because we're pretty smart and know that we need to focus on paying for food and shelter first -- and yes, our savings and our retirements funds for food and shelter in the future.  Maslow's hierarchy of needs need not be explained to us; it's just a fancy name for what we know and do daily.  

    So the problem is that Paulsen's proposal does not help we-the-people, the consumers upon whom our economy counts most.  The proposal bails out the rich, but at cost to us -- so we will spend even less.  

    And so, the big problem in our economy, consumer lack of confidence, will not be solved by this.  Now, from what I've recently read and reviewed about the Depression, it is of use to keep some  banks able to keep loaning to businesses to keep us employed.  So there is some need to assist the financial system.  But the more I read about Paulsen's proposal, the more I see it as a band-aid that still does not get to other basic problems -- and as those problems become gaping wounds, the band-aid will need another band-aid and another band-aid. . . .

    Paulson seems intent on preserving the status quo, (5.00 / 4) (#4)
    by clio on Sat Sep 20, 2008 at 07:59:33 PM EST
    not addressing underlying problems or even truly assessing exactly what they are.

    Particularly problematic is the Republicans' warning against any tinkering with Treasury's  no-strings-attached give away to Wall Street.  If the Republicans have time to play politics as usual the Congress has time to review  options.

    Also as one of the financial bloggers asked (apologies for not recalling which one), "What changed so drastically between Monday and Friday that this unprecedented robbery of the US Treasury  requires immediate and unreviewed approval?"  If there really is such an emergency then the people who are going to pay the bill deserve to know what it is.

    Finally, this wording should be a deal-breaker for any one who pretends to fiduciary responsibility to American taxpayers:

    Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

    This is the unitary executive with Henry Paulson instead of George Bush as monarch.  Were there doubt about the false urgency of this that raw power grab dispels them.*
    We have time to  think about this.

    *  Bet Addington and Cheney were involved in the drafting of this monstrosity.

    Just Give the Fed the $$$... (5.00 / 1) (#7)
    by santarita on Sat Sep 20, 2008 at 08:07:43 PM EST
    It knows what it's doing.  

     and don't ask any questions.  At least that's how I interpret the proposed law.  I do like its simplicity.  It's so simple that it makes me think that the Fed doesn't have more than a vague idea of how to proceed.  

    I'm with Krugman on this.  

    I don't know quite how to do it but I would require entities that get bailouts under this plan to build capital and eliminate dividends for a period of time, limit exec compensation for a period of time and provide whatever assistance the Fed needs in liquidating portfolios without cost to the Fed.  In essence a limited receivership.  I'd propose emergency bankruptcy legislation to provide qualified borrowers the right to mortgage loan interest and/or principal reduction along the lines of old Chapter 12.  

    That's right (5.00 / 1) (#11)
    by WS on Sat Sep 20, 2008 at 08:19:57 PM EST
    I forgot about the bankruptcy bill.  Rewrite it so that horrid law ceases to exist and we go back to the way it was before.  

    I don't understand any of this. (5.00 / 1) (#26)
    by kenosharick on Sat Sep 20, 2008 at 10:51:30 PM EST
    I hope somebody (like Chris Dodd and Barney FranK) know what the hell they are doing.

    We've been punked! (5.00 / 2) (#27)
    by ding7777 on Sat Sep 20, 2008 at 10:56:43 PM EST
    Remember when Bush failed to deliver Social Security "personal accounts" to the  financial institutions?  

    Bush and his financial institutions buddies just changed the name of the game and won via a "bailout" instead of "personal accounts".

    Heh (none / 0) (#31)
    by lambert on Sat Sep 20, 2008 at 11:37:17 PM EST
    Sounds about right to me.

    We're well and truly f'd, (5.00 / 2) (#33)
    by sarcastic unnamed one on Sun Sep 21, 2008 at 12:01:33 AM EST
    whether it be Bush or McCain or Obama.


    I want to vomit.

    i understand it, unfortunately. (5.00 / 1) (#34)
    by cpinva on Sun Sep 21, 2008 at 06:29:39 AM EST
    what paulson is proposing is that we, the people, purchase 700 billion dollars worth of non-performing loans (a non-performing loan is one on which payments aren't being made, but hasn't been declared uncollectable, yet), collateralized by assets worth far (far!) less than the face value of the loans.

    ordinarily, every lending institution has some of these loans, it's the nature of the business. foreclosure is the last gasp of real estate backed lending (banks aren't in the business of real estate), but may be the only way to recover the balance due, assuming the underlying asset value is close to or greater than the loan balance.

    in ordinary times, this will probably be true, or at least reasonably close. these are not ordinary times. thanks to shady loans by brokers, and incredibly lax oversight, by all the internal and external groups charged with making sure these loans have a reasonable probability of being repaid per the terms, and the plummeting housing market, the assets underlying these loans were either inflated in their value to begin with, or their value has dropped like a stone.

    in essence, we, the people, will be stuck with loans that will never be repaid, and real property that will eventually be worth nearly nothing, as the improvements deteriorate from lack of maintenance and occupation.

    this really amounts to a 700 billion dollar bonanza, for all the overpaid ceo's who profited in the first place.

    it's no wonder they want no review, by anyone, of any decisions made, relative to this. i'd want to hide it too!

    The language does seem heavy handed. (none / 0) (#2)
    by ChiTownDenny on Sat Sep 20, 2008 at 07:40:41 PM EST
    On the other hand, is there time to satisfy world markets to choose between the rock and the hard place?

    Is it a question of "Buy this bailout, or (5.00 / 3) (#3)
    by magnetics on Sat Sep 20, 2008 at 07:55:37 PM EST
    we shoot this dog?"

    The great American consuming public is supposed to step up to the plate to save the global financial system and prevent a worldwide depression?

    I would say, make a package deal with a marginal tax rate of 60% on all income over $10,000,000 per year -- with enough teeth so that compensation in the form of stock option packages does not escape.  Alright alright, someone who understands something about tax law (not me) figure this out -- but my point is, let the ultra-rich pay their share -- they are the ones who have benefited these last 30 or so years.


    magnetics, (5.00 / 2) (#5)
    by clio on Sat Sep 20, 2008 at 08:05:33 PM EST
    Here are my suggestions, which I hve posted elsewhere:

    1. Immediate end to the Bush tax cuts for the wealthy. Not next year. NOW!

    2. Immediate repeal of the loophole that allows some Wall Streeters to pay capital gains tax rates on ordinary income. And make it retroactive to the first year the damn loophole existed.

    3. Immediate imposition of Eisenhower era marginal tax rates. Retroactive to last year. Eisenhower was a Republican president. Let Wall Street Republicans pay Republican tax rates!

    4. Tax all capital gains above say $100,000/year as ordinary income.

    5. Bring back the estate tax. And make it 98% above 10 million dollars. If the super-wealthy want to control how their money is spent they can give it away while they are alive to see the good it does.

    6. Impose a trading tax on stock and bond trades.

    Ike's marginal tax rate was 91%.  Not quite sure at what income level it kicked in.

    AIG is paying 11% to stay alive. (none / 0) (#9)
    by ChiTownDenny on Sat Sep 20, 2008 at 08:17:28 PM EST
    I'll be curious to see how he negotiates with Citi, BofA, Chase,....

    He meaning Paulson; sorry. (none / 0) (#10)
    by ChiTownDenny on Sat Sep 20, 2008 at 08:19:01 PM EST
    I like Bernie Sanders suggestion (5.00 / 2) (#8)
    by WS on Sat Sep 20, 2008 at 08:17:13 PM EST
    of a tax surcharge on the rich to pay for this bailout.  The easiest would be to add another marginal tax rate perhaps to people making over a half million to a million dollars a year to maybe 42-45%?  

    Capital Gains should go up too.  Clinton era levels were at 20% I think so maybe 22-28% capital gains would be sufficient.  


    That puppy is YOU, and it's 'Sign now or die'. (5.00 / 1) (#36)
    by RonK Seattle on Sun Sep 21, 2008 at 11:17:54 AM EST
    As presented, it's outright extortion -- a massive raid on the working public by the investor class, with a big gun to our heads: No negotiations, no discussions, no arguments from equity or justice, no underlying reforms, no IOUs, just "take it or leave it ... and if you leave it you lose your job NOW, ATM's shut down NOW, trucks stop bringing groceries to market NOW, gas stations close NOW - with no way to restart anything".

    Paulson this morning showed little or no interest in bringing the public on board.

    He may not have to ... but the consequences (up to and including major domestic terrorist movements) are grizzly.

    With respect to Jeralyn's question, the money doesn't come from new taxes, or from spending trade-offs (there's nothing that big to swap). We borrow it from China et al, aggravating the underlying problem.

    In the endgame, most of the Investor Class can reflag themselves to selected nationalities ... instantly flipping from national debtors to national creditors, and leaving Joe Sixpack holding the bag.


    PS: Friday was National 'Talk Like a Pirate' Day (none / 0) (#37)
    by RonK Seattle on Sun Sep 21, 2008 at 11:25:07 AM EST
    ... and major market averages returned to mid-summer levels, as if nothing had happened.

    The Investor Class is you and me! (none / 0) (#41)
    by ChiTownDenny on Sun Sep 21, 2008 at 03:53:06 PM EST
    Unless, of course, you don't have an IRA, 401K, or Pension.  Then, screw the "b&st&rds".  For those of us who are invested, we'll be screwed without governmental intervention.   And then those who are not invested will be screwed when jobs disappear, interests are sky high (not that they wont increase), and that 10 year old car better last another 10 years.  
    There is a Wall St. and a Main St. quotient.  All of us need to see the big picture.

    Garden-variety BS deserving no further response (none / 0) (#42)
    by RonK Seattle on Sun Sep 21, 2008 at 09:25:30 PM EST
    The Authorization to Use Financial Force (none / 0) (#6)
    by lambert on Sat Sep 20, 2008 at 08:06:04 PM EST
    Pure Shock Doctrine.

    According to Glenn (none / 0) (#29)
    by MichaelGale on Sat Sep 20, 2008 at 11:29:56 PM EST
    Greenwald, the US Treasury will have complete control over financial markets and the treasury without any accountability. I find this hard to believe but it appears to be perceived that way.

    In re about CEO's receiving the millions in compensation, that in itself is, I think, criminal, particularly in the market of the last 8-10 years. However, my opinion about greed is not the issue.  Compensation has a greater effect in the overall scheme of things.  Read what Buffett has to say about that and I agree with him.


    Here is the wording of the law (5.00 / 1) (#30)
    by lambert on Sat Sep 20, 2008 at 11:36:13 PM EST

    Sec. 8. Review.

    Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency

    It's not a matter of perception; it's exactly how the law is written.

    Or we could do something else (none / 0) (#12)
    by cib on Sat Sep 20, 2008 at 08:39:02 PM EST

    I think he's right, despite all the progressives on this blog who will disagree. Government has no business bailing out banks, it also has no business telling banks who they must lend to. Lastly, it's pretty sure that the brought and paid fors in congress will bow to the will of their master: the Fed. Some fiscal conservatives have been griping for years about fiat currency and the unelected, massive power of the Fed. They were dismissed as kooks by both sides -Repubs bec ause they can profit under regulated markets, esp if they gain enough political control - and progressives because if progressives believe in anything it is the unlimited power of government to do good preferrably with other people's money and labor.

    Well, you are both getting what you deserve. And forget about any universal health care or any of your other dreams -we no longer have the $ to pay for it. We'll be lucky if our severely devalued currency enables us to rescue social security. One good thing about this though, is it means even McCain will find the cost of our current wars unsustainable.

    Please see (none / 0) (#16)
    by WS on Sat Sep 20, 2008 at 09:13:23 PM EST
    this as rebuttal to your libertarian fantasies.  

    I already read that (none / 0) (#17)
    by cib on Sat Sep 20, 2008 at 09:42:27 PM EST
    Yesterday. As well as quite a few rebuttals on various economic blogs.  Whilst I'm not going to say that most of this crisis is the result of the community reinvestment act, I'm going to go against Talkleft convention and refuse to to hold the ill conceived program entirely blameless, and I'll gladly use it as another example of how government fu**s over market structures.

    More to the point, you missed MY point as well as his larger one. This whole mess is the result of favored companies in a government regulated market being bailed out to save the status quo. Or at least an attempt is being made. I doubt it will suffice in the end. It's just going to weaken the currency.

    I used to be far more sanguaine about central banks. Then I got a bit of education. Now I'm not so sure anymore that even having a central bank is a good thing. But if you do have one -like all governmental power - it's gotta be tightly regulated itself.

    Forget it. You and yours, I, and mine,  and the average taxpaying American is about to take it up the rear-end. And there is nothing you or I can do about it, and none of the regulations you and the others on this board are going to propose -even if you assumed honest good statemen who wanted to pass them which I don't - can hide the fact that when government gets in bed with business both have things to lose and to protect themselves, both will gladly screw over you or me.


    You go ahead (5.00 / 1) (#19)
    by WS on Sat Sep 20, 2008 at 09:52:43 PM EST
    and build your temple of market structure.  I will leave it to smart people like Barney Frank to propose new reforms to prevent as spectacular financial fall as what we have seen.  

    Like Paul Krugman said, "there are no atheists in a fox hole and there are no libertarians in a financial crisis."  Regulation is required for a healthy economy.  History should tell you that.    


    Ha ha ha ha ha ha (none / 0) (#20)
    by cib on Sat Sep 20, 2008 at 10:02:55 PM EST
    "History" should tell me that?

    You are aware that modern economics history scarcely stretches back 300 years aren't you? Really looks like Hoover and Roosevelt's interventions did more to prolong the Depression rather than get us out of it,

    You quote a democratic hack economist like Krugman (yeah, i know he's THE hero on this site), and blab about how there are no libertarians in a financial crisis? Last I looked Lewrockwell.com was still there, and I hardly count most of the crowd on Wall-Street as "libertarian". I can return insult for insult you know.

    Smart people like Barney Frank? Choke.Right now, the smartest guy in Congress seems to be Ron Paul, he predicted this boondagle would arrive years ago. If you want to know where we are headed, I suggest you google around and look into things such as "fiat currency". Or read something besides the Daily Kos, Talkleft, the New York times and first year economics textbooks. Check out the Rothbardians for a change, or go to lewrockwell.com.

    Some nuts yes? But also some absolutely brilliant economics writers and theorists.


    Well (none / 0) (#21)
    by WS on Sat Sep 20, 2008 at 10:10:31 PM EST
    you have your biases and I have mine. The public would, of course, agree with me judging by the latest polls on regulation.  

    But you certainly don't need to be smug and condescending about it especially when you follow a wackjob like Ron Paul and call yourself enlightened.  


    A wackjob may be right from time to time (none / 0) (#22)
    by cib on Sat Sep 20, 2008 at 10:22:24 PM EST
    Hey, I'm not a total "Paulite". And I'd been introduced to Ludwig Von Mises years ago. So please don't think I'm some recent convert, or that everything I say Ron Paul said or told me to say, I disagree with the man quite a bit myself.

    But who cares if he's whacky about some things? He's right about this and is a more honest person than that "revered" Barney Frank.

    As for smug and condescending? Well, when you see people calling for more regulation when regulation is the very thing that prolonged the depression, led to the current All Powerful Fed, forced banks (via political pressue and rankings not based on ANY known economic theory)to make  SOME of the current bad loans and the fact that regulation is often "in the eye of the beholder" led the various fed agencies to look the other way when they benefited or their political sponser did, when the power to regulate this stuff seduced the current Bush administration into pushing these lousy pieces of economic crap more and more - and you see people calling for more and more bailouts and more and more intervention to play favorites in the market - well, you learn that people never learn and that the American fiscal nightmare is far from over.


    A wackjob (none / 0) (#24)
    by WS on Sat Sep 20, 2008 at 10:40:26 PM EST
    is still a wackjob, and what does it say about a person who thinks a wackjob is correct?  Too fringe maybe?

    Its very simple.  I think I'm right and you think you're right.  But it does seem peculiar that even the Bush Administration and most Republicans won't follow your advice.  Why is that?

    Meanwhile, we will attempt to win elections and institute reforms.  And hopefully you will see that a regulatory economy is not such an affront to your free market religion.    


    Can you tell me in what way you think the (none / 0) (#18)
    by tigercourse on Sat Sep 20, 2008 at 09:47:41 PM EST
    CRA forces banks to lend to certain people?

    Housing bust (none / 0) (#13)
    by nellre on Sat Sep 20, 2008 at 09:04:14 PM EST
    This was triggered when the housing boom turned into a housing bust when interest rates were raised over and over and over again.
    The root cause is loaning folks more money than they can afford to pay back, with the assumption the loan was secured by a house that would be worth more in the very near future. oops!

    In time the housing market will recover. Why is it that those institutions holding these mortgages can't hold on until then? Are these homes worthless?

    BTW wasn't it Reagan that deregulated all this?

    Deregulation (5.00 / 1) (#15)
    by dissenter on Sat Sep 20, 2008 at 09:09:52 PM EST
    Actually, it started under Carter. It was turned into a Religion by Reagan. It was embraced by Bush, Clinton and put on steroids by George Bush. This is a failure of both parties.

    Interest rates went up but many can argue they were artificially low in the first place. However, homes are over-valued and lenders made bad loans.

    Most of this debt though is junk. The Fed doesn't even know what it is. Probably some of the companies don't either.

    So, this bail out makes no sense in any way. We don't even know what we are absorbing but facts never get in the way of our esteemed Congress or executive branch.


    I think (none / 0) (#14)
    by WS on Sat Sep 20, 2008 at 09:08:53 PM EST
    these companies backed those mortgages or securities with collateral.  Because its not paying as much (or not at all) companies have to keep bringing up collateral that are scarce or that they don't have leading to the meltdown.  

    I'm still trying to get my head around this problem.  The New York Times have interesting graphs and articles that try to explain the problem to the masses.  


    Emptywheel, (5.00 / 1) (#32)
    by MichaelGale on Sat Sep 20, 2008 at 11:38:23 PM EST
    who Jeralyn linked too, has a video on the structure of the economy in re banks and the flow of money. It is very enlightening. However, it made me feel pretty dumb that I even have a car loan.

    I was a bond trader in 1987 when we had the last little crash. It seems to me that the brokerage firms did pretty good job with controlling the loses. This crisis has been building for years but apparently no one noticed. Except Krugman.


    This bill is astonishing.... (none / 0) (#23)
    by Berkshireblue on Sat Sep 20, 2008 at 10:39:03 PM EST
    we just buy all the bad debt...at what price? Whatever will allow the executives to keep their multimillion dollar salaries and bonuses. They suffer not at all and the middle class pays for it becasue they can't avail themselves of the tax loopholes that, for exemple, the executives of these companies can.

    There is no oversight by the other two branches of government. This is unbelievable-the executive branch, Bush and Cheney and their cronies get to decide how to "allocate" all that money-who does it go to? Not any of us that's for sure and NO ONE can question it. Is this a joke? Cause it's frightening, not funny.

    There are other ways to address this problem and I'm frankly not even sure that this proposal would fix the problem but even if it did it is simply not worth it.

    We the people simply should not be buying this debt or if the "people" need to pay for it it should actually primarily BE the People who benefitted from it. First, the people who have run these companies and created these insane debt vehicles. If the govenrment can spy on us they should be able to figure out who benefitted. Second the wealthiest people not the middle class. Impose a special tax to fund this rather than increasing the deficit and making our children pay for it.

    The people and corporate greedsters (none / 0) (#25)
    by Andreas on Sat Sep 20, 2008 at 10:50:50 PM EST
    It is not possible to make sure people don't go belly up and lose their retirement or life savings without going after corporate greedsters.

    There is a reason why Bush and others are against assessing blame. They are political representatives of those corporate gangsters.

    hm (none / 0) (#28)
    by connecticut yankee on Sat Sep 20, 2008 at 11:20:58 PM EST
    I really think Bush needs to come out, with some treasury guys and congressmen, and lay this all out in detail.  He owes the people a detailed accounting of the money and plan.

    Hopefully the morning shows make sense.

    Bush was quoted from his (none / 0) (#35)
    by inclusiveheart on Sun Sep 21, 2008 at 07:43:39 AM EST
    speech yesterday saying that while he didn't immeditately think that bailouts would be the right thing to do, he said, "It turns out there are inter-links in this economy" that made them imperative.  I doubt you'll get a much better explanation from a guy who just noticed the "inter links" in the economy.  Pretty scary really.  Earlier in the week while the markets were crashing the Republicans were claiming that the "fundamentals were strong" and later in the week when they noticed that maybe they weren't so strong they figured out that there are "inter links" - rolling eyes.  Harvard should revoke Bush's MBA for that comment alone.

    Hank Paulson = David Petraeus (none / 0) (#38)
    by robrecht on Sun Sep 21, 2008 at 11:54:28 AM EST

    "Henry, you're doing a heck of a job," (none / 0) (#39)
    by robrecht on Sun Sep 21, 2008 at 12:30:32 PM EST
    Also works

    No Deal is Right! (none / 0) (#40)
    by Doc Rock on Sun Sep 21, 2008 at 01:17:33 PM EST
    No $700 billion dollar blank check without major concessions from the Republicans on issues across the board--especially taxes to pay for the tax-payer losses!