DeLong's False Choice

By Big Tent Democrat, Section Economy
Posted on Sun Mar 29, 2009 at 10:07:51 AM EST
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Brad DeLong says:

“We have to ask ourselves: Do we want to revive our economy, or do we want to punish the bankers? . . . I don’t agree that we can do both.”

Punish the bankers? How? By not bailing them out and putting their universe back together again at taxpayer expense? This is sheer sophistry from DeLong. The government could in fact do nothing - not punish the bankers, and let their banks fail. Because that is what many have - failed banks.

More . . .

But that would be bad policy in my estimation. The financial system must be restructured and put in working order. What the debate is about is how to do this. No one is arguing for "punishing the bankers." We are arguing about how to fix the financial system. To DeLong, not putting the banks back as they were, at taxpayer expense, is "punishing" them. DeLong protests that Tim Geithner is not a creature of "Wall Street." Perhaps, but DeLong sure sounds like one to me in that quote. Being familiar with DeLong's views on the matter (he favors nationalization of insolvent banks), I can not believe he actually said that. But it is clear that DeLong has decided to carry water for Geithner, and no doubt this difficult task can lead to the type of sophistry he engaged in there.

Speaking for me only

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DeLong's False Choice | 51 comments (51 topical)

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The bankers have punished themselves (5.00 / 3) (#1)
by Militarytracy on Sun Mar 29, 2009 at 10:13:46 AM EST

They have flailed themselves wide open by their own hand and Obama keeps trying to push me in front of the whip.

Do these folks understand (5.00 / 1) (#2)
by andgarden on Sun Mar 29, 2009 at 10:19:12 AM EST

that if the banks "fail," they mostly just get nationalized in a fairly messy way?

BTW, your linked post doesn't seem to be the one you're talking about.

It is the right link (none / 0) (#3)
by Big Tent Democrat on Sun Mar 29, 2009 at 10:24:17 AM EST

Scroll down to DeLong being quoted in the blockquote he provides.


: Ok, I see it now (none / 0) (#6)
by andgarden on Sun Mar 29, 2009 at 10:33:02 AM EST

Sorry.

Ya gotta love how people think... (5.00 / 1) (#7)
by kdog on Sun Mar 29, 2009 at 10:36:19 AM EST

failing to deliver blank checks to big money and big banks is considered "punishment" now, like not cutting that blank check is some kind of jail sentence for money-changers...if that is the case the average working stiff has been sentenced to the death penalty for the last 50 years.

I think the only way to revive our economy is cutting the dead weight like AIG and Citi...aka let nature take its course and let them die of their own greed and arrogance. I don't think we'll notice a difference here near the bottom...check to check, job to job, same as ever.

Makes me livid (5.00 / 3) (#9)
by Militarytracy on Sun Mar 29, 2009 at 10:42:03 AM EST

Poor bankers......we must not deny them anything they say they need even though they have been so out of control they make this family's teenager look like a monastery inhabitant.


Ya know what we need Tracy.... (5.00 / 2) (#11)
by kdog on Sun Mar 29, 2009 at 11:00:38 AM EST

an Abraham Lincoln Brigade of Robin Hood-esque cat burglars to steal something back from the bankers and titans of finance...every bailout partially offset by the loss of their silver, china, jewels, designer clothes, and fine art...the brigade can dole out the spoils in the tent cities.

I'll donate to such a brigade....anybody know any civic-minded cat burglars? Where's Danny Ocean?


: Heh (none / 0) (#12)
by Big Tent Democrat on Sun Mar 29, 2009 at 11:02:53 AM EST

But it's okay to punnish (none / 0) (#4)
by TeresaInSnow2 on Sun Mar 29, 2009 at 10:30:12 AM EST

the little guy by letting them lose their home and rot in a tent city.

Personally, I'm not saying anyone should be punnished (okay, maybe I am ;-). However, if anyone should be punnished it's the banksters. I suspect they went into all this with their eyes wide open. It's one of those cases of, were they (1) stupid; (2) evil; (3) both.

I'm doubting 1.) stupid (5.00 / 3) (#10)
by Inspector Gadget on Sun Mar 29, 2009 at 10:49:50 AM EST

I think they planned this with precision. Can't let the banks fail. And, I think they will give us a round two if we give them the chance.


: I TOTALLY AGREE! (5.00 / 1) (#20)
by GeorgiaE on Sun Mar 29, 2009 at 12:03:28 PM EST

We've been screwed..This was all a plan. Now we are told to go out, volunteer, plant a garden, be responsible and keep sinking our hard earned money
into the bailout he*l hole. Whew, I am furious...

Um (none / 0) (#5)
by TeresaInSnow2 on Sun Mar 29, 2009 at 10:30:52 AM EST

Punish, not Punnish. More coffee please.


: Hey, I knew what you meant (none / 0) (#8)
by Militarytracy on Sun Mar 29, 2009 at 10:38:06 AM EST

Geithner's Proposal For... (none / 0) (#13)
by santarita on Sun Mar 29, 2009 at 11:10:43 AM EST

regulatory reform will probably result in a financial system restructuring. One item alone, changing the capital requirements, will have significant effect. Another item, imposing a systemic risk regulator also could have that effect. But the devil is always in the details.

Congress needs to step up to the plate here and do more than just posture.

Again (none / 0) (#14)
by Big Tent Democrat on Sun Mar 29, 2009 at 11:16:55 AM EST

You beg the question. the Geithner Plan on toxic assets is what the complaint is about.


Well, I guess that I'd ... (none / 0) (#15)
by santarita on Sun Mar 29, 2009 at 11:26:53 AM EST

lose at Jeopardy because I don't understand the question I'm begging.


Then what is it you are supporting? (none / 0) (#19)
by Big Tent Democrat on Sun Mar 29, 2009 at 11:50:21 AM EST

I'd like to see ... (5.00 / 1) (#36)
by santarita on Sun Mar 29, 2009 at 03:38:05 PM EST

Geithner's plan fleshed out a little more (Congressional debate might be useful). I'd like to give it enough time to work - like maybe 6 months. During that period I'd like to see regulatory frameworks beefed up, the international community brought in for negotiations, international protocols for handling international financial transactions and dissolution of multi-national financial institutions. At the end of that period, I'd like to see banks standing on their own without TARP or other subsidies, without the need to have the Fed and Treasury acting as banks. If on the other hand some banks are not adequately capitalized, then shut 'em down and dispose of their assets and liabilities in an orderly fashion.

When the FDIC comes in on a Friday, shuts a bank down and then has another bank ready to go on Monday, it takes planning on their part. I just don't see the federal troops ready to go right now.


Which first? (none / 0) (#43)
by Big Tent Democrat on Sun Mar 29, 2009 at 03:57:51 PM EST

the "fleshing out" or the "time to work?"


I Think That There Are ... (none / 0) (#46)
by santarita on Sun Mar 29, 2009 at 04:27:27 PM EST

some important questions about the Geithner proposal -

Will the buyers of the legacy loans be under a mandate to make an effort to avoid foreclosure?

Will the exemption from executive compensation and governance requirements be absolute?

Will there be any prohibition on banks buying their own assets or other methods of gaming the system?

I'd give them 6 months to see if the plan is working from May 10th which I believe is the estimated time for the potential buyers to be identified.


: So the "will it work" (none / 0) (#49)
by Big Tent Democrat on Sun Mar 29, 2009 at 05:19:51 PM EST

goes first.
I completely disagree.

If not Geithne's plan (none / 0) (#17)
by dallas on Sun Mar 29, 2009 at 11:48:28 AM EST

then what? What would you do?


I would (5.00 / 2) (#18)
by Big Tent Democrat on Sun Mar 29, 2009 at 11:50:05 AM EST

put insolvent banks into receivership and then devise a plan for shared sacrifice - from the bank's creditors, shareholders and taxpayers.

Really have everyone put some "skin" into this game.


Ahh. Shades of Lehman. (1.00 / 1) (#24)
by ChiTownDenny on Sun Mar 29, 2009 at 12:38:45 PM EST

Everyone needs to take a deep breath.


Lehman went bankrupt fool (none / 0) (#30)
by Big Tent Democrat on Sun Mar 29, 2009 at 01:57:42 PM EST

There was no receivership for Lehamn.

My gawd some of you are as dumb as posts.


C'mon, Armando. (5.00 / 1) (#31)
by ChiTownDenny on Sun Mar 29, 2009 at 02:26:38 PM EST

Personal attacks? You're better than that. I will show you courtesy. If I disagree with you, I just won't comment. Populism vs. legislation be damned.


I do not care (none / 0) (#32)
by Big Tent Democrat on Sun Mar 29, 2009 at 02:35:14 PM EST

what you show me. Shpow me thast you knwo an effing thing about what you are talking about.

Google this genius - Indy Mac.


Sticking my neck out to establish mutual courtesy: (5.00 / 1) (#33)
by ChiTownDenny on Sun Mar 29, 2009 at 03:05:57 PM EST

The Lehman reference refers to recouping $0 to significantly less than $1 on a dollar invested in or with Lehman; stock holders, bond holders, trading partners, etc. (The possibility of the same types of losses in other "major" players was paralyzing to the system.) Losses were significant; balance sheets were affected; credit froze; the stock market dived; confidence in all financial institutions was shaken; gov't had to prop finance. So, whatever term one wants to use, allowing the failure of a "major" financial institution has significant repercussions. As is evidenced, Geitner's plan is to prevent further failures (among other objectives; i.e. legislation to restructure oversight, etc.) And, with all due respect, IndyMac does not equate to "major" status.


Indymac (none / 0) (#34)
by squeaky on Sun Mar 29, 2009 at 03:20:37 PM EST

Wasn't that the second largest bank failure in US history?


Um, so? (none / 0) (#35)
by ChiTownDenny on Sun Mar 29, 2009 at 03:26:37 PM EST

Still not Lehman. Lehman's demise shocked the world. IndyMac's demise shocked some Californians (who, unfortunately, are still suffering further shocks).


So Nothing (none / 0) (#38)
by squeaky on Sun Mar 29, 2009 at 03:40:51 PM EST

Just taking issue with your comment that indymac failure was nothing major. And with a total of around 45 banks in FDIC receivership since last year the numbers add up.


Actually (none / 0) (#40)
by Big Tent Democrat on Sun Mar 29, 2009 at 03:43:25 PM EST

So EVERYTHING. the taxpayers put in 10.7 B of "skin" in IndyMac.

It is the right way to make decisions about how to deal with these insolvent financial institutions.

throwing a trillion dollars at them is the completely wrong way. The Geithner Plan is simply bad policy.


Agree (5.00 / 1) (#44)
by squeaky on Sun Mar 29, 2009 at 04:07:45 PM EST

With receivership we have accountability and the bankers do not get to call the shots. Much better than throwing blind cash at hungry bankers assuming that they will do the right thing because they are somehow naturally ethical.


: I did not state IndyMac's failure was not major. (none / 0) (#47)
by ChiTownDenny on Sun Mar 29, 2009 at 04:28:57 PM EST

I stated IndyMac was not a "major" institution. Please note the difference.

I did not state IndyMac's failure was not major. (none / 0) (#48)
by ChiTownDenny on Sun Mar 29, 2009 at 04:32:46 PM EST

In fact, I didn't comment on the size of failure that was IndyMac's. I stated IndyMac is not a major institution. Please take note of the difference.


Stick your neck back in (none / 0) (#37)
by Big Tent Democrat on Sun Mar 29, 2009 at 03:38:28 PM EST

My point about Indy Mac and RECEIVERSHIP is that the government went in and made policy decisions on how much hair to cut and how. Cost us $10.7 billion.

Lehman went to Chapter 11. No government involvement.

Are you capable of understanding the freaking issues? To date, the answer is a clear NO.


Thank you for sparing my neck. (none / 0) (#41)
by ChiTownDenny on Sun Mar 29, 2009 at 03:46:38 PM EST

However, I still disagree with your theory about "the freaking issues".
Ah, maybe some other time....


You have not even (none / 0) (#42)
by Big Tent Democrat on Sun Mar 29, 2009 at 03:57:00 PM EST

addressed the issues once in your commenting here.


: Is this more clear: (none / 0) (#45)
by ChiTownDenny on Sun Mar 29, 2009 at 04:18:06 PM EST

There are around 23 banks that have been seized by the FDIC, ytd. None of these seizures has affected the world economy; i.e., the costs of seizure, while expensive, has only affected equity; commerce still continues with the seized banks.
However, there are "major" financial institutions whose seizure would affect commerce. (Picture an octopus, eight tentacles ahold of eight different objects.) The example of Lehman's demise (and my comments about it upthread) proves this point. The demise of a financial institution with one tentacle can be managed, evidently. The demise of a financial institution with eight tentacles, or rather operations, domestic and international, as evidenced by Lehman, cannot. The risk to attempt such a seizure would "spook" all other "major" institutions, domestic and international. Capital would dry up, more world stock market dives, ect. Let me just say, in case it isn't clear, I support the Obama/Geitner proposals. Seizure, or whatever term you choose to use, just isn't viable for our "major" financial institutions.

Well Okay (none / 0) (#21)
by dallas on Sun Mar 29, 2009 at 12:09:44 PM EST

But it seems that the shareholders have taken a pretty big hit already doesn't it? How much more do you want them to suffer? And how would you go about further devaluing the stock prices? I don't think the government can just say these stocks are now worth half as much. And how about my Daddy's pension fund that would suffer from your plan? He worked hard for 45 years and any more drops in the stock prices might wipe his pension out. How about that? Do you want to hurt the poor folks when you say you are trying to help them?

And the taxpayer is not in bad as shape as some folks like to say. We didn't just give the banks money for free ya know. We have some equity in those banks or we loaned it to them and they have to pay it back. So if we get all or most of the money back then the taxpayer expense is very small I figure. I mean if I lend my buddy $100 and he pays it all back then it cost me nothing. If he can only pay me back $80 then I didn't get hurt so bad and I was glad I was able to help him out.


I doubt the shareholders of (5.00 / 3) (#22)
by Big Tent Democrat on Sun Mar 29, 2009 at 12:16:24 PM EST

insolvent banks will come out with anything. That's the system and the shareholders put their money in with their eyes wide open.

As for the value of bank stocks for non-insolvent banks, I have no idea how that will end up, but it can not be the government's concern. Bank stocks share prices have nothing to do with the financial crisis.

The real issue is the creditors.

Now if we were talking about non-financial institutions, like auto parts manufacturers like Delphi, then Chapter 11 is where most of this would end up. But I accept that the financial system is different and we have to find a different way of handling the problem.

But the Geithner Plan is nothing more than a trillion dollar giveaway to the banks with no shared sacrifice. I find it to be a complete nonstarter.


Alright (none / 0) (#23)
by dallas on Sun Mar 29, 2009 at 12:34:38 PM EST

I don't know what insolvent banks you are talking about that the gov has not taken over yet. But who ever they are you seem perfectly willing to hurt people pensions by doing. Seems to me that is what the gov is trying to avoid with the plan you don't like. If you are willing to hurt the poor folks like you are saying then I don't think most Americans would agree with your plan. I don't. You don't go out and hurt people when you say you are trying to help them.

And you say that creditors who take less might go into Chapter 11? How does that help? When you do that the business can't get credit and ends up laying off a lot of people. I thought the idea was to put people back to work. And you mention Delphi. Didn't I just see on the news where they took retired folks health care away? You want more of that? How does that help? I don't get it. You say you want to help but yet you plan actually hurts people. That's not good.

And then you say the gov plan is a trillion dollar giveaway. But yet we have that equity and the loans to pay us back. Did you count that in?


You are both wrong and misunderstanding (5.00 / 1) (#25)
by Big Tent Democrat on Sun Mar 29, 2009 at 12:43:25 PM EST

First you write:

"I don't know what insolvent banks you are talking about that the gov has not taken over yet."

I do not know which banks are insolvent but I bet we can have a pretty good guess. Citibank is surely one.

You continue:

"But who ever they are you seem perfectly willing to hurt people pensions by doing. Seems to me that is what the gov is trying to avoid with the plan you don't like."

Um what? You think "pensions" have not already been killed by the financial meltdown? You think taking over insolvent banks (which is the NORMAL COURSE for insolvent banks in case you do not know that) will wreck pensions? you must be joking. Then you write:

"If you are willing to hurt the poor folks like you are saying then I don't think most Americans would agree with your plan."

I want to help the "poor folks" by investing the trillion dollars in ACTUAL HELP to the "poor folks" instead of remaking the world of the Masters of the Universe. By the way, here's a hint for you, most "poor folks do not have pensions. Most "poor folks" do not own stock.

Then you write:
"I don't. You don't go out and hurt people when you say you are trying to help them."

but that is PRECISELY what you are supporting. You support using a trillion dollars to help remake the world of the Masters of the Universe INSTEAD of using that trillion dollars to help the "poor folks."

If I were to take the tone you used, I would accuse you of being completely indifferent to helping the "poor folks" and only interested in helping the "Masters of the Universe." Unless of course, in your world, Jake DeSantis is one of the "poor folks."


Oh Okay (1.00 / 1) (#27)
by dallas on Sun Mar 29, 2009 at 01:42:23 PM EST

You are guessing about those banks and are not sure who is insolvent. So what's the rush?

And about those pensions. Of course I know that pensions and all stocks have been hurt. I said so already. The thing is that you want to hurt them more. Saying they are already hurting like you are doesn't make hurting them more the right thing to do. But I guess I have to give you credit for not denying you want to hurt poor folk even if I and most Americans would disagree with you.

You got it all wrong bud. I want to help the poor folk. I just don't want to kill their stocks like you do. And if bank stocks go down all stocks go down as we have already seen. I don't like that part of your plan. I don't think hurting all folks banks stocks and other stocks is a good thing.

You wrote about Chapter 11 below. I know what it is. I also know what people negotiating to take less with out Chapter 11 does. Both make the some company weaker because they have less money. Even less money is less jobs.

I also know that it isn't what the banks owe creditors that is the problem. The problem is those assets they have. Saving a few dollars from paying creditors is not going to solve that problem is it now? There just is not enough money to be saved from creditors to make them assets right.

And lowering stock values don't make those assets right either. Lowering stock values doesn't bring any money into the banks or the gov does it now? So how does that help? All it does is drop stock values for everyone. You ought to get an envelope and write down some figures like I did so you can see that your plan does not have enough money in it to fix the problem bud. Other than the creditors there is no money in your plan. And that amount doesn't even scratch the surface I figure.

If your solution is saving a few creditor dollars which won't solve the asset problem and having poor folk have their stocks go down in value then it is a plan that won't work. All it does is hurt.

I understand what you are angry about. But your plan does not fix the problem. Hopefully those investors Obama is talking about buys those assets and the banks pay off the loans some day and buys back the stocks we own and all will be good. At least their plan aims at the problem I figure.


: I stopped at "what's the rush?" (5.00 / 2) (#28)
by Big Tent Democrat on Sun Mar 29, 2009 at 01:53:31 PM EST

The rush is the Geithner Plan to throw a trillion dollars at the banking industry.

: BTW (none / 0) (#29)
by Big Tent Democrat on Sun Mar 29, 2009 at 01:56:39 PM EST

Your hatred of poor people is obvious,. Why do you hate poor people so much? I mean you obviously think poor Jake DeSantis is "poor" so that must be who you want to help.
You write "But I guess I have to give you credit for not denying you want to hurt poor folk even if I and most Americans would disagree with you. You got it all wrong bud. I want to help the poor folk. I just don't want to kill their stocks like you do."
Poor folks DO NOT HAVE stocks, bud.
Let me make something clear to you - if you continue making sh*t up about what I write and displaying your ignorance, you won't be commenting long in my threads.
There was a time when I would enjoy exposing the likes of you, but that is not allowed at this site.
Consider yourself warned. Do it again and you will be gone from my threads.

Your misunderstanding lies (5.00 / 4) (#26)
by Big Tent Democrat on Sun Mar 29, 2009 at 12:45:12 PM EST

in the concept of Chapter 11. When a company goes into Chapter 11, creditors "sacrifice" by taking less than a 100 cents on the dollar. I am not arguing for anyone to go into Chapter 11. I am arguing that when a company is IN Chapter 11, the creditors take a haircut.

So far, no creditors are "sharing the sacrifice." Only the taxpayers are sacrificing.

BTD is exactly right (none / 0) (#51)
by Romberry on Sun Mar 29, 2009 at 11:22:41 PM EST

Shareholders have no right to or legitimate expectation of any retained value what so ever.

Stocks are risky things. People "invest" (quotes around invest 'cause the markets for years have seemed more like pure gambling and herd behaviour than investing) in stocks because of the (often mythical) higher expected rate of return. That (often mythical) higher rate of return is what is known as the risk premium. It's what you (are supposed to) get for the potential of losing every dime you put in. Why do so many people who buy stocks not seem to understand this basic fact?


if you loan your buddy $100, (none / 0) (#39)
by cpinva on Sun Mar 29, 2009 at 03:42:19 PM EST

and he only repays you that $100, than you have lost something, the time-value of that $100 for the period you lent it to him, and didn't have it for investment elsewhere. it is now worth less than $100.

And how would you go about further devaluing the stock prices? I don't think the government can just say these stocks are now worth half as much.

the government doesn't really have to say anything, the market has already spoken, pretty harshly.

that said, to raise additional capital would require the issuance of additional stock. this alone will devalue the shares previously issued and outstanding.


How do you devalue the stock prices? (none / 0) (#50)
by Romberry on Sun Mar 29, 2009 at 11:05:57 PM EST

In receivership, the stock becomes worthless. Same as in bankruptcy. And please, no "stockholders deserve something" stuff. I used to be in the securities biz and stocks come with risk. In fact, the higher expected (though in truth not necessarily historically accurate return) on stocks is because of something called the risk premium. Take more risk with the potential for more losses in exchange for (often mythical) higher returns.

If people wanted guarantees, they should have bought T-bills or CD's.


Carrying water (none / 0) (#16)
by trillian on Sun Mar 29, 2009 at 11:33:14 AM EST

Could family ties be the reason?