My Take on the Bailout

So Treasury Secretary Paulson is asking for 700 billion dollars to buy troubled assets from struggling financial corporations. The process of figuring out if this is good or bad is very much like an ogre, in that there are many layers.

At first, this seems like a huge waste of tax-payer money. Why should public funds to to help private corporations, and worse, taxpayers? Paul Krugman, an economist I respect a lot, takes this view. Especially if we're paying good money and getting junk in return.

But once I delved into it, I started to support the plan. The companies holding the bad assets need liquidity, that is, they need cash they can do stuff with. Their bad assets, while not worth nearly what we thought they were, still will pay out SOMETHING in the long run. If the U.S. Government buys them cheap enough, we'll help the companies while also getting a great return on investment (and it incentivizes leaders to help struggling home-owners, since their plan looks better if not-rich people get to keep their homes). And the US Government doesn't care as much about liquidity...it can borrow quite easily (people love treasury securities these days). We can get a good long term return. And will it drive up the deficit? In this case, I--a deficit hawk--can proudly say, "Who cares?" If we borrow at 5% and invest at 11% (maybe 8% after you adjust for the risk and the defaults we don't expect), we're turning a profit. Sure we have more debt, but it's offset by a good investment. If it's done right, this could be a great for the taxpayers financially in the short run (more solid financial sector) and the long run (a profitable investment that helps offset debt).

But then I read another editorial, by William Kristol, one of the most conservative people in all of media. He actually agreed with his colleague, Krugman, a bleeding heart liberal (well, for an economist) about this plan. So I took a closer look.

Note that I said the plan could be great IF IT'S DONE RIGHT. What Paulson is asking for is nowhere in the ballpark of "done right." There's absolutely NO transparency, NO accountability, and he wants the plan to be subject to the review of no court, no congressional committee, and no government agency. Basically, he's asking for immunity up front so he doesn't have the rush of trying to get it once he screws everything up! He can dole out contracts to private investment managers, play favorites and give fees to Republican party cronies, even purchase the securities for more than they're worth (in which case we'd be propping up shareholder value--the only way this makes sense is if we're buying the securities for LESS than they're worth, since we're also providing much needed liquidity)!

Congress needs to stop and think. I've heard a few interesting ideas. They range from the predictable ("Put in some oversight") to the incentive-based, which I like (such as "No company participating may compensate any officer or employee more than is made by the President of the United States"--a move which should help confine the participants to actually struggling companies, assuming the amendment also bans non-salary non-bonus forms of compensation).

But I don't like a plan that boils down to "trust me," especially when it involves a guy who repeatedly said that the worst is over and the system is "stable" (for over a year now Paulson's been saying stuff like that on and off). I don't trust him; this whole thing happened on his sleepy, deregulating, CEO-friendly, dogmatic watch. I'm being a little unfair to him to make a point, but we seem to have a choice between passing a good bill in a few weeks or passing the bad one that's been asked for quickly. I think the weeks working on a good plan would be well spent, that the markets are resilient enough not to completely collapse or do anything irreversible.

And isn't it suspicious that the ones demanding speed are the same ones who have touted the efficiency and resiliency of markets all along? I wonder why they're in such a hurry now...and that alone is enough to make me question the bailout. Though the plan and/or my analysis may change, right now I think that it's potentially a very good idea that they want to do very badly, and very quickly.