I’m certainly with the skeptical economists quoted in this New York Times article written by Peter Goodman They ask: why is moving bad debt (troubled, illiquid “assets”?) onto the federal books a good deal for taxpayers? What exactly are taxpayers getting in return for taking on all this risky paper? The article quotes Doug Elmendorf of the Brookings Institution (and a Fiscal Wake-Up Tour panelist):
“At first it was, ‘thank goodness the cavalry is coming,’ but what exactly is the cavalry going to do?” asked Douglas W. Elmendorf, a former Treasury and Federal Reserve Board economist, and now a fellow at the Brookings Institution in Washington. “What I worry about is that the Treasury has acted very quickly, without having the time to solicit enough opinions.”
(See Doug’s concerns about the Treasury plan here.)
And Dean Baker of the Center for Economic and Policy Research:
“This administration is asking for a $700 billion blank check to be put in the hands of Henry Paulson…It’s almost amazing they can do this with a straight face. There is clearly skepticism and anger at the idea that we’d give this money to these guys, no questions asked.”
The problem is this: why should we believe that the federal government taking on more (and “bad”) debt would be good for American taxpayers, or in particular, future American taxpayers, when the federal government has already been living beyond its means? Can a sinking ship really rescue another sinking ship? Exactly how much credibility in international capital markets does the U.S. government have at this point, such that their taking hold of the bad debt would suddenly make it better debt?
Or, as Peter Goodman puts it (emphasis added):
The trouble is that these investments are so intertwined and complex that no one seems able to figure out what they are worth. So no one has been willing to buy them. This is why banks have been in lockdown mode: with mystery enshrouding both the value of their assets and their future losses, banks have held tight to their remaining dollars, depriving the economy of capital.
Now, the Treasury aims to clear the fog by buying up these investments. But their value is as mysterious as ever.
And Peter concludes with the thoughts of my former Chairman of President Clinton’s Council of Economic Advisers, Martin Baily (emphasis added):
It’s a straight subsidy to financial institutions,” said Martin Baily, a former chairman of the Council of Economic Advisers in the Clinton administration, and now a senior fellow at the Brookings Institution. “You’re essentially giving them money.”
Mr. Baily favors the basics of the Paulson plan, albeit with some mechanism that would give the government a slice of any resulting profits. And yet he remains troubled by the dearth of information combined with the abundance of zeroes in the bailout request.
“I’d like a clearer statement of what we were afraid was going to happen that requires $700 billion,” Mr. Baily said. “Maybe they don’t want to talk about it because it would scare everybody, but it’s a bit much to ask.”
(See this paper on ”fixing finance” by Martin and his Brookings colleague, Bob Litan.)
This all strikes me as a bit of a crap shoot that the Administration is asking Americans to trust them on.
In a freshman seminar course I guest taught today at George Washington University, students participating in the Concord Coalition’s ”Principles and Priorities” exercise started to run into gridlock in deciding whether or not to extend the Bush tax cuts. The vote was split. Their solution: a coin toss, followed by a rousing round of “rock, paper, scissors.” The outcome just happened to be that the tax cuts were allowed to expire, with trillions of dollars saved (relative to the policy-extended baseline), but of course there was a 50-50 chance that they would have been fully extended instead. The students were pleased for having broken the gridlock, but also relieved that it “wasn’t real life.”
Well, the financial bailout being proposed sure seems like a real-life game of rock, paper, scissors–with potentially trillions of (real) dollars at stake. We should be somewhat relieved that Congress seems willing to ask the critical question this week: how can we make this a safer bet, so we know with greater certainty that taking such a bold step is worth it?