What to Do Now?
I agree with Yuval Levin and Noah Millman that increased transparency and oversight are desirable and likely modifications to the proposed financial bail-out plan. There may well be even more substantial changes to it over time.
We are extremely likely to put in place regulatory, legal and other structures that we come to regret later. I wrote an article in National Review last year about how, on the back-end of the tech bubble a few years ago, we did exactly this. There are reasons why we always do this after a bubble bursts.
But we are now in a position of choosing among unpleasant alternatives.
Consider the situation on Thursday morning. A run was happening in money market accounts – not “threatening to occur”, but actually happening. Failure to intervene at that moment would have been disastrous. This is one reason that one less-discussed feature of the bail-out plan is the federal guarantee for money market accounts. The intervention had to be large and credible, and it had to happen in the moment. Paulson had to make the pronouncement then, and not wait for approval, and it had to be simple.
[UPDATE]: Here’s Megan McArdle with a great layman’s rundown of what was happening on Thursday.
Now consider the current situation on Monday morning. If “we” (i.e., the political leadership of the U.S.) go back on this commitment, then the loss of confidence will be even worse than it was last week. We are already trying to work around some of the inevitable inconsistencies that will be present in such an emergency action. As one example, consider that a federal guarantee for money market fund accounts means that they are suddenly much, much safer. Hence, Treasury has had to modify this guarantee over the weekend to apply only to pre-existing money market fund balances to prevent a massive flow of funds that could destabilize traditional commercial banks.
This is pure ad hoc economic management by government officials. It is a Hayekian nightmare on several levels, and as I said previously, its ideological consequences are likely to be substantial, long-lasting and negative. I can make the arguments as loudly as anyone, and I believe them, that the causes of this problem that can be laid at the feet of government are ill-advised market interventions and poor regulation, rather than insufficient controls on the market. The best long-term solutions, in my view, all involve less government intervention. It will be important to make these arguments. But the patient has been hit by a car, and is lying on the ground bleeding. It’s all well and good to discuss how irresponsible he was to wander drunk into the street, how we should better design our traffic control systems, and so on. But first we need to stabilize the patient and stop the blood loss.
It seems to me that the crucial prudential judgment to be made right now is this: How much time and freedom of action does the political process have to improve the bail-out before the time and/or complexity of the process serves to undermine the confidence-building impact of the bail-out? My view is, unfortunately, “not much”. We need to pick our battles, and focus more on trying to make the bail-out as flexible and temporary as practicable, than on trying to get a well-designed regulatory reform in the time and policy space available to us.
Via my unique (both patented AND secret) method of assessing what will be the “mood of ‘the peoples’” once the peoples’ opinion has filted down to the peoples from whatever technicians the peoples choose to do their thinking for them, I am of the opinion that the current proposal is toast. As my technicians tell me it should be.
I think the basic principals (or some combination thereof or something similar) that are emerging are:
1. the government has to get equity for money it pays out (I don’t know how this happens if the finance companies don’t want to sell)
2. Executives pay for their mistakes.
3. The peoples get a taste.
4. The admin doesn’t get to run this without oversite.
As a person who understands very little about our financial system and the current crisis—and therefor an perfect representative for “the peoples”—this seems pretty resonable to me.
Can a bailout still work with these sorts of conditions?
— cw · Sep 22, 03:13 PM · #
Jim I’m admittedly way too poorly educated to be a good judge of these things but it seems to me that you’ve offered some of the best commentary around.
I understand the thinking that this comes from bad regulation, rather than not enough regulation. And (despite what you might think) I’m in favor of leaving the markets alone as much as they make possible. But in broad strokes, doesn’t this crisis underscore the idea that we can’t just let the boys in the back room cook up whatever kind of investments or schemes they want? I, like a lot of people, have felt that the danger has always been corruption and embezzlement, but not incompetence. The investment banks and similar were filled with too many smart people to dream up something that would significantly hurt their own bottom lines, or the economies. I’ve always felt sort of protected by the naked self-interest of the big financials. Now? Not so much.
I just think a lot of water got carried for these financial institutions by people simply saying “free markets free markets” and insisting that any kind of check on what the i-bankers could dream up was unAmerican. But there have to be at least some rules of the road, because it appears that they are fully capable of developing disastrous systems if we let then. And I don’t think that makes me an enemy of the free market, or a poor capitalist.
— Freddie · Sep 22, 03:30 PM · #
If you want to get ahead of the curve, you should set down your thoughts about how this is ultimately the fault of the government. Frankly, I don’t think it can be done. The financial markets are broken: more institutions than ever before are subject to bank-like runs. If bailouts are going to occur in a crisis (see money market funds), this means that great government oversight and FDIC like fee will need to be paid by more financial sectors than ever so that those who reach for greater yield don’t benefit at the expense of those who seek safety. If you want to argue for a pre-Fed, pre-FDIC universe, I’m all ears. I don’t think it’s plausible given the panics that happened pre-Fed and pre-FDIC.
— travis · Sep 22, 09:09 PM · #
I respectfully disagree. Insurance exists to pay out when times are bad; almost by definition insurers must be regulated to ensure that they have adequate capitalization.
Another way to look at this is the very existence of the corporate form, coupled with bankruptcy law, provides the incentive for financial firms to take massive risks. If there were no secondary consequences, I’d be fine with that, and allow the counterparties to negotiate for adequate guarantees. But as we see today, the financial industry as a whole can impose tremendous consequences on society, including those who had no opportunity to protect themselves against the risky behavior of financial entities.
A third way to look at the issue of regulation is to understand that virtually every banking regulation ever issued was written in response to misconduct. Banking institutions have a tremendous incentive to screw every client just a little. They can obtain massive benefits while dispersing the costs among the many, who are also politically weak.
A fourth way of looking at the issue is that regulation is the alternative to litigation. The cost of complying with administrative rules tends in the long run to be much lower than complying with judge-made rules.
Markets exist because each participant expects that all participants will follow a common set of rules. Since 1980, and accelerating in the last 8 years, Americans have been fed a steady diet of propaganda that the very existence of rule-makers is the problem, and eliminating them will free up the economy for the benefit of all.
That idea has always been nonsense. Regulations themselves are not evil any more than criminal laws are bad; there are both good ones and bad ones. The appropriate course of conduct for our elected officials is to keep the good and eliminate the bad. It took 28 years — an entire generation — but I for one am glad that the Reaganesque message that the government is the problem is finally utterly discredited.
— Francis · Sep 23, 07:18 PM · #
I think the bailout is a terrible idea. AWFUL.
It is abundantly clear to me that Paulson and Bernanke are WINGING IT. They really DO NOT have a plan. What they want is for us, average guys to trust them with OUR money, and not much of it just N times the cost of the Iraq war, where N can be as high as needed. A war incidentally that was first supposed to cost $50 billion AT MOST. Where do you think the $700 billion will actually wind up costing??
Forget it. Just forget it. And to those Dem senators, the Walls St. crowd – Dodd, Biden, Schumer, Corzine, I say, you approve this at your peril. You might even make me a libertarian Republican.
No bailout. None. If the stock market tanks, so be it, It is better, and I say this as a liberal democrat, to preseve the operation of the free enterprise system and market forces.
No bailout. It is better, far better, for not one penny of the taxpayer dime to be used to bail out the greedy crooks on Wall Street and their enablers in Bermuda and such places who first avoided all regulation, created disastrous financial instruments, lied about the strength of the economy and now come begging in their Porsches.
This is a bloody sham – a 1:00 am call to Congress to scare them witless and basically save the paychecks of a bunch of CEOs.
I would rather see my 401k decrease in value by 50% than sign up to a giveaway of dubious merit to a cast of crooks and liars with no end in sight.
— Posted by manfred
— manfred · Sep 23, 09:03 PM · #
“I can make the arguments as loudly as anyone, and I believe them, that the causes of this problem that can be laid at the feet of government are ill-advised market interventions and poor regulation, rather than insufficient controls on the market.”
So the blow-up right now has done nothing to change your mind?
Seems to me that every time a crisis happens, there is a natural tendency by the “less regulation” group to say “all of this is unknowable ahead of time, therefore, regulation is useless, therefore, we should have less regulation.” I know that is not your exact argument but it has that feel to it. From my point of view, what I see is that the SEC allowed 5 investment banks to go above normal guidelines for leverage. What is amazing is that you’d figure, after LTCM, that people in the SEC and banks would understand that leverage is a double-edged sword – but they didn’t. Maybe it was because the investment banks lobbied for it – that I can’t say. But it is also an obvious regulation that makes sense.
So this issue could have been seen a lot earlier. It’s like Greenspan saying he had no idea sub-prime would be a problem when one of his governors basically told him he should be putting out regulation on the independent brokers.
The bailout is terrible in the Paulson form, and should never be passed. We cannot reward the banks for creating the disaster without paying for it.
— inthewoods · Sep 23, 09:28 PM · #
Puhleeze! “problem that can be laid at the feet of government are ill-advised market interventions and poor regulation, rather than insufficient controls on the market.”
What’s the difference between “poor regulation” and “insufficient controls on the market.” You think we’re all stupid out here?
Somebody fire these people, too. They’re not just lying, they’re, they’re , they’re lying!
Personally, I think Wonkette’s got a better take on this than any of you. Just think about it. We been robbed.
— julimac · Sep 23, 09:40 PM · #
The drunk didn’t just step out into traffic and get slugged by a random cab. The drunk wasn’t drunk, he (the banks) paid the cab driver (the Fed) to hit him so that they could both go the bilk the insurance companies. Now they’re demanding the bystanders buy them another round of drinks and a new bigger better cab!
— widget · Sep 23, 10:57 PM · #