Bailout?

Saturday, September 27, 2008

I will readily admit that economics is not one of my strong areas.  My coursework on that subject was limited to half a year in high school and two semesters in college.  I have been trying to wrap my mind around the proposed bailout and other types of interventions.  While I am generally against too many regulations, I also don't believe that the market will just correct itself.  My middle of the road stance will allow some regulation with the probably naive belief that regulation should be minimal, fair, and do what it is proposed to do.

I know that some kind of intervention in our current economic crisis is necessary.  Unfortunately, the more I read about what is proposed, the more I am getting nervous.  This article, from the Volokh Conspiracy didn't alleviate any of those concerns.  Some of the proposed measures by Dodd just don't sit well with me.  From the article:

I have read Dodd’s proposed statute and in some respects, it is far worse than has been reported. Senator Dodd has placed a loophole in the bill that is explicitly designed to siphon off tens or hundreds of billions of dollars to the Housing Trust Fund and the Capital Magnet Fund even if there are no net profits in the $700 billion venture.

and,

With a net loss, one might think that nothing would be funneled to the housing funds for service organizations, but that is not what the statute says or means. One looks only at the sales generating gains to determine the size of the payments to the housing funds. With $2 trillion in profits and $2.1 trillion in losses, the housing funds nonetheless get $400 billion dollars in “profits.” (This is over 40% of a typical year’s US total federal income tax receipts.) And that is the result if only 20% of "profits" are skimmed; the statute puts no upper limit on the skimming, so long as they come from profits (not net profits). Theoretically, the new Agency could potentially siphon off $2 trillion to the two housing funds, more than its $700 billion portfolio limit.

What?!?  I know that some of this is speculation, but the fact that Congress created the environment for the current financial crisis doesn't exactly give me much confidence.  The author concludes with:

I was mildly in favor of the bailout until I read Dodd's proposed statute. The way that the statute is drafted is so tricky and its definition of profit is so unsophisticated and nonsensical that the statute smells more of graft than of an honest attempt to solve the financial crisis.

It sure looks that way to me.  

5 comments:

Smitty 9:31 AM  

Like you, my education in economics was a few college courses and whatever articles I pick up on the subject here and there (though I did read New Ideas From Dead Economists and found it very informative).

That said, I really think that if anything or anyone should have been bailed out, it is the people being crushed under these bad loans.

If you pay-off the worse 1,000,000 loans, it seems to me that frees up a bulk of the "lost" money, gets people out of debt and able to pay bills again and woul inject more money into the system. It has the same sort of effect as giving the big banks money (a-la the current bailout proposal), but is designed more specifically to get debtors out of debt.

I've seen it suggested around, and wonder if it would be the better option.

Former Labor Sec'y Robert Reich has some ideas, per a post a week or so ago at Mr. Furious' site.

B Mac 12:47 PM  

I share your knowledge of economics... I remember that there is a supply curve, and a demand curve, and where they meet, the Universe enters some sort of zen-like harmony.

I like Smitty's idea. If the analogy for the current crisis is a leaking bucket, we're using our money to pour more water into the bucket rather than trying to plug the damn holes.

Not only would buying out or re-structuring the worst of the loans help the people who are currently being crushed, but it would also allow the market to have a CHANCE to help correct itself.

steves 3:39 PM  

That said, I really think that if anything or anyone should have been bailed out, it is the people being crushed under these bad loans.

I agree. The CEOs of these companies shouldn't be able to run off with 20 million in bonuses. I read where the Lehman Brothers paid 2.6 million in bonuses a week after they declared bankruptcy. You shouldn't get a bonus if you ran your company into the ground.

(though I did read New Ideas From Dead Economists and found it very informative).

Can I borrow it?

Bob 7:38 AM  

I wish I had a better knowledge of economics, mostly because I think that most economic theory is politically-driven crap and I would like to have more knowledge to properly debate the subject. So much economics is unproven ideas driven by the right or left, but mostly by economists funded by Wall Street.

B Mac 2:53 PM  

Okay, I don't know economics. But I do know legislative politics. And when you're going to hold vote with wide political and economic implications, you have to be sure you have the GODDAMN VOTES.

Modifying the terms of the bailout would cause the market to wince. Delaying the bailout would cause the market to shudder. But letting the bill go down in a full vote of the House of Representatives?

Turns out, it will cause the market to shit itself, and pass out in a heap of ticker tape and tears.

Politics aside, they need to figure this stuff out. In a hurry.

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