Mon 29 Sep 2008
Finance Q&A
Posted by David under Chris Murphy '96 at 9:08 pm
Will Slack ‘11 has questions about the bailout. Below, I provide answers.
After having read several articles on the bailout ranging from never to now, it occurred to me that I should really get back to my third ECON 110 problem set and let the people who know what they’re talking about provide the commentary, without trying to play political games.
So was it a good idea?
Most experts think that this bailout was poorly designed. There are good ways to do a bailout and bad ways. The bill that was voted down in the house was one of the bad ways. See here for more.
Do we need this NOW?
That’s the rub. Although professionals almost all agree that this was a bad bill, many argued that a bad bill today is better than a better bill three months from now. See Krugman. But there was an active debate in the professional community about this claim. The central debate was, obviously, what would the world look like without a Yes vote on this bill, and how does that compare with a world without the bill? Counterfactuals are tough, but it sure looks like we are getting a view of how the world looks without the bill.
What’s going on?
The central reality is that the US economy is in a recession. Unemployment is rising. Production is falling. And so on. The unknown is how bad this recession will get. No one knows.
Paulson and others pushing for THIS BILL NOW argue that the financial markets are under such extreme stress that a bailout must happen right now, otherwise UTTER DISASTER. The problems with this argument are:
a) Lots of people think that Paulson and his Wall Street buddies are “talking their book,” i.e., arguing for actions that benefit them monetarily. For example, if the US Government buys lots of dreck from Goldman Sachs, then the owners of Goldman Sachs (including Warren Buffet) are better off. Are the rest of us? Maybe, maybe not.
b) Lots of people think that Paulson et al are crying wolf. Didn’t Paulson argue that we needed immediate action 10 days ago? Has the world ended? Not that I can tell. If the world doesn’t end in the next week or so, why should anyone believe Paulson (or Bush or Dodd or Frank or ….).
c) Lots of people think that the markets are due for a correction no matter what the government does. We have just had the largest credit bubble in 50+ years. No force on Earth could prevent home prices from falling, the stock market from going down. Indeed, I (and others) think that Greenspan and others created the credit bubble by constantly adding liquidity to the system for the last decade or more. It looks like that trick won’t keep working.
d) If you really believe that the world will end without this bill, then you ought to be able to point to better evidence of trouble today. (And, No, a 8% fall in the S&P does not count.) Paulson et al claim that credit markets are seizing up, but this does not seem to be true.
Just because IBM needs to pay 5% instead of 2% to borrow money for 30 days does not mean that the system has failed. Maybe IBM ought to pay 5%. Just because you need to put down 20% to get a mortgage does not mean that the world is ending,. Maybe you ought to have to put down 20%. (Letting people only put down 5% is, obviously, a bad idea.)
e) The public hates the bill, just despises the whole idea of spending $700 billion to bailout Wall Street. I saw this ad on CNN on Sunday.
Harsh. But the exact same ad could be made about almost any incumbent, Democrat or Republican. (Even the most honest politicians have received money from Fannie/Freddie/Wall Street.) The reason that the House leadership (both Democrat and Republican) had so much trouble gathering votes is partially because some members did not like the bill. But all members recognized that the politics or it were horrible. (I expect that Chris Murphy’s ‘96 opponent will try to use his Yes vote against him.)
If the credit market truly seizes up in the next few days or the stock market drops 20%, then I could imagine a bill getting done. But if things just sort of drift tomorrow and Wednesday, it is hard to see where the enthusiasm for the bill will come from.
Other questions?
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11 Responses to “Finance Q&A”
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Ronit says:
First of all, you’re kinda wrong on (e). Check here for a summary: http://www.fivethirtyeight.com/2008/09/news-accounts-may-overstate-public.html
It basically all has to do with the wording of the question. Pew finds about half the public approving the “bailout” when the question is termed in a non-incendiary way. Today’s market action will be reported in 72-pt font and will sway public opinion away from the anti-Wall St. mood it is currently in.
My prediction is that the public will learn to love the bailout, will in fact clamor to rescue Wall Street, when they see what this is doing to their 401(k)s and their local economies. Credit is the lifeblood of commerce; we are now in a credit crunch unlike anything that anyone alive is likely to have seen (at least since 1929); this will destroy Main Street’s economy unless it is corrected quickly. It is not about whether IBM borrows at 5% vs. 2% (though that is bad enough for IBM’s expansion and hiring plans). It is about whether small and mid-sized businesses get access to working capital at all. A single day of Wall St. action may not mean much in the long term, but the currently distressed state of the credit markets have a direct impact on “Main Street”. But I’ve been wrong before, and I guess we’ll see.
Also, if you don’t think that a single-day 8% fall in the S&P and a TED spread well above 3 and VIX at 48 is evidence of trouble, I’d frankly like some of whatever it is you’re smoking. When was the last time that VIX was at 48? I think the answer is “never”. Yes, the world isn’t ending, per se, but there is no question that we are in a severe credit crunch, and that is objectively bad for the economy – it is bad for jobs, for growth, and for investment. The public may not care much about such esoteric things as TED spreads and VIX, but they will start to care when they see the effect it has over the next few months…while the credit bubble may have been a mistake, I suspect that anti-Wall St. mentality won’t survive for long when “Main Street” starts to see the effect that a serious credit contraction has on employment. There is a real risk of a Depression, and a Depression is the worst possible time to adopt fiscal conservatism. The financial, housing, retail, and construction industries are looking at total decimation. As a hedgie, you might find a way to enjoy this, but I seriously doubt that Main Street will stand aside and watch it happen all for the sake of some ill-advised schadenfreude.
September 29th, 2008 at 10:25 pmPTC says:
Ronit- One thing for sure, McCain failed to get the votes in the house that he said he would. For or against this bailout, McCain failed to lead when he said he would. This is bad for him poltically. The timing of this could not be worse for Republicans. If the market continues to tank and the housing market gets even worse do to the lack of lending, this is going to hurt the Republicans very badly in this election cycle.
September 30th, 2008 at 3:39 am'10 says:
Well, Barry didn’t exactly succeed in rallying the troops in the House for the proposal, either, with x Dems voting Nay.
It’s a shame that the media and the public is falling for the projection of blame onto the Republics as a result of de-regulation, when this whole mess really isn’t fully (note, I will concede that parts of the mess might be…) related to that.
It’s a September (tomorrow October) surprise of sorts: a problem, that albeit a major issue, that will be blown out of proportion one way or another. There’s trouble on Wall Street and on Main Street, but this “looming”, “impending” crisis is not materializing as quickly as being predicted. I doubt people can point to, as David challenged, evidence of DISASTER (Great Depression II style disaster), outside of the hits in the market (which were more a result to news contrary to expectations than indicative of an actual reason).
DC should first get it right then get it through, because it’s not possible to get it through and fix it tomorrow.
September 30th, 2008 at 5:56 am'10 says:
Well, Barry didn’t exactly succeed in rallying the troops in the House for the proposal, either, with 95 Dems voting Nay.
It’s a shame that the media and the public is falling for the projection of blame onto the Republics as a result of de-regulation, when this whole mess really isn’t fully (note, I will concede that parts of the mess might be…) related to that.
It’s a September (tomorrow October) surprise of sorts: a problem, that albeit a major issue, that will be blown out of proportion one way or another. There’s trouble on Wall Street and on Main Street, but this “looming”, “impending” crisis is not materializing as quickly as being predicted. I doubt people can point to, as David challenged, evidence of DISASTER (Great Depression II style disaster), outside of the hits in the market (which were more a result to news contrary to expectations than indicative of an actual reason).
DC should first get it right then get it through, because it’s not possible to get it through and fix it tomorrow.
…and honestly, Pelosi should just step down. Not for the out-of-left-field remarks about Bush Policies, but for being unable to get this through her house, despite having a majority and despite saying this was “VITAL”.
September 30th, 2008 at 5:59 amJeffZ says:
It is absolutely ridiculous for the GOP to blame a speech by Pelosi for the defeat of this bill. Using David’s favorite technique, I dare them to find me a SINGLE member who will say that he or she would have voted for the bill but for Pelosi’s speech.
That being said, I really hope there is a new SOTH sooner rather than later. First, she is an enormously polarizing figure, by far the most polarizing Democrat currently out there, and an easy target for blame. Second, congress was not particularly effective this term. There is a lot of blame to go around there, there is only so much that can be done in the face of constant vetos for instance, but Pelosi did not drive the conversation in any helpful way, and she is viewed as being from the extreme side of the party. I believe that a more moderate speaker would accomplish a lot more. Now, if Obama wins and dem margins increase in both the house and senate, it may be moot given the enormous power dems will have (especially with a President whose greatest political skill lies in making those with opposing viewpoints feel comfortable working with him), but if McCain stages a miraculous comeback and wins (which should not happen so long as Obama and Biden — the latter I’m more worried about — don’t do anything REALLy dumb in the next month), then I think the dems need to replace Pelosi. But not because of this bill.
The initial defeat may actually end up being a good thing … people see some of the negative repurcussions, there are changes to the bill to make it better, or at least perceived as better, and maybe it will turn into less of a political poison pill. Definitely an interesting dynamic where the extremes and bases of both parties are both violently opposed to this bill, albeit for very different reasons, and the moderates are trying to forge a consensus …
September 30th, 2008 at 6:20 amJeffZ says:
By the way, if there is any district in which a congressman would be on safe ground in voting for the bail-out, I imagine it would be Murphy’s — a moderately conservative, middle to upper-middle class (aka, lots of investments) area where, I imagine, more than a few residents commute to Wall Street. In other words, Alabama it ain’t.
September 30th, 2008 at 6:33 amRonit says:
What we have here is a failure to be sufficiently cynical. If, as Bess Levin (Amherst ‘06) of Dealbreaker points out, we could have called it the “The American Freedom and Anti Terrorism and Defense Of Marriage Finance Act”, it would have passed by acclamation.
September 30th, 2008 at 10:17 amazj '04 says:
“e) The public hates the bill, just despises the whole idea of spending $700 billion to bailout Wall Street.”
Really? Isn’t the crux of the issue that the public has no idea what the bailout means for them. Ronit’s first comment gets at this.
Let’s give Paulson and Bernanke a fair shake and assume that they think they’re proposing what’s best for the country and not just increasing Buffet’s wealth. Their case rests on the belief that with some small probability, seizure in credit markets could result in widescale commercial bank insolvency, which would lead to Great Depression-style bank runs and millions of Americans being evicted from their homes.
There is a case to be made — but the administration is not making that case. They just use soundbites like “worse than the great depression” or “we need to fix wall st. to fix main st.” and the public has absolutely no idea what to make of them. The majority of the time this administration has tried to enact policy without using the words Nuclear Bomb, they’ve failed, so we shouldn’t be surprised that they can’t convince the public that this is in their interest.
All this is to say that I really don’t think you should argue that we don’t need this bailout now because the public hates it.
September 30th, 2008 at 12:10 pmJG says:
For some reason the computer I’m on right now will not allow me to put up a new post, so I’m putting this in the comments for David’s joyful reading. Feel free to move it to a post since I know it is not exactly on topic.
Vanity Fair has a piece in its October issue looking at Maria Bartiromo and Erin Burnett (cue drooling and panting by geeky econ boys). While I’m glad there is an article about women reporters who actually know something about their subjects (rather than being Fox newsreaders), the tone of the article is rather insulting even as it tries to dispell the myth of the bitchfight. If it were two attractive men, would we have the term “money honey” (which I know Bartiromo has now claimed for the branding) or “street sweetie”? Would there EVER be an entire article discussing who is the “Queen B” and making the whole damn thing seem like a stupid high school catfight? God forbid these just happen to be two intelligent people reporting the news. Yes, all news personalities have to be attractive or they wouldn’t be on tv, but male anchors are not subjected to this kind of inane overlay to stories about them. It is perhaps acknowledged briefly that they are “distinguished” or “handsome” and the article moves on. Nobody assumes that two men are backbiting or threatened by one another – perhaps because nobody questions that there can be several prominent men reporting business whereas women have to fight for the one designated female financial reporter slot? Hmmm…
Example:
Seriously, a “lazy, bedroomy smile”? Are you f-ing kidding me? The rest of that quote is fine – it talks about her style of reporting, her interests, also known as her qualifications for the job. Don’t even get me started on the photo that is half-way down the page. Again, Burnett is a savvy woman who knows how to promote herself and she is playing off of it. But male reporters don’t have to go there, no photo shoot would even propose to have a man pose like that. She agreed to it, but why was she even asked?
Frankly, I think Bartiromo says it best in the article (and note the total LACK of cattiness):
And from Burnett at the end of the article:
September 30th, 2008 at 1:06 pmRonit says:
Done, JG. Let me know if you had a different post title in mind.
September 30th, 2008 at 1:26 pmJG says:
Thanks Ronit!! That title is fine…the other option of course would have been “it’s a male-fantasy thing.” That article had some pretty good one-liners.
September 30th, 2008 at 3:04 pm