Bailout Plan, Redux

A revised bailout plan has been announced, and President Bush has thrown his weight behind it. To my eye, the rewriting of Paulson‘s plan this past week has been worthwhile; and the final plan, while imperfect, is a useful step forward, and a clear improvement on the original plan in terms of likely effectiveness, cost to the taxpayers, accountability, fairness, and political viability.

I gave a longer summary this morning on Bloomberg TV, here.


Paul Krugman
notes that markets are not reassured; although this may simply reflect ongoing developments with Wachovia. I don’t think that the problem is the revised plan, but rather fear that political posturing means that we are still some distance from the bill being passed in its current form.

The leadership on getting this done is coming from the Republican White House and the Democratic Congress, and neither presidential candidate is standing in the way. But the biggest risk appears to be populist Republicans in Congress, who may either knock the plan off course or try to include a variety of strange add-ons. We will learn more later today.

There is also still a lot of work to be done on the regulatory front; but hopefully the new administration will have the time to study the issues carefully, rather than redesign our financial architecture in a panic-stricken and politically-charged environment.

Further reading: Larry Summers; Robert Shiller; C.B.O. analysis; The Economist; and a radio interview I did on Friday.

Addendum: The House failed to pass the bailout bill, 205 to 228. Democrats voted 141 to 94 in favor of the plan, while Republicans voted 65 to 133.

I fear that individual political careers are being prized above getting our collective financial future together. Stocks have fallen sharply on this very disappointing news, and the TED spread is looking even more unhealthy. It’s the perfect storm: a financial mess meets unpopular politicians, with election season brewing. Where next?


pumpud up

a better bail out plan

This was not my idea, but I wish it was! Maybe we should forward it to all our elected officials in Washington - including our candidates for President? Or better - every news media outlet we can think of.........

I want you to consider this bailout plan instead of the one being debated:

I'm against the $85,000,000,000.00 bailout of AIG.

Instead, I'm in favor of giving $85,000,000,000 to America in 'We Deserve It Dividend'.

To make the math simple, let's assume there are 200,000,000
bonafide U.S. Citizens 18+.

Our population is about 301,000,000 ? counting every man, woman
and child. So 200,000,000 might b e a fair stab at adults 18 and up.

So divide 200 million adults 18+ into $85 billon that equals $425,000.

My plan is to give $425,000 to every person 18+ as a
'We Deserve It Dividend'.

Of course, it would NOT be tax free.

So let's assume a tax rate of 30%.
0D

Every individual 18+ has to pay $127,500.00 in taxes.

That sends $25,500,000,000 right back to Uncle Sam.

But it means that every adult 18+ has $297,500.00 in their pocket.

A husband and wife=2 0has $595,000.00.

What would you do with $297,500.00 to $595,000.00 in your family?

Pay off your mortgage - housing crisis solved.

Repay college loans - what a great boost to new grads

Put away money for college - it'll be there

Save in a bank - create money to loan to entrepreneurs.

Buy a new car - create jobs

Invest in the market - capital drives growth

Pay for your parent's medical insurance - health care improves

Remember this is for every adult U S Citizen 18+ including the folks
who lost their jobs at Lehman Brothers and every other company
that is cutting back. And of course, for those serving in our Armed Forces.

If we're going to re-distribute wealth let's really do it...instead of trickling out
a puny $1000.00 ( 'vote buy ' ) economic incentive that is being proposed
by one of our candidates for President.

If we're going to do an $85 billion bailout, let's bail out every adult U S Citizen 18+!

As for AIG - liquidate it.

Sell off its parts.

Let American General go back to being American General.

Sell off the real estate.

Let the private sector bargain hunters cut it up and clean it up.

Here's my rationale. We deserve it and AIG doesn't.

Sure it's a crazy idea that can 'never work.'

But can you imagine the Coast-To-Coast Block Party!

How do you spell Economic Boom?

I trust my fellow adult Americans to know how to use the $85 Billion
'We Deserve It Dividend' more than I do the geniuses at AIG or in
Washington DC.

And remember, this plan only really costs $59.5 Billion because
$25.5 Billion is returned instantly in taxes to Uncle Sam.

Ahhh...I feel so much better getting that off my chest.

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Brett

To Kinglink...

In a truly capitalist market, corrections are natural and necessary for the health of the system. When the government intervenes and prevents corrections from happening, then they are creating an artificial and unsustainable economic environment, making future corrections even more dramatic.

The government can't predict the economy any more than it can predict the weather, so it should stay out and let the market regulate itself. That is the 'invisible hand' of free-markets that Adam Smith wrote about. Yes, corrections can be painful, but every time the government steps in and props up failed businesses, it only make the future correction that much worse. What are we going to do in another couple of decades when the price tag for the next bailout is $1.4 trillion dollars, or more??

This bailout just passes the buck to our children's generation, and their children's generation, because we don't have the guts to deal with the problems ourselves. Recessions are inevitable, we need to allow them to occur so that our economy can evolve and come out stronger on the other side.

You know, debt is a funny thing... at some point, you actually have to pay back the money you borrow.

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David Thornley

We might well have to recapitalize the banks sometime, but it isn't clear to me that this is the time. After over a year and a half of crisis, the Bush administration shows up with a declaration of WMD on Wall Street, and asks for about seven thousand of my family's money (per capita; more by taxable income), NOW.

Delaying and considering is the exact correct thing to do in this situation.

TJP

re: 15

Japan is probably the best example of how NOT to bail out a banking system. There is near universal agreement on that. Sweden is seen as the example to follow. Japan has been stagnating for more than a decade because of slugggish reaction and reluctance to recapitalise banks. Any Japanese financier will tell you that.

Re: You could not be more right. Finally, some lucidity. A lot of people are scuttling the whole ship to get rid of the rats.

Brett

Thank goodness Congress finally acted with some sense and didn't pass this bill. Aside from the amazing moral hazard that such legislation would create, I don't believe that it is the taxpayers responsibility to bail out Wall Street. They got themselves into this mess, they should get themselves out. If that means that 1,000 banks fail, then so be it. That's what capitalism is all about. Let the market sort out the mess and let the chips fall where they may. Lets experience wealth re-distribution, capitalist style for a change, instead of racing into the arms of socialism screaming "Government, save us! Save our broken business model so we don't have to adapt to a changing world!"

"Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety. "
- Benjamin Franklin

Kinglink

Some are already blaming the failure of the law on Pelosi's speech before the vote, claiming she put partisan politics over the law itself. If you read her remarks, it's extremely true that she decided to make a political move rather than something she believed would help Americans.

Not like she's the only person ever to do that, but it's sad that someone plays with 700 billion dollars to make a political statement rather than getting the bill sign sealed and delivered? Not the right move in my opinion.

Btw those who oppose the bailout realize the other option is to continue to let Wall Street freefall and more companies fail til everything gets devalued, don't you think having companies fail and foreign investors losing confidence in the American business will inevitably lose more money. I'm sure we can all be happy that every American has that 2500-3500 dollars when the money isn't even worth a tenth of that much.

I understand that the bailout isn't the best, and we need accountability, but rather than playing games that might destroy the American economy that everyone seems to try to prove this lesson, let's save the economy and then focus on criminal proceedings.

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HildaCMS

Despite the fact that 700B is a tremendous amount of money coming from our taxes, doesn't the economy need to be saved? I mean, isn't the sole purpose of the government in economics to handle things when they get out of hands in the firms? If they bail-out plan does not work, what will happen to the economy in the United States? I mean, even Wachovia is down now and a few others went down with it. Where will all this madness stop if the banks aren't helped? However, it doesn't have to be exactly with this plan, there may be other alternate plans that can work but someone better start making those if the bid is not to be passed.

Dave

The bailout plan is a bad idea on many levels. Government is proposing to intervene, with our tax money, in the natural consolidation of an industry that has had a huge run up in recent years.

Dave
http://www.islandersoftware.com/weblog/2008/09/27/just-say-no-to-the-bailout-plan/

DJH

I just read that the plan failed, according to MSNBC: "More than two-thirds of Republicans and 40 percent of Democrats opposed the bill."

Turns out I was right. This bill was not, after all, stopped by House Republicans, about 1/3 of whom voted FOR it!. It took some Republicans along with some Democrats to block it.

So far, Wall Street's effort to blackmail the US government -- and taxpayers who fund it -- has failed. One can only wonder what measures they'll resort to now.

Justin

I am completely against this bailout.

If you want to fix the economy, put the money in the hands of the consumer. Period.

The jerks who caused this problem - Wall Street and the de-regulators in DC - must not be allowed to get paid off for screwing up.

Justin

It appears that the list of UChicago and other economists who urged us not to be rash or hurry the bailout bill will get their wish. Now we can see if there really will be a doomsday scenario.

Barb

How often are you going to see President Bush and the Democrats agree on something? It's frustrating that other Republican Congresspeople can't get over it.

David S

The house republicans can stop this plan because democrats don't want to go out on a limb and pass this without republican support. The Dems fear that they will pass alone and the economy is still plummeting on election day.

DJH

I don't see how House Republicans can stop this plan. They're in the minority in their chamber, by enough that even a few defections by Democrats there won't endanger it.

Bobby G

@ Cris (#1) and David (#3)

That suggestion reminds me a lot of direct democracy. There are a lot of issues with that idea, however, that I'm sure someone like Mr. Levitt (it's not "Dr." right?) would jump on: namely, incentive structures.

With a wiki plan like that you would have to analyze who would have the most creative power on something like that. I do not mean moderation power, I mean who would be writing on the site in the first place. It would be people with a good amount of time on their hands (or at least a lower value of time) and with internet access during these times. Busy people, or people who do not have lots of time to spend on the internet, or people who's time is too valuable to spend writing in their own personal comments, would not be able to spend as much time on the site and as a result would not have as much "power" over that approach. This is not a good sample of a functional and efficient direct democracy, since access and power to the method of voting, as it were, would not be equal across all demographics. That plan would thus be skewed and biased towards the people that COULD spend a lot of time on the site.

As for Peter's question, #2, many people have been asking for alternatives, and while I'm sure many of them were considered already before the initial proposal, the fact is that Paulson is the guy responsible for proposals such as this: it's his job. On top of that, a lot of the popular alternatives are highly flawed. I saw one the other day in a chain e-mail proposing a direct refund of roughly $200k per 18+ citizen instead of bailing out AIG... with the solution of liquidating AIG and forgetting about it. No. We can't just liquidate such a strong part of our country's financial stability and expect the average citizen to all of the sudden become a 200% more responsible spender (yes I made that number up, but the point stands). Sure, everyone wants to get a check for $200k post tax, but mortally wounding our lending market is not an acceptable long term solution to that problem.

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Missy

How much of those billions will be paid out to executives quitting? How does that improve anything? This isn't even effing logical. I could retire with 22 million or be paid 400,000 per year. Come on! Where's the outrage against this type of corruption?

Let's see, if you estimate the US population to be roughly 305,290,000 this 700 billion expense is contributing $2,293.00 per person (but that doesn't take into consideration children or the elderly population who don't really pay taxes themselves). That's money our of OUR pockets to bail out executives that squandered millions.

RR

@2
The House Republicans did offer an alternative. It was included in the final draft but in a much weakened form. It wasn't much of a plan in any case. These "populists" as Wolfers calls them are rightly resisting this bailout. Let the banks fail. Lend the $700 billion directly to Main St.

David Rasmussen

@1
I have a small role in local government, and @1 is right on. Opening up our issues to the public via the web would improve our performance greatly.

RZ

"We got ourselves into this mess and now we need to come up with a way to get out of it."

Um, I certainly had nothing to do with this mess. I didn't buy a home I couldn't afford. I didn't take out equity to fund a luxury vacation or an SUV purchase. And I didn't loan money to people who I knew couldn't pay me back. And now I have to cough up taxes money to help out these idiots? I'm all for riding out a recession. Maybe people at all levels will learn how to manage money and policies if they had to suffer from their past bad behavior.

No one has yet explained what exactly this bailout will do, and what exactly will happen if we don't have a bailout.

Plus, wouldn't things be a lot rosier if the government politicos didn't keep trying to scare us into supporting this bailout? Maybe if the President and everyone else came out and explained that money up to $100K in an FDIC insured bank will be just fine, rather than talking about how there will be "panic on the street" if the bailout doesn't pass, WAMU might have been saved since people wouldn't have rushed to withdraw their funds.

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Peter Brooks

Why is no one asking for alternatives to Paulson's plan? Tweaking the $700B giveaway is obviously worthwhile, but, given the fact that Paulson and his ilk were largely responsible for creating this situation, wouldn't it have been sensible to have have at least consulted some of the other "experts" without ties to Wall St. ... perhaps in academia. Choosing the first path offered to us is very unwise. Any competent manager would consider an array of options ... preferably options that vary significantly ... he would weigh the arguments pro and con.. and then decide how to structure his path. This is a huge amount of money and there will be no turning back. The country deserves better. The opportunity costs of this bailout are staggering in terms of what $700B could have done for infrastructure, energy independence, healthcare, education, etc., etc.