Trickle-up bailouts
This is a simple point.
Suppose the government is going to give away money to fix the economy. Yes, yes, I know. They are making “investments” and guaranteeing “undervalued” assets and all of that. But let’s cut the crap. They are giving away money on a vast scale. Even the Obamawonks estimate a net loss of 33% for every dollar “invested”.
So, the government is going to give money away to fix the economy. Consider three options: It can give money to the people who are owed money by troubled banks, for example by guaranteeing bank debt. That makes the creditors whole, but leaves banks and the debtors dangling on a fish-hook. We can keep giving money to banks, who will eventually find themselves reasonably capitalized (as long as the rate at which taxpayers supply net wealth is greater than the rate at which insiders steal or gamble it away). But that still leaves the people who owe the banks money high and dry, teetering between insolvency and personal bankruptcy.
Finally, we can give money to the individuals and firms that are in debt, so that they can repay the banks, which then become solvent as their toxic assets are made “money good”, which enables them to payoff their creditors.
We’re talking about the same amount of money in all three cases. But giving money to the ultimate debtors bails out three parties for the price of one.
Paul Krugman has speculated that one reason why World War II seemed to absolve the United States of its depression is that wartime austerity and inflation had cleansed the balance sheets of households and businesses. If we are bailing out various groups in order to jump start the economy, wouldn’t we want to repair as many broken balance sheets as possible on a per-dollar basis? Call it balance sheet bang for the bailout buck.
And don’t go all Rick Santelli on me about the injustice of paying for your asshole neighbor’s granite countertop. We are bailing out a banking system that served as a vast criminal conspiracy built around plausible deniability and limited liability. We are bailing out “savers”, who not only demand to be made whole by the government on risky loans they chose to make to banks for profit, but are smugly self-righteous about it, like it’s their “right” because after all they were the “prudent ones”. Of the three groups we might bail out, these crybabies and criminals are no more deserving than some nearly-broke bastard who believed his financial adviser, his banker, his mortgage broker, and the Wall Street Journal op-ed page when they told him that a cash-out refi was as good as money earned, and that granite countertops were a luxury that would pay for themselves. Don’t get me wrong — I’d rather we could bail out no one, just do a rip-off-the-band-aid kind of reset and let everybody take their lumps. But households and firms in debt are by far the most sympathetic villain in this horror show we wake up to every day.
In the end, it is households and firms that drive the economy, not financial intermediaries, and most households are not large net savers. If we’re going to spend large sums of money on bailouts, and we want an economy in which people have confidence enough to work and spend, and businesses the have ability to invest, why would we not give the same bail-out money to end-debtors, and let it trickle up to banks and their creditors, repairing broken balance sheets at every step along the way?
So if I kept my money in an FDIC-insured savings account — or invested it in the stock market and have accepted the losses — I am in no position to criticize those who took out loans they could never afford to buy houses they could never afford? And if I object to having my wealth confiscated and handed to housing speculators, I am a “crybaby”?
I am a little confused why you think we should bail out the bus driver who bought the $800,000 house and not my friends and family who deferred vacations in order to max out their 401(k) contributions. But I am sure you have a good answer…
March 11th, 2009 at 4:56 pm PDT
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Well, well Nemo has a very good point. It’s all about social justice. You got a mortgage and a house which contributed to screw up the financial system and the economy but perhaps do not loose your job or your house, and an honest worker is being fired either because somebody screwed up the company or worser his company does not get credit anymore to keep going.
I would simply say: do not bailout anybody!!! They all have a share of responsibility. If you are serious government interested in a public good like the functioning of the credit market just put some money to set up brand new good banks and forget about the rest. The system will start to work properly again and hopefully while the markets clear themselves and their mess without too much “interference”. forget about who take the hit or a haircut. Normal savers and people for sure should not continue to pay the mess of somebody.
March 11th, 2009 at 5:23 pm PDT
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I agree that bailing out the ultimate debtors is preferable. You could always deal with the justice issue by giving money to everybody. Means-test it, even.
I expected a housing crash, so I’ve remained a renter. And I put the money I saved mostly into equities, some of which were in small risky companies (cellulosic ethanol), so Steve can’t scold me for being a passive saver. When it comes to being angry about bailouts, I feel pretty safe here on my high horse.
I kept my money in equities mainly because I was worried that we’d inflate our way out of the problem, so I’d be fine with the inflation that would follow a mass distribution of cash. So give it to everyone! The aggregate quality of the economic decision making that would follow is strictly higher than it would be if you just gave it to the idiot mortgage borrowers.
March 11th, 2009 at 5:42 pm PDT
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There are things not to like about enforced mortgage “restructuring,” but here are a couple of things to like about it: one, it probably replicates something like the deal the banks would make anyway if anybody could figure out who owns the $#@%! stuff. That is, if you hold a $100 note on which the debtor can only pay $80–but which in foreclosure will yield you only $60–you will take the $80 and count yourself lucky. Happened all the time back when live bankers made the deals, and kept the paper (or got it back on recourse).
And two, it has the virtue of distributing the pain–some to undeserving borrowers, some to undeserving lenders.
I’m still a little tempted to go all Austrian on ’em (What this nation needs is a good panic! Restore the moral fibre!). But I’m too cowardly to risk the consequences.
March 11th, 2009 at 6:27 pm PDT
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I don’t know how excited I am to bail out debtors – but when it comes to banks vs. consumers – no one (that I know of) can force a bank to lend money. It would be one thing if you borrowed money from grandma, but you assume the banks have economists, analysts, are in business to make a buck, etc.
Basically, there are two types of individuals who took out more $ than they should have: 1) dishonest, playing the system (sometimes in concert with mortgage brokers, etc.) and 2) people who had faith in the US systems – the ones who think “these rich people are smarter than me, they must know what they’re doing”. They are either going to receive some relief, or learn they were suckers and get cynical real fast.
I figure the dishonest folks didn’t put any signficant equity into their deals. Those that were honest if they didn’t put any equity into theirs then they can’t lose much anyway. The ones that did put signficant equity chunk into their property and are upside down, that’s a big loss to take – so a lot are walking. If the mortgage can be rewritten, there should be some way to provide an equity stake to the homeowner to incent them from walking – otherwise it’s just an expensive rental.
March 11th, 2009 at 6:54 pm PDT
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Nemo — The only people I object to are those who made investments that were not explicitly guaranteed, but who now expect to be made whole. I believe in limited deposit guarantees. (I’ve explained why elsewhere.) I have full sympathy for not wanting to bailout a 800K McMansioner, but not much sympathy for someone willing to bail out uninsured depositors of Citibank and the firm itself, but objecting to the McMansion dude ‘cuz he’s more visible and salient. Plus, it’s worth noting that the vast majority of people in debt and in trouble were not so extreme and deliberate as the 800K McMansion example implies. Some people did synthesize valuable options for themselves by stretching as far as they could in McRealEstate, but that’s the poster-boy, not the rule.
The chain of logic is simple. If we’re going to bail out bad actors and reward bad behavior, we ought to do it in the most effective way possible from a macroeconomic perspective, and we oughtn’t discriminate in favor of the wealthier and better connected classes. Putting moral hazard aside, economists would say that paying an underwater homeowner to pay a banker is a Pareto improvement over paying the banker, of the homeowner otherwise would have defaulted. If the homeowner would not have defaulted otherwise, the banker loses the debt slave if we pay the homeowner. That’s not a good thing. Somebody ought to be escaping debt slavery for all the loans we are effectively paying off.
MG, Nemo, and Buce — Again, if we want to take the chance, we can “go Austrian”. I’m ambivalent at best about all this stuff. But if we are going to give away money to people who should be bankrupt, leaving out the end-debtors but bailing out criminal intermediaries and relatively well-off savers is unconscionable. Why should only the poor be unable to escape the consequences of their bad behavior?
Mitch — I really have become a scold, haven’t I. I want to make clear that I have no problem with passive savers per se, and certainly don’t recommend people put money in equities unless they think they’ve found a good investment. I object to people demanding an above risk free return on savings that were placed in risky vehicles, and then demanding they be made whole because they thought the risk was only hypothetical, losses were “unthinkable”. I also think it’s a problem when people hold too many government claims under a regime where the state tries to guarantee the purchasing power of those claims. But for the same reason I support limited deposit insurance, I think people should be able to carry a limited (but pretty large to most) stock of government claims if they choose to.
I very much agree that one good way to bail out end-debtors without stoking jealousy would be to just cut a substantial check to everyone. That way debtors pay their debts, while non-debtors reap a windfall for their prudence. In a previous thought-iteration of this, I was going to suggest cutting 10K checks to every US citizen or somesuch.
I’m gonna repeat myself repeat myself. I don’t like rewarding bad behavior, but if that’s the road where taking, we ought to do it in a way that maximizes the macro effect and that doesn’t only reward the bad behavior of the rich and well-enfranchised.
March 11th, 2009 at 7:15 pm PDT
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BTW, there’s a lot of debt out there besides mortgage deals. Credit card debt loads, for example. And student loans, a “virtuous” kind of debt that for at least a while won’t yield economic returns consistent with the reasonable and sincere expectations of borrowers.
March 11th, 2009 at 7:18 pm PDT
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Steve-
Think of the person who invests in money market funds and stock index fund as part of their 401k. The government creates all sorts of tax incentives to make the funds available in your 401K more attractive than holding your money in the FDIC. The Fed then allows money supply growth on the order of 5-10% a year, while interest rates are set so low CD’s are only paying 3%. Naturally, with this kind of dilution, any kind of asset – houses, stocks, etc is better than holding dollars. Thus over time, even the most conservative investor realizes they are a fool for keeping their money in treasuries. But then money supply growth shuts off completely, instantly making dollars far more valuable than stocks and houses. How is the ordinary person supposed to deal with this? How are they supposed to know when the money supply is growing and when the money supply is going to collapse?
Gross mismanagement of the financial system turned everyone into speculators. There were no safe investments, and haven’t been for decades. The fairest way to do a bailout would be something like Winterspeak’s or Moldbug’s plan. Declare a payroll tax holiday and print money to fund it. Or simply calculate everyone’s net worth, at current market prices, and then print money so that everyone’s worth doubles. Either way – the goal is to restore the value of world wide assets while minimizing transfers of wealth.
March 11th, 2009 at 7:52 pm PDT
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IMHO, we should figure out some way going forward to get rid of FDIC insurance. The biggest problem here is that banks could do any kind of crazy lending b/c they had a very cheap source of funding. It would actually be better if banks that held cash only had SPIC type insurance and charged fees for ATM and cash management functions. Then if you wanted a yield you would have to go to a fund that is not guaranteed by anyone.
As far as bailouts, why doesn’t the Fed finally give in and cut all US citizens a check for 30k of freshly credited funds? We’d get the inflation needed to repair all balance sheets while at least giving everyone the same freebie. No means testing, no sliding scale.
March 11th, 2009 at 8:26 pm PDT
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Jubilee, baby, jubilee.
March 11th, 2009 at 10:21 pm PDT
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Maybe I’m a bit naive about this, but couldn’t the government (HUD, for instance) buy up all the underwater mortgages from the homeowners/banks for the best of loan value or current market price? They can use eminent domain to force the issue. Thus they restore the balance sheet of the household and give a restoring (though shortened by haircut) sum to the banks. In this way, all troubled assets are off household accounts and banking accounts. A giant reset button? And the government can then subsidize housing for the poor and unemployed, and then break-even/reap a small profit as the housing market improves and they sell off the housing stock.
Philosophically, I am against government intervention of this sort, but since we are doing the thought experiment of how best to spend the dollars that are already committed, there is my 2 cents. There is not the political will, nor the financial discipline within the government to make this work.
March 11th, 2009 at 10:46 pm PDT
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i’ve been saying this as well, but there are some problems with it. i am going to answer with a rambling post, who knows if it makes sufficient sense.
here’s how i see it: the problem right now is not so much the amount of debt in the system but with its distribution versus ability to pay. there are far too many people whose debts exceed their ability to pay. this is the natural result of years where people borrowed without thinking of repaying and people lent (ie printed money) without regard to whether borrowers could repay. (dollars under that system SHOULD be worth less than dollars under a system with more accountability — which is why i think that inflation/devaluation is the least moral hazard way of dealing with this, except that the rest of the world is in the same situation. you might screw some honest savers, but you are screwing the people who made a lot of money selling assets at inflated prices.)
note that in my view the money was printed and inflation was originated at the moment that excessive debt without accountability was created, not at the moment that the government printed money to deal with the problem later.
i think if there were a good way of devaluing past debt uniformly that’s what we should do. there is, and it is called inflation, and it has the side effect of devaluing past asset accumulation as well. in my mind that is fair in aggregate and even fair to many of the indignant savers. there should be a way escaping the past in aggregate.
anyway, the normal way to fix the debt distribution vs ability to pay problem is through default/bankruptcy. if this distribution is ‘clean’ and at some sort of equilibrium commerce can go on pretty well. however: this distribution got so bad that fixing it through bankruptcy will bankrupt the intermediaries.
the way i see this is as an interconnected web of people, debt, obligation, and assets — people are connected to banks are connected to banks are connected to people — and keeping the banks functioning is a key part of keeping the network up and functioning. solvency of people, well that is also a key part of keeping the network up and functioning. they go hand in hand.
a debtor bailout could take many forms. one form that already exists, which i’ve mentioned above, is bankruptcy or foreclosure. this cancels debt, and so it is a bailout. (not a government bailout but a bailout nonetheless.) there are other forms of debt negotiation that reduce but do not eliminate debt, etc. so you could say that allowing for bankruptcy/cramdown plus backstopping the banks is in effect a bailout of consumer debt.
the only problem i can see with it is that it could be quite inefficient. if you are giving people money to keep the financial system solvent, you have to give it to the right people — you have to give it to the people who are close to defaulting — or this money does nothing to help the financial system. so you have to pick the right people to pay. this leads back to the bankruptcy case.
March 11th, 2009 at 11:22 pm PDT
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If we’re going to bail out bad actors and reward bad behavior, but if that’s the road where taking
“Putting moral hazard aside, economists would say that paying an underwater homeowner to pay a banker is a Pareto improvement over paying the banker”.
I believe you have too many if… As far as the Pareto improvement I would not be that sure because you do not respect the condition of an efficient allocation “without making any other individual worse off”. As I matter of fact Pareto efficiency does not consider the equity of resource allocations that is more or less what Nemo and me were mentioning.
We should not continue to try to do things right but try to do the right thing. And one thing to be done along with the creation of good banks, which avoid the Pareto efficiency problem of resources allocation, is the complete renegotiation of all mortgages, one by one. Change your system of mortgages as we do not have that in Europe…here the bank can seize your property only if you do not pay your installments, after a while, not if the value of your property goes down…because somebody else via his behavior is hurting you and making you worse off.
March 12th, 2009 at 3:08 am PDT
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Kill em all and let god sort ’em out.
March 12th, 2009 at 3:16 am PDT
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Steve,
I’m to some extent with MG, but I’m a real trickle up fan – GMI (or variant thereof). Keep the liquidity flowing at the bottom and it trickles up to the productive.
March 12th, 2009 at 5:48 am PDT
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Steve Keen is all for (partial?) debt forgiveness in these cirumstance, but the unfairness sort of grates on me. Give EVERYBODY a bit more money and see who survives.
March 12th, 2009 at 5:50 am PDT
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A good way to do as Steve R. Waldman suggests is to use the gobs of money that the US Govt. is throwing at banks and AIG to start a new bank. Call it the Commonwealth Bank of the United States. But that doesn’t mean I wouldn’t support debt forgiveness too.
March 12th, 2009 at 6:01 am PDT
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Disgruntled:
I’m with you. Clone Andrew Jackson. Give the clone some flintlocks and let him loose in Manhattan.
March 12th, 2009 at 9:00 am PDT
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last year i suggested that the government should make a payment (say up to $25k, $40k, or $50k; pick a number) on all primary mortgages regardless if current or delinquent. it would be based on you oustanding balance as of june 30, 2007 so that recent buyers would not doubly benefit since they bought at a lower price. only debt on primary residences qualifies, no seconds, vacation, or investors. my guess is that this would cover about 35 to 40 million mortgages with a cost ranging from $2t to $4t (depending on amount). this would completly eliminate some household’s mortgage, reduce others and save some FCs, and reduce loss severities to lenders/investors for those that could not be saved. this would be highly stimulative as it would lead to greater savings or spending. but it gets to the root problem of fixing consumer balance sheets. this would have been far cheaper than the monies spent already. it would be more populist tamping down the santelli crowd. only losers in plan would be renters and homeowners that own outright.
March 12th, 2009 at 9:34 am PDT
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Congratulations on re-discovering the Greenback movement of almost 200 years ago. Forget about monetary policy and deficit-financed fiscal policy, just spend the damn money into existence.
March 12th, 2009 at 10:43 am PDT
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It is not unreasonable that an uninsured depositor should take a loss if their bank does not have the money to repay them, but I think that the depositor has every right to expect that established bankruptcy law is applied first – ie foreclose on the mortgage defaulter and sell their house, if the resulting losses make the banks insolvent, zero out the bank shareholders, then the bond holders and so on. Then the depositor could probably buy what they were saving for with what they have left anyway.
Here’s my solution. Instead of trying to forestall liquidation, use government funds to expedite it, protect the financial system (as opposed to its users) and mitigate the worst suffering, and then to start the recovery process. There should be no jubilee or inflationary reset – these would just further extend the cultural moral hazard that, in my opinion, is the main cause of the present crisis.
March 12th, 2009 at 11:23 am PDT
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Mr. Waldman,
By proposing a bailout of the “end-debtors”, are you not proposing that the government buy up the toxic assets at prices that the banks say they are worth?
March 12th, 2009 at 11:28 am PDT
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Rhunzzz, no. Buying up the loans would leave the debtors on the hook. I’m proposing that the government cut a check to debtors, who then use that check to pay down their loans. That increases the value of the assets banks hold (the effect that you’re pointing), but it also decreases the level of indebtedness of the borrowers behind that asset.
As far as what bankers say things are worth, there’s nothing about magnitudes here. If the government was going to give away a dollar to the banking system, it ought to give it to a debtor instead, and let the debtor give it to the banking system. It’s still up to the government to decide how many bail-out dollars it wants to provide. But for every dollar provider, it might as well bail-out a debtor along the way if it is going to bail out a banker anyway.
i have full sympathy for a lot of commenters’ (hi Rebel!) concern for moral hazard. i would have preferred we not start down this road, which would have implied putting a series of banks and insurance companies in receivership in late 2007 and having a lot of pension fund obligations taken over by PBGC (and yes, that would have implied some pensions bailout, as PBCG would have been quickly underfunded, and Congress would have had to re-fund it).
but it’s too late for that now. we have already made transfers on such a large scale that it strikes me as unsustainably hypocritical to say we can’t payoff debtors, because that rewards bad behavior, while we can payoff bank stakeholders and creditors, who systematically and deliberately arranged to profit from bad behavior.
in any reasonable system, creditors are the gatekeepers of the financial system. there are always deadbeats gladly willing to pay on tuesday for a hamburger today. we rely on creditors not to lend on them, rather than imagining we can perfect the human race and make all borrowers time consistent. in an absolute moral sense, who knows? but it is creditors who failed to perform their role in the financial system much more than debtors. in every time and every culture, borrowers good and bad have out out their hands for money, and creditors had to distinguish. it was creditors whose behavior changed: they stopped discriminating, and relied instead on magic. to expensively forgive creditors now when we could also forgive debtors at no added cost strikes me as perverse favoritism towards those with resources to lend.
March 12th, 2009 at 1:34 pm PDT
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> it is creditors who failed to perform their role in the financial system much more than debtors. in every time and every culture, borrowers good and bad have out out their hands for money, and creditors had to distinguish. it was creditors whose behavior changed: they stopped discriminating, and relied instead on magic.
i don’t buy this. they are the same exact people, modulo the suit and modulo the luck.
March 12th, 2009 at 1:45 pm PDT
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I think there is far too much emphasis on how to “fix things” vs doing what is most fair. Without confidence in the system the economy will eventually implode. Without some hope that things are handled fairly confidence will decay. Sure, perhaps you can make things “better” in the near-term by applying unfair fixes but it comes at a far greater long-term cost in my opinion. Bail out no one…provide some safety nets for those who lose jobs, etc. Allow assets to flow from weak hands to strong hands.
March 12th, 2009 at 1:59 pm PDT
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“i would have preferred we not start down this road……but it’s too late for that now” Heard it before; in 1987, 1998, 2000 etc. If you don’t turn off that road, it ends in Argentina if you are lucky, Zimbabwe if not. The US and the UK are now on the motorway section.
I would question whether it is a creditor’s responsibility to check whether their debtor has the ability to repay comfortably; only to check that they have the means to repay. Of course creditors should lose if they get that wrong, but lets not shrink from, as MB puts it, some assets flowing from weak to strong hands first. It’s not as though I am suggesting that debtors should be required to sell one of any organ that they have a pair of to pay off their debts (although come to think of it…..!)
March 12th, 2009 at 2:44 pm PDT
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babar — same people, different roles. we’re not judging different tribes. we are rewarding and penalizing people based on “job performance” (or not, if we end up setting outcome regardless of performance, e.g. via bailouts.
again, i’m cool with bailing no one, and forcing debtors to pay what they can under bankruptcy and creditors to accept the losses that implies. but i am not cool with bailing out creditors and leaving debtors to hang. and i am especially not cool with bailing out creditors, and letting them get paid twice if they manage to get debtors to pay what they owe despite having been paid already during a mark-to-market downturn.
rebel — if you (we) can persuade the powers that be to decisively turn off the bailout highway, i’ll join you. but if we can’t, i won’t sit by and watch the well connected get bailed out and while the peasants get squeezed. either we eschew bailouts, or we bail-out debtors as well as creditors. any other choice is sheer corruption.
we’ve gotten a lot of comments against bailouts generally, and good on that. but can anyone make a case why banks and creditors should get bailed out while debtors remain on the hook to them?
March 12th, 2009 at 3:13 pm PDT
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“Allow assets to flow from weak hands to strong hands.”
OK MB so let’s follow the money today. Taxpayer money to AIG (and customers of AIG’s renegade London based hedge fund), to Wall Street Banks (the largest include investment bank arms which manufactured and fraudulently sold illiquid mortgage “assets”)and to hedge funds directly via TALF and the private/public scheme via Treasury. Total commitment somewhere north of $6 trillion. Weak (taxpayer) to strong (financial intermediaries and their client speculators).
So, the money’s already out of the vault. There isn’t enough left for much of anything else, including Waldman’s idea of sending money to end user debtors.
What would have happened if we’d just closed down a couple Wall Street banks and AIG? We’ll never know because it wasn’t tried. We’ve kept them alive and we keep buying illiqid assets and paying AIG’s CDS obligations to banks around the globe. We’ll have to stop doing this, of course, because at some point the bloodletting has to stop. It appears the line of investors with worthless derivaties still snakes around the corner and up the block, no matter how much the taxpayer buys.
So much good to be done. So little money, and thus ability, to do it. This recession is going to last quite a while, I’m afraid. I can’t wait until the first nascent recovery runs into $5 p/gallon gasoline.
March 12th, 2009 at 3:13 pm PDT
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The problem in a recession is that nobody knows anymore what’s an asset and what isn’t, or which hands are strong and which are weak.
Factory for making cars? Seems like an asset– until everyone starts believing that car-buyers will get laid off and stop buying cars.
Financial institution with enough capital to do a leveraged buyout of Microsoft? Seems like strong hands– until the ‘capital’ turns out to consist of derivatives with a strictly notional value– and everyone gets the notion that their value is zip.
People are afraid of lots of different things happening in a recession. Some of these things involve rich people suddenly becoming poor. I can see why rich people are afraid of this, but not why the government should try to keep it from happening. After all, I’ve been poor all my life, and no one has been raising a fuss about this being a violation of my human rights.
Some of the things we fear in a recession involve non-rich people becoming so poor that they can’t afford food, shelter, healthcare, or education. Outside of a recession I can understand the claim that what with all the well-managed economy and loads of opportunity and all, it’s their own fault and we shouldn’t be responsible for saving them. During a recession this claim is bs.
What the government should be trying to do in a recession is maintain a minimum standard of living for everyone, and a good education as well. Spending money on decaying or outmoded infrastructure could also make sense. Any other ‘fixing’ is in my opinion trying to fix the problems of the rich. Let those chips fall where they may, sez I. No matter how bad things get, the Uhmericun Peeepul are not so stupid that they can’t manage to feed and shelter the entire population. The luxury is optional. It may come back after the recession is over.
If a single person dies of exposure sleeping on a subway grate next winter, I want to see a wall street fat cat get the electric chair for it.
March 12th, 2009 at 5:29 pm PDT
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> again, i’m cool with bailing no one, and forcing debtors to pay what they can under bankruptcy and creditors to accept the losses that implies. but i am not cool with bailing out creditors and leaving debtors to hang. and i am especially not cool with bailing out creditors, and letting them get paid twice if they manage to get debtors to pay what they owe despite having been paid already during a mark-to-market downturn.
i agree with most of this.
in my rambling reply earlier, i pointed out that there are currently ways in which debtors get off the hook (cramdown, bankruptcy, non-recourse foreclosure). i think these need to be used extensively to reduce unpayable debt. however, if they are, the intermediaries will go broke. letting them fail will not solve the problem of bad debt: it will only transfer that problem onto the creditors of the intermediaries. i don’t see how that helps anything.
arithmetically, a foreclosure plus a govt bank bailout = govt reducing a person’s mortgage to recovery value (current market price). you get the same effect all around, plus the person gets to stay in their home or sell at market price and break even. (it only makes sense if they can afford the new mortgage however.)
this has to be done right, as there is a lot of opportunity for fraud, and reducing debt of those who are able to pay is neither efficient nor fair.
from my point of view, moral hazard be damned, the fastest way we can normalize debt the better.
March 13th, 2009 at 12:10 am PDT
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Last September, I had the same nut of an idea you have here — I called it the $10K Solution. $10,000 to every taxpayer to pay down debt. And like you say, the money goes through the entire system this way.
A week or two after I posted my plan, I saw Nouriel Roubini making calls in the same vein for money to go to pay down personal debt.
I posted this idea across the internets all fall, as Andrew or wanderindiana, through January, when I got frustrated that no one was listening.
I still am frustrated no one listened to me, and hope you have greater success with the idea than I did.
March 13th, 2009 at 12:48 am PDT
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we’ve gotten a lot of comments against bailouts generally, and good on that. but can anyone make a case why banks and creditors should get bailed out while debtors remain on the hook to them?
Well, I tried to make the case by saying that if you bail out debtors not only you continue the moral hasard but you do not have yet again an efficient allocation or a Pareto real improvement as you continue to make any other individual, not debtor, worse off. You must consider equity in your resource allocations not only trickle up effects. Money is fungible and if you give money to debtors you do not force them to save or to reallocate their resources to repaying their debts or broken bances. You have just to force renegotiation of mortgages and avoid house’s sale, changing contracts. In Europe we do not have the mechanism of foreclosures and sometimes you cannot even kick out of a house a debtor, particularly renter, during winter time…
March 13th, 2009 at 6:57 am PDT
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One method of implementing the same is as others have said, give money to everybody as to not penalise those who were prudent. But still, cash-holders would get punished, which is indeed a sad result.
To prevent moral hazard in such a situation, one might think of “out of the box” ways to pay. Let everybody be given a credit card with a payment term of a year or two. Let anybody who runs a certain balance on this lose their right to vote for a certain period.
By default, the next election will be fought on fiscal prudence since all those who would be eligible to vote will be only the fiscally prudent. Ofcourse, there is exactly zero chance of such a policy being implemented.
March 13th, 2009 at 7:26 am PDT
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