The IMF just released a study that analyzed 124 banking crises, and I wish everyone in Congress (well, at least their staffers), the Treasury, and the Fed read the paper. It provides insight into what worked and didn’t work in past banking crises, and gives an idea of what we might expect from various policy measures.
I’ve only skimmed it, and key bits stick out. Page 6:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.5 Of course, the caveat to these findings is that a counterfactual to the crisis resolution cannot be observed and therefore it is difficult to speculate how a crisis would unfold in absence of such policies. Better institutions are, however, uniformly positively associated with faster recovery.
Now of course, one can argue that the IMF is biased and this paper is merely a defense of the cold-water remedies it imposed in the Asian financial crisis of 1997-1998, which produced a great deal of dislocation (business failures, rises in unemployment, riots, changes in government). But one reason the US would not suffer as badly is that we have the reserve currency. In Indonesia and Thailand, what made a bad situation worse was that companies had borrowed in foreign currencies, so that when the home currency plunged in value, the debt burden rose sharply, sinking a lot of businesses.
The paper contains other useful warnings that appear to be getting little heed. For instance:
All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.
Special bank restructuring agencies are often set up to restructure distressed banks (in 48 percent of crises) and asset management companies (AMC) have been set up in 60 percent of crises to manage distressed assets. Asset management companies tend to be centralized rather than decentralized. Examining the cases where AMCs were used, we find that the use of AMCs is positively correlated with peak non-performing loans and fiscal costs, with correlation coefficients of about 15 percent in both cases. These correlations may suggest some degree of ineffectiveness in AMC’s, at least in those episodes where asset management companies were established. In line with these simple correlations we find Klingebiel (2000) who studies 7 crises where asset management companies were used and concludes that they were largely ineffective.
So much for the idea that taxpayers might show a profit.
We have been advocating direct recapitlization of banks, and the research finds that even though it has larger up-front costs than some other options, economies that go this route fare better:
Another important policy used in the resolution phase of banking crises is recapitalization of banks. In 32 out of the 42 selected crisis episodes, banks were recapitalized by the government. Recapitalization costs constitute the largest fraction of fiscal costs of banking crises and takes many forms….
On average, the net recapitalization cost to the government (after deducting recovery proceeds from the sale of assets) amounts to 6.0 percent of GDP across crisis countries in the sample, though in the case of Indonesia it reaches as high as 37.3 percent of GDP. Recapitalizations seem to be associated with lower output losses. The correlation between recapitalizations and output losses is about -15 percent. A rationale behind this correlation is presented in Valencia (2008), who shows—in a rational expectations bank model—how a persistent credit crunch can generate significant output losses, following a shock to bank capital. Therefore, by replenishing banks’ capital, the supply of credit returns to normal sooner and the output losses become smaller.
These programs DO NOT pay for themselves:
Fiscal costs, net of recoveries, associated with crisis management can be substantial, averaging about 13.3 percent of GDP on average, and can be as high as 55.1 percent of GDP. Recoveries of fiscal outlays vary widely as well, with the average recovery rate reaching 18 percent of gross fiscal costs
As we have suggested, there is no free lunch:
There appears to be a negative correlation between output losses and fiscal costs, suggesting that the cost of a crisis is paid either through fiscal costs or larger output losses.
The New York Times’ Dealbook discusses a Merrill Lynch write-up of the IMF report:
A look at Japan’s financial crisis in the 1990s is instructive, the Merrill report said. Like the current American crisis, Japan’s banking turmoil included the rescue and disposal of home-loan companies and the bankruptcy of a big securities firm — although the crisis in the United States seems to be unfolding much faster than Japan’s, possibly accelerated by the magic of securitization.
Judging from previous crises, Merrill’s economists suggest that the United States should move quickly to declare certain banks “survivors” and put the others out of their misery.
Doing so, they said, would end the “who’s next?” game that has gummed up the credit markets:
The Asian crisis teaches us that it is imperative that U.S. policy makers tell us which financial institutions will survive; and which not. This could possibly involve blanket government guarantees to unfreeze money markets. Until this uncertainty is resolved, financial institutions will be reluctant to deal with each other.
I am very glad to have this historical data hit the web _before_ we pitch the public purse into the bonfire. And I’m glad to have empirical confirmation of what is my personal read from a less comprehensive standpoint of historical examples.
“All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency.” Let’s put this in plain English. Capital infusion of banks as a crisis mitigation action costs more upfront but has lower long term costs and better outcomes (explicitly in terms of the real economy). Asset purchases and liquidity infusions have lower up front costs, but higher long term costs and poorer outcomes (explicitly in terms of greater loss severity); in particular, this result follows from the protracted insolvency of firms eating up greater resources prior to their ultimate failure.
I will further highlight that rapid closure of insolvent firms has high political costs and pushback, but is directly associated with least cost and best macroeconomic outcomes. Really, it is not hard to see what Congress needs to do; it isn’t. It’s hard to see them having the courage, competence, or sense of public service to CUT THE DAMN NUT! I’d love to see Mike Shedlock email this IMF report to every Congresspersona and staffer *hee* (though I doubt that the IMB makes his ‘most preferred institution’ list).
Yves, in terms of quality data per pixel, conciseness, and relevance, this is, to me, the best post I have ever read on NC. Let us pray there is still time to bollox the Bullrush Bailout and implement a functional solution instead.
It’s beginning to bug me that BBC and others are talking about “a package to rescue the American financial system.” We don’t _have_ a system. There’s no machine with a master on/off switch, nor a head with a massive headache or tumor to be treated. “Wall Street” is a far flung constellation of competing firms. Some are banks, some are investment houses, brokers, mutual funds, funds of funds, insurance companies, etc. Half of “Wall Street” isn’t in New York and a big chunk is in Europe. The entire world has a stake, one way or another, in US tradable paper, issued by hundreds of firms whose star of fortune might rise or fall from day to day.
No system. No single cure to fix a single problem. That’s why Paulson is obviously lying. He intends to rescue _some_ players, not others, and certainly not everyone.
Recapitalizing the banks without any strings is like giving a gambling addict money to stop his legs from getting broken. Instead of paying off the debt, they will place even larger, risker bets.
And if I have a $10,000,000 short position on a bank, I would be really, really happy to loan them $5,000,000 and hope they went bankrupt. But I can't hedge. Going the opposite way on equity and debt used to be a popular hedge. But no short on equity, no long on debt. And we are shocked to see the credit markets freeze.
My bias is for completely free markets, but Banks seem to want things both ways. They don't want to show the portfolios of securities – some might be toxic waste, some good. They don't want an exchange to trade the CDOs, MBS, whatever where there would be a bid/ask, margin requirements, and a market price – they could claim they were worth so much and booked them as profits when they were going up, but they controlled the valuation. Now they don't want to say.
There are parallels with the Japanese banks keeping dud loans on their books through the 1990s (or our S&Ls trading the dead horse for the dead cow until the music stopped).
That is the core of the problem. How can you recapitalize something whose books are completely opaque? Or even having a small opaque box which might have a financial neutron bomb (like the off balance sheet debt vehicles Enron used)? Who are the counterparties? They aren't exchanges. The securities aren't traded (and some end up in court trying to determine the nuances of some legalese).
Is JPM, BoA, or Citi liquid and/or solvent? Who knows? Put another way, would they be solvent at half their current stock price or not? If you don't know and can't by law hedge, why loan to them?
John Mauldin fans the flames of “panic and civilization (as we know it) collapse” if Congress doesn’t use taxpayer money to bailout Wall Street.
Who’s Afraid of a Big, Bad Bailout? (yada, yada, yada)
I’ve sent him the link to this article, not that I expect he will change his opinion as he is part of the problem.
Video worth watching:
Congressman DeFazio: We’re Going to Be in the Repo Business!
“Our fundamentals are sound”
“As we have suggested, there is no free lunch”
Free lunch ?!?
My God, but the ONE thing that the present crisis has made awfully clear is that the US IS the country of free lunches, of course not for all… only for those who DON’T NEED free lunches !!!
So, please, DO NOT use anymore “free lunch”… it’s like speaking about sunlamps to the nuked Hiroshima and Nagasaki survivors
‘Just across the northern border in Canada the average life expectancy is nearly 10 years longer for both genders, you’d think that one fact would be sufficient to motivate a change to decent health care but it hasn’t and Obama won’t try much less succeed in getting any sort of meaningful health coverage instituted for all amerikans.’
‘Not least of all because it is too late. The asset base, skill sets and community infrastructures had to be built up before the baby boomer bulge over-strained the resource. But even if that weren’t so he wouldn’t succeed because the fundamentals of amerikan society are too askew. Peeps can be persuaded that idiotic issues like the spread of communism, rise of islam or whatever are more important than the health and well-being of their own family.’
‘Not only do people accept that lunatic suggestion a substantial number of amerikans will try and ram that stupidity down the throats of anyone who attempts to disagree. The oppression has become self-service. Amerikans race to institute more and more laws defining more and more types of criminal act that can be committed by the poor while they destroy any restraints on the criminal behaviour of the rich and powerful. . . Willingly. Not because they were told to but because they imagine it will be better that way. better for who?’
‘Grey nonentities struggling for the right to commute to servile labour in order to scrape together the means to buy pre-packaged nutrition free food?
Certainly not for the millions of amerikans who will spend their entire lives in ‘the prison system’ fully 25% of people on this planet who are in prison are incarcerated in amerika in the sadly misnamed ‘amerikan justice system’. (amerikans make up about 4.5% of the world population and have 25% of the world’s prisoners yet they believe other countries want their freedoms? It would be funny if it were not so sad.’
Here is a link to an article yesterday by John Mauldin supporting Treasury’s bailout plan.
Mauldin’s peice is pure salesmanship because describes the need to recapitalize banks, but completely fails to address why Treasury’s plan isn’t so inefficient and ineffective that it amounts to a helicopter drop of free money to banks.
“We have been advocating direct recapitlization of banks, and the research finds that even though it has larger up-front costs than some other options, economies that go this route fare better”
And indeed, Paulson being no fool, is suggesting a recapitalisation of banks. The only problem is that he is presenting it as some kind asset purchase programme so that this recapitalisation takes place at no cost to the banks and full cost to the taxpayer. Call it a $700bn handout to the most undeserving people in America.
"Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks."
Well hell, we learnt that our ownselves in the S&L crisis, did we not? Before the crisis came to a head, weak regulators let undercapitalized S&Ls use all kinds of jakeleg "capital," including goodwill and even capital notes issued by the government itself.
Not that KongressKlowns are going to remember, much less understand, something that happened more than 20 years ago. The technology of men's hairstyling and tinting has improved vastly since those primitive 'Grecian Formula' days. And we're all lookin' good …
"The Asian crisis teaches us that it is imperative that U.S. policy makers tell us which financial institutions will survive; and which not."
Uh huh. And to that point, David Mildenberg writes in Bloomberg:
"Wachovia Corp.'s suitors may use a template honed by JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon last week: Wait to see whether regulators will seize the bank, then buy the best assets and let the government sort out the rest, according to analysts.
"WaMu's takeover has proven that there's an easy way, if the FDIC is involved," said Sean Egan, president of Egan-Jones in Haverford, Pennsylvania. "You kick the hell out of the equity holders and bondholders. That may be the new model for bank takeovers."
Oh, my! Just remember this: currency is a liability of the sovereign, or its central bank lapdog. As Sean Egan has rashly revealed, we're gonna "kick the hell" out of dollar-holding doofuses.
I'm talkin' to YOU, John Mauldin, and all your hedge fund client/victims. REDEEM … if you think you can. Do you feel lucky, punks? Well, do you?
— Juan Falcone
Unfortunately, but predictably, the IMF’s so-called ‘analysis’ entirely omits any reference whatsoever to Christian principles. Too many of their examples are for nations who are not Christian or Christian-based. The United States of America can do things that don’t work elsewhere because we are a Christian nation and, as has been seen repeatedly over the Bush years, our faith can turn what seem like bad ideas into brilliant outcomes such as has happened with our victories in Iraq and Afghanistan, our defeat of terrorists, our free market economy, our #1 education and health care systems, and, of course, the growth and prosperity of our mega churches.
John Mauldin and his greedy little hedge fund budies are what helped get us here screw that bastard.
Juan, you crack me up. Great stuff.
Thought experiment- Suppose this government asset purchase mechanism had been implemented as a prescription to the S&L crisis of the 1980’s (as opposed to the creation of the RTC)?
If Charles Keating (Lincoln Savings fame) had been offered the opportunity to sell his most distressed assets to the government, as opposed to having his company taken over by the Feds, his balance sheet would have been strengthened, and hypothetically, his S&L would have been in a better position to continue to extend credit. (Maybe it would have also saved him from lengthy criminal convictions)
It seems that Keating and the rest of his ilk would have been granted decision making capacity as to how the bailout funds would have been reinvested. Where do you think the money would have gone? What type of return do you think the taxpayers would have received on that deal? Would it have solved the problems of the S&L Crisis better than what was achieved by forming the RTC?
What's so different about the ethics of the people responsible for today's crisis vs those who triggered the S&L crisis?
I saw the S&L crisis first hand. I agree with you. No bailout. Let the big banks file bankruptcy if need be.
Thanks for posting this Yves…
So that we have a more complete data set here, I would point out that this same IMF also published a pretty detailed analysis around 2001 stating that its decision to let Thai banks fail was likely mistaken because they failed to understand how peoples steeped in authoritarian traditions assumed their entire world was collapsing when one bank was allowed to fail.
According to this same IMF, that was a decisive factor causing a general run on the banking system, exacerbating the situation greatly.
Disagree with it or not, that was the IMF’s own post mortem on the situation.
Like the Fed, there are some pretty dramatic debates going on between the younger economists and the old school at the IMF. For example, look at how they are beginning (at long last) to reconsider the Washington Consensus.
Let’s be clear. This does not rebut many of the assertions in this study (which I have not had time to review in detail) but I wanted to provide additional data points for discussion.
One can make a case that we are still experiencing unexpected consequences (such as a collapse in CP linked to hedge funds) from the failure at Lehman.
PS: I apparently stated recently that the notional value of derivatives outstanding was 500 billion. It is 500 trillion. Sorry for the typo.
No sensible or even workable plan is feasible given our current political/financial system.Good luck,all.
Child mortality in Thailand rose significantly during the asian crisis.
Be careful what you wish for.
“Here is a link to an article yesterday by John Mauldin supporting Treasury’s bailout plan.”
Mauldin is a hedge fund promoter. If the hedge funds aren’t bailed out, Mauldin will take it in the shorts. Since he makes his money off hedge funds, you can’t trust him in advocating any policy that helps him. You have to parse his analysis and draw your own conclusions.
Been there, I changed your language a little and sent your argument to my senators and representative. Here's how I said it:
Suppose we had done this government asset purchase thing for the S&L crisis of the 1980’s?
If Charles Keating had sold his most distressed assets to the government, instead of the Feds taking over his company, his balance sheet would have been strong, and his S&L could have kept on extending credit. (Maybe it would have saved him from lengthy criminal convictions)
It looks like Keating and the others would have the choice how to spend the bailout funds. Where do you think the money would have gone?
Thank you. I told each of them that I wouldn't consider it plagiarism if they used my words in their own speeches. They represent me.
I have to admit it seems like plagiarism to me when I use your words. I hope you forgive me too.
If hedge funds don’t get bailed out, who will make the next great blockbuster movie? Entertainment, America’s last great export…Christ we’re in deep.
regardless if the government bailout. Socialization of losses will still occur because the FDIC has insufficient capital to handle all of the failures and will eventually ask the treasury for a handout.
Now consider the jpm WaMu deal. 150 billion in deposits bought for 1.9 billion with a mortage portfolio considered to lose 20% of its value overtime. 10 billion raised in an equity sale which was higher than expected. Jpm market cap increases by 11%. Which makes perfect sense. Especially since WaMu was acquired after defaulting on 20 billion in debt.
Expect this process to continue for the well capitalized banks. Will be interesting to see what additional bank failures occur this weekend. Also I believe the mother of all failures is yet to come which is why we need 700 billion now and fast.
“Also I believe the mother of all failures is yet to come which is why we need 700 billion now and fast.”
what would the mother of all failures be?
This is moving too fast and people are having trouble organizing events during this multi-day coup to take America:
THURSDAY, SEPT. 25TH
On September 25th 2008, progressives came together in 251 emergency rallies in 41 states saying NO to the $700 billion Bush corporate bailout for Wall Street. As a result, the tax giveaway, assumed to be a "done deal" only a few days earlier was stalled and being reconsidered by lawmakers who are stunned by the speed and scale of America's reaction. Instead, Congress turned to work on an economic recovery package for Main Street.
>> I hope that if people can not get away for these types of events today, you will all consider challenging your reps when they come to your town looking for votes; they all need to feel very unwelcome IMHO!!
People know now that whoever said “it’s different this time” during the American credit boom time a couple of years ago has been proved plain wrong. I know.
As much as it pains me to say it, I have to say this. Here it goes: The nature of the American bailout this time is different from the EM govt bailouts in the past.
Here, as reckless as the bankers had been during the boom time, most of them are now aware of the mistakes and are rependent (and more importantly, their shareholders now have little tolerance for risk taking). Recapitalization in the banks by the govt would, therefore, likely result in greater productive, worthwhile credit extension–much unlike the past crisises in the EMs, where banks’ corporate governance was terrifyingly weak, and the govts were hell-bent on protecting their pet companies rather than firms that are truly worth bailing out.
And as important, it’s shown indeed in the IMF paper that govt interventions tend to be associated with faster economic recoveries. It’s crucial in this case–not only because the US economy is sliding down fast amid the ongoing (and possibly accelerating) credit crunch, but also because few other countries would feel well if the US economy so much as catches a slight cold. From global economy’s perspective, the US bailout plan can only do good, even if the benefit might be less clear-cut for the US taxpayers.
“what would the mother of all failures be?
The bankers, hedgies, and Bushies have no argument for their corporate handout. That is why they make vague threats of doom unless their proposal — and nothing else — is passed. This is a cheap debating trick of posing your oponent a false dilema of 2 choices. Anyone who uses it thinks their audience is stupid. And anyone who falls for it is stupid.
“Here, as reckless as the bankers had been during the boom time, most of them are now aware of the mistakes and are rependent (and more importantly, their shareholders now have little tolerance for risk taking). Recapitalization in the banks by the govt would, therefore, likely result in greater productive, worthwhile credit extension”
This is a cheap debating trick. You say there is a problem (the banks need capital), but fail to say why Paulson’s plan is a good one.
Banks are in trouble, and the public needs loans: Fine nationalize the insolvent ones, and contribute cash to them for 100% of stock. This wipes out shareholders and equity comp of management who profited from incompetence and corruption. That is far better than Paulson/Bernanke’s plan for a helicopter drop of free cash to banks.
Re: "wish everyone in Congress (well, at least their staffers), the Treasury, and the Fed read the paper."
>> There is no time for research or thought, because the market in Japan will open in just a few hours and we (the people) thus need to place America on a new course, behind closed doors, under the table (with lobby groups) as soon as possible, before the public can react and participate in democracy.
Who’s Lobbying Congress On The Bailout?
Among the armies of well-heeled lobbyists pressuring Congress on the size and structure of the financial bailout this week are a number of familiar faces. CBS News found 21 former staffers from the Senate Banking, Housing and Urban Affairs and House Financial Services Committees are now lobbyists for financial firms. Their job? To lobby those in Congress who will shape the financial bailout. The former staffers now represent hedge funds, private equity firms, investment banks and the failed mortgage giants Fannie Mae and Freddie Mac.
It seems to me that in general, rich people aren’t protesting this bailout, even though it’s in the country’s interest and ultimately in their interest to stop it in its tracks. Where is the outcry from the upper class?
Child mortality in Thailand rose significantly during the asian crisis.
Sorry, but this paper does not agree with your statement.
The social and demographic impact of the Southeast Asian crisis of 1997-99
Journal of Population Research, May, 2000 by Gavin W. Jones, Terence H. Hull, Dennis Ahlburg
Re: “what would the mother of all failures be?
About Thursday, I thought I should get behind The Plan, because things are looking fairly weird with yields and liquidity, but as you (or I) step back and take deep gulps of air, the mechanics of this need to be examined, as in looking at a business plan.
What will happen? I thought they were dancing around all this shit, because they didn’t want to cause a panic and explain to people how there could be runs on money market funds and more banks, both of whom use short duration bills and securities for liquidity — e.g,, at one point last week very short term bills hit zero — a situation that would freeze redemptions for some institutions that don’t have their collective crap together.
That potential lockup theory sounds awful and the mechanics are a little complicated, but I’m thinking we need to see that picture or a blueprint schematic which connects these dots in this economic engine, i.e, why not put a mini-camera-probe down the financial sewer and look at this cancer and see where the pipes are plugged, to see where repair needs to happen ASAP — versus pouring Drano down the wrong toilets and playing a game of Hungry Hippo??
We may spend $700 Billion to clean the wrong toilets and then cause stress in the infrastructure which may collapse the entire sewer system at XMAS.
I want a second opinion from other plumbers and I think we need to use several types of scopes to probe the system. Obviously we dont want crap backing up and causing immediate health problems in the bathroom, but dont ask me to destroy my house to save the toilet!
“Nothing that happened to South Korea in the Asian Financial Crisis came within a light-year of producing as much poverty, even transitorily, as North Korea has managed to produce sustainably.”
– Michael Clemens, 2008
“If hedge funds don’t get bailed out, who will make the next great blockbuster movie? Entertainment, America’s last great export…Christ we’re in deep.” — Anon 12:19 p.m.
Touché, anon! Last night, my wife organized a concert by several musicians and singers. I was tapped to deliver the pianist back to his apartment. On the West Side Highway, we fell to talking about the Paulson plan. He refered to the “Great Depression.”
“If it happens again,” I replied, “the Thirties will be known as Depression I, and the present as Depression II.”
“Well, there would be one bright side for people in my profession,” he ventured. “Musicians were booked solid in the Thirties.”
“Why was that?” I asked, sensing where he was going.
“Because people needed escapist entertainment, amd were willing to give it a higher priority than paying their light bill,” he averred.
Ohhhh man, I’m thinking. Eight years of childhood piano lessons, for naught. I could have had a depression-proof gig, tinkling the keys in a baudy house, and garnering tips from the girls. Maybe in the next life, I won’t screw up so bad.
— Juan Falcone
Paulson and friends are pitching this proposal as an accounting fix, but really the right way to analyze it is in terms of game theory. The man in the street intuitively understands this. The banksters’ intentions are naked for the world to see, and it’s not pretty.
Well since this is a crisis of high finance, why should everyone pay for it? I think we should tax anyone with an income of more than 1 million a year at 90% until the crisis is resolved. I’m all for the bailout in that case.
The bailout plan will work if you accept the fact your children’s children will still be paying on the debt owed long after your gone, worldwide.
The alternative would/will be unbearable for most citizens.
President Bush’s rush to judgment on the Wall Street bailout is political theater and overly partisan. Many excellent solutions for consideration will be offered if given time, e.g., the Swedish financial crisis solution or Mr. William M. Isaac’s FDIC assisted merger approach are excellent examples. Treasury Secretary Paulson’s plan, even after Congressional changes, mainly bails out the bankers, i.e., there is no guarantee that the greedy bankers who caused this fiasco will use the $700 billion dollars for the good of the US, but rather just double down on their own bad bets. Giving $700 billion dollars of taxpayer money to good and bad bankers alike, because we haven’t allowed the bad bankers to fail, is a fools errand. First, let the bad bankers fail, e.g., the bailouts of IndyMac and WaMu went smoothly, and only then use taxpayer money to support known good bankers.
FWIW, Buiter, a well-known European economist whom Yves has cited favorably on more than one occasion, has just come out in favor of the bail-out in order to avoid what Buiter calls a Great Depression.
I highly recommend recent Nobel Laureate in Economics Daniel Kahneman’s critical book on decisonmaking under uncertainty:
This can be a challenging read at times, but it is an essential tool to improving decisionmaking in turbulent contexts with asymmetric information such as these.
You can pick up a used copy for around $35.00.
It’s a beautiful day here in California. I hope everyone is well.
I must admit that I secretly hoped that John McCain would oppose the bailout, with the Republican Congressional Insurgency giving him the opportunity to be a “Maverick’. I thought he would then call this rubbish the Bush-Obama Wall Street bailout, thus covering his greatest weakness. But alas, it’s obvious after last night’s debates that it was just wishful thinking. In fact, it was like watching American Idol with two contestants singing the same song. So this is where we are. The Congress is receiving phone calls of up to 100 to 1 against the bailout, yet they are about to sign into law perhaps the most unpopular piece of legislation in the history of our Republic. So one has to ask. What will happen after $700 Billion is engulfed by the Disappearing Deep Hole of Derivative Destruction? What will happen after the MOAB (Mother of All Bailouts)?
One has to believe that there will be a temporary increase in liquidity, which will be quickly sucked up by the system. But it has been obvious that every Fed and Treasury intervention has had more ephemeral staying power. So this intervention will help for maybe 3-6 months. Maybe. But what will happen when the sequel comes out? MOAB II, or perhaps the Son of MOAB? Don’t you think Americans will be even more pissed off? They will say, and justifiably so, you told us that this will save the system and now we’re right back to where we were a few months ago, and you are asking for another massive bailout! I am afraid that we are going down the slippery slope of ill-guided intervention. Didn’t Paulson and Bernanke say that there is no housing bubble, then they said that Subprime is contained, then they said that by nationalizing Fannie and Freddie that it puts a floor under the mess? WHAT WILL THEY SAY? There will probably be new actors, buy they will still have to read the same poorly scripted lines.
We are going down the path of self-destruction. Lenin said that there is no surer way to destroy a nation than to debase its currency. There is no surer way to debase the dollar than to continue down this misguided path. We have become so caught up in stock market and real estate losses, that we have taken our eyes of the real prize! Our greatest asset as a nation is our currency. Today, the US Dollar reigns supreme. But one has to ask how much longer will our creditors keep the credit flows open while we debase and inflate our way out of this self-inflicted greed wound. There are already grumblings of a Sino-Russian alliance, one that could put significant pressure on other nations to abolish the dollar standard. Once the dollar standard is usurped, we are TOAST!!!!!!! Expect massive tax increases, spending cuts and a drastic decrease in our standard of living. Yet, the guys on the yachts are smart. They will have diversified into other currencies, homes in other nations, and accounts in safety deposit boxes around the world. Much like the Nazi’s who bought their freedom after WWII, these criminals will save their hides. Caviar for them and feudalism for us. You’ve been warned.
Buiter hasn’t been giving good advice lately. He said at Jackson Hole that the Fed needed to fight inflation and raise rates. Smart guy, but very wedded to convention.
Kenneth Rogoff, who is an expert on banking crises also cited here, in a recent panel discussion came out against it. So pick your economist.
The bailout plan will work if you accept the fact your children’s children will still be paying on the debt owed long after your gone, worldwide.
So, how long did it take us to get into this mess? Maybe 5 years? And how long will it take us to pay for it? Maybe 90 years? And how many more messes can we get into in that time?
The alternative would/will be unbearable for most citizens.
What’s the alternative? Any reason to think there’s only one alternative?
This is a time we can’t afford such shoddy thinking. So are we going to mortgage our grandchildren’s futures for a plan we’ve looked at for one week? No, too rushed. If we need to do something this big we ought to spend at least six months working out the details. Better a year or two.
I at first thought we would get through this, the bailout is nothing more than swapping non liquid paper with liquid paper. There is no gold standard to maintain.
It would seem however we have to have the pain before putting liquidity in the system is seen as something other than a bailout.
Depression here we come.
Buiter was going on for months about it being a liquidity crisis. He was in favor of the UK toxic asset swap scheme — even though the pricing was ridiculous. He is quite articulate but frankly I’ll take competent and insightful over articulate any day.
This new IMF study was discussed in the 9/18 issue of the Economist, here: http://www.economist.com/finance/displaystory.cfm?story_id=12262103 .
How many banks went down this week? How big were they?
How long was it known they were in trouble?
Why couldn’t they be saved?
Was debt paid down or just moved to another location?
How many more go under here and abroad before the picture becomes clear? Before your funds and assets are frozen in legalese when payments and payroll can’t be met? When oversea assets are confiscate due to default?
Nothing to see here, just move along and go about your business while you still can.
Bankruptcy isn’t the PROBLEM. Bankruptcy is the SOLUTION. The FDIC’s take over of WaMu, showed us the correct way to deal with the “banking crisis”. If the FDIC got busy and closed a couple of dozen more banks with balance sheets that stink to high heaven, the entire “crisis” would be over. Just like that. There wouldn’t be any need for a bailout, of any kind. The stockholders and bondholders of the weak and dying banks would lose big bucks, but they are exactly the people who SHOULD take the hit on this. The rest of society would get nothing but benefits. The banks assets would be transferred to a well managed bank, with a strong balance sheet, who would begin to loan against them again. The economy would get moving again. The US taxpayer, and Congress, could go back to sleep. No $700 billion dollar bailout, no increase in the federal debt, no social injustice.
Best of all, it would be QUICK (the FDIC is already in place, and obviously capable of doing the job). All they would need would be a little bit of encouragement from Bush, to move things along and get these things resolved.
How many more go under here and abroad before the picture becomes clear?
Over here in the USA we have found that while government tends to do small simple things badly, it does big complex things even worse.
This is pretty much the biggest thing the US government has ever done. And we’re going into it without any clarity at all about what can be done, what needs to be done, or what will be done after the project is approved.
And here you are saying “More! Faster! Terrible things will happen unless we trust the Bush administration to do the right thing with the largest sum of money ever allocated in one lump sum.”.
Let’s wait 4 months and get a better idea what needs to be done, and then let the new president make a proposal.
I think I’d have much more trust in a new administration that doesn’t have a track record yet.
Bankruptcy isn’t the PROBLEM. Bankruptcy is the SOLUTION. The FDIC’s take over of WaMu, showed us the correct way to deal with the “banking crisis”.
Excellent. Correct. Thank you.