Thursday, September 25, 2008

The Bailout....choosing the lesser of 2 evils.

One of my students asked yesterday what "we" would get out of this bailout. A good question. And I think the problem many people are having is understanding how the pain in doing nothing may be worse than the pain of that huge $700B price tag, and that it is not just a gift to the rich.

We are stuck in a situation where we have to choose between and expensive bailout, or running the risk of another depression. Most of us don't like the idea of bailing out a Wall Street that got high on risk and leverage, and now is making us clean up its mess. However, I think many fail to see how important the financial markets are to the whole economy, in other words, our jobs, homes, student loans. The availability of credit is vital to all of these things.

Certainly, the original package that was proposed was seriously flawed. First, it was a classic of the Bush Admin...."give us all the power and trust us". It included a clause that the Sec. of Treasury would have absolute power and no oversight. We've seen how well giving the Bushies this kind of power has worked out, how they squandered out money in Iraq and after Katrina on no-bid contracts with cronies who had no idea or experience doing the job. So there has to be some checks and balances on what is going on.

Secondly, we have to make sure that there is an upside for our risk, that these bad debts are not bought at a too generous price. The taxpayers either need to get equity, as with the AIG bailouts, or make sure these securities are priced where there is an upside. Also, the guys in charge of making this mess have to lose their jobs, and without giant severance packages. It looks like something is going to be done in that regard, as even Bush has now agreed to limits on executive pay.

Finally, financial regulation needs to be modernized. This problem is not in the regular banking industry, which is regulated in the risks it takes. If other institutions are able to put us in a situation where we HAVE to save them, then we need to have oversight on this institutions. And that regulation should include stiff penalties for those who violate the rules.....I'm talking about jail time for anyone who runs an organization that needs government help!

I told the student that what he will get is the likelihood there will be jobs for him when he graduates, mortgage money when he wants to buy a house, or money to borrow if he wants to start a business. Without working credit markets, and faith in our financial system restored, all that is threatened.

Sure, we all hate the guys who caused this, and that includes the people who were supposed to be watching the store. As part of this deal, all the big time execs on Wall Street, and the regulators who didn't regulate, should be put in stockades and pelted with rotten tomatoes....that would make me feel better. But to do nothing and let the economy collapse would cause us way more pain in the long run.


John Ritzenthaler said...


Bailout vs. no bailout is a false choice. Among many other options, we could buy defaulted mortgages at market price. I mention that as an example, not as a recommendation.

The point is, don't ask "Bailout yes/no", ask how could we best use $700B to improve our country.

ClaireWalter said...

The only upside to all this that I can see is McCain's presidential big MIGHT have been deep-sixed by his lack of comprehension about the consquences of the Bushies' deregulatory fervor. I don't know why anyone as smart as Obama would WANT to try to extricate the country from the deep piles of doo-doo in which the Bushies have buried us, but I'd rather see his administration try than McCann/Bush III, w/ Palin waiting in the wings.