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Thursday, 2 October 2008

This wasn't what I wanted

I was worried by Paulson's initial bailout plan. Only three pages? No oversight? $700 billion?

Worse, Paulson didn't seem sure he knew what to do with the money. When Lehman Brothers went under and things suddenly got dramatic, well, quite frankly, it looked like nobody had any idea what to do (Certainly not John McCain or Barack Obama, and, unsurprisingly, not the current President either). It was as if Paulson had stepped into the vacuum and said, well, since we're not sure what to do about it, how about we throw lots of money at it and hope it works?

So I hoped that additions would be made to the plan. I was glad there was questioning and opposition. I hoped somebody would come up with some more specific suggestions!

What I was not hoping for was this. Now, I'm glad that the bill that passed the Senate includes more oversight. I approve of giving the money in installments. But I'm deeply disappointed that the critical eye of many Senate members, even at a time like this, seems to be mostly on the lookout for irrelevant but costly concessions.

I'm not even sure I approve of the suggestion that we help out "Main Street" by bailing out the small people who owe on their mortgages as well as the big companies. Not if it costs more money. I don't want to see lots of random spending. I don't necessarily want that spending to be based on who is more deserving. I want to see 'bailout' money used as wisely as possible. If this article is to be believed, the approach currently outlined is well short of shrewd.

There's a real, scary problem here that needs solving. Slacktivist points out this incredibly informative piece from NPR and This American Life detailing the problems faced by small businesses and areas of the market which had nothing to do with sub-prime mortgages. There's nothing fundamentally wrong with those areas of the economy, it's just that they need day-to-day credit to survive. They pay off that credit, and quickly. We're not looking at dodgy loans here. But the whole credit market is in danger of freezing because loans that looked secure before -- mixed packages of mortgages -- have been shown to be stupidly risky, so nobody really feels like lending money to anyone right now.

I am not an economist (IANAE). Still, here's a thought. What if, instead of trying to bail out the purveyors and packagers of dodgy mortgages and hoping that this will make everyone forget what happened, the government were to focus on finding a way to secure the rest of the market? Protect the innocent, so to speak. IANAE, and I've got no clear idea of what we could do with any amount of money, but what could we do with $700 billion focused directly at the problem of availability of credit in general? For example, could we find a direct way to make the commercial paper market more secure? After all, I get the impression (with many repetitions of IANAE) that it's not that insecure to begin with, it just feels that way. I would have thought propping up a system that is still mostly sound but with a lot of uncertainty might be easier than mopping up a system that is fundamentally unsound. What if the government proposed temporary insurance on certain kinds of lending that probably won't fail, just for a few months until the crisis eases?

IANAE. Is bailing out banks and investors the only way to make credit available out there, or is there another way?


Alon Levy said...

Is bailing out banks and investors the only way to make credit available out there?

Pretty much... when the federal government failed to bail out Lehman Brothers, the private credit market got so scared that it just stopped lending to anyone except the federal government. The federal government could borrow for 0.05% interest, the private sector for 7-8%.

Lynet said...

What I'm asking, though, is whether there's are alternative ways to make the private credit market less scared. I don't know enough about what the government is allowed to do to know whether that's the case, but I'm sort of thinking maybe the government could insure (i.e. effectively promise to bail out) those types of lending that are mostly secure. The FDIC plays a role vaguely along those lines, right? (She says, understanding almost nothing of the matter . . .) So increasing the FDIC limit is one alternative that is already being put into practice. Are there others?

Anonymous said...

I like the fact that you're trying to think of alternatives. IANAE either, but I agree with the principle of trying to protect those sectors of the economy that are still functioning soundly from the fallout of the chaos that needs to be repaired.

Alon Levy said...

Mind you, IANAE, either.

The FDIC protects people's savings. It insured up to $100,000 per person; the bailout bill just increased it to $250,000. It helps private savers, but it doesn't do much to prop up the credit market. If your net worth is $100,000, you don't need a personal loan; any business loan you might need is likely to be far in excess of any reasonable cap.

In addition, banks often borrow from one another to fund their investments. These investments are entirely unprotected. Even the $250,000 doesn't apply, since these aren't bank accounts, but ordinary loans.