No deal

I hate to say this, but looking at the plan as leaked, I have to say no deal. Not unless Treasury explains, very clearly, why this is supposed to work, other than through having taxpayers pay premium prices for lousy assets.

As I posted earlier today, it seems all too likely that a “fair price” for mortgage-related assets will still leave much of the financial sector in trouble. And there’s nothing at all in the draft that says what happens next; although I do notice that there’s nothing in the plan requiring Treasury to pay a fair market price. So is the plan to pay premium prices to the most troubled institutions? Or is the hope that restoring liquidity will magically make the problem go away?

Here’s the thing: historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets. The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the RTC. The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

I hope I’m wrong about this. But let me say it again: Treasury needs to explain why this is supposed to work — not try to panic Congress into giving it a blank check. Otherwise, no deal.

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cliff feld September 21, 2008 · 2:40 pm

The last time the Bush Administration tried to panic Congress into massive action, we wound up in Iraq.

I agree: no deal.

Joe September 21, 2008 · 2:57 pm

And what about section 8? No review whatsoever? Is it normal with these kinds of bailouts (at least to the extent that such bailouts are normal)? And why? It strikes be as totally bizarre to have no review on 700 billion dollars. How come no one is talking about this?

UnEasyOne September 21, 2008 · 3:08 pm

This is the last big scam to be inflicted upon us by the criminal enterprise known as the Bush administration. The Russian wheat deal previously inflicted on us by Nixon/Kissinger beggared anything previous in American history – this dwarfs that.

It is a transparent attempt to stampede our cowardly congress into subsidizing all the Wall Street Roulette – picking up the tab for every losing turn of the wheel, while the fat cats keep all the “winnings.”

Not only that, but it’s only the first installment! The only problem it will solve is a permanent end to the concept of “discretionary spending” for the vast majority of Americans.

As written, it essentially turns over the printing press – the US Treasury – to the same crooks who got us into this mess in the first place. No review, no accountability, no changes (in the corruption), no limit to the bailouts, no help for the real victims.

No how, no way!

Even worse, it simply turns over the bigger problem to President Obama – and he not only ets to be the bad guy (forcelosing on all those bad loans) – but he’ll get the blame for the crash to come – because the real biggie comes next year when all those “liar loans,” “pick-a-pay,” loans and other implements of financial destruction come home to roost.

Daniel September 21, 2008 · 3:10 pm

I have to say I’m starting to feel the same way. Though I certainly do not have the expertise of Dr. Krugman, I am unnerved by the insistence by Mr. Bernanke this morning on This Week that there be no reciprocity and that he be placed in charge of nearly a trillion dollars with absolutely no protections for the taxpayer and no oversight.

That does not seem like a response to a crisis as much as a cash grab that we whose risks cannot be socialized must fund.

Arthur September 22, 2008 · 8:20 am

We are somehow supposed to believe this was all a huge surprise to the Treasury Department, who thought everything was just swell? If they are that dumb, why should we assume they now have a clear grasp of the actual situation? Decisions made in haste, in a panic, often are unsound, as contrasted with a more measured approach. And help me understand what the idea of compensating foreign banks and a couple of brokerage firms is all about? Are we saying that any investment in any kind of dodgy security marketed in the United States should, by definition, be backed by the US Government, even though we were not consulted in advance?

But Secretary Paulson says things “are moving very fast” and there is no time to think, no time to ask reasonable questions, the only answer is to sign a blank check, don’t worry, he will fill in the payee line and the amount later. Oh, and the choices he makes cannot be questioned, now or later. Riggghhhhttttt…. and if that sounds good to you, I have an e-mail from a nice man in Nigeria who has thirty million dollars he would like to transfer to your account, because he has heard so many good things about you.

Vaughn Beams September 22, 2008 · 9:53 am

This appears to be a continuation of the Republican policy of transferring U.S. Treasury funds to private corporations and individuals who run these enterprises. It makes corporate welfare seem tame. When Chrysler took the federal loan, I remember that it was repaid. These pikers don’t want to return any funds, to admit any responsibility or accept any real consequences. Warren Buffet warned of the consequences of using derivatives on pp. 14 and 15 of the 2002 annual report of Berkshire. It seems that “sooner” (than later), arrived last week.

Jonni Good September 22, 2008 · 11:06 am

Paul, have you called up McCain and Obama and given them your take on things? Maybe they could get together and have one of those bipartisan discussions that they keep claiming to want, and put the brakes on this deal.

Gus Wynn September 22, 2008 · 4:39 pm

No deal – let the firms who have mismanaged money die. Let investors who trusted them lose. This is propping up the financial sector artificially, the opposite of free market economics. Otherwise theyre saying we needed regulation and didn’t have it in place.

A massive failure of American capitalism, government and the Bush administration. Why would we give this untrustworthy, lame duck failure more power to abuse our money? Let the next administration deal with it. By then maybe the companies can make an accurate accounting of their holdings.

dlr September 24, 2008 · 1:35 pm

The thing that gets me is Paulson’s adamant opposition to the US getting contingent equity stakes in the companies we buy these toxic assets from. This is the only protection the US taxpayer can possibly get from mis-pricing of these assets, either deliberately or accidentally. The fact that Paulson is against this protection for the US taxpayer leads me to believe his goal is to overpay for these assets, and structure the deal in such a way that the US taxpayer will never recover the money they lost, no matter how profitable these banks become again down the line.

rgoalierob September 24, 2008 · 2:20 pm

So, let me get this straight, we should give $700 billion, unquestioned, to a dude that drove Goldman-Sachs into the ground?
I don’t think so.
Privatize profits, socialize losses, it’s the Bush economy, stupid.

JeffRubinoff September 24, 2008 · 2:43 pm

Something similar happened in the Czech Republic in the 90s, when the government created the “Consolidation Bank” to buy up and try to fix and sell bad debt that had been issued by the bank, and they did this without taking over the banks. Mind you, the government had owned “golden shares” in the banks at the time the bad debt had been issued, and the situation was to a large extent the result of gov’t action. For what it’s worth, Consolidation Bank has done what it could and closed shop, and the Czech economy is doing very well now, thank you very much. On the other hand, it didn’t take much outside money to fix the Czech economy.

Jim Simonetti September 25, 2008 · 6:47 pm

It’s time for some hard choices, and some realistic prioritization. Charity begins at home. Let’s limit the bailout to only those delinquent mortgages that were given to illegal immigrants, and deport the illegal immigrants, then offer their homes and jobs at minimum wage or higher, to those legal residents who lost their jobs to illegal immigrants who were employed below minimum wage!

Hannah September 26, 2008 · 7:51 am

How can any of us understand what this is all about when we have been told for months that the economy is basically sound? Why suddenly do we have to bail out all of these bad debts? Since we are so fond of handing things over to foreign investors, why not auction these things off to some other country and let them profit from bungled real estate deals? We are paying for the stupidity and greed of lenders, and the plain stupidity of borrowers who couldn’t afford to pay up when the time came to do so. I do not want to lose all of my hard earned savings because of a market panic, but there must be a better way to handle this situation. When the massive foreclosures started was the time to step in…now we are a day late and 700 billion short. And of course, we all know where the 700 billion will come from…our pockets.

I hate the political climate in this country…BOTH SIDES. SHUT UP AND PUT UP something we can actually cling to Washington and stop your petty bickering and partisan warring. The American people are not as a whole too stupid to understand a reasonable plan.

frank September 27, 2008 · 4:16 am

The worst that can happen is a bad recession. Let it happen. They are using tax dollars to try to repeal the natural business cycle. Capitalism needs to purge itself now and again. We should not stand its way. Let the recession come and let the bad bets be punished.

Ming Hu September 29, 2008 · 3:23 pm

People who should reponds for this mess are who took advantage from this trouble. those are homeowners dumped thier house and high level banking people who failed their multi billion dollars business maybe they brokeor hinding their money.
people who short sales or foreclose their house. their supposed to cant own any type real estate property in the US for next 10 to 15 years not 3-7 years
and those high level people supposed not stay away the financial business industry for next 20 years.

Shirley September 29, 2008 · 11:45 pm

No bailout. Let the chips fall where they may. No blank checks. I just don’t trust this administration at all anymore. I’m sick of their fear tactics, and I for one, am falling for it again. It’s just a few months till the new administration comes in. Let’s wait …. and see what happens, and let the New President decide what’s best for the American people, not what’s best for the big wigs on Wall Street.

Mark Ehrmann October 5, 2008 · 4:50 am

A NEW ALTERNATIVE STABLE FINANCIAL SYSTEM MUST BE
DEVELOPED BASED ON THE PEOPLES TAX CONTRIBUTIONS!

We the people of the United States of America are financially joined together through the process of taxation. Our accumulative assets are wealthier than any single corporation or country. Yet Congress freely spends our tax dollars without any financial compensation to us. This is a call for all Americans to demand that our tax dollars be placed in public trust as the FIRST BUILDING BLOCK of our National financial system that in turn will earn quarterly interest. Since “We the People” are the Government, we must demand that any loan from our Treasury to any bank, state, city or institution must include the structure of our free market principals to benefit the collective whole who participate in this taxation process.

We need to create a System of Federal Funds based on the collection of all our tax dollars. The uniting title for these funds would be “The USA fund”. Each fund would be attached to the department that uses money from the American taxpayer. Examples would be: USA-Military Fund; USA – Health Care Fund; USA-Farming/Agriculture Fund; USA-State fund; USA City fund; USA-Transportation-road, infrastructure Fund; ……. on and on. We the American tax payer would be allowed to designate 25% of our Federal taxes dollars to these Federal Fund(s) of our choice. Every fund accumulates value via the millions of people who contribute. The value of these funds also increases as more people invest in them. These are not speculative funds, but rather funds backed by genuine assets of hard earned cash.

These Funds must become the first building block of our whole financial system. The federal government borrows money from the funds created by our tax base. All Banks borrow money from the Federal Government. USA FEDERAL FUNDS is the pool of real money that the Federal Government uses to lend money to the banks. The banks pay back the loans with interest. A small percent would also be charged to the bank to reinvest back into the specific fund from which the bank got the loan,

This system would unify America. Any money spent by Congress would have to be paid back to these Federal Funds of the American people. Any financial deal made by banks would generate a small percent of profit that could be spread to all taxpayers. This profit could offset the annual amount of taxes owed the Federal Treasury, or could be reinvested back into any Federal Fund. Taxation would decline, since the money used by the Federal Government would always be generating new wealth that is equally paid by all who participate in this financial system. All transactions would be held accountable.

Thanks for your time.

Mark Ehrmann

Mary October 5, 2008 · 2:02 pm

Sadly, in the midst of the financial “crisis,” the real perpetrators have not taken responsibility. Through encouraging, or forcing, businesses to make poor business decisions for political reasons, Congress has broken our system. Riddled with partisan blame, no one in Congress is accepting his/her role. As the American people, we need a full list of the Congressmen whose campaigns profited from this and we need to prosecute them. Hopefully then, the next time they will think twice before using their position to profit. We need statesmen, not politicians. We are monetarizing debt, placing a failed CEO in charge of billions, and allowing Congress to force the American taxpayer carry the debt. Perhaps we are responsibile, we elected them.

Devin Harmon November 14, 2008 · 6:54 pm

This is just like no deal accept you’re not using Treasury. If they feel, or you feel uneasy – just tell them thanks for cautious criticism and take the plan elsewhere. Premium prices is usually characterized by no deal involving their equivalent institutions of cautious criticism.

jack hasson December 27, 2008 · 11:05 am

What are Swiss bank accounts? The global financial crisis and the Madoff affair cause me to wonder about sources of ready cash from sources other than the US treasury and new taxes. I envisage untouchable trillions of dollars safely stored in Swiss bank accounts. It seems like an awful waste of a cure available only to one individual or other entity. We need an understanding of how swiss bank accounts work and are regulated.

dilatorydame January 29, 2009 · 4:13 pm

I wonder if Krugman would support the Good Bank, Bad Bank project? He is absolutely right that we got mislead and more has to be done to segregate out the bad assets in order to cut a fire wall around the conflagration.

V E Debs June 9, 2009 · 1:42 am

We are in a down turn the likes I have never seen. I am 65 years old and I don’t remember one like. 1982 was bad but not like this. We have one of two ways to get out of this. 1) We all can run and hide, even take our money and hide it. ( 2 ) Or we can spend our way out it. The Republicans think and always have that we close our eyes and go to sleep wake up and everything will just fine. I as a Democrat think we should spend and spend lord knows there is a lot to be done. Yes we may have to increase tax’s big deal. You may have to keep the liquor cabnet a little less stocked. Maybe cut back on your tobacco use. Yes maybe even eat a little less. That won’t kill us. So if you got a better idea then the President send it in, have them take a look at it. You might even become a hero.