We keep getting stories, with a varying lack of detail, that say Congress is ‘close’ to a deal on a Big Shitpile bailout bill. I am not skeptical about the lawmakers’ nearness to an agreement on the language of the bill, but I can’t avoid wondering how in the hell they are going to get anyone one to vote for it.
Senator Barbara Boxer, Democrat of California, has received nearly 17,000 e-mail messages, nearly all opposed to the bailout, her office said. More than 2,000 constituents called Ms. Boxer’s California office on Tuesday alone; just 40 favored the bailout. Her Washington office received 918 calls. Just one supported the rescue plan.
Senator Sherrod Brown, Democrat of Ohio, said he had been getting 2,000 e-mail messages and telephone calls a day, roughly 95 percent opposed. When Senator Bernard Sanders, the Vermont independent who votes with Democrats, posted a petition on his Web site asking Mr. Paulson to require that taxpayers receive an equity stake in the bailed-out companies, more than 20,000 people signed.
“We certainly have never brought in 20,000 names in a day and a half,” Mr. Sanders said, sounding astonished. “For us, that’s off the wall.”
…Representative Ray LaHood, Republican of Illinois, said he had not seen such an outpouring since President Bill Clinton’s impeachment trial in 1999.
Now, one way to get support for the bill is to address some of the concerns that people are expressing in these contacts to lawmakers. Making sure the bailout doesn’t pay for excessive executive compensation is one piece. Granting an equity share (public ownership) of the rescued firms, as Bernie Sanders suggested, is another. But, with a spontaneous outpouring like this, it’s doubtful that people will be overly appeased by the details. They want Wall Street punished, not rescued, even if that would ultimately hurt the overall economy.
Skepticism about the efficacy and necessity of this bill is not limited to the raving horde. Even the experts on the financial services sector are doubtful that the plan is well structured and absolutely necessary. The main problem is that the bailout is trying to do two things simultaneously, using a tool that is not well-positioned to take care of either of them. If the object is to restore liquidity to the credit markets, then this plan is a very expensive and inefficient way of doing it. We will wind up overpaying for assets. If the object is to rescue firms at risk of bankruptcy, an huge infusion of cash makes sense, but the mechanism contemplated in the bill is horribly inefficient because we will infuse cash into sick and healthy firms alike.
Under the plan, Treasury will buy up assets, and they will try to get a fair price for them. Insofar as they get a fair price for them, it will cost the taxpayers nothing. If you spend $100 for a share of stock, you have merely swapped cash for something of equal value. In this case, putting cash into the credit system can free up lenders to make new loans. That’s good. But, if you haven’t expended any value (because you obtained a fair price), then the lender hasn’t gathered any value. From the standpoint of financial health, the lender is still broke. To improve the lender’s books you have to overpay for their assets. The real cost of the bailout will be a measure of the degree to which the Federal Government overpays.
This is a very indirect way of bailing out a failing financial institution, and it involves doing things at cross-purposes. You are setting up systems (like reverse auctions) to try to assure you get a fair price, but part of the point is to overpay. That seems like a recipe for an ethical catastrophe. But, even worse, the use of reverse auctions (and the like) assures that you will wind up buying assets from the lowest bidder, not necessarily from the firm with the greatest need of a bailout. It’s a very inefficient way of doing a rescue.
This isn’t to say that the plan will not accomplish what it sets out to do. It’s number one goal is to restore trust in the books of lending firms so that they will be more willing to lend each other money. Along with that, the goal is to avoid panic in the markets. The plan may succeed in this. But it will certainly cost more than is necessary.
Giving the taxpayer an equity stake in the rescued firms will help. But we will have to see the details of the plan to know how well insulated the taxpayer will be against massive losses.
If I were designing this plan, it would look nothing like this. And I remain unsure just how the bill’s crafters are going to convince members of Congress to ignore the ratio of voter contacts against the bailout.
Getting agreement on the language in the bill will be significantly easier than passing it.
