The auto bailout bill could have cost the taxpayers as much as $14 billion.
Failing to pass it cost U.S. stockholders about $300 billion.

By preventing consideration of the auto bailout, Senate Republicans seem to have driven world equity markets down by about 3%, with the futures markets suggesting U.S. averages will follow. I don’t have current figures, but an estimate from 2001 puts the total value of equities worldwide at $37 trillion, of which about 40% was in the U.S.

So to save U.S. taxpayers a maximum of $14 billion, the GOP cost holders of U.S. equities something like $300 billion, and equity-holders worldwide something closer to $1 trillion.


Footnote Maybe the big share-price declines suffered by Toyota and Nissan (as a result of the dollar’s fall to under 90 yen) will lead the management of those firms to rethink their strategy of encouraging Congress to let their Detroit rivals go belly-up.

A $50 billion Ponzi scheme?

So it appears. We may be in the process of measuring a macroeconomic variable once proposed by J.K. Galbraith: the “bezzle.”

Apparently so. That’s “billion,” with a “b.”

John Kenneth Galbraith once argued that in normal and boom times there is always a certain amount of hanky-panky going on both inside firms and in trading markets, concealed amid generally positive results. He proposed to call the total amount of money involved in that hanky-panky “the bezzle.” And he argued that the conventions of economic discourse discourage discussion of how big a role frank dishonesty plays in the business word. (My understanding is that virtually every S&L failure revealed massive fraud, and that most were in fact the products of that fraud, but virtually all of the published analysis of that event treats it as a moral-hazard problem rather than a moral problem.)

Well, now it looks as if the bezzle is bigger than ever. And it looks as if we’re about to find out.

Update It’s not clear to me whether this was a true Ponzi scheme, where the operator pays big “dividends” to existing investors out of the money forked over by new investors while skimming as much as he can off the top, or whether Madoff actually lost all that money making bad trades and simply covered it up by faking results in order to keep the apparent returns high. It’s fraud, and self-interested fraud, either way, but he may have engaged in cheating rather than outright stealing.


Hank Paulson has decided that the answer to the crisis caused by the collapse of the housing bubble is to re-inflate the bubble.

Hank Paulson seems to have decided that the right response to a situation in which cheap credit pushed housing prices way too high compared to either rents or incomes, leading to over-investment in housing and then a fall in housing prices which then put lots of homeowners under water and threatened the solvency of the financial system is … wait for it … to offer cheap credit to keep housing prices way too high. Repeat after me: High housing prices are the enemy. High housing prices are the enemy. Housing prices must come down.

It’s the old principle of lowering the river rather than raising the bridge. Don’t try to re-inflate prices to justify the old mortgages; renegotiate the old mortgages to fit the new, lower prices.

I usually shy away from conspiracy theories, but just ask yourself: if Paulson were an al-Qaeda sleeper agent tasked with destroying the U.S. economy, is there anything, starting with letting Lehman go down, that he would have done differently?

Footnote Apparently the folks at Treasury are urging the real estate agents to lobby Congress for the plan. (And yes, it’s against the law to use Federal resources to orchestrate a lobbying campaign.)

Update Dean Baker points out that a temporary subsidy on mortgage interest rates will produce at best a temporary increase in prices, so the people who bought under such a plan would likely wind up under water when it came time to sell.

The British plan

as best I can make it out:

1. Buy equity in banks.

2. Guarantee interbank loans, for a fee.

3. Demand board seats.

4. Limit executive compensation.

The government reps on the boards can help limit the moral hazard problem that would otherwise arise from guaranteeing the debt of insolvent banks: their managers have strong incentives to take on lots of risk in hopes of returning to solvency, since being a whole lot bankrupt is no worse for the managers and shareholders than being a little bit bankrupt, but being slightly solvent is much, much better than being slightly insolvent.

This contrasts with the Paulson plan, in which the government takes non-voting equity and doesn’t guarantee interbank borrowing (at least explicitly). I think the UK plan makes more sense, if those board reps can really rein in risk-taking.

The trick will be to set the guarantee fees. This is where the taxpayers can make out like a bandit. If people and businesses trust governments but not banks, then there’s revenue to be derived from the spread between the short-term guaranteed interest rate and the short-term non-guaranteed interest rate. It’s a variation on seigneurage.

I see no good argument for making a present of that spread to the shareholders of financial institutions, even if the government is one of those shareholders. Ideally, the fee wouldn’t be like the U.S. deposit insurance system, where all banks pay the same premium, but would be proportioned to the riskiness of the institution, perhaps as determined by default-swap pricing on banks’ borrowings from non-banks.

Equity, not just assets

Paulson moves to recapitalize banks. Non-voting equity purchases by the government, complementary to new private capital.

And the Europeans, having had their fill of yukking it up about the stupid Yankees and our financial crisis, are now on board. Maybe Iceland’s bankruptcy concentrated some minds.

It’s an ill wind … Oil closed below $80. A credit crunch leading to a recession isn’t one of the better ways to pop a commodities bubble, but it’s one way.


This is written as the Dow is sinking almost 7% through about 9600, after a similar day on foreign markets. The judgment of investors isn’t the rousing endorsement of the bailout some had hoped for. And Floyd Norris passes on the following CNN poll result:

As you may know, the U.S. went through a depression in the 1930s in which roughly one out of four workers were unemployed, banks failed across the country, and millions of ordinary Americans were temporarily homeless or unable to feed their families. Do you think it is very likely, somewhat likely, not very likely, or not likely at all that another depression like that could occur in the U.S.?

Very likely, 21%

Somewhat likely, 38%

Not very likely, 29%

Not likely at all, 13%

Hmm. The 59% in the first two categories, think they’re headed for the mall and the car dealer and the Sunday open houses?

Time for some old-fashioned 1930’s stimulus: every day of unemployment by every willing worker is a day’s value creation lost forever. Forever. Not to mention underemployment. The good news in this state of affairs is that it’s occurring at a time when investment in the kind of thing government is good at buying, especially infrastructure, is just the ticket. It will never be cheaper to buy houses for transit right-of-way, and the construction workers not building tract houses and office buildings will never be more grateful for jobs.

This piece of good fortune is aligned, with more luck than we deserve, with a whole expensive shopping list of stuff we need to do to slow, and adapt to, global warming. This shopping list is a fantastic Sunday supplement insert of bargains, things that are such a great deal we should happily go into hock for them (unlike a house with two bedrooms for every occupant and a three-car garage). We need transmission lines to get electricity from where the wind blows to where people live. We need high-speed rail to connect the downtowns people are moving back to. We need nuclear power plants. We need a lot of expensive research on stuff like vehicle batteries, geoengineering, and carbon capture and storage. We need a lot of cheap research on how to teach people that driving a big car is just rude.

Of course, with credit locked down and the private sector on a gurney with a drip, these are only possible if government steps in. If that happened, it would mean that the smug philosophers of “small government and low taxes forever and no matter what” would have been wrong. If it happens in an Obama administration, it would probably mean that the opportunities for no-bid cost-plus ripoffs by friends of imbecile appointees would be greatly constrained. Perhaps these are good reasons to hunker down and have the depression; a slogan is a terrible thing to throw away just to save an economy, and anyway the people who matter have already socked away enough to be set for life.

In fact, a lot of nice things will be cheaper with breadlines keeping the labor force docile…now that I think of it, a carpenter building a school is one less waiter bringing a drink to poolside.

Darth Vader’s Fingerprints on the Garbage Pail

The LA Times has an interesting piece today on Paulson’s botched sales job on the bailout/rescue package. (h/t Yglesias).

Clearly, the White House’s strategy here was tin-eared. Not only did it not reach out to interest groups and Congress, but it wrote a plan that just gave the Executive untrammeled and unreviewable authority to play with the economy.

Hmmmm….botched political strategy? In order to give the Executive massive and unreviewable power? Where have I seen that before?

The original bill had Cheney’s and Addington’s fingerprints all over it. It’s vintage Cheney: just charge ahead and take command to make the “tough calls” and the reaction be damned. And often his incompetence shows through. As Gellman reports in his book, it was Cheney who refused to negotiate with Jim Jeffords, leading to the short Dem takeover of the Senate in 2001. It was Cheney who pushed ahead with his energy task force, making absurd claims for Presidential power and achieving nothing. Gellman also reveals that Cheney had initially persuaded Bush to certify the NSA wiretapping program himself, which would have led to dozens of of DOJ officials resigning. (Bush backed down after recognizing that the political fallout in an election year could be fatal.).

LIttle wonder that it was Cheney who went to the Hill in the middle of last week to try to get House Republicans in line.

Cheney’s strength, Gellman notes, was that he knows exactly what he wants and will always try to get there. As Paul Krugman has rightfully remarked, this is an administration that tried to use crises, not to solve them.

Decouple Fannie and Freddie?

Most people seem to agree that the old Freddie/Fannie structure was the worst of all possible worlds: no government control, but an implicit government guarantee. Where they disagree is where we move from here.

Not surprisingly, progressives say that we should return them to their earlier structure, when they were government entities (as they are now under the buyout). Conservatives argue that they should be completely privatized.

I’m wondering whether this is one place where splitting the baby would make good sense from a policy perspective: take one of them and make it wholly public, and take the other completely private.

After all, Congress created two entities to compete with each other, so would it be unreasonable to have them compete as different systems? The tradeoff would be the security/Treasury guarantee of one vs. the private flexibility of the other.

I am hardly an expert in this, and perhaps the different structures would undermine the entire competition here, but if people have thoughts, as Ross Perot would say, I’m all ears.

Mean Old Nancy, Part II

Stopped-clock Department: a sharp-eyed reader points me to Jonathan Weisman of the Washington Post, who, after reporting House Republicans’ frantic search for smelling salts in regard to Nancy Pelosi’s speech, notes:

In truth, few Republicans were on the floor to hear that speech, and those who were there showed no signs of discomfort, as they often do. Republican leaders backed away within hours, conceding they never had the votes they had promised.

David Brooks still frantically spins for them (“did she have to act like a Democratic fund-raiser at the most important moment of her career?”), but even his heart isn’t in it. Pathetic.