Paulson and Bernanke seem to be asking the US Congress to agree to the $500-1,000 billion bailout of Wall Street within the next week, before their regularly scheduled session adjourns.
I hope our lawmakers remember the horrendous consequences that flowed from the equally momentous decision– the enabling resolution for the war against Iraq– that they were railroaded into, also from a sense of very imminent fear, back in October 2002, and that this time around they refuse to be similarly hurried into enacting very far-reaching and potentially extremely damaging legislation just before yet another national election.
There are a number of huge questions about the Paulson/Bernanke proposal that need to be answered before legislators make a firm move on the subject. If the lawmakers need more time, they should take it. The country’s big outside creditors are all so deeply invested in (exposed within) the US financial sector that they– like us, the US taxpaying public– need Congress to get it right, rather than acting in haste.
We elected these legislators to have oversight over the national budget and that is what, right now and for as long as it takes, they need to do.
I realize there’s an election looming. That consideration will have to take second place for the legislators until they have dealt properly and responsibly with this crisis. Paul Krugman has raised many questions about the bailout plan as reported so far. They are well expressed here.
Bernhard of MoA has an even broader set of critiques, expressed here. He proposes the following far-reaching plan to address the whole broad, house-of-cards dimensions of the crisis:
- * all financial exchanges and markets of the world close for a week
* [All ‘credit default swap’ transactsions (CDS’s)] are declared null and void and new CDS creation is forbidden until new regulation is in place
* the publicly dealt financial entities have seven days to figure out and publicly restate the value of their liabilities and assets excluding all CDS
* a onetime windfall tax will be created that socializes overt advantages some entities will have from this
* the proceed of that tax shall be used to prop up the capital of the big losers in a program comparable to the Reconstruction Finance Corporation of 1932.
Bernhard has also been asking some very important questions about how, precisely, the proposed bailout will be financed. Unless those questions are answered satisfactorily, the proposed “solution” to the crisis as current defined could end up actually exacerbating it.
Lawmakers, get this right! Make it fair to the whole national community. Make it sustainable and workable. And above all, don’t get hustled by the fearmongers.
* [All ‘credit default swap’ transactsions (CDS’s)] are declared null and void and new CDS creation is forbidden until new regulation is in place
This is quite ignorant and very silly. No government has the jurisdiction to ban CDSes (which mainly apply to non-financial industries anyway). And if one intends to ban them one would need to ban a lot of other stuff they mimic — plain vanilla bond options, for example, which are fundamentally the same thing.
Vadim, I’d love to know the main outlines of how you propose we should deal with the crisis.
No government has the jurisdiction to ban CDSes
Wrong. The government can make laws about anything.
There is precedence for this from the Great Depression where FDR simple made a certain widely used contract clause illegal. The Supreme Court held it up.
There is a link in my piece that clarifies this.
The government can make laws about anything.
Sure they can, but how, and which government?
If a law is totally unenforceable (a law against looking up, or breathing, or a law against cold weather) it will be a very silly law. A law banning CDS agreements is like those.
Most CDS trading is done from London and has nothing to do with the US government. In fact only a tiny proportion of the CDS market has anything to do with banking at all.
But the silliest thing about the idea is: even if you try to ban it, people will continue to synthesize CDS-like structures any number of ways (bond options being the most obvious way — so would you ban those as well?)
Here’s a tip: try a little humility before you go goose-stepping into someone’s line of work threatening to ban what they do.
Vadim, I’d love to know the main outlines of how you propose we should deal with the crisis.
You haven’t quite articulated what you consider to be ‘the crisis.’ I don’t see it. If Goldman Sachs and Morgan Stanley went out of business tomorrow I would lose no sleep. If a plummeting mortgage market made it impossible to sustain high real estate prices, and harder for baby boomers to finance their next vacation, I would be happier still. The US real estate market should go down, not up. First time homebuyers shouldn’t go into hock so that real estate speculators (and their wall street backers) can get rich.
Thanks for clearing that up vadim, though it took you a day or so longer than I expected to articulate it in your comments to Helena’s blog.
So, the market must be allowed to operate just as it has been because it’s your business and there is no crisis. The market will sort everything out, just as it should, especially with a trillion dollar dole cheque or two courtesy of the US taxpayer.
What the hell were we all thinking with this “crisis” nonsense? Yes, I’m looking at you, George, John, and Obama among others. And now the Chinese want Taiwan back to bail the US out of this non crisis? “Guns before Wallmart”, I say! Really, we should ask the financial experts first or risk being exposed for being the fools we are! I am so happy to live in the age where we can finally buy Milton Friedman’s mythological pencil, with each distinct part made from the cheapest global sources, all financed by American investment, (I guess he thought) and wonder at how cheap it all really is!
Roland, do you own shares in Lehman brothers? If not, why exactly do you care that they’re bankrupt? I sure don’t. And I don’t think the US taxpayer should bail anyone out of anything (least of all defaulting homeowners choking on their second or third investment property.) In fact I’m outraged by the plan. But why are you so upset about it? You don’t pay US taxes, do you?
Seriously, do you think there’s a crisis because you saw it on CNBC? Because Hank Paulson of Goldman Sachs said so? How exactly are you suffering personally?
And now the Chinese want Taiwan back to bail the US out of this non crisis?
and this is a possibility because you read it on Xinhua??
..and anyway, as has been said elsewhere, with all the added debt in this dramatic solution to the debt crisis “a trillion dollars will be the new 27 cents”. All this tax payer borrowing to cover will soon enough turn out to be much worse than doing nothing for everyone but the immediate “get out of jail free” card or “bail out” recipients. This non-crisis will continue to take it’s course guided unerringly by the invisible hand of the Free Market, with the usual effects for rich and poor.
You give our senators and representatives entirely too much credit here. True some probably thought it was a bad idea but went along so as not to swim against the tide (and what does that say about their morals?), but many were out in front leading the pack..
HC said “… I hope our lawmakers remember the horrendous consequences that flowed from the equally momentous decision– the enabling resolution for the war against Iraq– that they were railroaded into, also from a sense of very imminent fear, back in October 2002, and that this time around they refuse to be similarly hurried into enacting very far-reaching and potentially extremely damaging legislation just before yet another national election…”