On Tue, 30 Sep 2008, Doug Henwood wrote:
> If it's done through the FDIC, fine, but there's no way to avoid
> spending serious amounts of money.
If that's true, this bailout plan won't work, since in the end it doesn't spend serious money. For all the talk about spending $700B, what it really does is trade $700B in treasuries for $700B in other securities. If Bernanke's theory is right, we'll make money, and if he's wrong, we'll be losing 10s of billions a year -- which is not serious money in banking crisis terms.
Or is it? The more I read about banking crises, the more I wonder how you're supposed to count the cost. If you count what got recouped, it seems the RFC during the depression made money too. When we first started talking about the Swedish solution, we noticed how estimates ranged from 6% to 2% of GDP; it now seems that's because the first is the initial outlay and the second is the net outlay after recoupment.
(And if you add in the GDP costs of not acting -- which is hard to do mathematically but really has to be part of your calculus as a policymaker -- I would guess that even on a conservative estimate an A-1 operation like Sweden's would probably have to be considered a net gainer compared to the price of non-action. But maybe we shouldn't be talking about the price of bailing out the system, but the price of fucking up the system, which will be paid one way or another, and the GDP losses below trend and the bailout costs should be added together rather than subtracted from each other.)
Certainly here in America right now we seem to have a certain disaster-porn attraction for the big numbers, adding together every intervention as if it was money out of pocket. But the $85B to AIG is a loan, not a grant. The guarantees to various banks are still unexercised. And this $700B is a swap. It's theoretically possible that so far we haven't spent a dime.
Of course, the fact that we haven't might point to the fact this is all stop gap, and the real purpose of passing Dodd bill is to get us to the spring and the next administration. And then we'll have to take the real hits that shrink the overall debt and shrink the financial sector.
Michael