On Thu, 1 Jan 2009, Jordan Hayes wrote:
> Sorry, but until/unless some of those numbers are "essentially zero"
> instead of "down a bit from nosebleed historical highs" I'll continue to
> have a hard time believing that anything is "frozen" ...
<snip>
> Sure: there's a tightening, which there ought to be given how lax it has
> been.
>
> But a Trillion Dollar Bailout kind of tightening?
<snip>
> *Something* needs bailing out, that's for sure (and the original article
> agrees). The question is whether the bailout we received was the one we
> needed, or was it part of an elaborate rip-off? I mean, sure:
> *something* needed to be done about terrorism and Iraq, too. But did we
> get what we needed? Or were we lied to and given something that's,
> frankly, a rip off?
Assuming arguendo that there is nothing misleading about the Minn Fed figures, I think this argument starts with 3 truths few bailout supporters would deny, and then builds three consequences on them that don't follow.
The three truths:
1) Giving all this money to the banks hasn't gotten them to lend any more than they were lending before, which is a problem.
2) This is because we are still caught in the "paradox of thrift," where banks and households are all trying to build up their savings at the same time. Or in contemporary terms, where banks and households are all trying to deleverage a the same time, because they've all had a huge increase in their liabilities and/or fall in their assets. In either case, they are all doing it for the very good reason that they've all taken a big hit. Businesses meanwhile are shrinking their spending because in logical anticipation of a huge fall in demand.
3) The bailout is astonishing untransparent. The original arguments were misdirecting, and now we have very little idea of where much of the money is being spent.
The four arguments built on those points that seem entirely wrong are:
1) The bailout was unneeded;
2) It was too much money for the purpose;
3) It was a fraud; and
4) There exists and either/or relation between massively helping the banks and massively helping the economy, and by giving all that money to banks, we've somehow lowered the chances for a massive spending program for the economy
None of those things seem at all true on their face, nor to follow from the good points.
The reason we needed the bailout was that we were facing a systemic bank run. Lehman had failed, and clearly that "froze" a large part of the system. The entire investment bank sector vanished in a week; and if the government did nothing, there was a serious threat a major portion of the old fashioned banking sector could follow Lehman into bankruptcy in one big chain reaction.
Are any of you guys questioning that part? Or the idea that such mass bankruptcy would have been a financial freeze of ice-nine proportions?
The injection of funds was made, and that threat of a bank run pretty much stopped (with a couple of scary creaks in the dike thereafter at places like AIG and Citi). I know it's post hoc ergo propter hoc reasoning, but it doesn't seem unreasonable that fattening bank capital warded off bank runs precisely because it made them look no longer on the brink of insolvency.
Is there some part of that that you're questioning?
As for the size, so far TARP has gone through $350B. $250B was the injection into the banks -- $125B immediately into the big 9, and another $125B for all other banks (of which approx $35B has so far been claimed, IIUC). Was that too much? On top of that, IIRC, $40B went to AIG after a pre-tarp allotment didn't keep them off the mat. Should we have let them fail like Lehman? Then another $20B to Citi when the run started up there again (same question). And then $20B to start up a $200B facility to buy up securities backed by student loans, car loans and credit cards, and $20 to cover the risk of loss in buying up a large amount of Fannie and Freddie.
I think that's it. So which part of it was too much? Leaving aside the fact that the capital injections into the banks and AIG are more like a loan than like spending, whereas the coming trillion dollar economic recovery plan really will be flat out spending.
As for the claim that it was fraud based on the guys who were doing it, I think this argument by pattern doesn't hold up to inspection. The guys who brought us the Iraq war and the Patriot Act and Katrina were mainly frozen out of this. The TARP program was designed, introduced and run by Paulson, Bernanke, Barney Frank and Chris Dodd. The Bush administration swallowed it against their will.
Lastly, for the claim that this is an either/or situation, this seems simply wrong. Most people who support the bailout support the trillion dollar spending program the Obama administration is now putting forward. And most people who are against the bailout are against the coming spending. Nobody in effective policy positions sees an either/or.
In fact, even the guy who wrote the original article that started this (Joshua Holland), even though he starts with this misconceived either/or, seems to have changed to a both/and by the time he gets to the last two paragraphs.
Essentially the TARP plan and the coming Economic Recovery Act are aimed at two different crises. The first was to stop a run on the banks. The second is to fight off deflation. They are both needed for entirely different reasons.
The only residual advance I can see in this argument is that maybe we should stop using the metaphor of the economy and/or banking system freezing. Perhaps "coagulating" would be closer to the truth. But I don't think people should be taking the metaphors very seriously. As Krugman pointed out, if you put them all together, we're suffering a freezing crunchy meltdown. You don't really need numbers to prove the pictures don't make sense.
Michael