by Adam | The more I read about the financial industry bailout, the more angry it makes me. I have a hard time thinking rationally about this, but I think that's because the entire idea of the bailout is fundamentally irrational. This is really an unfathomable amount of money (i.e. more government debt) being tossed around, and I don't think the benefit is even close to being worth the cost. That's not even bringing up the enormous moral hazard issue here, and the basic lack of moral fairness in a plan that bails out investors and industry powers but leaves individual morgage-holders and taxpayers holding the bag.
Any time you can find ample commentary from the left and the right that something doesn't make sense, it looks bad. Here's Newt Gingrich arguing he doesn't like the plan. Paul Krugman, a New York Times economist who generally tilts very liberal and pro-government action, also sees this as a big bailout. He does a pretty good job explaining what got us here. Bill Kristol, a conservative NYT columnist, is equally skeptical. The Nation, a reliably liberal magazine, has a exquisite takedown of the current plan which could have easily been written by someone in the National Review (he basically calls it socialism). Conservative commentator Michelle Malkin (a regular on Fox News) opens up a huge can of whoop-ass on the plan.
The Nation has a nice historical breakdown of various other bubbles and bailouts, although it has an obvious political slant. In fairness-and-balancedness, here's a WSJ editorial that blames government action for enabling the crisis. I believe there's a lot of truth to both of these arguments. Here's more back and forth on the blame game for subprime loans. I, for one, think those two arguments miss the point - the market overvalued these assets and was willing to buy them off of the banks. From the bank's perspective, why not make the loan, as bad as it may be, if you can repackage it and sell it for a profit? It's risk-free to the original lender if you can get rid of it.
The bottom line is that nobody on either side seems to think this $700 billion bailout makes sense. Seriously, I can't find a single editorial that attempts to argue that Paulson has the right idea. If you can find an essay arguing that, I'd be interested to see it. The closest I can find is people arguing that doing nothing would be really bad.
It's clear that this "buyout" being proposed will massively increase the value of the companies getting bailed out. It's one thing to save the country from financial meltdown by extending an emergency line of credit, but it's another thing altogether to incur MASSIVE debt in order to shore up the value financial companies (many of which are significantly foreign-owned).
As far as I'm concerned, any bailout that involves the values of the stock in these companies rising at all implies we paid too much for the assets. I can't for the life of me figure out why the taxpayer should be shoring up the stock price of a financial institution. And again, I can't figure out why it's the USA's job to take care of this for the entire world. Shouldn't we at least make the Euros take care of UBS, et al?
Chris Dodd is proposing that the government get equity in the firms in return for taking on the bad debt. I don't particularly like that, but at least it's a form of compensation - it turns a massive government giveaway into a massive government purchase. It works for me if the government sells off that equity once the economy becomes stable. Still, it seems like the whole "buying up loans" concept is rife with potential for abuse, due to the uncertainty in pricing those assets. I've read some alternate solutions that seem easier to implement.
Again, I don't see this as a partisan issue. I see a straight bailout as basically corrupt - corporate welfare at its worst.
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