Monday, September 22, 2008

Risky Business

George Will, not a man I either admire or whose bromides and harangues I pretend to really even listen to, once said one of the smartest points about American government policy.

Unintentionally, of course. He's not that bright. He originally had been speaking of the tax code when he said that businesses tend to privatize profits but socialize losses.

In other words, a business can deduct its losses from the IRS (and by extension, the government) but will work like the dickens to retain as many earnings as possible and avoid as much tax as possible, even to the point of tax evasion.

Unfortunately, as Paul Krugman points out today, this policy is not limited to the tax code:
The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.
In other words, ladies and gentlemen, we've co-signed a home loan for a friend, without any access to his income, and now the bill is due, he can't afford to sell enough of his crap on eBay and the mortgage is due.

If this was the first or only bailout we had endured, that might be OK. After all, it would be an experiment, and experiments are allowed to go bad.

But this is neither the first time we've had to bailout out bad loans (Krugman correctly refers to the S&L crisis of the 80s), or even companies in deep fiscal trouble.

We've been down this road before, and will sadly travel it many times into the future unless we change the paradigm. More on that later, perhaps next week.

We are in essence buying $700 billion dollars of near-worthless paper...after all, if it had value, the banks could package and sell the hopes that some miracle, mirabile dictu!, and they gain value again.

Some will, many will not. While I find it hard to believe that these so-called "adults" of the Bush administration haven't calculated a generous breakeven point for the bailout where we stand to make back our $700 billion, I can pretty much guaran-damn-tee you that point is highly, perhaps even exuberantly, overoptimistic.

I haven't run the numbers, but I'd be willing to bet Paulson's gamble will show us losing a few hudnred million, maybe we recapture $400 billion. Maybe. Not likely.

Meanwhile, these banks, the WaMus and Wachovias and Wells Fargoes, all get to line up at this big pig trough for their slop of Fed money, in the hopes that somehow, banks that managed to keep their books in order privately, like Citibank, who ended up with a saudi bailout will begin lending them good money after bad.

With no penalty to the banks who got Federal money. No management changes. No seizure of assets to offset even a small portion of the bailout. No censure of the board of directors for failing their fiduciary oversight, and all golden parachutes intact.

Meanwhile, if you owe a mortgage and you have trouble paying it off, you lose your house, even if the Fed somehow steps in and finds you a shelter, but then again, the Republicans have cut those unnecessary social services because, you know, it inflates the deficit...

George Will is correct: Our priorities are all screwed up.