Bailout Fail
So why isn't the bailout working? Well, it sort of is. The TED spread (the gap between treasury note yields and LIBOR interbank rates) is down from an insanely high peak to more like "intense crisis" levels. But this would have happened with a sensible intervention policy as well. What's making TED drop, in my opinion, is the belief that government will step in to backstop major banks. I'll bet that in fact, a more sensible plan might have actually eased the credit crisis more. The theory would be that with crazy giveaways like the Citi bailout, the public will start clamoring for heads to roll and the backstop guarantee will evaporate as politically impossible (and damn the consequences), whereas if it was conducted in a more sensible way, such a clamor might be further away.
By "sensible" I mean that the government could be demanding far, far more concessions than it is getting. The banks are using bailout money for shareholder dividends, for instance. The government isn't even getting the shares in the banks it deserves for the value of the bailouts it is handing out. The Citi and AIG bailouts are the prime examples here. There's little doubt that Citi would crash and burn without government assistance. The government should demand a much, much higher stake than it did. Given that the alternative is liquidation, is 99% the right number? (That is, a nationalization.) Given Swedish history, it might be. One could argue that the right number is the one that pulls the most non-government capital back into the game. Too little runs the political risk of intervention fatigue. Too much may run the risk that investors, if they pick the wrong bank to invest in, will get their shares confiscated if it goes under. Caveat emptor and all that, but there's definitely that argument that you can go too high. (Unless you're willing to nationalize all the banks in one go.)
It would seem like even Treasury Secretary Paulson's original second-rate plan of having a government-lubricated market for trash mortgage securities would be better than the straight-up giveaway he's ended up doing. (Insert lubrication joke here.) Even better would be direct government investment in banks in return for radical concessions, up to and including nationalization for the worst offenders.
More from Robert Reich and Mark Thoma. ¶ 8:51 PM
Monday, December 1, 2008
What's up with the bailout? Tons (literally) of money spent, and still the stock market is in turmoil, economic indicators are bad, and the credit crisis is still severe.
So why isn't the bailout working? Well, it sort of is. The TED spread (the gap between treasury note yields and LIBOR interbank rates) is down from an insanely high peak to more like "intense crisis" levels. But this would have happened with a sensible intervention policy as well. What's making TED drop, in my opinion, is the belief that government will step in to backstop major banks. I'll bet that in fact, a more sensible plan might have actually eased the credit crisis more. The theory would be that with crazy giveaways like the Citi bailout, the public will start clamoring for heads to roll and the backstop guarantee will evaporate as politically impossible (and damn the consequences), whereas if it was conducted in a more sensible way, such a clamor might be further away.
By "sensible" I mean that the government could be demanding far, far more concessions than it is getting. The banks are using bailout money for shareholder dividends, for instance. The government isn't even getting the shares in the banks it deserves for the value of the bailouts it is handing out. The Citi and AIG bailouts are the prime examples here. There's little doubt that Citi would crash and burn without government assistance. The government should demand a much, much higher stake than it did. Given that the alternative is liquidation, is 99% the right number? (That is, a nationalization.) Given Swedish history, it might be. One could argue that the right number is the one that pulls the most non-government capital back into the game. Too little runs the political risk of intervention fatigue. Too much may run the risk that investors, if they pick the wrong bank to invest in, will get their shares confiscated if it goes under. Caveat emptor and all that, but there's definitely that argument that you can go too high. (Unless you're willing to nationalize all the banks in one go.)
It would seem like even Treasury Secretary Paulson's original second-rate plan of having a government-lubricated market for trash mortgage securities would be better than the straight-up giveaway he's ended up doing. (Insert lubrication joke here.) Even better would be direct government investment in banks in return for radical concessions, up to and including nationalization for the worst offenders.
More from Robert Reich and Mark Thoma. ¶ 8:51 PM
