Pure signal.

The non-bailout

The left and the right are both missing the boat on this one:

This analysis of the causes is fantastic, but then it buys into
conspiracy theory at the end which really ruins it for me.

I do not believe (as is being asserted here and other places by the
left) that the crisis is a fiction generated to transfer wealth to
industry heads.

As with all conspiracy theories it oversimplifies the problem, and
overestimates the collusion and power of the group who are recognized
as “the enemy.”

It does not make sense that rich people would push the investment
banking industry into bankruptcy — for one thing, if it really was
healthy they could just ride it out and make more money playing the
game then a one time pay out. For another, because of the size of the
bailout, it is the rich who are going to be hurt the most as their
assets (securities and bonds) just plain disappear. Not that anyone is
crying for them, but it would have been an irrational thing to do

More importantly — the “conspiracy” argument ignores what is positive
about Paulson’s plan. Despite what Congress is saying, he did explain
what he wanted to do, and the safeguards he is asking for make a
tremendous amount of sense for someone who is trying to do what he
claims he is trying to do.

This is NOT a bail out — he specifically is trying to avoid future
bail outs that is the whole point. What he wants to do is to NOT bail
out any more companies — he observed that there is a single kind of
security which is making an otherwise healthy market behave as an
unhealthy market. WaMu didn’t collapse because it was a bad bank, it
collapsed because it had too much of a certain kind of security. If we
could eliminate that security, the bank could have been saved.

So with several hundred other banks.

Paulson needs protection to distribute the money, because he has to
distribute it FAST to prevent more failures (if Congress had given it
to him when he asked for it he could have saved WaMu.) Distributing it
fast is going to lead to rich people with lots of lawyers being angry
that he didn’t give it to them, and they are going to sue (and they
have lots of time — years — after he distributes the money to
analyze the transactions and create evidence of collusion — which can
always be done in sufficient complex interactions.)

Likewise with oversight — if you have congressional oversight, the
issue becomes a political football (every bank that fails next week
can be said to have fallen as a result of this.) This is because
Congress is an interested party. The more bogged down in negotiation
this becomes (and the more saddled with additional cost, like Barak
Obama’s well intended but completely wrong headed mortgage
legislation) the less maneuverable and effective this becomes.

What Paulson was hoping for, and what he stated he was hoping for, was
to be able to sit back and survey the financial scene, and observe
when firms start to teeter, and to have enough money that he can zap
them and reestablish stability. The market, knowing that he was there
with enough capital to prevent immediate disaster, could then develop
confidence and get going again with a minimum of casualties.

This is also why executive pay caps are a bad idea — we don’t want
participation to be voluntary –we don’t want people making the risky
decision to avoid participating because it is going to personally cost
them. The goal is not reward — it is stability. Instability is
expensive, you spend 1 Trillion now, or lose 5 Trillion to unstable
markets. That is the real choice.

Yes — you have to trust him to do the job, and for that you can look
at his resume. He has demonstrated himself as a trustworthy person. He
knows his shit, and has performed above the level of his industry
throughout his career. Moreover his plan is rational — he has
identified the problem correctly, and his strategy for solving it is


September 27, 2008 - Posted by | Uncategorized

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