Friday, September 26, 2008

A Pair of Bailout Perspectives

An old friend, K, posted her opinion of the bailout yesterday on Facebook, including this corrective to those who are themselves crying for a piece of the action arguing against using taxpayer funds to rescue Wall Street:
The bailout is meant to fix the credit market and stabilize the economy.
Individuals aren't the only ones who use credit - companies use it too, and they use it just like we do: to cover expenses until they have the cash to pay them off. These expenses include: money owed to other companies for supplies, copyrights, etc., and of course, payroll.

If companies have their credit lines cut or severely reduced, they won't be able to cover their expenses...and this doesn't apply only to poorly managed companies. A bad credit market affects everyone, including well-run, ethical businesses. There were financially sound Fortune 500 companies that almost didn't make payroll last week for this very reason.

So, what happens if there's no bailout is employees don't get paid, companies go under and countless workers are laid off. This is what the bailout is meant to prevent. It might not give money directly back to the taxpayers but it will help them keep their jobs. Aiding companies that have used poor business practices and people who made bad decisions with their mortgages is an unfortunate side effect, but it's better than the whole economy going in the tank.
Very true, and probably the most succinct argument I've read yet for the necessity of the bailout. Then this morning, Charles Krauthammer agrees with K and adds an additional (and vital) warning against the instinct to punish Wall Street's supposed malfeasance:
Congress has every duty to be careful with taxpayers’ money and to suggest improvements in the administration plan. But part of Congress’ reaction has nothing to do with improving the proposal and everything to do with assuaging the rage of constituents — even if it jeopardizes the package’s chances of success, either by weakening it or by larding it up with useless complicating provisions designed solely to give the appearance of sticking it to the rich [and] window dressing such as capping pay packages, which the Bush administration has already caved in to. I’ve got nothing against withholding golden parachutes from failed executives. But artificially capping the pay of people brought in to lead these wobbly companies back to health is a fine way to tell talented executives to look elsewhere for a job.
I like having smart friends.


Kristina said...

Awww...thanks I'm flattered :)

Krauthammer has a really good point, too - introducing pay caps isn't exactly a great way to incent talented people to take these jobs...

Shane said...

I don't know her but almost anyone who uses the word "incent" is OK by me. Same for people who use the preposition "absent."

My big thing about "punishing" Wall Street is not that bad actors ruined America with their poor decisions, but that a rescue implicitly reengineers the incentive structure of Wall Street. Banks that were more conservative with their use of fancy derivatives and risk models made less money up through 2007, when it turns out that they actually did the right thing. Knowing that there is a bailout around the corner encourages risk taking - and I think that the financial sector already suffers from fundamental systemic problems regarding risk and uncertainty. However, the appropriate punishment, I believe, is to just have the government seize an equity stake in these financial institutions, to be auctioned off after the crisis is over. Let the shareholders decide whether to dilute their stakes in these corporations in exchange for a rescue, and don't make the bailout

If the taxpayer buys only the troubled assets, either they pay far more cash than they're really worth, or the financial institutions will still suffer from the same cash-flow problem. After all, the problem is that they overvalued certain assets and took on liabilities on that assumption. Now that the actual value of these troubled assets is far lower than estimated, these companies don't have the cash/credit necessary to conduct business. So if the federal government gives the companies what they used to be worth for the assets, we're getting ripped off. If we pay what the market says they're worth, it solves nothing.

And if I sound ignorant about what the actual proposals are and how they've changed since last weekend, it's because I haven't had internet or TV for about a week. All my news comes from Stars and Stripes.

Bruce Gee said...

There is also this:

Any time there is this much money involved, there will be scoundrels with fingers in the jar. I don't know how you do anything about that. Well, vote for McCain, I guess, and see what he is able to do. Otherwise, we little guys are as usual having to put our trust in some people--Congress--with very mixed agendas.