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Monday, September 22, 2008

Dodd's Proposal

Probably as good as it's gonna get, and, given political exigencies, not flabbergastingly bad all told. Anybody want to pick at its scabs for me?


Anonymous said...

All of this hemming and hawing about protecting the taxpayer is political cover for the simple truth that no matter what anyone does, this government-backed sovereign wealth fund we're creating is the only one of its kind established for the express purpose of losing money.

This will not eventually pay off for taxpayers. There is a ton of cash available out there held by private parties just itching to buy these non-performing assets. But the owners won't sell them. Why? Because if the owners sell them at market value, this will spark a huge new wave of write-downs and send many of them into bankruptcy.

Read that again: financial institutions can't sell at market value or they go bankrupt. Paulson knows he has to pay more than market value for this plan to work. Paulson doesn't even have to negotiate. The banks just hand him the worst of the worst assets, and present him with a bill in an amount that works for them.

This doesn't end well. Nice try, Dodd. You're complicit now.

Dale Carrico said...

I'm not entirely sure what the force of your last three words is, though. Complicit, as opposed to what? What actually possible move are the Democrats supposed to make under these circumstances that won't get them pilloried as "complicit"? Yes, it's a Bailout -- everybody is calling it that. No, this doesn't end well, isn't everybody fairly agreed that the bed's been shit and can't be unshitted and the point is diminish losses and learn lessons and apportion blame? I can't see how either utter defeatism pony plans represent a better course for Democrats to take here -- But maybe I'm misreading you.

Martin said...

Anonymous wrote: There is a ton of cash available out there held by private parties just itching to buy these non-performing assets.

The eminently sensible Fareed Zakaria disagrees:

"As of this writing, we don't know the details of the plan that is being crafted by Henry Paulson and Ben Bernanke to restore confidence in the U.S. financial markets. It is impossible to be certain that it will work. But the administration and the Federal Reserve were right to intervene in a large and systemic manner. Modern capitalism depends on credit, and credit depends on confidence. By the middle of last week, fear was pervasive and no one was ready to lend money to anyone for any purpose. It turned out that only government intervention could change this psychological paralysis. The lesson of the almost 100 (smaller) financial crises of the past three decades is that only government intervention can stabilize the system when it chokes."

As for the Dodd report itself, you'll notice some important features.

1. It establishes an Office of Financial Stability, which has oversight over the funds.
2. It establishes an Emergency Oversight Board, which has oversight over the actions of the Treasury and the Treasury Secretary.

3. Both will file monthly reports.

4. In Section 8(a), "IN GENERAL.—Any determination of the Secretary with regard to any particular troubled asset pursuant to this Act shall be final, and shall not be set aside unless such determination is found to be arbitrary, capricious, an abuse of discretion, or not in accordance with the law."

I think this is to prevent endless squabbling over the purchase of particular assets.

5. Section 9 discusses Assistance to Homeowners and Localities.
6. Section 11 discusses Minimizing Foreclosures.

I'm glad both of these sections are included. As has been discussed in the media, protecting Main Street is just as important as protecting Wall Street.

7. In Section 12(a)(1), the Act expires on December 31, 2009, so you know all this $700bn is going to be doled out before then.

8. SEC. 13. INCREASE IN STATUTORY LIMIT ON THE PUBLIC DEBT. Section 3101(b) of title 31, United States Code, is amended by striking "$10,615,000,000,000" and inserting "$11,315,000,000,000".


9. Section 17 states that there will be limits on executive compansation, but it doesn't actually set any limits. I would set the limit at $300,000. That is, no employee of a financial institution receiving aid from the Treasury can pay any of its employees more than $300,000 as long as they owe a single dollar to the Treasury. I think that's fair. For $300,000, you can still put food on the table.

The rest of it is rather detailed stuff. One thing I should point out is that there is a section for Credit Reform (Sec. 14), but it hasn't been written yet, so this Act is incomplete.

Otherwise, it sounds good.

Anonymous said...

We had the chance to prove that the system doesn't work for the poor *or* the rich. We had a chance for a New Deal, a Better Deal. All we had to do was let the system run to its logical, inevitable conclusion.

And that conclusion is bad, but it isn't so bad that there's no recovery. An economic depression? Perhaps. But disruptive events are sometimes required for great social change. We wouldn't all starve, we wouldn't all suddenly get sick, we wouldn't all die. We'd live a simpler life for a decade but the vast majority of us live simply anyway, by necessity.

But during that decade, the role of government would become incredibly important. We'd get a real conversation about national health care and basic income. We'd realize that overseas wars don't really help us all that much.

But, we live in a garden-variety plutocracy. And even our Democratic congresspeople don't want to wake up tomorrow morning without their millions. So they'll do whatever they can, within the bounds of political expediency, to maintain the status quo.

That's all I mean by 'complicit.'

It seems to me, in times like these we learn a lot about where one or another gets his bread buttered.

Dale Carrico said...

It seems to me, in times like these we learn a lot about where one or another gets his bread buttered. Quite so, and of course I see where you're coming from. But... We had the chance to prove that the system doesn't work for the poor *or* the rich. We had a chance for a New Deal I'm not sure that that's truly the chance we had here. I do think this can be and is showing some signs of managing to be the moment when ruinous market fundamentalist rhetoric loses its luster, when re-regulatory initiatives gain back the initiative, and the worst of the worst neoliberal and neoconservative nonsense finally faces its Waterloo (woh woh woh woh!).

Dodd's proposal, such as it is, still seems the best proposal with any kind of momentum behind it on offer. Far better than Administration backed proposals certainly.

In this, Dodd's proposal is rather like the Responsible Plan to End the War that Darcy Burner and others started circulating way back when, the best on offer but not the best reflection of my sense of what is right and what is wrong.

And there does remain, after all, a constitutive difference between morals and politics one always needs to bear in mind, even when it feels a bit unbearable.

Martin said...

There is one improvement that some have suggested. Why not start with something like $150bn and see how hit goes? See if the method is working? See if Wall St is recovering? Then, if need be, we can add more.

The problem is that we really may not have time to debate this thing. Last night on Hardball, Jim Cramer said that he knows of "several other banks" that are on the verge of collapse, but he wouldn't specify which ones (obviously so as not to paralyze the market even more). These institutions may have only days or a week left. So, according to him, this money needs to start going out ASAP.

Interestingly, Warren Buffett invested $5bn in Goldman Sachs today. I don't know if that's just coincidence, but why else would GS need such a huge investment? Maybe they are one of those institutions on the verge of collapse. Could you imagine? GS is even more of a standard-bearer on Wall St than the other companies that have failed. I'm sure that Buffett, like Cramer, would be privy to any internal problems.

BTW, Paulson, our current Treasury Secretary, used to be the CEO of Goldman Sachs, and in 2004, his last year, he earned $38 million. Now IT is on the verge of collapse? And now HE is going to manage $700bn to bail out his former colleagues?

The mind reels.

Dale Carrico said...

I am getting a bit distressed to find people I count on for good sense strangely dividing between a "there is no crisis, it's a scam" narrative and a "they're exploiting their own crisis to exacerbate it" narrative. The more I hear the more all the NOW NOW NOW NOW NOW NOW business is red-lighting my control board, but the honest truth is that there are differences that make a difference between the hideous Iraq Authorization rush job and the hideous Patriot Act rush rob and this Financial Meltdown Bailout rush job (differences even if manifestly the wrecking crew on the Right is acting strategicially like there are no differences to them). As for your reminder about Paulson's dirty hands -- Amen to that, obviously.