Emergency Economic Stabilization Act of 2008

Here's the full text: Emergency Economic Stabilization Act of 2008.

Here's the CBO analysis of the proposal.

I'm with everyone else. The proposal could be better, but as I've argued all along, the problems are real and if this is the best we can get - and it appears that's the case - then it will have to do.

Others: Paul Krugman [2, 3], Brad DeLong, Economists' for Obama, Interfluidity, Justin Fox, Adam Levitin, Larry Summers, Barry Eichengreen, Stan Collender, Paul Krugman, Nouriel Roubini, Dean Baker, Greg Ip. Extra: Understanding the TED Spread.

Update: One section would:

Allow the Federal Reserve System to pay interest on certain reserves of depository institutions that are held on deposit at the Federal Reserve, starting on October 1, 2008

That gives banks with reserves on deposit with the Fed an infusion of capital, but not sure how large and it's unlikely that's the reason for the change (which is to stabilize the federal funds rate within relatively narrow bounds - see below - and because it no longer has to sterilize injections of reserves into the banking system through open market operations, again, see below). I've written about this before (as far as I know, removing reserve requirements isn't part of the bailout proposal, just paying reserves on deposits - the following is from March 2006 and discusses changes scheduled for 2011):

This (discussed previously here) brings up the possibility of a "channel" or "corridor" system for setting the federal funds rate as is currently in place in Canada, Australia, and New Zealand. A channel/corridor system makes open market operations unnecessary and allows the Fed, as proposed elsewhere on the proposed list of regulatory changes, to remove reserve requirements.

Currently, the federal funds rate is capped by the discount rate. Since the Fed will lend to banks at the discount rate, no bank would pay a higher rate in the federal funds market so the federal funds rate cannot go any higher than the discount rate. Similarly, with the ability to pay interest on deposits, no bank would lend to another bank at less than the rate the Fed will pay on deposits, so the federal funds rate cannot be lower than this. These two bounds are shown in the figure below (copied from Mishkin's text). Notice that if these bounds are fairly tight, the federal funds rate will be controlled precisely (for more on this point, see Woodford).  In addition, keeping the federal funds rate on target does not require open market operations, only discount window (lombard facility) borrowing and lending.

Larger version

The Woodford article explains some of the advantages of this system (though it's a bit technical).

Update: John Jansen notes this from JPMorgan explaining why being able to circumvent open market operations is important:

This change would greatly increase the ability of the Fed to expand the size of its existing liquidity facilities. Under current procedures, any time the Fed has provided market liquidity by injecting reserves into the banking system — be it through the TAF, PDCF, discount window lending, lending to AIG, or other forms of Fed lending — the increase in reserves has had to be ’sterilized’ by selling Treasuries, conducting reverse repos, or, more recently, through the novel route of having the Treasury overfund itself to increase its account at the Fed. Those means of sterilization threatened to run up against certain balance sheet constraints: the Fed now has less than $250 billion of Treasuries that it hasn’t lent out through the TSLF and TOP, and the Treasury’s overfunding could eventually bump up against the debt ceiling.

With interest on reserves, the Fed would not have to sterilize injections of reserves into the banking system. Normally, reserve injections need to be sterilized to prevent the fed funds rate from undershooting the FOMC’s funds rate target. With interest on reserves, wherever the Fed sets the rate on its deposit facility would effectively set a floor under the funds rate...

One proposed operating procedure using interest on reserves, called the floor system or the Goodfriend system, would have the Fed set the deposit rate at the FOMC funds target rate and then inject massive amounts of reserves into the banking system — possibly by increasing TAF or similar facilities — and allowing the excess reserves to be deposited with the Fed at the target rate. Following such an operation, the Fed’s balance sheet would contain more risky assets and — on the liability side — more deposits (the monetary base would be roughly unchanged); the private sector’s balance sheet would contain less risky assets and more safe assets in the form of deposits with the Fed. The effect on the private sector balance sheet from the TARP is similar, though in that plan Treasury debt takes the place of Fed deposits.

The Fed has not discussed how soon they might implement interest on reserves, one obvious reason being that the proposed legislation hasn’t yet become law. Because this power would be granted roughly contemporaneously with the TARP, the Fed may choose to see how effective the TARP is before setting up a deposit facility as a tool to help address the credit crisis.

Comments

[Bruce Wilder]

Talk about having a gun to one's head.

If a majority of House Republicans vote against the plan, the Democrats should vote against it, too. And, the Democrats should pray that the Republicans vote it down.

This is still Paulson's, Appoint Me Dictator so I can give money to my pals plan, but with a lot of verbiage thrown in to disguise that reality. There's somewhat increased transparency, and a threat -- probably an empty one -- to claw back any ill-gotten gains, five years hence. (Five years hence -- that would be after the Republicans have trashed the Obama Administration, and are back on top.)

And, the chances that a hedge fund or two go bust on Tuesday, causing a real panic on Wall St is definitely non-zero.

[Robinia]

Hold this thought, from Krugman:

But someday we’ll have an administration that actually proposes good policies to start with.

The work of restructuring our economy to function better has only just begun. Crisis averted; much work ahead to forestall other crises.

[esb]

So far, the action in Asian equity markets and in US stock index futures is quite poor and quite amazing.

Some usually accurate players will not be happy. (Hussman was looking for a spike run to 130-140 in SPY.) So far so bad.

Sensing this, Paulson held a semi-private conference call this evening with some of his plutocratic friends and their designees. Details should leak out slowly.

Its early still, but perhaps the prescient one was George Walker Bush with his "this sucker's goin' down."

(It looks like a forced take under of WB by WFC is at hand. Just too many corporate deposits there to play with it any longer. The common share holders probably get a buck or two. I'm sure WFC wanted to pay the price everyone now wants to pay for everything, zero.)

And then there's this.

http://blogs.cfr.org/setser/2008/09/28/
it-is-almost-official-the-quiet-bailout
-is-roughly-equal-in-size-to-the-us-
current-account-deficit/

Looks like we are in the hands of our good friends in Beijing.

Sigh.

[rawdawgbuffalo]

How do they know this gone work? And behind closed door? Sounds like shadow boxing to me

[Easy Money]

And so the powers that be who had no idea what hit them have got more freedom to squander the nations wealth.

The public senses the massive theft in progress, but the economics priesthood is blinded by the koolaid. Bye bye dollar and the US standard-of-living.

[esb]

Well, here we are, 4:30 AM ET, and world markets and US index futures markets are voting on the Paulson ploy (oops, plan). The vote is nay.

If you are a Member (of Congress) you are confronted with the prospect of voting for the Paulson plan (the changes are pure BS, an attempt to sell an illusion of safety to the public) and then encountering an equity market crash.

Then, of course, you will be blamed for the crash, and will lose your seat.

As you should.

If the passage of the Paulson plan is met with an equity market crash, Paulson and Bernanke should resign.

[prostratedragon]

Zero-reserve banking: A great idea? A stealth enterprise of DUC Ltd.*? When someone's trying to make you act like your house is on fire it would be nice to be able to tell the difference as quickly as they want you to act.

______
* Holding company for Dominant Unintended Consequences and other fine nameplates.

[esb]

Yikes, C (not WFC) gets WB, acquisition price zero to the WB common shareholder.

And the beat goes on.

[cb]

You want this?

conflicts-of-interest provision:

(a) STANDARDS REQUIRED.— The Secretary shall issue regulations or guidelines necessary to address and manage or to prohibit conflicts of interest that may arise in connection with the administration and execution of the authorities provided under this Act, including—

(1) conflicts arising in the selection or hiring of 18 contractors or advisors, including asset managers;

(2) the purchase of troubled assets;

(3) the management of the troubled assets held;

(4) post-employment restrictions on employees; and

(5) any other potential conflict of interest, as the Secretary deems necessary or appropriate in the public interest.

Talk about foxes guarding the hen house!

or this

Section 135. Preservation of Authority.
Clarifies that nothing in this Act shall limit the authority of the Secretary or the Federal Reserve under any other provision of law.

Whose wings do they need to clip if not this guy?

Check the details

[lonesome moderate]

Dean Baker now says that he opposes the bailout bill (as pointed out by James Kroeger in the Krugman thread).

[acerimusdux]

Apparently this does include abandoning reserve requirements as well.

Section 128:

"Section 203 of the Financial Services Regulatory Relief Act of 2006 (12 U.S.C. 461 note) is amended by striking ‘‘October 1, 2011’’ and inserting ‘‘October 1, 2008’’. "

In other words, all of the changes that had previously been scheduled to go into effect in 2011 would be accelerated to go into effect now. This includes allowing the Federal Reserve Board to set reserve requirements as low as zero.