Who Should Pay for the Bailout?

Luigi Zingales' reaction to the financial market bailout plan, "Why Paulson is Wrong," has been getting a lot of attention and a Vox EU version of the argument appears below (my initial reactions are here). The main point is that taxpayers should not pay for the bailout.

Several points on this. First, if the government does do a bailout, the size of the bailout won't necessarily be $700 billion, and it is unlikely that it will be. The government is using the money to purchase assets. Some of those assets will appreciate, some will depreciate, and we don't know for sure what the net result will be. We could make money on the deal, we could lose money, we just don't know. But one thing is fairly certain, it's unlikely that the value of every security the government purchases will fall to zero, and that would be required for the government to lose all the money it spends (invests). See knzn on this point.

However let me be clear, even if the expected value of this deal is zero, that is, even if we expect losses and gains to cancel over time, taxpayers still need to be compensated for the risk they are taking. There is a risk that this bailout could lose hundreds of billions of dollars, and, just like in any financial transaction, the parties assuming that risk need to be compensated for it.

Second, I am not too concerned about the particular mechanism that we use to compensate taxpayers for the risk they are assuming. One way is the method below recommended by Luigi Zingales where taxpayers are bypassed altogether, but charging a higher than market interest rate on loans, entering into a formal profit sharing agreement, increasing taxes for corporation who take out a loan, all of these are ways of recovering some of the investment, a way of sharing the upside with taxpayers, and these don't exhaust the possibilities. To me, what's important is to get this rescue in place as soon as possible, to compensate taxpayers for any risk they are assuming, and to be sure that if the bailout does cost money, that the people who did nothing to cause the crisis and who did not benefit from it are insulated from paying for it. The particular mechanism for extracting payment for the bailout is less important and will likely be dictated by the politics, some solutions will be more politically viable than others.

If it was up to me, I'd get a government bailout going as soon as possible, we shouldn't rush into a bad agreement but we shouldn't waste time either, and use progressive taxation as the way to extract the payment for the rescue operation. As I look at the large corporate profits in the finance industry, and as I think about what has happened to the distribution of income since the Great Deregulation begin in the 1970s, it seems pretty clear that those at the top received most of the benefits on the upside of the boom. So it's only fair that those who had the largest share on the way up ought to pay the largest share on the way down. If this bailout costs us money, that is who should be paying for it.

But why raise taxes for everyone at the top, shouldn't the burden be limited to people in the finance industry who made out like bandits? The benefits from the housing boom weren't limited to fat cats at hedge funds and other financial entities. If you built houses, poured concrete, sold doorknobs, had a roofing company, etc., you benefited from the housing boom. And there are secondary effects too. During a boom more cars are sold, people eat out at restaurants more, they buy more TVs, go on more expensive vacations, all sorts of business did better because of the boom, and hence, so did the business owners (the benefits probably weren't distributed equally at the top, but even if you were, say, a major league baseball player, if attendance was higher, if you starred in more car commercials and so on because of the booming economy, then you shared in the profits from the euphoria).

But not everyone did better. Workers, in real terms, did not get a share of the profits from the boom, their wages stagnated over this time period. So why should they pay for the bailout? This is nothing more than The Little Red Hen run backwards, they ate the bread first and now the hen is asking "Who will help me pay for the bread?" It shouldn't be those who weren't allowed to sit at the table.

So I would increase taxes progressively, and I would do it in proportion to the changes in the distribution of income over this time period.

I understand that this may not be the best solution politically, taxation is a hard sell, and so is the argument that the benefits from the boom were general rather than confined to the finance industry. But if it was up to me, I would do a government bailout as soon as possible, and raise taxes progressively to compensate taxpayers for risk and to cover any losses. But in the end, I will be happy with any solution that insulates taxpayers in the middle and lower income classes from sharing in the burden of the bailout, a solution that places the costs directly on those who benefited most from the housing bubble.

Update: Comments are not pleased with this post, so let me potentially dig the hole a little deeper by trying the argument from another perspective:

Another way to think about the progressive tax approach is that it internalizes all of the costs. If there are indirect benefits from a boom, then those people who get the indirect benefits have an incentive to encourage a boom - it helps them while it's on, but they can argue it's not really their doing, so why should they be penalized for the clean up? They at least have an incentive to look the other way, to not get involved in stopping whatever behavior leads to booms. Why should they? While it's on, they do better, when it's over, the cost of the bailout falls elsewhere (assuming it's not a big crash that eventually leaves them worse off on net).

We want this to be internalized - we don't want people indirectly supporting a boom, we want them to say hey, stop that, if it continues it's going to cost me money.

Update: Before getting to Luigi Zingales' argument, let me insert this from Paul Krugman:

Thinking the bailout through, Paul Krugman: What is this bailout supposed to do? Will it actually serve the purpose? What should we be doing instead? Let’s talk.

First, a capsule analysis of the crisis.

1. It all starts with the bursting of the housing bubble. This has led to sharply increased rates of default and foreclosure, which has led to large losses on mortgage-backed securities.

2. The losses in MBS, in turn, have left the financial system undercapitalized — doubly so, because levels of leverage that were previously considered acceptable are no longer OK.

3. The financial system, in its efforts to deleverage, is contracting credit, placing everyone who depends on credit under strain.

4. There’s also, to some extent, a vicious circle of deleveraging: as financial firms try to contract their balance sheets, they drive down the prices of assets, further reducing capital and forcing more deleveraging.

So where in this process does the Temporary Asset Relief Plan offer any, well, relief? The answer is that it possibly offers some respite in stage 4: the Treasury steps in to buy assets that the financial system is trying to sell, thereby hopefully mitigating the downward spiral of asset prices.

But the more I think about this, the more skeptical I get about the extent to which it’s a solution. Problems:

(a) Although the problem starts with mortgage-backed securities, the range of assets whose prices are being driven down by deleveraging is much broader than MBS. So this only cuts off, at most, part of the vicious circle.

(b) Anyway, the vicious circle aspect is only part of the larger problem, and arguably not the most important part. Even without panic asset selling, the financial system would be seriously undercapitalized, causing a credit crunch — and this plan does nothing to address that.

Or I should say, the plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.

So what should be done? Well, let’s think about how, until Paulson hit the panic button, the private sector was supposed to work this out: financial firms were supposed to recapitalize, bringing in outside investors to bulk up their capital base. That is, the private sector was supposed to cut off the problem at stage 2.

It now appears that isn’t happening, and public intervention is needed. But in that case, shouldn’t the public intervention also be at stage 2 — that is, shouldn’t it take the form of public injections of capital, in return for a stake in the upside?

Let’s not be railroaded into accepting an enormously expensive plan that doesn’t seem to address the real problem.

Here's the argument from Luigi Zingales:

Why Paulson is Wrong, by Luigi Zingales, Vox EU: When a profitable company is hit by a very large liability, as was the case in 1985 when Texaco lost a $12 billion court case against Pennzoil, the solution is not to have the government buy its assets at inflated prices – the solution is Chapter 11. In Chapter 11, companies with a solid underlying business generally swap debt for equity. The old equity holders are wiped out and the old debt claims are transformed into equity claims in the new entity which continues operating with a new capital structure. Alternatively, the debt holders can agree to trim the face value of debt in exchange for some warrants.

Even before Chapter 11, these procedures were the solutions adopted to deal with the large railroad bankruptcies at the turn of the twentieth century. So why is this well-established approach not used to solve the financial sectors current problems? 

No time for bankruptcy procedures

The obvious answer is that we do not have time.

Chapter 11 procedures are generally long and complex, and the crisis has reached a point where time is of the essence. The negotiations would take months and we do not have this luxury. However, we are in extraordinary times and the government has taken and is prepared to take unprecedented measures. As if rescuing AIG and prohibiting all short-selling of financial stocks was not enough, now Treasury Secretary Paulson proposes a sort of Resolution Trust Corporation (RTC) that will buy out (with taxpayers’ money) the distressed assets of the financial sector.

But at what price?

If banks and financial institutions find it difficult to recapitalize (i.e., issue new equity) it is because the private sector is uncertain about the value of the assets they have in their portfolio and does not want to overpay.

Would the government be better in valuing those assets?  No. In a negotiation between a government official and banker with a bonus at risk, who will have more clout in determining the price?

The Paulson RTC will buy toxic assets at inflated prices thereby creating a charitable institution that provides welfare to the rich – at the taxpayers’ expense. If this subsidy is large enough, it will succeed in stopping the crisis.

But, again, at what price?

The answer: billions of dollars in taxpayer money and, even worse, the violation of the fundamental capitalist principle that she who reaps the gains also bears the losses. Remember that in the Savings and Loan crisis, the government had to bail out those institutions because the deposits were federally insured. But in this case the government does not have do bail out the debtholders of Bear Sterns, AIG, or any of the other financial institutions that will benefit from the Paulson RTC.

A alternative to Paulson’s RTC

Since we do not have time for a Chapter 11 and we do not want to bail out all the creditors, the lesser evil is to do what judges do in contentious and overextended bankruptcy processes. They force a restructuring plan on creditors, where part of the debt is forgiven in exchange for some equity or some warrants. And there is a precedent for such a bold move.

During the Great Depression, many debt contracts were indexed to gold. So when the dollar convertibility into gold was suspended, the value of that debt soared, threatening the survival of many institutions. The Roosevelt Administration declared the clause invalid, de facto forcing debt forgiveness. Furthermore, the Supreme Court maintained this decision.

My colleague and current Fed Governor Randall Koszner studied this episode and showed that not only stock prices but bond prices as well soared after the Supreme Court upheld the decision. How is that possible? As corporate finance experts have been saying for the last thirty years, there are real costs from having too much debt and too little equity in the capital structure, and a reduction in the face value of debt can benefit not only the equity holders, but also the debt holders.

If debt forgiveness benefits both equity and debt holders, why do debt holders not voluntarily agree to it?

· First of all, there is a coordination problem.

Even if each individual debtholder benefits from a reduction in the face value of debt, she will benefit even more if everybody else cuts the face value of their debt and she does not. Hence, everybody waits for the other to move first, creating obvious delay.

· Secondly, from a debt holder point of view, a government bail-out is better.

Thus, any talk of a government bail-out reduces the debt-holders’ incentives to act, making the government bail-out more necessary. 

As during the Great Depression and in many debt restructurings, it makes sense in the current contingency to mandate a partial debt forgiveness or a debt-for-equity swap in the financial sector. It has the benefit of being a well-tested strategy in the private sector and it leaves the taxpayers out of the picture.

But if it is so simple, why no expert has mentioned it?

Taxing the many to benefits the few

The major players in the financial sector do not like it. It is much more appealing for the financial industry to be bailed out at taxpayers’ expense than to bear their share of pain. Forcing a debt-for-equity swap or a debt-forgiveness would be no greater a violation of private property rights than a massive bailout, but it faces much stronger political opposition. The appeal of the Paulson solution is that it taxes the many and benefits the few. Since the many (we, the taxpayers) are dispersed, we cannot put up a good fight in Capitol Hill. The financial industry is well represented at all the levels. It is enough to say that for 6 of the last 13 years, the Secretary of Treasury was a Goldman Sachs alumnus. But, as financial experts, this silence is also our responsibility. Just as it is difficult to find a doctor willing to testify against another doctor in a malpractice suit, no matter how egregious the case, finance experts in both political parties are too friendly to the industry they study and work in. 

Profits are private but losses are socialized?

The decisions that will be made this weekend matter not just to the prospects of the US economy in the year to come. They will shape the type of capitalism we will live in for the next fifty years. Do we want to live in a system where profits are private, but losses are socialized? Where taxpayer money is used to prop up failed firms? Or do we want to live in a system where people are held responsible for their decisions, where imprudent behavior is penalized and prudent behavior rewarded?

For somebody like me who believes strongly in the free market system, the most serious risk of the current situation is that the interest of few financiers will undermine the fundamental workings of the capitalist system. The time has come to save capitalism from the capitalists.

Comments

[hari]

Underlying the arguments *pro* and *contra* bailout, is the issue of constitutionality of avoiding any legal recourse to the process under Paulson's proposal. What if there is adequate basis for challenging the proposed buy-out of illiquid financial portfolios and depriving Treasury of its sanctuary under the law?

[a]

If there's going to be this bailout, by all means *very* progressive taxation.

But it seems pretty clear that this measure, and the U.S. government in general, is by the rich and for the rich. So, tell me, does anyone really expect progressive taxation on the order that is necessary?

[mrrunangun]

The equity holders in these private companies should be wiped out as in any bankruptcy or governmental receivership. Holders of debt should not be made whole at AIG or any other private entity. IMO Goldman-Sachs and other private investment banks should not be bailed out at all, though Mr. Paulson may be voting his own interests either way in that regard. The private inestment banks and hedge funds are not as vital to the system as the commercial banks and are more justly able to bear the losses and as they have a lot of the responsibility for the problem. Their stockholders are generally the people who benefited most from the bubble profits.

[ilsm]

A bit larger tariffs are in order.

If the Japanese, Chinese, etc have nothing better to do with the excess value of what they sell in the US than lend it to US then tariffs have no impact on them and only minor incentive for US consumers to buy US.

[ilsm]

...no impact on them short run.

Further, there needs to be a commitment to deficit reduction and debt elimination to avoid this in the future.

[Barkley Rosser]

I am being mostly silent on this matter, even though I am someone who has long forecast that we were heading for very serious problems. There are aspects of the current proposal I do not like, and criticisms by people ranging from Zingales to Krugman all sound very reasonable. I am also concerned about the apparent grant of nearly absolute power to the Treasury Secretary in the proposal, which I definitely hope gets scaled back. But, I do not have a magic answer or proposal, and I fear that an outright rejection of this proposal without a reasonable alternative in place would be truly catastrophic. We were very close to 1931 this past week. But this is a time to think very carefully.

BTW, I shall be going out of the country again for about two weeks in a couple of days, including to attend a conference in my honor, so will go silent again for awhile.

[Angelica (a.k.a. Battlepanda)]

Mark,
What do you think of the idea that the bailout should buy the companies rather than the assets? The government seems substantially more likely to come out ahead if it owns pieces of the companies rather than their worst assets.

[a]

"I fear that an outright rejection of this proposal without a reasonable alternative in place would be truly catastrophic."

So this is how democracy dies.

[anne]

Barkley Rosser:

I shall be going out of the country again for about two weeks in a couple of days, including to attend a conference in my honor....

[Nice.]

[a]

"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety."

[Bruce Wilder]

MT: "First, if the government does do a bailout, the size of the bailout won't necessarily be $700 billion, and it is unlikely that it will be. The government is using the money to purchase assets. Some of those assets will appreciate, some will depreciate, and we don't know for sure what the net result will be. We could make money on the deal, we could lose money, we just don't know."

Right. And, Iraq could have been a great success.

Just stop with this nonsense, please.

If the U.S. could make money on the deal, no one would be proposing to do it. The $700 billion is a limit. By buying and re-selling, the Treasury can lose up to $700 billion. And, it is not even a hard limit, because Bernanke has his own $800 billion balance sheet, half of which he's already committed. Bernanke has had to impose terms, which have limited the Fed's losses, but those attempts to solve the liquidity problem have proven insufficient. The Treasury proposal addresses the solvency problem, and to "work" the Treasury "plan" has to lose the money.

If the Treasury doesn't lose a substantial part, if not all, of the $700 billion, then it will have done nothing to re-capitalize the banks. So, what would be the point of simply doing more of what the Fed has already been doing, to no particular effect?

The point is to lose the $700 billion, or a major part of it, preserving the banking system intact, in its dysfunctional form, without any reform or change in ownership. Duh.

And, "the Plan" to do this is simple "trust us" authoritarian bullshit. The present crisis has been unfolding for over a year, and now, in panic, because these clowns have not been able to formulate even a minimally adequate policy -- in a whole frickin' year!! -- the Congress is supposed to hand-over, with no structure, no strings, no conditions, no oversight, authority to give away $700 billion.

And, your brilliant defense of this horror show is to argue that 1.) we have to do something; 2.) this is something; and (here's the best part, the real frosting on the cake) 3.) no one knows what this something is, because the something is nothing more than "trust us", so all criticism of this clown show is unfounded -- after all, no one really knows what this something is, because the proposal is all of 3 pages -- it might be an opportunity to make money!!* -- so it is unfair to criticize this something as something in particular.

This something is so ill-defined that its apologists feel free to suggest that it might be a well-disguised opportunity to make money.

Invading Iraq was an opportunity to remake the Middle East as a font of Democracy, too! Remember that!

Financial innovation and competition were going to better distribute risk and lower the cost of home ownership. Remember that?!

Cutting taxes was going to increase revenues and reduce the deficit. Remember that?!

It is pure idiocy to give blank check authority to a man, who does not have the first clue about the dimensions of the problem, and has repeatedly demonstrated his determination to screw anyone and everyone in this country, with a net worth of less than $10 million.

And, it is just absurd to argue, with the banking system collapsing around a crater, reliably estimated to total $1.2 trillion, that this $700 billion is not intended to just disappear, filling that crater in.

I am not opposed to "doing something". Unlike some people, I am not in denial about what's needed being on the order of $700 billion, or, very likely, even more. This crisis is not about an illiquid $700 billion of securities; it is about a missing $1.2+ trillion of value in a pile of $4 to $6 trillion nominal value securities, created by a bunch of people, who made a whole lot of money doing so. Those people, in the person of one of the biggest Masters of the Universe, is asking for a parting gift.

Like morons, we will probably give it to him. This country is so worthless.

If somebody seriously suggests a bankrun in protest, I'll be there. I'd rather stand in line at Bank of America and take my money, and see the whole shebang collapse now, than watch this continual, cowardly, irresponsible mismanagement. This is enough. Just stop with the lies and the crap and the stealing.

[a]

Bruce - Well said. And something which you said needs to be emphasized: the whole *point* of the exercise is to transfer a lot of money from the US government to financial firms, in the hopes that this is enough to recapitalize them. If this transfer did not occur, there would be no point. An insolvent bank which sells assets at its real value it still insolvent.

And let's not forget: this is *not* the last bailout. The FDIC will still need to be bailed out some time next year.

[Mark Thoma]

You should read a little closer or I should write better. I said it's entirely possible that we will lose hundreds of billions of dollars - the whole post is about who should pay for that and an attempt to get people to start thinking about charging those who are responsible rather than charging everyone.

Show me where I ever said Paulson should have unlimited authority.

The section you quoted is making the argument that even if we break even, taxpayers still deserve to be compensated. That is to counter the argument I've heard that since we expect to break even or make a little bit, there is not cost. That's not correct - even then there is exposure, and a substantial chance of very large losses.

So I'd appreciate it if you stop with the nonsense criticisms. At least take me on over the positions I actually have, not the ones you imagine.

[im1dc]

Obama seems to have gotten his head around this problem or at least his speech writers have.

Obama On Bailout: "No Blank Check" (VIDEO at link)

"Speaking at a rally in Charlotte Sunday, Obama addressed the issue of how the government should respond to the financial crisis. He began by stressing that Washington must recognize "that economic recovery requires that we act, not just to address the crisis on Wall Street, but also the crisis on Main Street and around kitchen tables across America." Obama also criticized the Bush Administration's lack of a plan to combat the problem:

As of now, the Bush Administration has only offered a concept with a staggering price tag, not a plan. Even if the U.S. Treasury recovers some or most of its investment over time, this initial outlay of up to $700 billion is sobering. And in return for their support, the American people must be assured that the deal reflects the basic principles of transparency, fairness, and reform.

He then made a number of key points concerning how the government should tackle the financial crisis.

First, there must be no blank check when American taxpayers are on the hook for this much money.

Second, taxpayers shouldn't be spending a dime to reward CEOs on Wall Street.

Third, taxpayers should be protected and should be able to recoup this investment.

Fourth, this plan has to help homeowners stay in their homes.

Fifth, this is a global crisis, and the United States must insist that other nations join us in helping secure the financial markets.

Sixth, we need to start putting in place the rules of the road I've been calling for for years to prevent this from ever happening again.

And finally, this plan can't just be a plan for Wall Street, it has to be a plan for Main Street."

link: http://www.huffingtonpost.com/2008/09/21/obama-on-bailout-this-pla_n_128072.html

[anne]

Mark Thoma:

"That is to counter the argument I've heard that since we expect to break even or make a little bit, there is no cost. That's not correct - even then there is exposure, and a substantial chance, of very large losses...."

That reminds me to ask how did we price the Mexican assistance risk? How we price this risk is puzzling because the bond market is so difficult to read now. I would guess we priced the Mexican risk as low investment grade because the bond market was easier to read in 1994, but I need to ask.

[a]

"But in the end, I will be happy with any solution that insulates taxpayers in the middle and lower income classes from sharing in the burden of the bailout, a solution that places the costs directly on those who benefited most from the housing bubble."

This is a small point, I guess, and entirely unAmerican, but in order to place the costs directly on those who benefited, one needs a wealth and not an income tax. E.g. real estate agents benefited greatly during the boom years, but they're not making much income now, so income taxes won't affect them much.

[a]

"Second, taxpayers shouldn't be spending a dime to reward CEOs on Wall Street." I'm sorry, this strikes me as completely fatuous. We can reward overpaid traders and salespeople at Wall Street firms, but hey we have to draw the line at CEOs? If this isn't poster-child politics, I don't know what is. Look at Lehman's. 2.5 billion for the top 200 (and nothing for the CEO), *after* there firm went bankrupt.

[Ciphernerd]

It doesn't matter how tax payers are compensated? Wouldn't Zingales' plan give us our compensation up front?

[im1dc]

I caught SoT Paulsen on the talking head shows this am and viscerally reacted with anger.

I believe he was deceitful and deceptive on AIR, i.e., his bailout is for those he favors not the average American.

His panic is real, he wants to save Wall Street. I don't believe he gives a wit about Joe and Jane Sixpack.

That is only my gut talking. I have no evidence.

Which is why I am very glad to see Paul Krugman taking a second look at the proposal and Obama demanding something for Main Street America and average Americans in return for this gift of $700Billion.

It is a start at calm cool heads coming up with a real plan for our economy and not just more money for the Masters of the Universe on Wall Street who created this mess.

[cindy]

I have been a republican since the day I was born .. But I am close to voting for Obama..
BUT FOR THIS..

"Fourth, this plan has to help homeowners stay in their homes."

There it is again... Help everyone except the prudent. The people who do not need help to live in their 3500 square foot McMansion with a pool and a hot tub..

No no.. No help for me living in a 900 sq ft house.. How about we add #7.. Lets give the most prudent a free house overlooking the valley and ocean with an Olympic sized pool.. Just for doing the right thing..

[cindy]

Clawbacks.. We need them to keep main street sane...

[robertdfeinman]

Always the contrarian - me. The question is not who will pay, but how will they pay?

Today's Times had a chart showing how much the holdings by the (ex)CEO's of the failing firms had dropped in value. Several have lost $100+ million.

If we impose a tax on income, this won't recapture much since annual income of the parasite class is not the great. If we impose a wealth tax then there will be a rush to sell to fulfill their obligations. But the drop in value of holdings is what has precipitated this crisis in the first place.

Imagine what would happen if several of the biggest share holders were forced to unload at the same time to meet their tax obligation.

Suppose they chose to sell other assets instead. There are many stories of huge mansions finding no buyers in the past year or so. One not far from me has been marked down from $11 million to $8 and still has no offers.

There is a liquidity issue with the assets that can be taxed and how to extract value from this for tax purposes is just as difficult as when they are used for collateral.

[a]

"If we impose a wealth tax then there will be a rush to sell to fulfill their obligations."

Rush to sell what? I'd be happy with a 2% tax on wealth per year.

[AnonCC]

I think the govenment should void all CDS contracts. Only then will we have a hope of seeing banking system stability. I posted this idea at Angry Bear.

[ken melvin]

What evidence that credit is tight? I remember paying 18% in the 80s.

Any bailout should include cleaning out and liquidating those firms that do more harm than good.

[ken melvin]

Someone wrote in comment, yesterday I think, of the naked capitalist in a barrel; there could be no greater exposure of how capitalism works than this current mess. I've no doubt that the more ignorant truly believed that the upper 5% per cent created and earned all the wealth that the lower 955 made demands on. I've absolutely no doubt that the more intelligent of that upper 5% fully understood that it was the other way around. Henceforth when a libertarian half-wit tries to feed me this line it's up against the wall MF and here's how it really works.

[Paul Johnson]

The "risk" to the taxpayers from Paulson's proposal is hard to define because it comes down to the time cost of tax money -- how could the $700 billion (or whatever the net revenue drain) have been used during the ten or more years it takes to sell off the mortgages? The taxpayers lose the interest on the tax money which either could have been rebated to them or used for other social expenditures. Those who favor capital interests like this outcome because they assume that government always spends revenue on pure consumption rather than interest-earning investments. Because people cannot be "owned" (since 1865), extra money spent on health care, education, etc. cannot be capitalized like other assets. It is the failure of the liberal imagination to explain how, in a postmodern global economy, all US citizens ARE capital investments and their productivity is the new property that brings wealth.

says...

'And, "the Plan" to do this is simple "trust us" authoritarian bullshit. The present crisis has been unfolding for over a year, and now, in panic, because these clowns have not been able to formulate even a minimally adequate policy -- in a whole frickin' year!!'

Thank you, Bruce.

[cdo-cubed]

Long time reader first time writer. Like the blog but I strongly disagree with your arguments here. The bailout could easily cost most of the 700 billion because the Treasury can buy stuff, sell it at a loss, then do it again (see Calculated risk).

Progressive taxation is hardly a cure for moral hazard. It is the shareholders, bondholders, and executives of the banks you want to penalise, not the surgeons. And penalise the ones that caused this problem, not future generations of bankers OR surgeons.

[Mark Thoma]

cdo-cubed:

Before I read this, I put up another post that addresses these points, somewhat anyway.

[im1dc]

cindy says...

"I have been a republican since the day I was born .. But I am close to voting for Obama..
BUT FOR THIS..."Fourth, this plan has to help homeowners stay in their homes."

I agree with you that troubled homeowners should not be given a gift such as implied by your assumption above that Obama said 'give the troubled homeowner something for nothing.'

I don't think that is what he means however. Although he may not know that himself yet.

Remember this is Day 1 of Obama's response to the Paulsen Bailout plan and he's on the stump trying to get elected president. The situation is fluid.

But do allow that none of his points have meat on them yet, give his advisers (the experts in the field) time to come to the table and work out the details. I for one do not believe any reckless homeowner is going to walk away unscathed.

That is not how finance works on Main Street USA. Maybe Wall Street but not MS. You know that.

[esb]

Well, so here we all are, with emotions running wild.

Now, on a few occassions in the recent past I have been able to have (somewhat superficial and brief) conversations with United States Senator Dianne Feinstein, my Senator, probably more as a result of an earlier relationship with her husband.

I attempted to reach her on this issue, and was told by an aid that she would be unavailable indefinitely.

Then she said, "we're all working triple shifts and more here."

Fair enough,

but what I took away from the conversation that was most striking was her statement that what shook up everyone on The Hill was Paulson's use of the phrase, "end of our civilization as we have known it."

If those were the exact words that were used (and not some third hand or fourth hand alteration of the exact wording) then I am absolutely convinced that what we are witnessing here is a repeat of the strategy and tactics that were used to force legislation to authorize the Iraq War in 2002.

I had been prepared to witness the largest perception management game ever played during the 2008 election,

but I never dreamed that an even larger game had been prepared to run ahead of it.

I do not believe that we are in immediate danger of witnessing the collapse of civilization as we have known it and I resent Henry Paulson for using such tactics. What we are witnessing here is an asset repricing of uncertain extent and duration and the first in decades which the IB community cannot control and exploit.

Ask yourself one simple question, "does near-billlionaire Henry Paulson represent me and others like me or does he represent the interests of those whose names are personally known to him."

Or, to put it a little differently, "am I the beneficiary or the mark."

[Dee]

Why are we nationalizing failed businesses instead of the ones making money, like the oil industry or pharmaceuticals industry? It seems to me that if the taxpayers are going to buy a business, wouldn't it make more sense to buy one that records huge billion dollar profits? That's where the money is!

We could pay for our current trillion dollar deficit in a matter of months if we let oil companies interested in drilling in ANWR do so, but they each must forfeit say 30% of their multi-billion dollar company to the US taxpayers.

[esb]

One more thing.

What seems to be the joke of the weekend in the watering holes in the Hamptons is three little words,

"sold to you."

Then everyone laughs.

Those of you with IB experience will understand why.

If we need a new New Deal, then lets have one, and one in which Henry Paulson is given a seat at the drafting table but is not allowed to sit at its head.

I know his type, I have worked for and with his type, and I simply do not vest a scintilla of trust in him or his representations in this matter.

[realpc]

No, I don't agree that everyone who benefited should be penalized. Anyway, we all benefit from a (seemingly) good economy because there are more jobs. If you want to penalize, it should be the people who were responsible for the abuses and the unjustifiable risks.

[Walt French]

Any taxpayer costs -- and what "risk-adjusted rate of return" would be appropriate for somebody who doesn't want to buy toxic waste given the monstrous risks involved? -- should come first out of shareholders in the firms. As you say, employees are not directly responsible for the problem.

Shareholders and management with high-leverage options are the ultimate beneficiaries of the "maximizing shareholder returns" mantra that is mathematically best achieved by raising risk (especially, simple leverage) to the breaking point -- gaining all the upside if the roulette wheel spins your way, while letting bankruptcy court, or Secretary Paulson, shoulder the downside.

Or maybe, it's Russian Roulette. More appropriate to the gun that has been put to our heads by financial terrorists who want to overthrow the US Constitution.

[Mark Thoma]

Another way to think about it is that it internalizes all of the costs. If there are indirect benefits from a boom, then those people who get the indirect benefits have an incentive to encourage a boom - it helps them while it's on, but they can argue it's not really their doing, so why should they be penalized? They at least have an incentive to look the other way, to not get involved in stopping whatever behavior leads to booms. Why should they? While it's on, they do better, when it's over, the cost of the bailout falls elsewhere (assuming it's not a big crash that eventually leaves them worse off on net).

It's because you want this to be internalized - you don't want people indirectly supporting a boom, you want them to say hey, stop that, if it continues it's going to cost me money.

But maybe the recession itself will take care of that.

[donna]

I haven't used a bank since the 80s. I am now encouraging all my friends to move their funds to credit unions. I wish I could protect my investments, but, if Fidelity can't protect them as best they can, nobody can. We're as diversified as we can be with money all over the place. We didn't buy too big a house, too fancy a car, or anything else more than we could afford. And yet we'll pay for this.

I'm sorry, but if they get to keep their money and cars and yachts and all, with no penalties whatsoever, and none of them go to jail for this, I'm going to be doing everything I can not to pay any taxes at all, move as much as I can out of the country, and encourage my kids to move to Canada or Europe. At least there they get health care.
And I will join them there.

Socialism for the rich cannot stand. We'll go into a depression of there isn't something given out for those at the bottom. This bailout at the top is exactly what created the depression. It isn't feasible, and it won't work.

[Paul Johnson]

Donna: Good luck getting any interest on your deposits if there is a mass movement of funds to credit unions. You'd be better off sending your kids to India and China than to Canada or Europe. Canada and Europe don't want either your depreciated dollars or your non-citizen welfare demands. Inflation will kill your family quick if you take your funds and your imagination out of the global market economy.

[James Kroeger]

And, your brilliant defense of this horror show is to argue that 1.) we have to do something; 2.) this is something; and (here's the best part, the real frosting on the cake) 3.) no one knows what this something is, because the something is nothing more than "trust us", so all criticism of this clown show is unfounded -- after all, no one really knows what this something is...Thank you for this, Bruce, from the bottom of my heart...

[James Kroeger]

It's the sentiment, Mark, the sentiment... :)

[Tom Davis]

I'm a Home Inspector - Your government is fixing to bail out an Over Priced Contaminated Decaying infrastructure. - Good Luck

[James Kroeger]

Progressive taxation is hardly a cure for moral hazard.Quite true, but if we were to go along with Paulson's proposal, the moral hazard problem is simply re-inforced. IF THAT IS WHAT WE ARE STUCK WITH, then the paramount issue becomes one of which taxpayers should be asked to pay any of the cost of the bailout.

Simply increasing the top marginal rates to what they were prior to Ronald Reagan's cuts (sans loopholes) would greatly reduce the number of innocent victims, but it would not exclude all of them. (Certainly a good number of academics were not willful co-conspirators to the Republican crime.)

Yes, it would be a blunt instrument, but it would also nevertheless be reasonable. If you are wealthy (say top 20% of income earners), then even if you are innocent of culpability, you are still among those who can afford to come up with the money that is needed to make the world safe for our private-sector gaming culture.

[dd]

A distinct institution is required subject to congressional oversight and judicial review. Anything less is a banana republic/Russian plutocracy. If it passes in its current reported form the run on US institutions will be catastrophic. Simplistic monetary concerns are secondary; it is about the survival of the democracy and faith in the underlying institutions aka "confidence."

[save_the_rustbelt]

This looks like a really complex design problem with the audience being very skeptical of the intentions of the designer.

I am reminded of the castor oil dilemma:

Gulp or sip?

Gulp, always gulp. Get it over with.

[paine]

"If you built houses, poured concrete, sold doorknobs, had a roofing company, etc., you benefited from the housing boom. "

linking to kudzoo ???

off track here i think

get those who benefitted
from the lot value bubble
and the credit-security hussle
not the housing construction boom

wack the developers that rode the bubble yes
like the mortgage originators security packagers raters and insureres
that fueled the bubble
and the one eyed regulators and midnight legislators
that let it happenwhen they didn't make it happen
but
contractors and builders ???? no way

[dd]

Gulp only if it is castor oil; but methinks its melamine.

[knzn]

Just for the record, I have changed my mind about the bailout. I designed a thought experiment that convinces me that the real purpose of the bailout is not to restore liquidity in the banking system but to give away taxpayer money to banks. I do think that the banks need taxpayer money to help them recapitalize, but in order to get it, they should be required to give the taxpayers equity participation (much as AIG did). Otherwise, it's just welfare for the rich.

[dd]

Time for a Ronald Reagan golden oldie:
Trust, but verify.

[dd]

This plan is not about stabilizing "financial" markets. Anyone with half a brain knows the CDS market can not be stabilized. It must be collapsed against itself and the surviving institutions will be much smaller but functional. Bazooka Hank thinks he can ring fence a couple of financial institutions and save them for 700 billion plus. He can't; it will cost at least 3 trillion to save derivatives and for that we still get tent cities in California, NY and Florida.

[Policy Analysis, Inc.]

Look if the leftists don't to do the bailout lets call the whole thing off. What do you think about that?

XXXXXX@pai2.com

[Lafayette]

Ultimate recourse

MT: To me, what's important is to get this rescue in place as soon as possible, to compensate taxpayers for any risk they are assuming, and to be sure that if the bailout does cost money, that the people who did nothing to cause the crisis and who did not benefit from it are insulated from paying for it.

I don't see how this is practicable.

When the American government is the Last Resort, that means the Treasury must pay for the dropped and broken pottery. Who is Treasury, if not those who pay taxes into it?

Not only, there will be also the indirect consequences of this bailout. It cannot but drag on the American economy for years to come. Do we not collectively "pay" for the foregone economic growth, by renouncing as much as a point or a point-and-a-half of GDP growth?

This mess must be transformational for any benefit to arise from it. It must change fundamentally the way Wall Street does business -- meaning manages and profits from risk-management. This cowboy era of free-for-all financial engineering must be replaced with a more sober and less risky mechanism. After all, an economy cannot do without credit -- if ours presently broken, then it must be fixed.

Chapter 11 simply replaces the ownership of a company. Its debtors become its owners. Presumably, the new owners proceed with an orderly liquidation of the assets to be repaid. Let's not forget, in this present mess, the creditors are also debtors. They incurred debt to make loans to Investment Banks.

This situation is highly particular. It is not a question of one company having failed and, within a context of overall normality, it should be dealt with, meaning liquidated if necessary.

The issue here is Systemic Failure , meaning every agent is involved in the remedial process -- not just one or two companies. And, when you trace all the debt, you get back to only one recourse in terms of debt repayment/liquidation -- the American Treasury. There is no one else there to pay the piper.

Meaning this: That recourse is ultimately you and me and the cat that just walked in.

En passant

Given the pervasiveness of the crisis, it is doubtful that America can bootstrap itself alone out of the mess. So, it will go hat-in-hand to a larger pool of assets for assistance. This compromises our much prized "American sovereignty", at least in Financial matters.

We no longer have either the goodwill or the past authority in these circles. This mess has been building for too long and its consequences are too systemic and too many people saw it coming.

Regardless, the international community will rally around. It is in their vested interests that no one country, as large and dominant as ours in International Commerce / Finance, should fail. But the shame of what we have allowed to happen will linger long within their memories.

Uncle Sam has been humbled by his own hubris and the greed of a number of financiers.

[Lafayette]

esb: I know his type, I have worked for and with his type, and I simply do not vest a scintilla of trust in him or his representations in this matter.

I concur with this sentiment.

In my own experience, these often "brilliant managers" are flawed with simple vices that render them untrustworthy. Which investment bankers on Wall Street today, with a position of responsibility, can claim to have been just a passive observer given the magnitude of the crisis?

Not a one.

[Lafayette]

The devil in the details

The following is excerpted from an article to be found here.

Caveat: It is not for the faint-hearted or those seeking simple answers to complex problems. (And, if there ever was a complex problem, this present Systemic Financial Failure is one.)

It's time to go down to meet the devil in the details.

The Origins in Unprecedented Debt Creation

The problem that has overcome the economy has its most recent roots in the creation of nearly $7 trillion of new residential real estate and consumer debt during the first 6 years of this decade. Much of that debt was created in the period of 2004 through 2006 during which savings rates in this country turned decisively negative. Simply put, this level of debt creation was unprecedented - more than doubling the amount of homeowner and consumer (credit card and auto loan debt, for the most part) debt that existing at the end of 1999.

The extension of this mountain of debt was enabled by a prolonged period during which the Federal Reserve Bank maintained its target Fed Funds rate at or below the rate of inflation - thus essentially providing a subsidy to borrowers (banks that borrowed from the Fed, and the institutions and individuals to which the Fed Funds were re-lent) and a massive incentive to borrow. The Fed's policy went well beyond offsetting the shock to the economy that followed the crash of the technology stock bubble in 2000 and the horrific impact of 9/11/2001, but engineered a new, and quite dangerous, asset inflation bubble in residential real estate, as well as in the value of businesses and commercial real estate assets acquired with billions of dollars of leveraged acquisition loans.

A Targeted Solution aimed at Swift Resolution

... the solution must adhere to five clearly articulated principles which:
a) Because the parties that took unwise risks also take responsibility for their acts (i.e. no bailout, no exacerbation of moral hazard);
b) Rely as little as possible on the government/taxpayer;
c) Strive to keep people in their homes;
d) Save lenders and borrowers the enormous cost of adversarial foreclosure;
e) Provide sufficient time for American families, who are unable to afford continuing as homeowners, to work their way out of their mountain of debt and to rebuild material savings.

There are presently fewer potential buyers of homes than there are homes available for sale, so the best thing to do in the case of many “underwater” homes and their occupants is to offer market-rate leases in exchange for the surrender of deeds, in lieu of foreclosure and sale. A workable solution would envision banks, other lending institutions and securitized mortgage holders obtaining, and ultimately selling, title to homes in question (homeowner equity having been wiped out anyway) and homeowners being offered a special, government promulgated, 5-year “Recovery Leases” to enable them to get their lives back in order.

This Recovery Lease-based plan would involve less cost to the government/taxpayer than the huge cost of write-offs and other expenditures associated with the massive wave of foreclosures that is the alternative. It would dramatically reduce the social and economic impact of growing dislocation in the housing market. Moreover, this proposal would not expose the government to valuation issues arising from being a buyer of last resort for defaulted mortgages. While the plan would involve only private market transactions (hopefully outside of the contested foreclosure process), government would enact the following to encourage the participants to move in this direction:
o Grant tax deductibility to all or a portion of rents paid on Recovery Leases, to lessen the burden on the former homeowners (just as they were previously deducting mortgage interest) - levelling the playing field between owning and renting for existing owners of homes secured by troubled mortgages.
o Establish mandated benchmarks and guidelines for rents that can be charged under Recovery Leases, based on prevailing rents in the local sub-markets in which the homes are located (during the housing bubble, market rents fell well below the carrying cost of ownership in most markets).
o Enable financial institutions and subsequent investors in the homes to rapidly depreciate the value of the homes they have taken over, reducing depreciation periods from 28 years to 18 years.
o Remove passive activity loss limitations in the case of homes subject to Recovery Leases - thus providing enhanced tax incentives to individual investors interested in buying Recovery Leased real estate.
o Mandate a right of first offer to the former homeowner/Recovery Leaseholder, pursuant to which the occupant would be offered a 90 day right to buy the house at the price at fair market value just prior to the expiration of the 5-year Recovery Lease term, if the occupant is able to do so.

In the event the now-renting occupants stop paying their rent, they would be subject to eviction as in the case of any lease. Most importantly, this should all be viewed as an emergency measure and should have a defined sunset - applying only to Recovery Lease arrangements made for the next 18 to 24 months or so, thereby forcing maximum resolution into the shortest period of time.

Finally, lenders should be encouraged to monetize (sell) the homes, subject to the Recovery Leases, as soon as possible to get the assets off their balance sheets and permit professional investors to replace the repossessed real estate with cash, on the balance sheets of lenders, in order to improve regulatory capital.

My only bone of contention is reducing the loan period, from 28 to 18 years. Unless the reduced price at which a house is released for repurchase is significantly lower in price than the original mortgaged price, then the monthly payments will be unattractive to the larger part of the original sub-prime buyers.

Offering market-rate leases should clear that roadblock. Still, offering an extended payback period of 22 years would also boost prospects of the solution's success.

[Dunc]

I think the benefit of a Soak The Rich Tax is that you don't need any faith in the system or any individuals involved. You can afford to loose the whole $700 billion and more because it's just going to wind up being a transfer from the pockets of the wealthy into the businesses of the wealthy - a sort of reverse asset stripping, if you will.

[BJ Feng]

Mark Thoma, booms affect a large portion of society, in fact the last two booms benefited the majority of Americans while the going was good. During the internet boom, ordinary mom and pop investors were making 30-50% a year, average Joes quit their jobs to day trade. I know a friend who bought a 4 unit apartment building with his gains, he was both smart and lucky to get out in early 2000.

Likewise, the housing boom was also a benefit to the majority of Americans. Not only because most households own their own home, but also because it allowed households to increase their spending by borrowing against their gains. The entire economy benefited and when things are good, it's unlikely that enough people will advise caution even if they will be on the hook later on.

Lastly, the previous bailouts did punish the risktakers who suffered tremendously. Anyone who invested in the bailed out firms and enjoyed the benefits during the good years saw their investment destroyed. It's the bondholders, who thought they were investing in safe, AAA rated bonds, or in government sponsored agency bonds, that were saved. A significant number of bondholders were mom and pop investors who owned the bonds through their pension funds and mutual funds. THEY were the ones bailed out.

Now the future bailout plan could differ substantially from the past bailouts, but so far, the people who took risk have been punished, their gains completely wiped out. Those who benefited from the bailouts represented a wide enough portion of society to justify government intervention with taxpayer money on behalf of the taxpayer.

[Lafayette]

Who is policing the police?

BJF: booms affect a large portion of society, in fact the last two booms benefited the majority of Americans while the going was good.

Yes, but you forgot the other half of the equation. The phrase should read "booms 'n busts", which is the sort of economic activity that we experienced in 19th and 20th Centuries upon occassion.

Would not one think, a half century or century on, that mankind, certainly smarter, might have learned something? But, no. We've learned nothing since the Tulip Bubble in Holland during the first half of the 17th century. Humans get frenetic during a sustained asset price rise. It is more than likely a question of psychological dysfunction and certainly sociologically both collective and viral.

One need not be Einstein to understand that economic policy has a responsibility to avoid such catastrophes to the nation. The Fed has a Search & Destroy mission for asset price feeding frenzies.

It was asleep at the wheel. Citizens have a right therefore to ask, I submit, "Why are such nerds paid so much?" Who is policing the police?

[Real Person from the Real World]

I am tired of hearing how Americans don't save. 2-4% on bank savings, while being paid low wages (due to global wage arbitrage for many workers) that make it impossible to accumulate, or pay for necessities, while banks sucked out fees and 21%+ interest out of credit card users and got fat with cash. As someone has already pointed out, the low interest rates encouraged those with the means to borrow and take risks to increase their bootle. (Certainly an indictment of unfettered raw capitalism.)

So, whom do you punish?

As someone above pointed out, the assets of the "masters of the universe" who never bothered to question their bad, over-leveraged, risky actions, are now holders of assets that are depreciated and won't provide much value to pay for the bailout.

Investors and shareholders are not just the well-heeled, but include IRAs and pension funds, and small individual investors that had nothing to do with these companies or the bad decisions that are sinking them. These are the same tax payer folks that will also pay for the government bailout plan.

No one has a crystal ball to see how things will turn out, but chances are, everyone will hurt. Let's hope that when the smoke clears, the proper steps are taken to keep this from ever happening again, and with minimum impact on longtime homeowners who didn't game the system to upscale or play real estate games.

[ken melvin]

What boom? What evidence? In lieu of reasonable growth we had this bubble of speculation and equity extraction - no real gain. This was not 'let the good times roll'. Only those who sold at inflated prices and the skimmers made money on this.

[PSP]

Sales tax on securities.

[Icarus]

Real Person,

"I am tired of hearing how Americans don't save. 2-4% on bank savings, while being paid low wages (due to global wage arbitrage for many workers) that make it impossible to accumulate, or pay for necessities, while banks sucked out fees and 21%+ interest out of credit card users and got fat with cash."

Well, the low wages are 'earned'. And, the key to avoiding the financial trap you describe is to reduce those 'necessities'. Americans overspend on junk, and much of that has to stop. As well, they often enter lifestyles they cant afford. A high school educated person cannot rationally expect to be able to afford a family nowadays. Things have changed, and we need to set expectations accordingly.

And,

"As someone has already pointed out, the low interest rates encouraged those with the means to borrow and take risks to increase their bootle."

So, which is it? Were banks charging too much, or too little? You complain of 21% interest, which should induce any rational person to NOT borrow (but, it doesn't). But, when banks do/did offer cheap credit, you blame them for that. So, the creditworthy citizen cannot be trusted to borrow, as well as the non-creditworthy?

This is a sad state we're in.

[ken melvin]

Icky, I've no doubt that you believe this you spew. If you are that dumb and dumb enought to believe tin trickle down, what can I say? What can anyone say? Implicit is such belief is the belief that the working class serve as cannon fodder to provide for the rich, as you persist in informing us. Such contradiction bespeaks much.

[paine]

ken

if yellow legs like ick and his ilk
didn't exist

come the rev

after wackin'
the tower trolls themselves...

hell
if our blood lust
after decades of exploitation and oppression
remained unslaked

well...we'd be forced to shoot the innocent
"class neutrals"

instead of ick and his fellow members
of the kulack fools' reactionary posse

so god bless
ick and the rest of the hord of
talk radio listening midget
ever eager to lick
a rich man's ass ..as if they might get gold dust on their tongue not ....

[ken]

Let's get beyond 'trickle down' aspersions...

Jobs in the US are also a result of small businesses. These are ventures people must try on their own, relying on their own work ethic, innovation, and smarts. Perhaps this is a more positive move than hoping your employer keeps you for life, as it was expected in 1960. Those days are simply over...

We need to re-set expectations accordingly. In our globalizing business atmosphere, employment is more 'at will' than ever. This creates new realities, and people need to form strategies accordingly.

And remember, we can separate out the "rich"...they may be the ones who don't 'work' and can manage their money. There are also the abject poor; those who really don't have any opportunity.
But, in between, are the bulk of our masses. People who do have a chance, and can 'succeed' and be well off. The key is to employ a good strategy and execute. People are doing it...

[BJ Feng]

Ken, how about making a detailed response filled with logic and specifics rather than broad platitudes? I can't speak for Icarus, but I could be convinced. The 2-4% bank savings rates allow Americans to get 5-6% mortgages as Icarus pointed out. You can't have it both ways. Savers and borrowers are on opposite sides of the transaction. Now savers can reach and buy higher risk debt, or they can join the ranks of the rich and become investors to a point.

Thanks to regulations, only the rich, those who have $2 million to invest, can get into hedge funds that can make 50-100% gains. But ordinary folks like you and me can't get into these funds because of REGULATIONS designed to protect us from us. So yes, the ordinary mom and pop saver has to be content with 2-4% while the rich are able to get 30% by taking on more risk, regardless of the market climate. Some of the better funds are still up 20% this year and there are others who have doubled up.

So there is one example of how regulations have prevented ordinary Americans from participating in the boom. Yes, you've prevented the chance of a 50% or more loss with hedge funds, but you also took away the 50% gain, and ordinary people can still lose more than 50% by investing in individual stocks like AIG or Fannie. I sold all my Goldman shares as soon as the crisis began. I'm lucky to only have lost 30%, unfortunately, regulations prevent me from hiring the best regarded talent to make me money. Only the rich can hire top talent thanks to the rules. And those who have talent usually go to start their own hedge funds, making them inaccessible to the rank and file forever.

[BJ Feng]

I believe the Yale and Harvard endowments are up this year. Unfortunately, people like you and me can't copy their simple strategies. Yes we can duplicate their investments in equity indexes and bonds, but we have no access to "alternative" investments like hedge funds which provide diversification. All equities indexes are down across the globe, hedge funds have the ability to short markets, and have the power to demand very favorable terms from their lenders/brokers. The government has crippled me as an investor, I'm forbidden from touching this very valuable tool only the rich can use. Not all regulations benefit main street residents, even if they were made to "protect" them in theory. The last thing I need is for the government to protect me from myself.

[Lafayette]

RPfRW: So, whom do you punish?

We have laws, lets have them observed.

The subprime mess was fraud on a large scale in the sale of credit. The Truth in Lending Act (TILA) should cover such a situation. But, I've yet to see a perp-walk in its name.

Gross negligence by the Golden Boys is another matter and somewhat more difficult to prove. But, Elliot Spitzer, before becoming Governor of New York, as a DA in NYC, had a field day trotting in the Wall Street machos who had bent the law.

The public is craving, once again, for such a public show. You or I, if we rob a bank for $100K, we go to jail. If they game a speculative market and earn Megabucks (by bending the rules but not necessarily breaking the law), they get a bailout?

Stop the world, I wanna get off.

[Joe Taxpayer]

If all we need is 2 or 3 hundred billion then we should get it from George's war buddies who have stealing 25 billion from us every month. They've certainly been taking that out of my pocket and calling it patriotic to kill my brothers and cousins, a couple thousand American ones and a couple hundred thousand 'other' civilians.

[Sue]

I have a serious issue with politicians making this decision. We need a committee of economists to hash out the incredible complexities of this issue. They must look closely and carefully at all the possible implications and possible outcomes. Then, report to Washington. A quick plan with money thrown at it is not the answer. Paulson, is first, a member of wall street. There is no doubt that credit is seizing up, which will cause an inability to borrow for everyone, which will cause lay offs as companies fail, and ultimately, there may be a depression. Trust me, we don't want that to happen. Something must be done. This plan may not be able to stop the inevitability of our fall into a long period of great hurt, but it needs further review.

[DazedandConfused]

The bailout is being sold to us (the taxpayers) as a way to help liqudity. The credit markets are "locked up" (banks won't lend money). Well, this may be true. But I can't see how this bailout solution will fix short-term liquidity. This will take MONTHS to implement. Banks can borrow from each other (LIBOR) or now all banks can borrow directly from the FED (TAF), and the FED is pumping billions into the system. So it's really not a cash/liquidity problem. It's more to do with insolvency / need for capital, and that shouldn't really be a taxpayer problem.

[Eric]

Stimulus the taxpayers the 700 billion. ALL OF US!!! I gaurantee the money will be put back in the system. Houses will be paid for. College for the kids paid for. Outstanding loans paid for. The Govt. can tax the checks and put that money back in the system. All the while the greedy CEO's can't get thier hand in the cookie jar and the Govt. is not in charge of MY MONEY!!!!