Sunday, October 26, 2008

Financial Bailout Act III

So I earlier posted on the financial bailout and among other things talked about how in our panic, the purpose of the $850 billion bill was quickly evolving, and that Congress basically gave the Treasury an open ended check. First it was to buy bad mortgage securities, then it was to buy equity stakes in banks, eventually forcing nine institutions to sell part of themselves to the government. Now, as lobbying forces descend on Washington armed with the precedent of government bailouts, other industries are lining up for their share.

Insurers, automakers and American subsidiaries of foreign banks all want the Treasury Department to cut them a piece of the largest government rescue in U.S. history.

The betting is that many with their hands out will be successful, especially with financial markets in a stomach-churning dive and predictions the economy is about to tumble into a deep recession.

Lobbying efforts are intensifying.

The Financial Services Roundtable wrote Treasury officials on Friday requesting that the initiative to buy $250 billion in bank stock grow to cover insurers, auto companies, securities dealers and U.S. subsidiaries of foreign companies, including banks.

Who's going to be next? Lets just socialize all risk in the economy and make the government part owner in every industry? I've lost some money in the stock market recently. Where's my bailout?



I must preface my response by noting that there is a certain, noticeable, interior inconsistency between the first and second parts of my blabbering. This is because the first part (in which I defend the policy) is premised on the idea that the bailout was intended to remedy the current credit freeze. The second part, which seems contradictory, is only so if one rejects the premise underlying the first part; namely, that the bailout is not going to increase liquidity and stimulate bank loans, but will, instead, simply act to reshape the relationship between industry and government.

I think allowing other industries to accept some of the bailout money is actually a pretty good idea. The open-endedness of the bailout plan allows for a high degree of flexibility in its approach to dealing with the financial crisis. If the 850 billion came conditioned upon its use for one or two narrowly defined purposes, then the Treasury would be unable to alter its plan in the event that lawmakers and economists discover new and better ways to help ease the crunch. I think it's also important to note that the article does not assert that these industries are asking for a larger bailout. Thus, the bailout amount would stay the same; however, different portions of it would go towards various uses which had not been originally discussed.

Now I see that part of EJB's argument is a type of slippery slope idea and it's probably a valid one. Allowing different industries to take a piece of the government handout would, perhaps, set a dangerous precedent for the future - should the economic condition worsen.

However, the credit market is absolutely frozen. I supported the bailout because, originally, it was intended to improve the liquidity of these major banks - thus allowing them to loan and borrow more money. The article EJB links to seems to suggest that allowing these other industries to take a piece of the pie will also help to unfreeze the credit market:
"The institutions that are excluded play a vital role in the U.S. economy by providing liquidity to the market," Bartlett wrote Neel Kashkari, the Treasury Department official running the bailout program.

If that were true, I'd have to fully support the move (especially since I'm crossing my fingers that my law school loans come through for one more year).

Unfortunately, there's this news from the NY Times. It turns out banks aren't actually using the new money to make new loans - they're simply buying out smaller banks. I was going to make a separate post about this, but I figure this is as good a time as any to break the bad news. Under the guise of "improving liquidity in the market by incentivizing new bank loans," the Treasury has essentially begun to fund a new round of bank consolidations.

This is not good. Instead of targeting the crippling credit freeze, the government has decided it would rather try to reshape the banking industry. I'm not bothered by the pro's or con's of this move - I'm bothered by the fact that I don't know the pro's or con's of that move because we never heard any debate on the issue. The government's ulterior motive was never discussed ex ante. We ought to have been fully informed so that Congress could have had a meaningful debate on the subject.

So, linking this back to EJB's initial post. The article he links to seems to claim that letting other industries in on the bailout money would help to improve liquidity and would require no extra tax-payer money. The truth of that proposition, though, must be seriously scrutinized in light of the fact that "improving liquidity" by helping banks to make new loans has seemingly ceased to be a governmental priority. EJB asks, "Where's my bailout?" Until this week, I could have responded that he doesn't get one because bailing him out would not significantly help improve the status of our credit market. But, apparently, no part of the bailout is doing this anyway. Nuts.