This Is Acceptable?

Robert Reich comments,

In other words, Geithner and Fed Chair Ben Bernanke continue to do pretty much what Hank Paulson and Bernanke did: They hide much of the true costs and risks to taxpayers of repairing the banking system. Those risks and costs should be put on the people who made risky bets on the banks in the first place - namely bank shareholders and creditors. Shareholders of the most troubled banks should be wiped out entirely. Bank creditors- except depositors - should take major hits. And top executives who were responsible should be canned. But Geithner and Bernanke don't want to take these steps for fear of spooking the Street. They think it's safer to put the costs and risks on taxpayers -- especially in ways they can't see.

Remind me again why "nationalization" is such an awful word? Not in the context of healthy organizations, or even those that are struggling to recover, but in the context of bankrupt financial institutions that seem to lack the will, desire, and ability to get themselves out of the mess they created? "It spooks the street" just isn't convincing enough for me.

But It's Even Worse, Isn't It?

If you wait long enough, somebody's probably going to articulate what you are thinking, and probably say it better. Case in point: I haven't had much time to type out my thoughts on the nation's fear of "nationalization", but Robert Reich does a pretty good job of describing something that's been bothering me:

The federal government -- that is, you and I and every other taxpayer -- has taken ownership of giant home mortgagors Fannie and Freddie, which are by now basket cases. We've also put hundreds of millions into Wall Street banks, which are still flowing red ink and seem everyday to be in worse shape. We've bailed out the giant insurer AIG, which is failing. We've given GM and Chrysler the first installments of what are likely to turn into big bailouts. It's hard to find anyone who will place a big bet on the future of these two.

In terms of the companies lining up for bailouts,

If anyone has a good argument for why the shareholders of these losers should not be cleaned out first, and their creditors and executives and directors second -- before taxpayers get stuck with the astonishingly-large bill -- I would like to hear it.

I completely agree. But there's something Reich doesn't mention that concerns me: Our current bailouts aren't working. That is, it may cost us more to continue bailing out loser companies while declining to nationalize them than it would if we nationalized them, ate their bad debt and, as quickly as possible, restored them to private ownership. (Part of the reason, of course, is the appalling greed of incompetent managers.)

I can also tell you this, not far off from one of Reich's points - Chrysler is a black hole. If it weren't, Cerberus would be bailing it out itself. They shouldn't be invited back for more "loans" or bailout funds, save perhaps a bridge loan to help them seal a takeover deal with a viable company.
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Addendum: "Moral haz... whuttard?" David Ignatius flat-out calls for subsidy:

How will the managers of the Bad Bank coax the gremlins out of hiding? With money, of course -- buying up an estimated $1 trillion to $2 trillion in toxic paper. Will the government overpay? Of course it will, especially at first, as it discovers fair prices for securitized debt for which there isn't now a functioning market.

Anybody even casually conversant with this crisis knows that the government will overpay because to do otherwise won't help the banks. We can buy them for the pretend value the banks presently use, knowing we're paying probably two, three, four times their actual value, removing a huge liability from the banks' shoulders, then hope that with actual assets back in their coffers banks will return to "business as usual". Or we can try to come up with something approximating market value, force banks to report multi-billion dollar losses on those assets, and... then most of them have to admit insolvency.

At least people seem to be through arguing that if the taxpayer ends up owning these toxic assets, there's a chance of "turning a profit". Does Larry Kudlow blush when he reads crap like this, or does he shrug, smile at the corporate interests he serves and say, "It was worth a shot."

If Kristol, Reich, Mallaby and Krugman Are All Skeptical....

Although you may not get a sense of it from reading this blog, as I focus on the 10% at issue, I don't much care for the brand of debate where people focus exclusively on the 10% of issues that give rise to contentious political debate, rather than the remaining, soft 90% of issues where people are mostly indifferent or are largely in agreement. Despite occasional controversy, it's hard to find someone who gets hot under the collar because our nation "doesn't have the sense" to eliminate the Electoral College. You would have to work pretty darn hard to find somebody who is incensed that we don't have a unicameral legislature, or that Presidents are elected every four years. You may find people who scoff in one direction or the other at notions of an "ownership society", but general concepts of capitalism and private property are uncontroversial.

But sometimes the stars align in funny ways, and a consensus forms among people on an issue that is controversial despite their political differences, or get incensed on a topic where the mainstream media seems to be largely reacting with a shrug. Perhaps it isn't too surprising that Paul Krugman, economist, and Sebastian Mallaby, defender of the financial industry, both question the Bush Administration's proposed $700 billion financial industry bailout. Given what's known of the plan, I would be surprised to see any economist not demand additional details or question the viability of the plan as proposed. And Mallaby's defense of the financial industry necessarily involves making the industry responsible for its own failings. When you advocate leaving the industry largely unregulated such that financial geniuses can find clever ways to make money without the interference of government, you can't credibly argue that when those geniuses mess up - big time - that the government should bail them out with a blank check.

Krugman's instinct may be toward more regulation and Mallaby's toward less, but their common ground is to try to hold financial institutions responsible. Putting things in very simple terms, with regulation you risk stifling innovation, and you may still the source of an eventual financial crisis. With less regulation (and I'm not aware of anybody who is seriously involved with these issues who advocates none) you risk what we're seeing right now, but you enjoy the fruits of the innovation that might otherwise occur. Under the Mallaby approach, holding financial institutions responsible for their own failures is even more critical, as that's the check that is supposed to keep them responsible in their experimentation and innovation.

Robert Reich is a very smart man, but he also has a clear political affiliation, as does Bill Kristol. Reich offers some proposals that, apparently, would make this bailout acceptable to him. (Contrast that with Mallaby, who proposed alternate plans that might achieve the desired effect without a taxpayer subsidy.) Reich's credulity - this is a plan he seems to believe we can fix - lends credence to Kristol's worry, which is sufficient in magnitude to overwhelm his more typical deference to the latest party memo:

[The plan] would enable the Treasury, without Congressionally approved guidelines as to pricing or procedure, to purchase hundreds of billions of dollars of financial assets, and hire private firms to manage and sell them, presumably at their discretion There are no provisions for - or even promises of - disclosure, accountability or transparency. Surely Congress can at least ask some hard questions about such an open-ended commitment.

And I’ve been shocked by the number of (mostly conservative) experts I’ve spoken with who aren’t at all confident that the Bush administration has even the basics right — or who think that the plan, though it looks simple on paper, will prove to be a nightmare in practice.

But will political leaders dare oppose it?

It depends upon how much cover they get. And despite Kristol's skepticism of the plan as a whole, his proposed fixes for the plan are far less significant than Reich's.

Comments by McCain on Sunday suggest he might propose an amendment along the lines of one I received in an e-mail message from a fellow semi-populist conservative: “Any institution selling securities under this legislation to the Treasury Department shall not be allowed to compensate any officer or employee with a higher salary next year than that paid the president of the United States.” This would punish overpaid Wall Streeters and, more important, limit participation in the bailout to institutions really in trouble.

Reduced salaries for one year? You could drive a semi through the loopholes that idea creates. But to his credit, Kristol ends up more in Mallaby's and Krugman's territory than in Reich's:

While assuring the public and the financial markets that his administration will act forcefully and swiftly to deal with the crisis, [McCain] could decide that he must oppose the bailout as the panicked product of a discredited administration, an irresponsible Congress, and a feckless financial establishment, all of which got us into this fine mess.

Many have observed our society's tendency to cheer on capitalism and private profits, but to socialize losses. This appears to be a grotesque example of the Bush Administration doing exactly that - with the financial industry eagerly demanding an even larger bailout of all of its junk assets. I'll credit Reich, Mallaby and Krugman with far more knowledge of economics and market theory than I, so (dare I say, like Kristol - I guess we're in that area of overlap that's so often hidden in plain sight) I'm operating more on instinct. But my instincts are screaming, "This is an incredibly bad deal for everybody but Bush, Paulson and a handful of financial elites."
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Update: Dean Baker observes,

If the bailout were properly structured, firms would not be lining up to get in. It should be a last resort that involves selling most of the firm to the government, as happened with AIG. If banks are lining up to get in, then the people who designed the bailout should be chased out of town.