Arguing for the bailout.

[randomness]

Those who advocate a bailout should meet this minimum standard: they need to make the case that borrowing or taking $2,000 or more for each of us Americans and using it to bail out the various financial institutions is a better use of that money than simply letting those institutions go bust, and sending each of us a check for $2,000 instead. Or even not borrowing or taxing that $2,000 per person in the first place, and just letting the companies go bankrupt.

They can try making the case that the alternative to borrowing or taxing us an extra $2,000 each is a depression. It's almost certainly true that for most people, avoiding a depression is worth more than a $2,000 check. But they need to explain why dire consequences will occur if they don't get the money, not simply wave their hands and tell scare stories. Uncertainty in their explanation is fine. The situation is fluid and no one can be sure about many details. Obfuscation is not.

One might say that it's a very difficult bar I've set, and that Americans simply don't know enough economics to understand the explanation. In that case, I'd say then it's certainly past time educating the American people about economics. They can make that part of their explanation.

I say this as someone who suspects some action may end up being a good idea. But I still haven't heard a conclusive argument for action in general, and no convincing argument for this bailout in particular.

If you want our money, you have to convince us why we should give it to you. It's up to you to convince us.

Comments

[browngirl.livejournal.com]

Well said.

[nathanjw]

And they need to not lie while they're doing it. "Good ideas do not need lots of lies told about them in order to gain public acceptance.". Plus, there's a non-negligible amount of "Administration who cried wolf" to overcome.

[madbodger.livejournal.com]

Americans simply don't know enough economics to understand

Well, that's yer problem! That, and without coming right out and saying it, they seem to have managed to sell the idea that if we bail out the CEOs, all those people who bought houses they couldn't afford* will also be bailed out.

* See "Americans simply don't know enough economics to understand"

[tamidon.livejournal.com]

I asked my mother ,a very high end securities lawyer, why AIG was getting bailed out. She said it would take down the world if we didn't. Everything they insure would, legally, have to be grounded while things are dealt with. They cover over 900 airplanes internationally alone,most shipping by land, air, and sea. That's just a small part of it. They hold a huge amount of the insurerance debt for hurricane, that would have to be stopped payment until dealt with. Apparently it would be much bigger than just a Wall Street issue

[r-ness.livejournal.com]

The AIG bailout was last week's bailout, and more or less a done deal at this point.

This bailout is a new, different, and much larger one.

[drwex]

Yeah, AIG was really too tentacled to be allowed to collapse. My understanding of the AIG bailout is that it's structured as a finite-term bridge loan to be repaid by the orderly sale of assets(*). That makes a whole lot more sense than the current 3-page proposal that the administration wants turned into legislation post-haste.

(*) AIG turns out to own a boatload of non-insurance stuff, most of which is profitable on its own.

[(Anonymous)]

"But I still haven't heard a conclusive argument for action in general, and no convincing argument for this bailout in particular."

Yeah, that would definitely help, along with the varuious ideas for making sure that we at least see some of that money back (as happened in the '30's)

The quick-n-dirty version, as I heard it last night, is imagining the various lenders as the central gear in a system that includes credit & the ability to spend/loan in virtually every other sector of the economy. Without bailout - of some kind - to clear out at least a good portion of the bad debt, the central gear pretty much stops turning. It is already slowing with tightening of credit & willingness to give loans already. Without unclogging the system, kiss economic flow goodbye for at least several years. What does that mean? Basically there will at least be a severe recession and possible depression. So folks say.
Which reputedly is why the markets wet themselves in fear yesterday when it looked like the plan was being held up in Congress.

(Personally I like Schumer's suggestion of "You say you only need $50 Billion now? OK, we can do that & then see what you need afterwards. Not $700B all at once, under the Secretary's control alone"

[dpolicar]

So, just for grins, I'll assume you're serious. In which case I'd ask what makes this particular case so special? In general, we operate by electing representatives, not by submitting every issue to direct vote of the electorate -- which, given the American electorate, I'm generally in favor of. The bailout thing is the singular exception, why?

[r-ness.livejournal.com]

So, assuming you're serious, do you always think that our reprsentatives should take actions the electorate rejects?

I'm not, btw, advocating that this bailout be put to a referendum. I'm saying an actual case needs to be made for the bailout. Fortunately, at least some of our elected representatives seem to agree with me on this, or they're at least making noises as if they do.

If it sounds like I'm talking about a direct vote, I'm not being sufficiently clear and should probably edit my post. (Sometime when I'm not driving, I'm thinking.)

[dpolicar]

Oh... yeah, I was confused. I thought you meant the case should be made to us, the public in general, which seemed to suggest that when all was said and done we'd be deciding what to do about it. Failing that, I can't quite tell how we'd know when a case was done being made, or whether it had been made successfully.

And to answer your question, I don't think they always should pick a rejected answer -- sometimes the popular answer is a right one -- but they should always be willing to. Basically I think representative democracies have it all over direct ones because the electorate is not particularly qualified to make most of the decisions that need making, even at the level of picking advisors and listening to them.

[stolen-tea.livejournal.com]

I've heard the consequences are roughly: day one, banks start refusing credit even to large corporations, day two, grocery stores can't purchase resupplies, day three, empty shelves, food riots, etc.

It does match up with what I'd heard about grocery stores, in that they're now keeping very little in stock, and buying what they need on cheap credit. I give less credit to the timeline, but I do think many people underestimate the complexity of the financial system...

[nathanjw]

Marginal Revolution points out that if that's the issue, than the $700B might be better applied as, essentially, direct loans to the productive businesses that need credit. At some level, the banks are an intermediary between savers and borrowers; what's needed to keep the grocery store going is borrowing, not the existing banks per se.

[drwex]

There's a significant difference between providing lines of credit and/or becoming the "lender of last resort", which is what the government has done before, and what's proposed now.

The former makes sense, in that it keeps capital liquidity in key areas and restores confidence. The fact that Goldman got a $5 billion buy-in today and may get another $5 billion later this week simply because it accepted the government's terms, shows me this is a potentially workable strategy.

The new plan is not to extend credit, but rather to buy flat-out unknown valued and potentially risky securities. That's a much less clearly good move, from our point of view.

[nathanjw]

Right, the linked post and mine were critical of the structure of the Paulson plan for that reason.

A partial answer

[fin9901.livejournal.com]

The short answer as to why we should spend all that money? Because it's cheaper than the alternative.

Just as one example: people living on pensions. That pension money comes from mutual funds that are invested in a variety of companies; when big Wall Street companies go insolvent, it puts strain on every company they do business with, and causes a number of them to go insolvent, and the dominos just keep falling from there. Large trees in the financial forest can't fall over without taking out a lot of smaller ones with them. The mutual funds then fall apart, and then pension funds start failing. Millions of retirees wake up to discover that they don't have a pension any more, all they have is Social Security, and we all know how good a shape *that's* in.

And that's just one piece of the whole mess.

[shostack.livejournal.com]

More of a meta-comment, but I'll add it anyway. I agree that politicians should have to answer for their actions. If they believe that this is a good idea, they should have to explain it. They don't necessarily have to win over everyone's opinion, but they should have to explain what they are doing in terms that everyone is comfortable with, not just the dumb people.

Reason has a solution

[fin9901.livejournal.com]

Reason has their solution to the current crisis here. My summary: get rid of the capital gains tax, cut business taxes, change the accounting rules so that the bad loans don't have to be undervalued like they are now, and get rid of Sarbanes-Oxley.

Makes a whole lot of sense to me, though I can't see many Democrats especially this close to the election being willing to put their demagoguery aside and cut taxes.

Re: Reason has a solution

[julianyap.livejournal.com]

Of course, (based on your summary) this is Reason's answer to everything.

[jicama]

Some liberal economists who think that the problem is real, that we need to do something soon, but that the Paulson/Bernanke plan is unacceptable:

http://krugman.blogs.nytimes.com/
http://delong.typepad.com/

[mentalapse.livejournal.com]

Here's a crazy idea. Do the bailout, buy up a ton of these mortgages, then just tear them up and give everyone free houses.

I think I'm just joking.