Tag Archives: Peter Wallison

Do You Remember 1980? Because We Sure Don’t

Peter J. Wallison at The Wall Street Journal:

In the rapturous days after Barack Obama’s victory and the Democratic congressional sweep that accompanied it, House Financial Services Committee Chairman Barney Frank declared that the new Congress would enact a “new New Deal.” Few people really thought at the time that he or his party meant this seriously. After all, the original New Deal—as anyone who has read history knows—failed to revive the economy.

Indeed, the modern era of rapid economic growth commenced after both Democratic and Republican presidents undertook to lift costly and stultifying New Deal regulations. The deregulation of trucking, railroad and airline rates produced lower prices for travelers and lower costs for consumers. The deregulation of interstate voice and data communication fostered the growth of the Internet and the cellphones that are ubiquitous today. The deregulation of oil and gas prices eliminated shortages and gas lines; and the deregulation of fixed commissions for securities trading led to markets where shares can be traded literally for pennies.

But Barney Frank was right. The signature initiatives of the Obama administration were very much in the mold of the old New Deal—the heedless spending, a stimulus plan focused on government employment, a health-care program that brought one-sixth of the economy under government control, and now the financial regulatory bill that would control another sixth. It will be years before the damage can be undone.

Richard Green on Wallison:

Using the National Income and Products Account, I looked at real annual GDP growth between 1933 and 1980 (the stultifying years) and 1980 to 2009 (the “rapid economic growth” years). Between 1933 and 1980, GDP grew by about 8-fold, or more than 4 percent per year (actually 4.5 percent per year). Between 1980 and 2009, real GDP did slightly better than doubling, or 2.7 percent per year.

I try to respect people whose points-of-view differ from mine, but who decides to let this guy waste ink?

Paul Krugman:

Green points out that growth has actually been slower since the big rightward shift circa 1980. But what he doesn’t seem to realize is that Wallison is just following the party line. Read almost any conservative commentator on economic history, and you’ll find that the era of postwar prosperity — the gigantic rise in living standards after World War II — has been expunged from the record.

You can see why: the facts are embarrassing. Here’s a rough-cut version. The blue line, left scale, shows median family income in 2008 dollars; the red line, right scale, shows the top marginal tax rate, a rough indicator of the overall stance of policy. Basically, US postwar economic history falls into two parts: an era of high taxes on the rich and extensive regulation, during which living standards experienced extraordinary growth; and an era of low taxes on the rich and deregulation, during which living standards for most Americans rose fitfully at best.

DESCRIPTIONCensus, Tax Policy Center

This does not, to say the least, make the case for free-market orthodoxy. So a large part of the right has invented an alternative history in which the good years came after, not before, the Reagan revolution. Hey, that’s what should have happened; who you gonna believe, the doctrine or your own lying eyes?

More Krugman:

Unfortunately, some of the comments indicated that my point didn’t get across. So, a few notes:

1. This is not meant to show a causal relationship. I used the top marginal tax rate as an indicator of the changing policy climate, with the sharp drop as conservative ideology took hold; the point then is that contrary to myth, the good years came before that shift, not after.

2. I used a logarithmic scale for income because in that case the slope of a trend line represents the rate of growth; for those wishing I’d shown growth rates instead of levels, they’re right there if you just lay something straight along the blue line.

3. No need to use a comparable scale for the top tax rate; see 1.

4. Family size etc.: this is complicated, yet simple. One one hand, yes, families have gotten smaller, so on a per capita basis we’ve done better. On the other hand, the typical family’s income gains since the 1970s largely reflect women entering the paid work force, so if you look at income per hour it’s actually worse than the median income. The key point, however, is that by any measure the first half of the postwar era was much better than the second half.

5. International competition etc.. In general, having your trading partners reduced to rubble is NOT good for your standard of living, so the idea that postwar prosperity was made possible by the wreckage of WWII is odd. Anyway, the United States did very little trade in the postwar generation, relative to GDP. This was not an export-led boom.

The basic point I was trying to make is that the US economy did very well with tax rates and levels of regulation (and strong unions) that, according to modern mythology, should have been crippling. That’s why conservatives have invented an alternative history in which it never happened.

Scott Sumner:

Suppose you had gotten a room full of economists together in 1980, and made the following predictions:

1.  Over the next 28 years the US would grow as fast as Japan, and faster than Europe (in GDP per capita, PPP.)

2.  Over the next 28 years Britain would overtake Germany and France in GDP per capita.

And you said you were making these predictions because you thought Thatcher and Reagan’s policies would be a success.  Your predictions (and the rationale) would have been met with laughter.  Indeed around that time most of the top British economists signed a petition asserting that Thatcher’s policies would fail. For those of you not old enough to remember 1980, let me explain why.  Labour rule of Britain had reduced their economy to a shambles.  The government ran the big manufacturing corporations and labor unions were running wild.  They had 83% MTRs, 98% on capital.  There was garbage piling up in the streets of London.  Britain had been the sick man of Europe for decades, growing far more slowly than Germany, France and Italy.  The US wasn’t doing as badly, but certainly wasn’t doing that well either.  We had also been growing much more slowly than Europe and Japan.  Unlike Britain, we were still richer than most other developed countries, so this convergence was viewed as partly inevitable (the catch-up from WWII), and partly reflecting the superior economic model of the Germans and Japanese.

Now let’s look at what actually happened over the next 28 years.  All GDP per capita data are from the World Bank, and are normalized as a fraction of US GDP/person:

Country       1980        1994      2008

USA              1.000      1.000    1.000

Australia      .841        .770      .837

Canada        .905        .818      .843

Britain         .688         .705      .765

France         .780        .730      .713

Germany     .803        .812       .763

Italy             .756        .754      .675

Sweden       .868        .777      .794

Switz.          1.146      .987       .915


HK                .547      .845        .948

Japan          .732      .815         .736

Singapore   .577      .899       1.064

Latin America

Argentina     .395     .300       .309

Chile            .210     .251        .311

Note that four countries gained significantly on the US, two were roughly stable (Australia, Japan) and the rest regressed.  The four that gained were Chile, Britain, Hong Kong and Singapore.  Of course lots of poor countries gained on the US, but that’s to be expected.  But I will show that the performance of every single country on the list is consistent with my view that the neoliberal reforms after 1980 helped growth, and inconsistent with Krugman’s view that they did not.

Krugman makes the basic mistake of just looking at time series evidence, and only two data points:  US growth before and after 1980.  Growth has been slower, but that’s true almost everywhere.  What is important is that the neoliberal reforms in America have helped arrest our relative decline.  The few countries that continued to gain on us were either more aggressive reformers (Chile and Britain), or were developing countries that adopted the world’s most capitalist model. (According to every survey I have seen HK and Singapore are the top two in economic freedom.)

Krugman responds:

We can try to parse whether that’s true — but in any case it’s not a response to my original point. That was about the claim, quite common on the right, that the US economy was stagnant until Reagan did away with those nasty New Deal policies — a claim that is simply, flatly, false. The era of strong unions, high minimum wages, high top marginal tax rates, etc. was also a period of rapid growth and rising living standards. That doesn’t prove causation; it does disprove the widespread dogma that these things are always economically devastating. And it’s telling that so many on the right have airbrushed the whole postwar generation out of history.

Given all that, what do we learn from the fact that since 1980 the United States has more or less maintained its relative GDP per capita, after substantial decline previously? Well, that’s not a simple story. Part of the answer is that our relative decline for 30 years after WWII largely reflected technological catchup by others; by the 80s that catchup was largely over, with all advanced nations at roughly the same technological level, so there was no reason to expect faster growth in Europe and Japan.

There’s also an issue of labor-leisure choices. In the 70s the long-run trend of taking productivity gains out partly in the form of shorter working hours came to an end in the US, while continuing elsewhere. What that’s about is the subject of dispute, but it’s important to understand that a large part of the GDP difference between the US and Europe reflects that choice. France, in particular, is a country with about the same level of technology and productivity as America, but with roughly 25 percent lower GDP per capita; this mainly reflects longer vacations and earlier retirement, which may or may not be bad things, but are not a straightforward case of inferior performance.

But back to the original point: where this all started was with the common assertion that the US economy was a failure until Reagan came along. This should be true, according to doctrine — so that’s what people believe happened, even though it didn’t.

Reihan Salam:

Sumner tried to contrast U.S. growth performance relative to other societies. But I actually think Sumner could have gone further than he did. The logic of conditional convergence suggests, as I’ve argued earlier, that Europe and Japan should have grown faster than the U.S., as ideas and capital flowed relatively freely across the OECD throughout this period and there was a great deal of room for the non-U.S. OECD to embrace productivity-enhancing managerial innovations. Krugman disputes this:

Part of the answer is that our relative decline for 30 years after WWII largely reflected technological catchup by others; by the 80s that catchup was largely over, with all advanced nations at roughly the same technological level, so there was no reason to expect faster growth in Europe and Japan.

I’m not sure this is true. Krugman is very familiar with the failures of the Japanese retail sector. And of course the U.S. saw considerable productivity gains in this sector throughout the 1990s. “Roughly at the same technological level” might be right, but the fact that the U.S. still had a higher level of GDP per worker hour than all but a handful of high-unemployment OECD economies suggests that there was still room for technological catchup, if we use the term technology broadly.

Krugman goes on to discuss, very rightly, the labor-leisure tradeoff.

France, in particular, is a country with about the same level of technology and productivity as America, but with roughly 25 percent lower GDP per capita; this mainly reflects longer vacations and earlier retirement, which may or may not be bad things, but are not a straightforward case of inferior performance.

I find it very peculiar that Krugman is using France as his example, given that France went through a series of transformative neoliberal reforms during the 1980s as well. I strongly recommend reading Perry Anderson’s brilliant 2004 essay on postwar France in the London Review of Books.

Over twenty years, liberalisation has changed the face of France. What it liberated was, first and foremost, financial markets. The capital value of the stock market tripled as a proportion of GNP. The number of shareholders in the population increased four times over. Two-thirds of the largest French companies are now wholly or partially privatised concerns. Foreign ownership of equity in French enterprises has risen from 10 per cent in the mid-1980s to nearly 44 per cent today – a higher figure than in the UK itself. The rolling impact of these transformations will be felt for years to come. If they have not yet been accompanied by a significant rundown of the French systems of social provision, that has been due to caution more than conviction on the part of the country’s rulers, aware of the dangers of provoking electoral anger, and willing to trade sops like the 35-hour week for priorities like privatisation. By Anglo-American standards, France remains an over-regulated and cosseted country, as the Economist and Financial Times never fail to remind their readers. But by French standards, it has made impressive strides towards more acceptable international norms.

And how about those strong French labor unions?

Under the Fifth Republic, the French have increasingly resisted collective organisation. Today fewer than 2 per cent of the electorate are members of any political party, far the lowest figure in the EU. More striking still is the extraordinarily low rate of unionisation. Only 7 per cent of the workforce are members of trade unions, well below even the United States, where the comparable figure (still falling) is 11 per cent; let alone Austria or Sweden, where trade unions still account for between two-thirds and fourth-fifths of the employed population. The tiny size of industrial and political organisations speaks, undoubtedly, of deep-rooted individualist traits in French culture and society, widely remarked on by natives and foreigners alike: sturdier in many ways than their more celebrated American counterparts, because less subject to the pressures of moral conformity.

Granted, I’m being unfair here: I am analyzing France as though it were an actual country rather than an abstraction conjured up by “so many on the right” or “so many on the left,” some of my favorite interlocutors.

Let’s return to one of Krugman’s observations.

The era of strong unions, high minimum wages, high top marginal tax rates, etc. was also a period of rapid growth and rising living standards.

Krugman helpfully notes that the international context was important, though of course his interpretation of that international context is somehwhat idiosyncratic — i.e., there was little room for catchup growth in Europe and Japan post-1980, a pretty remarkable statement. My sense that Europe and Japan are ahead of us in some technological domains (broadband penetration comes to mind) while we’re ahead in many other domains, many of which fit under the rubric of managerial innovations that enhance capital productivity.

Will Wilkinson:

Taken together, this pair of outstanding posts by Scott Sumner and Reihan Salam seems to me a pretty decisive rebuttal to Krugman’s preferred narrative about the relationship between economic policy and American growth.

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Bailouts Now, Bailouts Never, Bailouts Later, Bailouts Forever

C.S. McCoy at Redstate:

The Dems will be able to tap into voter anger at the banks and will argue that they’re preventing the next crisis, all while framing Republicans as the bankster’s evil cronies.  Conservatives, of course, know better.  Each financial reform bill coming down the pipeline adds more layers to the existing bureaucracy.  We can expect higher bank fees, decreased and more expensive access to credit for individuals and businesses of all sizes, and of course, a future crisis brought on by an unforeseen side-effect of the proposed legislation.

Real reform involves fixing the perverse incentive structures in the current system.  The moral hazard created by various Federal Reserve initiatives, aspects of the FDIC, and whatever goodies are offered up by whatever Goldman Sachs alum-turned-bureaucrat is in a position of power at a given time each contributed to the financial crisis.  And of course, let’s not forget Freddie, Fannie, affirmative-action lending, and similar pieces of legislation that set the housing market on a one-way path to bubble city.

Unfortunately, given the political realities in DC, there may not be much that conservatives can do to transform the current bills into positive legislation.  At this point, we must focus instead on minimizing not only the economic consequences but also the political damage that we could very well incur should we appear to be on the wrong side of the fight over financial reform.  This issue could very well blunt some of our momentum going into November, and given the importance of retaking the House to prevent funding of various health care initiatives, fighting the tax increases that the Dems will offer up to conquer mounting deficits, and controlling the narrative for the 2012 election, that is simply a chance we cannot take.

This fight has been framed terribly for Republicans.  The Democratic aide in the above quote has it exactly right.  Already this battle has been described as the consumer vs Wall Street bankers, and we’re poised to appear to be fighting on the side of one of the least popular groups in America.  Fortunately, one thing more unpopular than Wall Street is bailing out Wall Street.  And fortunately (from a political standpoint), each of the proposed bills has a mechanism to entrench the Federal bailout trough.  Republicans must play up this aspect of the legislation to have any hope of turning this fight into a win.

And we need to start by referring to it simply as the “Bailout Bill.”  “Financial Reform” has a positive connotation, when none is deserved for the proposed bills.  Additionally, “Bailout Bill” does a considerably better job actually describing the legislation.  Regardless of whether or not one has been following this debate, does the term “Financial Reform” actually make it clear what the bill entails?  No, but the term “Bailout Bill” makes it quite clear.  Let’s face it, the Republican leadership in the Senate isn’t exactly the most charismatic bunch.  Do we really want to see them on TV droning on about the intricacies of what’s wrong with the “Financial Reform” legislation?  No, the typical viewer most likely neither cares nor is knowledgeable enough to accurately assess Mitch McConnell’s criticisms.  Boehner, Pence, and Ryan would do a better job, but nevertheless, the topic isn’t particularly engaging.  The term “Bailout Bill” delivers the message to the viewer in a clear and concise manner.

On top of that, it throws the Dems’ attempts to appear to be combating “special interests” right back in their faces.  Regardless of your opinion of Ron Paul, he brought up a great point this weekend when he referred to Obama as a “corporatist” (although the other part of his statement was wrong…Obama has shown both corporatist and socialist tendencies).  We need to harp on about how this “Bailout Bill” will forever put taxpayers on the hook for Wall Street’s misdeeds.  The public already knows that Democrats have been handing out goodies to special interests: auto companies, big Pharma, unions, and even the insurance companies.  Let’s hammer it home.  The Dems of course will respond that Wall Street will actually be the ones paying for the bailouts since special taxes on the banks will go into a bailout trust fund.  This may be true, but it requires that the public trust that these funds won’t get looted in the future, something with which Washington doesn’t exactly have a stellar track record (see: social security).  Additionally, as seen during the health care debate, the more that proponents of the legislation have to defend its complex and unpopular components, the more difficulty they will have selling the entire package.

Brian Beutler at TPM:

About a week or two. That’s how long Republicans have to decide how they ultimately want to play their hand on financial regulatory reform. According to numerous Democratic aides and key senators, the GOP will either have to join forces with Democrats on a bill that hews very much to the White House’s demands, or they’ll have to do their best to block a bill that enjoys wide popularity. But as much as Democrats want to change the rules that govern Wall Street quickly and smoothly, they also love the politics of moving the bill forward without GOP support and letting Republicans publicly justify their decision to protect hated financial institutions from the regulations they oppose.

“We are ready to go forward. The bill’s ready…if I have to go it alone, I’ll go it alone…. I’m ready to go to the floor tomorrow if they want.” said Senate Banking Committee Chairman Chris Dodd last night, after a brief meeting with his counterpart, Sen. Richard Shelby (R-AL).

Aides go further, admitting that they’d relish the prospect of putting Republicans on the side of big banks in opposition to reg reform.

In stark contrast to their approach to the year-long fight over health care reform, Democrats now say broad bipartisan agreement isn’t worth it if it sucks up too much time, and needlessly weakens the bill.

“Having an agreement that at the end of the day would largely have no teeth…would be a sham,” DSCC chair Robert Menendez told reporters yesterday, off the Senate floor. “If you just want bipartisanship for a figleaf, I think that would be a huge mistake on a policy basis, and a huge political mistake as well.”

“This is not going to be a repetition of the health care [debate],” Dodd said last night. “That was one of the biggest mistakes ever made, in my view–people waiting around, praying and hoping, day to day, that someone might show up and be supportive of the view.”

Christopher Buckley at The Daily Beast:

Senator McConnell, whose facial opacity amounts to a kind of poker-face magnificence, sallied forth to the microphones outside the White House to denounce the bill as a means of perpetuating federal bailouts of too-big financial institutions. The bill’s defenders rushed to the same microphones to proclaim that in fact, it does the exact opposite. There’s rather a lot of… swing between those two positions. The two top headlines Wednesday on Realclearpolitics.com were a study in Washington yin and yang:

“Financial Reform Bill Ends Bailouts.” Sen. Dodd

“Dodd Bill Institutionalizes Wall Street Bailouts.” Sen. McConnell

Perhaps between now and the November elections, one of these interpretations will emerge as the true one. In the meantime, as Bette Davis used to say, fasten your seatbelts. It’s going to be a bumpy summer and fall.

Edmund L. Andrews at Wall Street Pit:

When Mitch McConnell charged that the Senate Democrats’ bill to reform financial regulation would lead to “more bailouts” for Wall Street, I could almost imagine how GOP word-smiths had racked their brains for ways to spin the effort.

Here was a bill aimed at clamping down on the rapacious mortgages and wanton risk-taking by Wall Street firms that nearly destroyed the financial system and led to huge bailouts. It would be hard to find groups that are more detested by voters — including populist Tea Partiers and End-the-Fed supporters of Ron Paul — than big banks and Wall Street.

GOP leaders know exactly why they oppose the bill: it’s a Democratic bill. Full-stop. But will that fly with ordinary voters? Do red-state conservatives hate derivatives regulation even more than they hate Wall Street greed, trillion-dollar bailouts and all the bad things that led to the epic meltdown? Doubtful.

That’s why McConnell’s attack was so clever. He appeared to be on the ramparts fighting Wall Street rather than helping Wall Street firms avoid all the things they hate: a consumer protection agency, regulated trading for credit default swaps and new levies on the banks to pay for past and future calamities.

Is McConnell right? Let’s nip this in the bud.

It is true that the Senate bill would require financial institutions to put up $50 billion to deal with possible future meltdowns. It is also true that federal regulators would have new “resolution authority” to shut down failing institutions in an orderly way.

But those are very different things from pre-authorizing future bailouts. The recent bailouts kept zombie banks and AIG alive, because both the Bush administration and the Federal Reserve correctly feared that their collapse would set of a chain-reaction of failure. The bailouts were necessary because the government didn’t have the authority to shut the companies down in a orderly way.

One big example: Fed and Treasury officials didn’t have the legal power to force creditors of AIG and others to take haircuts. They had two stark alternatives: push the companies bankruptcy, let them default on hundreds of billions worth of obligations and let the chips fall where they may; or prop them up, bail out the creditors and hope taxpayers would get their money back after the crisis.

The new resolution authority would give the government new powers to take over and shut down failing giants. That is quite different from bailing out a bank and keeping it alive.

James Gattuso at Heritage:

President Obama met today with members of Congress to jawbone them on the pending financial reform bill. A key part of his message: “we must end taxpayer bailouts.” Few statements are less controversial than that. Nobody wants to see more bailouts.

But wait a second. Doesn’t the very legislation he’s plumping for — and which will soon be voted on in the Senate — itself provides for bailouts. When asked that by a reporter just before the meeting, the President hedged, saying only “…I am absolutely confident that the bill that emerges is going to be a bill that prevents bailouts. That’s the goal.”

Well, that goal, as it turns out, only survives up to page 134 of the 1,334 page Senate bill. On that page begins a section entitled “Funding for Orderly Liquidation.” The text reads that the Federal Deposit Insurance Corporation, the designated federal receiver for failing financial firms, “may make available…funds for the orderly liquidation of [a] covered financial institution.”

Where are those funds to come from? Well, on page 272 the bill creates an “Orderly Resolution Fund” within the U.S. Treasury. The target size of this fund? Fifty billlion dollars.

That sure looks like a bailout fund. Yet, the bill’s supporters deny it. Elizabeth Warren, a leading proponent of the plan, calls the idea that it perpetuates bailouts “just nuts.”

The argument is that no funds could be provided to to compensate a firm’s shareholders. They would be forced to bear the cost of a firm’s failure, so it’s true they they aren’t being bailed out. But the failing firm’s other creditors would be eligible for a cash bailout. The situation is much like the scheme implemented for AIG in 2008, in which the largest beneficiaries weren’t stockholders, but rather other creditors, including foreign firms such as Deutsche Bank. Hardly a model to be emulated.

The second line of defense is that, bailout or not, the funds are to come from fees on big banks, not from taxes. But that’s a distinction without a difference — whether it’s called a fee or a tax, the effect is the same. And the fact that it will be paid by “big banks” is hardly cause for relief. Like other taxes, these would certainly be passed on to consumers, who would ultimately pay the tab.

Peter Wallison at American Enterprise Institute:

Does the bill, as McConnell has said, provide for permanent bailouts? Yes, again without question. The administration and the Democrats, especially Dodd, seem wounded by this suggestion. To them it seems obvious that this can’t be true. Why, they protest, the bill says that these firms have to be wound down, not bailed out. But why then is there a $50 billion fund set up to assist this wind down? In his statement yesterday on the Senate floor, in which he said the opposition had used “falsehoods” to oppose his bill, Dodd said: “And middle class families on Main Street won’t have to pay a penny: the largest Wall Street firms will have to put up money for a $50 billion fund to cover the costs of liquidating the failed financial firm.” The costs of liquidating the failed financial firm? What might those costs be?

The answer is that the $50 billion will be used to pay off the creditors, so that the market’s fear of a general collapse will be allayed. Remember, the theory under which the administration and Dodd are operating is that the failure of one of these large companies will cause a systemic breakdown or instability in the economy. The way to avoid that is to assure the market—in other words the creditors—that they will be paid. Otherwise, they will run from the failing company, and every other company similarly situated. That act—paying off the creditors when the government takes over a failing firm—is a bailout. It doesn’t matter that the management lose their jobs, or that the shareholders get nothing. When the creditors are aware that they will get a better deal with the failure of a large company than they will get with a small one that goes the ordinary route to bankruptcy, that is a bailout. And the signal it sends to the market is the most dangerous part of this bailout, because it tells the market that creditors will be taking less risk when they lend to small companies than if they lend to large ones, and this—as noted above—will simply provide the credit advantages to large companies that will not be available to small companies. Again, like too big to fail, this will distort and suppress competition in financial markets.

Michael Barone at Human Events

Ezra Klein:

In negotiations stretching from the spring of 2009 to February of 2010, Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) worked together to agree on financial-regulation bill. Their work produced the resolution authority section of Dodd’s legislation, which is to say, the section that attempts to avoid future bailouts. After that, Corker continued to work with Dodd on other elements of the bill. So after Sen. Mitch McConnell said that the legislation ensures “endless taxpayer-funded bailouts for big Wall Street banks,” I called Corker to get his perspective. What follows is a transcript of our conversation, lightly edited for clarity.

Was Sen. Mitch McConnell correct? Is the Dodd bill, as currently written, a permanent bailout?

I’ve cautioned against hyperbole. But the fact is that the bill as it now is written allows numerous loopholes that allow a situation where you could have bailouts in perpetuity. It’s a fair statement. This all happened after Mark [Warner] and I finished our work but my negotiations with Dodd ceased. Treasury and FDIC became involved and there are provisions that have been added that change the effect of our work. It can be fixed pretty easily. And everyone already knows how to fix it. To be fair, every administration wants unto themselves as much flexibility and freedom as they can get. What we need to do is take some of that back.

I think it would be useful for us to get very concrete here. So what is a “bailout,” exactly?

A bailout is when the government comes to the aid of a company after the company begins to fail. The government comes in and creates mechanism for its survival.

My understanding is that the bill’s resolution authority mandates that a company gets liquidated if it has to tap into the $50 billion resolution fund. Shareholders get wiped out. Management gets wiped out. The company gets taken apart. Am I wrong in any of that?

That’s exactly right. What you’ve just said is true. But there are a ton of technical things that have to do with the FDIC’s ability to guarantee indebtedness, the ability of the Federal Reserve to do things that act like a bailout. I have a list of 14 items that we’re sharing with Treasury that we want them to look at. And by the way, I think they’re very willing to look at them.

I hope what you get out of this is that Mark and I have no issue. But there’s some bankruptcy court language that’s not in here. There are some issues regarding judicial review of the FDIC’s activities. Some of these things, if you read the language, the FDIC could have the ability to inject equity into the company. They want something called incidental powers. Unless things are clearly defined, they can cause problems. The biggest issue is narrowing what the Fed is able to do, what the FDIC is trying to give itself in order to create flexibility.

It sounds like what you’re saying is that the issue here is not a philosophical dispute between the two parties, but technical changes to make sure the language of the law accords with its intent.

That’s exactly right. Let me give you another example. The way the language is written right now, the resolution process could be used on an auto company. We want this clearly, solely to apply to financial institutions. That’s just one example of a definition type of thing that has to be dealt with. But I think the rhetoric has been overheated, and I’ve cautioned against it. Little words mean a lot here. And I think we’re better off discussing this issue on the substance. And there are other things, too. The bill does not adequately deal with one of the basic causes of this crisis, which was that underwriting was really bad. Now, we have to end any discussion of companies being too big to fail. But there are other important issues.

Matthew Yglesias:

Sheila Bair explains that the regulatory reform bill will end bailouts and that Mitch McConnell and others who say it institutionalizes them are lying:

Would this bill perpetuate bailouts?
SHEILA BAIR: The status quo is bailouts. That’s what we have now. If you don’t do anything, you are going to keep having bailouts. Bankruptcy doesn’t work — we saw that with Lehman Brothers.

But does this bill stop them from happening?
BAIR: It makes them impossible and it should. We worked really hard to squeeze bailout language out of this bill. The construct is you can’t bail out an individual institution — you just can’t do it.

In a true liquidity crisis, the FDIC and the Fed can provide systemwide support in terms of liquidity support — lending and debt guarantees — but even then, a default would trigger resolution or bankruptcy.

As I said this morning, there are some questions as to whether the process the Dodd bill sets up is genuinely 100 percent airtight. But there can be no denying that it makes bailouts less likely. Some conservatives are trying to outline alternative approaches to this goal, but what McConnell and John Boehner have on the table is a policy of make believe—don’t regulate banks, let Wall Street run wild, pretend there won’t be bailouts, then when the casino goes bust show up with a bailout.

Steve Benen:

To prevent the bill from moving forward towards a vote, all 41 Senate Republicans would have to unanimously agree to filibuster the motion to proceed. (In other words, the GOP would refuse to allow the debate to even get underway.) As of yesterday afternoon, Senate Minority Leader Mitch McConnell (R-Ky.) did not yet have commitments from all 41 members of his caucus.

Today [Friday the 16th], that changed.

Every member of the Senate Republican Caucus has signed a letter, delivered to Senate Majority Leader Harry Reid, expressing opposition to the Democrats’ financial regulatory reform bill, which they all claim will lead to more Wall Street bailouts.

“We are united in our opposition to the partisan legislation reported by the Senate Banking Committee,” the letter reads. “As currently constructed, this bill allows for endless taxpayer bailouts of Wall Street and establishes new and unlimited regulatory powers that will stifle small businesses and community banks.”

The Republican caucus was not specific about the path ahead. Indeed, the GOP’s letter did not even specifically vow to block the motion to proceed, but rather, simply articulated the caucus’ collective “opposition.” It stands to reason, though, that the point of the letter is that Republicans are prepared to block the vote and the debate on bringing some safeguards to the industry that caused the economic disaster.

It’s worth remembering that Senate Democrats, by and large, didn’t really expect it to come to this. Given Wall Street’s scandalous recklessness, and the public’s disgust for irresponsible misconduct in the financial industry, Dems thought it would be politically suicidal for Republicans to reject reform efforts.

As of this afternoon, it appears Republicans are prepared to link arms and take their chances, fighting to protect Wall Street from accountability.

UPDATE: PolitiFact

Andrew Sullivan

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Take A Load Off Fannie, Take A Load For Free

Chris Isidore at CNN:

Shares of mortgage finance giants Fannie Mae and Freddie Mac soared Monday after the Treasury Department announced what essentially amounts to a blank check for their bailouts.

Treasury lifted a $200 billion limit on the amount it was ready to pump into each of the two mortgage firms after the markets closed Thursday. Fannie Mae (FNM, Fortune 500) shares leapt 21% Monday to $1.27, while shares of Freddie Mac (FRE, Fortune 500) jumped 27% to $1.60.

While the support from Treasury would appear to be a vote of confidence for the firms, the companies’ leaders apparently have no interest in owning the stocks themselves.

According to pay packages disclosed for Fannie Mae and Freddie Mac on Thursday, no stock or options are being issued to any of their top managers. That is unusual for shareholder-owned companies.


I don’t know for precisely what’s motivating the administration’s recent actions on Fannie and Freddie, but I am worried that they’re continuing to double their bets on helping the “housing market,” whatever the hell that means.

One can understand extraordinary actions to avert financial armageddon, but this just seems like an ongoing policy of trying to prop up financial institutions in a not especially smart way. I’d like to read more articles about the administration trying to help people instead of “markets.”

Peter Wallison at AEI:

It’s a favorite government trick to announce bad news on a Friday afternoon, so it appears in Saturday’s paper, the least likely edition to be read. By Sunday and Monday, it’s old news. The Obama Treasury just went one better, announcing on Christmas Eve that they were uncapping the amount they believe will have to be invested in Fannie and Freddie. The Bush Treasury first estimated the government-sponsored enterprises’ (GSEs) losses at $100 billion each. The Obama administration, which has been using the GSEs to stabilize the housing market by reducing their underwriting standards, upped the ante to $200 billion each. Now the administration has thrown in the towel completely, and dropped a large lump of coal in each taxpayer’s stocking—it won’t even try to estimate the total losses of Fannie and Freddie.

This is the culmination of an unprecedented policy disaster, inflicted on the American taxpayer by congressional supporters of Fannie and Freddie who refused over many years to approve new and tougher regulations for the two GSEs. Now that many of  these folks are in charge of the House and Senate committees that deal with financial reform, they have suddenly found new respect for regulation and are trying to apply it to the entire financial system. Perhaps the American taxpayers, acting as voters in 2010, will decide that one disaster per career is all they should be allowed.

Calculated Risk:

As everyone knows there has been a massive government effort to support house prices. Some of this has been aimed at limiting supply (modification programs, various foreclosure moratoria), and some has been aimed at increasing demand (tax credit, lower mortgage rates, loose lending standards).

Here is a quote from Secretary Geithner from a recent Newsweek interview by Daniel Gross:

“We were very careful from the beginning … to say that we are going to focus the bulk of the financial force on bringing interest rates and mortgage rates down to cushion the fall in housing prices and help stabilize home values, which will feed into people’s basic sense of financial stability.”To help keep this straight, here is a list of the status of a number of programs:


  • Support for Fannie and Freddie: Treasury has uncapped the support for Fannie and Freddie for the next three years. From Treasury:

    Treasury is now amending the [Preferred Stock Purchase Agreements (PSPAs)] to allow the cap on Treasury’s funding commitment under these agreements to increase as necessary to accommodate any cumulative reduction in net worth over the next three years. At the conclusion of the three year period, the remaining commitment will then be fully available to be drawn per the terms of the agreements.

  • Fannie / Freddie Low-Cost Refinancing program. This is the program that allows homeowners with Fannie and Freddie mortgages to refinance loans up to 125 percent LTV. I believe this program expires June 10, 2010.
  • FHA Loose Lending Standards: In his Dec 2nd testimony to Congress, HUD Secretary Donovan said the FHA would propose tighter lending standards by the end of January 2010. This included:

    •Focus on enforcement and lender accountability
    •Reduce the maximum seller concession from 6% to 3%.
    •Raise the minimum FICO score.
    •Increase the up-front cash for borrower (it isn’t clear if this is an increase in the downpayment, currently a minimum of 3.5%, or requiring the borrower to pay more fees).
    •Increase FHA insurance premiums.

  • Various Holiday Foreclosure Moratoria: Fannie, Freddie and most of the large banks routinely suspend foreclosure activity over the holidays. This has been true this year too. Fannie and Freddie’s holiday moratoria ends Jan 3, 2010, and Citi’s holiday moratoria ends Jan 17th. The other banks programs end in early January too.There is probably more …
  • Jane Hamsher at Firedoglake:

    Analysts are predicting that this will be “the largest cost to tax payers of all of the financial bailout programs.” It was done under the authority granted by the Housing and Economic Recovery Act (HERA) of 2008, which Rahm Emanuel cosponsored and pushed through shortly before he left for the White House.

    And on Christmas eve, it was also announced that compensation packages of $4-$6 million were approved for Fannie & Freddie’s top executives.

    The elite who created this mess are rewarded for their continued failure, because any solution to the foreclosure crisis apparently has to make the banks rich in the process.  Just as it is with the insurance companies, the banks expect to be paid handsomely in any government program that addresses the problems they created.

    There needs to be an investigation.

    Update: Fannie and Freddie shares soar on the bailout news, 17% and 21% respectively.

    Marla Singer at Zero Hedge:

    As they hit 5%, and when they think no one is listening, Freddie whispers that 30-year rates could climb to 6% in 2010. (Rahm: “No big thing.  Just sayin’ is all.”)

    UPDATE: Tim Duy

    Paul Krugman

    Dean Baker at Huffington Post

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