Bailout redux

This is a situation with no "good" answers, and if I had a vote in Congress today, I would have looked at the bailout bill and been strongly tempted to vote "Present." In any case, there's a few things worth mentioning.

First, one relatively unremarked problem with the bailout is that Paulson et al wanted to Congress to do something that it had no authority to do. By that I don't mean that if it cleared both chambers of Congress and signed by the President, that it wouldn't have the force of law. But this particular bill was not just extremely unpopular, it also does things that the both the political class and the people in general are psychologically unprepared to understand.

Remember, the people who need to be deterred from the moral hazard aren't them, the suspenders-wearing malefactors of Wall Street, they're us. That means Congress and the American people in general have to make some effort to figure out what's going on hold ourselves accountable for what happens instead of trying to pretend that Sec Paulson and Fed Chairman Bernanke are some kind of Svengalis that are going to make it all better.

Part of this process is separating the desire for retribution against irresponsible lenders and undercapitalized borrowers versus acting prudently to preserve the health of the economy as a whole. Another part of this process is actually taking a look at the precise nature of the financial crisis and figuring out what to do about it. One problem with the Paulson plan is that it's intended to work as a bank shot. By clearing out the bad paper that financial institutions hold, these financial institutions will be stronger and more transparent and acceptable as counterparties. But even if that happens, it may not solve the bigger problem. The capital on the sidelines has to give it to the banks in one form or another, and the banks have to lend it out in the larger economy. Neither of which is guaranteed to happen. Overall, it could work, but certainly doesn't have to.

There's something else that needs to be addressed. How much does Sec Paulson intend to pay for the "distressed assets?" I hope intends to buy them cheap but I fear that he's more interested in getting money back into the banks than value for the taxpayer. I see why he thinks that but it's still short-sighted. Besides the current credit crisis we still have to deal with inflation and currency devaluation. And underlying those is the threat of debt repudiation. I have a hard time believing that the Democratic establishment is going to allow Sec Paulson to buy bad paper from Citibank without big payoffs for ACORN, midnight basketball, whatever's on the to-do list this week. When you combine the amount Sec Paulson is going to overpay to the counterparties to sell plus the additional money to buy off the political class, we're building a bigger hole of debt to climb out of.

Update: What he said.