Thursday, September 25, 2008
Riding Out the Day's Events
Today was a near pitch-perfect illustration of the flaws of our major Presidential candidates.
Barack Obama has had various positions of authority, but as near as I can see he's never been held accountable for accomplishing anything, or even staked his personal reputation on the attempt. Today is no exception. By now, he's been the de facto leader of the Democratic Party for almost six months and his voice carries all the power of Marcel Marceau. John McCain has an innate feel for the exercise of leadership, but poor judgment for its end. Ie, he knows how to overcome inertia and rationalization for a common purpose, but he doesn't know what the common purpose is.
Today, John McCain suspended his campaign and is going to Washington to participate in the bailout debate. This has been characterized by many as a stunt, and that's certainly a legitimate pov. But I can almost guarantee that it's not a stunt in McCain's mind, but a real statement of priorities. For the sake of the economy, this might be good or bad. It's easy for me to envision the scenario where McCain builds a legislative consensus where there otherwise wouldn't be one. But the resulting bill might be your typical Congressional hodgepodge we'd have been better off without.
Fwiw, the lay of the land is changing so quickly, I don't know what we want to happen. I still expect some sort of intervention to happen, but it looks a lot less urgent now than it did a few days ago, which is a very good thing in my book.
If I had my druthers, here's the framework I'd use. Come up with criteria for a reasonable dividing line between "healthy" banks who we think can survive without an intervention. Figure out what the current market liquidation price of the various sorts of bad paper is, and have the Treasury bid at a small to medium-sized premium to that price, ie, well below the hold-to-maturity price Sec. Paulson has been talking about. Then, use the regulatory power of the government to force the "unhealthy" banks to clear out all their bad paper, either to the government or to somebody else. For many of them, this will not give them enough capital to continue operations. For those, we handle like an ordinary bank failure, ie, inject enough capital into it for a healthy bank to take over. Finally streamline the process of chartering new banks with new capital, perhaps allowing them to operate in a looser regulatory environment for a while. That should be okay, we know they're not carrying bad paper.
This approach would solve the moral hazard problem and be the best for the taxpayer. It avoids demagoguery and blame games. On the downside we're left hoping we're using enough club to get the job done. On that score, today at least, I think we just have to take our chances. From what I've seen, there is no magic bullet where we're guaranteed to get out of the mess if we give the Treasury X number of dollars worth of spending authority.
Like anyone else, my view on this might be completely different tomorrow.