Stiglitz on Worst Case Scenario
Economist Joseph Stiglitz says everyone would be hurt if nothing is done
Originally broadcast: 60 Minutes - Sun Sep 28, 7:00 PM ET
Wednesday, October 01, 2008 | 12:30 AM | Permalink
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Thanks, Barry. Being a Democrat now, I am a little bit more at ease hearing that from Stiglitz. But I still worry that the Democrats have bought into Paulson hook, line, and sinker and will fall into a political trap Wednesday night that could cost some Senate seats or even Obama the Presidency. I am also worried about how much the bailout will hamstring Obama from moving forward on his energy independence platform.
It's out of our hands. I don't really have a position on this bailout anymore, because I am tired of worrying about it. Let the chips fall where they may.
Posted by: CNBC Sucks | Oct 1, 2008 12:50:31 AM
I hear a Steely Dan refrain accompanying the bailout - "See the glory ... Of the royal scam"
Posted by: whippersnapper | Oct 1, 2008 1:08:40 AM
Barry,
Thanks for staying on top of this boondogle. I just read that they're making serious sausage in the senate. They're throwing AMT adjustments as crumbs to the middle class and a bunch of UNFUNDED infrastructure crap. These clowns really want to trash the dollar. I hope Leahy isn't part of this but he's bent over for his precious machine gun factory in Burlington before so they may have ways of forcing him. Sanders should hang tough though.
Posted by: AGG | Oct 1, 2008 1:11:54 AM
The bailout needs to happen. No ifs ands or buts about it.
Just get it done and get it approved.
There's just too much at stake here to fiddle around with other alternatives. There are no alternatives.
Don't trust Paulson, Benanke or Wallstreet if you don't want to, but at least trust Warren Buffett. If there were a better alternative, he would have said so.
Posted by: beanieville | Oct 1, 2008 1:12:59 AM
Hey, here's an idea! Let's create a Neo Department of Home and Financial Security, and sink another $T a year in baaksheesh ransom into the black hole of NYC:WADC! Does anyone have any conception just how upside down we are as a society?! Never mind buying up all their nuclear waste, we're already glowing in the dark, a deep blood red. What's another $T, when you're down by the bow, black icy waters of usury caving in the last bulkheads of freedom before the banks and brokers end up owning everything and selling our children off to our foreign landlords.
http://www.arthurmag.com/magpie/?p=3160
Posted by: Lovehate Punchkick | Oct 1, 2008 1:49:02 AM
Everyone will be hurt anyways. By opposing the bailout people don't want to make it worse.
Posted by: Nathan Smith | Oct 1, 2008 1:57:21 AM
Nathan,
Give me a freakin break. I never heard a bull say it's a bad thing. All the negativity came from the bears. *sigh*
Posted by: beanieville | Oct 1, 2008 2:02:58 AM
This situation is far beyond petty partisan trading preferences.
The American people clearly don't like being tricked into major financial decisions through threats and fiat. Good for them. I hope their representatives are listening.
Posted by: Nathan Smith | Oct 1, 2008 2:45:11 AM
I am very much against virtually any mainstream bailout proposal I've heard. As I see it, you win, then good for you; you lose, then sorry, but thanks for playing.
With that said, why has no one proposed something like this, which is purely based on helping the main street crowd:
1) Take the $700 billion (or whatever you'd like) and create "n" number of banks from scratch (say n ~ 10; definitely greater than 7 and less than 50). These would be funded by the government, but not BACKED by the government and initially serve a population and/or area that is equal to 1/n of the country. Each would be run independently
2) Hire talented people by giving options/restricted stock/partnership in the company they join. Give the fed. government say 79% ownership, state government 10% ownership, and the rest to workers and executives at new companies.
3) Give autonomy to the leadership at the companies (i.e. government is passive investor)
4) Give the companies two mandates: maximum leverage of y:1 (y=10?? perhaps) and must invest at least X% of total capital at a given time (i.e. they can't horde all the money in treasuries while government owns majority stake!!!). Each company should diversify between small business loans, short term money market operations, and perhaps underwriting municipal debt. This should be profit motivated, not for charity.
5) Each company must go public or unwind positions and close by some fixed date (say 7 years): this can be staggered
6) Government must divest large majority of it's interests in the firms by some fixed time (20-25 years), hopefully earlier. (Maybe set profit goals at which the government must divest small chunks along the way)
7) These firms may not merge with each other until completely privitized (no Fannie or Freddie!)
----------------------------------------
I think this plan is the least reprehensible for a few reasons.
1) Well capitalized, new banks can borrow cheaply at today's rates, without legacy debts, and cherry-pick the best deals in an otherwise frozen market. This directly helps main street, small business, and the average guy trying to get ahead by innovating and creating new jobs
2) n-number of firms ensure no great concentration of power in any one firm. They will initially have unique footprints, but eventually compete against one another
3) No bailout for current firms who are in trouble: This plan doesn't retard price discovery and forces firms to breakup, merge, or die as necessary
4) At the same time, this would return confidence that the system itself would not fail. At least n-number of institutions will and MUST lend to qualified borrowers.
5) Government intervention actually has a CHANCE of returning on the public investment and by mandate, the firms cannot be permanently a GSE.
6) This is a "free-market" approach. Other than initial government funding, and the two mandates (max. leverage ratio, min % of capital must be lended out), companies must be run for the purpose of long-term profit. Executives and workers will be compensated with equity that will pay off to them if they do their jobs well! (Make sure to have compensation claw-back provisions in case someone blows up one of these firms!)
Alright, I guess these are the crazy ideas I come up with when I'm jet-lagged and can't fall asleep! I guess I was getting sick of just criticizing the bailout without having at least some form of idea. In all fairness, it's not TOO much more insane than what's going through the House and Senate.
HCF
Posted by: HCF | Oct 1, 2008 2:47:59 AM
"The bailout needs to happen. No ifs ands or buts about it."
Why? I am willing to take some short term hurt in exchange for some long term fiscal conservatism. A bonus would be if the people who lent money to those who could not afford and those who borrowed more than they could afford get hurt worse.
Posted by: Blackhalo | Oct 1, 2008 2:50:22 AM
Most of the approaches proposed/adopted are wrong, and average Joe received the stick on the way up, on the way down, and now at the bottom. For instance, there is something fishy in this credit crisis. Mortgages are supposedly the reason why banking institutions are down. Further it is typically stated that they are worth only 20 to 30 cents on the dollar.
If this were really true, I (and many others I am sure) would love to buy back my personal mortgage which is supposedly trading/worth right now somewhere in the area of 20-30 cents on the dollar. I would even like to buy the mortgages of others.
But they will tell you NO NO NO.
A MUST READ article
http://financialtraders.blogspot.com/2008/09/lessons-from-aig-insolvency-leh.html
Posted by: RFT | Oct 1, 2008 2:51:38 AM
"I think this plan is the least reprehensible for a few reasons."
This idea is smart and appealing and may be the best bet for meeting the stated goals of the bailout (but not the real goals). But I have issues with it for some key fundamental reasons.
A) It really is socialism.
B) Good banks that did not participate in the bad behavior that is hurting the bad banks, would be negatively impacted by competition with the government banks.
C) Moral Hazard. Good banks do not get to benefit from their good behavior over the past few years. They do not get to win the rewards of responsible lending and grab the market share that will be left behind when the bad banks die.
D) It is not yet the time for government action. Housing needs to find a bottom and the bad actors need to fail before government intervention should start. It is bad policy to attempt to re-inflate a deflating bubble. It is a waste of money to do so. Government funds are best spent accelerating a recovery rather than preventing a downturn.
E)Housing prices and cost of living are still too high. Once prices reach 2.5x income, I could see justification for action, but we are not there yet.
Posted by: Blackhalo | Oct 1, 2008 3:05:26 AM
Do not be fooled. The $700 billion (ultimately $1 trillion or more) bailout is not predominantly for mortgages and homeowners. Instead, the bailout is for mortgage-backed securities. In fact, some versions of these instruments are imaginary derivatives. These claims overlap on the same types of mortgages. Many financial institutions wrote claims over the same mortgages, and these are the majority of claims that have "gone bad."
At this point, such claims have no bearing on the mortgage or housing crisis; they have bearing only on the holders of these securities themselves. These are ridiculously risky claims with little value for society. It is as if many financial institutions sold "earthquake insurance" on the same house: when the quake hits, all these claims become close to worthless — but the claims are simply bets disconnected from reality.
Follow the money. Average Joes and Janes are not the holders of the other side of complicated, over-the-counter derivatives contracts. Rather, hedge funds are the main holders. The bailout will involve a transfer of wealth — from the American people to financial institutions engaging in reckless speculation — that will be the greatest in history.
Rescuing financial institutions is not the best solution. Yes, banks are needed to provide capital to businesses. But it is not necessary to spend $1 trillion to maintain liquidity. If the government is to intervene, it should pick and choose which claims to purchase; claims that are directly tied to mortgages would be a good start.
Let financial institutions fail, merge or be bought out. The faltering institutions will see their shares devalued and will be likely to be taken over by stronger institutions — as has already started happening. This consolidation of the financial sector is both efficient and inevitable; government action can only delay the adjustment.
The government should not intervene. It should leave overleveraged financial institutions to default on their derivatives obligations and, if necessary, file for bankruptcy. Much of the crisis has arisen from miscalculating the risks involved in a large book of positions in these derivatives. It is only logical that these institutions pay for their poor management.
Rather than bailing out Wall Street, we propose that the government should buy up the actual mortgages in question and do nothing else. The government should not touch any derivatives; that is, claims that do not directly tie into the actual mortgages. If money becomes too tight, then the Fed can certainly increase its loans to financial institutions.
Let the poorly managed, overly risk-taking financial institutions fail! Always remember that Wall Street and the real economy are not the same thing.
— Ari J. Officer has completed his master of science degree in financial mathematics at Stanford University. Lawrence H. Officer is a professor of economics at the University of Illinois at Chicago.
Posted by: AGG | Oct 1, 2008 3:41:15 AM
I've said it before and I'll say it again, "It's not an issue of banks not lending to each other. The issue is that they aren't lending to each other CHEAPLY!" What happened to all that liquidity that was sloshing around last year all around the globe? When business's get hungry they will pay for what they need and not necessarily what they want.
Posted by: Rob P | Oct 1, 2008 4:08:44 AM
Bob P., yes those higher interest rates are there for a reason. Markets Work!!!
Posted by: JustinTheSkeptic | Oct 1, 2008 6:45:23 AM
I agree with him something must be done...there would be a revolt in this country if nothing is done and we have a Depression. I've said it before...if you are down 6 points with 5 seconds left on the 40 yard line, you throw a Hail Mary pass. It will likely fail, but you tried.
Don't assume that "if nothing is done, we collapse, therefore if something is done, we don't collapse." That is faulty logic...we could STILL collapse if the plan is bad...and a bad plan can make potential recovery that much harder. That's why I have repeatedly called for a true team of experts to help form policy, not Paulson, Congress and the Fed. I have received an encouraging note from BR that he might actually be considering my idea!!
Posted by: Steve Barry | Oct 1, 2008 7:01:16 AM
Everyone is going to hurt whether or not this bailout happens. This bailout is just another golden parachute. The super wealthy are the ones screaming loudest about this for a reason--they are the ones who stand to benefit. The average American, with his zero savings and pile of debt won't be any worse off without the bailout.
Posted by: matt | Oct 1, 2008 7:05:33 AM
AGG,
Don't you know it, this 'Bail-Out' Plan is all about MBS, that steaming pile of yesterday's/year's Powerball Tickets that were only printed with 4 numbers to begin with...
truly, another Front in the multi-spectrum War on the 'Cained Peep.
all these Threats, amounting to: "More Gov't Debt/Spending, or no more 'Personal' Credit" have been obvious from the drop.
There's no way We can accede to this Deal, it's a Sham.
Posted by: Mark E Hoffer | Oct 1, 2008 7:05:53 AM
What's laughable to me is that we have the very people who told us Fannie and Freddie were just fine 4 years ago leading the charge for this, Frank and Dodd. Unbelievable!
There is going to be some major unrest when this passes. They can spin all they want but J6P is pissed!
No way I vote for these two parties. Idiots!
Posted by: Ken H. | Oct 1, 2008 7:31:13 AM
"Don't trust Paulson, Benanke or Wallstreet if you don't want to, but at least trust Warren Buffett. If there were a better alternative, he would have said so."
Posted by: beanieville | Oct 1, 2008 1:12:59 AM
Yes, BUT....,
Why should the American taxpayer receive a deal any less favorable than Buffett? Warren did NOT buy toxic ‘assets’, did he? Didn't he buy warrants with 10% interest? If it's good enough for Warren, it's good enough for us. With warrants toxic MBS, derivatives, etc. would stay on the balance sheets of the last, greatest fools who bought them. The ones who work it off will be rewarded as will we. Those who don't will share the pain with us.
Posted by: batmando | Oct 1, 2008 7:36:15 AM
Boy here's a impartial view of things from 60 minutes, let's bring on Joseph Stiglitz. Yes that's right that Stiglitz who never met a government intervention in the market that he didn't like. To boot he's an advisor to Obama.
Yes it's all gloom and doom without this bailout. Oh really?
If 60 minutes wasn't selling snake oil it would have brought on someone neutral or at least with an opposite position instead of a political economist selling his previously held positions. I'm surprised they didn't spin off into his global warming fears.
That will be next week.
Posted by: Patrick Neid | Oct 1, 2008 7:38:01 AM
Hell, if we're going to throw a hail mary (setting aside the chance that what we are throwing is a grenade - not a football), we might as well go whole hog and bail out the middle class. Let's use our fiat to do what it does best: Create phony wealth.
Here's my bail-out proposal:
$3 million stimulus check to every taxpayer not currently in possession/control of that amount (hey - it's fiat - nothing is stopping us). Taxable as income. Fixed prices on US made goods and US-based assets for 2 years (excluding services and intellectual property). we pay off mortgages, buy cars and flat-panel TVs, and consume like crazy. The FedGov uses tax receipts to pay down the debt.
This is a plan the majority can get behind. Let the party begin.
Posted by: Marcus Aurelius | Oct 1, 2008 7:46:49 AM
Marcus:
I like the way you think...really highlights the beauty of fiat currency. I think your plan breaks down when every other merchant violates the controls and jacks up prices...also, many will take the money and quit their jobs...heroin prices will also skyrocket.
Posted by: Steve Barry | Oct 1, 2008 7:55:54 AM
The only way you can get out of this hole is to keep leverage flat or increasing.
That ain't going to happen.
Even if leverage stays flat, many industries will collapse because their stock price valuations are based on growth.
Just go look at all the Small Business stories on CNN Money; if it had not been for the credit bubble, they wouldn't have existed in the first place!
This is like a flu. You can take Tylenol, cough drops and chicken soup to dampen the symptoms but at the end of the day, you just have to bide your time.
Posted by: D. | Oct 1, 2008 8:01:33 AM
Stiglitz is being less than honest when he says everybody will be hurt. The implication made by that statement is that the giveaway bill, or one like it, will therefore keep everybody from being hurt and that is not the truth.
Posted by: wally | Oct 1, 2008 8:14:46 AM
