Apparently, the U.S. government has access to $700,000,000,000 that isn't already claimed by this program or that. After recovering from the initial shock of that number, people are starting to realize that the bailout has a substantial opportunity cost: the price of any new initiatives from an incoming president.
On Tuesday Barack Obama conceded the point on the Today program: "Does that mean I can do everything that I’ve called for in this campaign right away? Probably not. I think we’re going to have to phase it in. A lot of it is going to depend on what our tax revenues look like."
Phase it in?
Obama claims, "I think the middle-class tax cut that I've talked about -- 95 percent of Americans getting a tax cut -- is something that still makes sense in this kind of environment."
Seriously?
Ok, by raise of hands, how many of you believe that any President would be able to pull off a tax cut next year if Congress passed the Paulson Plan? Yes, it's true that the Paulson Plan would not require a net expenditure of $700,000,000,000, since those assets we would be purchasing presumably have some value. And it's also true that the Paulson Plan is intended to give a boost to the economy that would increase tax revenues. But all of this will take time to sort itself out.
In the meantime, this seems like the appropriate moment for me to make another completely outrageous claim about the financial crisis: if Congress passes the Paulson Plan -- or anything remotely resembling the Paulson Plan -- the November election will be meaningless.
As I walked to work this morning, I imagined a big hypothetical conspiracy theory that explained the Paulson Plan. No, this isn't the one about how Henry Paulson and his minions are trying to soften their landing on Wall Street next year. Think bigger. This is the one about how Republicans realize that Obama is going to win the election, so their best strategy for avoiding national health insurance and any other expensive initiatives is to tie up all of the nation's resources.
Sorry, nothing left for new ideas, Barack!
Obviously, I am kidding about the conspiracy -- and perhaps I should have added "almost" right before "meaningless" in my outrageous statement -- but I believe the outrageous claim is pretty close to the truth. The President will still make important decisions, including appointing cabinet members and Supreme Court justices, and the President still plays an important representative/symbolic role, but the Paulson Plan would knock out any major new policy initiatives [added: except this one] for a couple of years. At least.
UPDATE: I added "hypothetical" to "conspiracy theory" to retain some basis for my claim that I am not a complete crackpot, but then I found the video below linked (approvingly!) by Frank Pasquale at Concurring Opinions. My imagination looks downright restrained by comparison.
In fairness to Representative Kaptur (Orwell could not improve on that name!), the proposal for mortgage buyouts deserves discussion, but the fact that she and others are raising this possibility reveals one of the major pitfalls of the Paulson Plan: it implies that we have $700,000,000,000 lying around just waiting to be spent. The only issue then becomes prioritizing the spending.
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1. Posted by Matt Bodie on September 24, 2008 @ 8:35 | Permalink
Just wanted to tweak your hypothetical conspiracy theory. You say: "This is the one about how Republicans realize that Obama is going to win the election, so their best strategy for avoiding national health insurance and any other expensive initiatives is to tie up all of the nation's resources." I would change it to: "This is the one about how Republicans realize that (1) the Democrats will retain control of Congress, and (2) either Obama or McCain (a Republican maverick who has been talking quite populist lately) is going to win the election . . . ."
But I hear the folks on CNBC emphasizing that we won't lose $700 billion -- in fact, taxpayers may even make a profit. Buffett said that if he had $700 billion to lend at the Fed's costs of capital, he'd make the same loans (as long as they were market price). But then again, Buffett is pouring $5 bil into Goldman, so he may not be completely objective on this.
2. Posted by Morgenstern on September 24, 2008 @ 13:51 | Permalink
A few comments on the $700:
(1) It's the amount that can be outstanding at one time, so it only indirectly has to do with total loss.
(2) It is obscure to me what the measure of "outstanding" is in this context. Dollars paid? "Cost" according to the expected NPV formula provided in the draft? The "hold-to-maturity" value less some sort of bad-debt allowance?
3. Posted by Frank Pasquale on September 24, 2008 @ 14:21 | Permalink
I think you're absolutely right to note the opportunity cost of this bailout; Dan Gross does as well:
http://slate.msn.com/id/2200604/
He asks its proponents: "Which Cabinet-level agency should be zeroed out? Which benefits programs cut? Which component of the defense budget gutted?"
Of course, we can borrow the money to avoid those tough choices. But isn't that how we got into this problem in the first place?
As for Rep. Kaptur: I linked to her approvingly because she is one of the few voices I've heard that's willing to look at this in a "big picture" way. How Treasury/the Fed could let this issue fester for so long, with so little effort to intervene or hold its authors accountable, and then suddenly ask for massive authority and money with very little oversight, is beyond me.
Occasionally it takes some heated rhetoric and robust suspicions to get people to pay attention to a momentous intervention in our economic life. Don't blame Kaptur--blame a press that only appears willing to dig deep into financial stories when it has some sort of compelling narrative to follow.
Given the clubby nature of the group involved here, there's a case to be made that the bailout will only be legitimate to the extent that those running it can't later profit on the connections they make while doling out this largesse. As David Leonhardt noted today, they can likely value the distressed assets anywhere between 25 cents and 75 cents on the dollar. That's a huge amount of discretion.
And lastly, I resist the "great and good" who say this is a narrowly technical problem that should be unencumbered with politics (or, in Paulson's words, that there needs to be a "clean bill."). I will continue to ask--where is the bailout for the kids without health insurance? the consumers subject to harsh terms under the 2005 bankruptcy bill? the localities that can't afford roads and bridges? Even if you estimate the ultimate bailout cost at $100 billion (after sales of equity stakes/assets), that's a great deal of money wasted.
4. Posted by Cliff on September 28, 2008 @ 0:13 | Permalink
go kaptur, go kaptur, it;s your birthday...
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