Well, at least Pearlstein acknowledges that it is a bail-out. Further, as Charles Morris, Paul Krugman, and you have both pointed out, the Feds actions, huge as they seem, are nothing compared to the huge loss of mythical wealth they issued loans during the 2000-2006 time period. But I do think that Fed is not doing this just to help their friends running the big commercial and investment banks. Rightly or wrongly, they fear a repeat of the collapse of the banking system that occurred during 1929-1932, when credit just completely froze.

"The bubble was driven by incredible incompetence by those calling the shots both at the Fed and other regulatory institutions and in the financial sector. We should clean house as quickly as possible. This bailout is not in the public interest."

It seems to me that if the bailing-out continues, and there really is no reason to think that it won't, that 'those calling the shots' could be considered very competent. Privatize the profits and 'externalize' the losses- corporate capitalism at its purest and its best. The interests of those at the very top will have been quite well served.

Dean,

The bubble was driven by the wholesale repeal of the prudent scheme of financial regulations enacted in the wake of the Great Depression. It was also driven by the removal of securities fraud cases from the courts.

The "incompetence of those calling the shots" is not even a substantial factor. Unregulated greed and hubris are, I suspect, what you so generously call "incompetence". We cannot hope for those "calling the shots" to behave competently and ethically unless they (and their corporate employers) can be called to account for their greed and hubris.

Dean,

The bubble was driven by the wholesale repeal of the prudent scheme of financial regulations enacted in the wake of the Great Depression. It was also driven by the removal of securities fraud cases from the courts.

The "incompetence of those calling the shots" is not even a substantial factor. Unregulated greed and hubris are, I suspect, what you so generously call "incompetence". We cannot hope for those "calling the shots" to behave competently and ethically unless they (and their corporate employers) can be called to account for their greed and hubris.

My impression of the Fed's actions is that it is primarily intended to stem the almost irrational fear and lack of confidence permeating the crdit and capital markets. As several folks have pointed out the amount of money being pumped into the system is tiny compared to the losses being suffered. If the Fed were to allow some of the big banks to fail what happens to that fear and lack of confidence? If the result is panic what does that mean for our economy and the average citizen?

I'm not suggesting that panic would be the result I'm just asking.

"The bank's operations will still continue."

Except they won't. Depositors will get their money, but people who want loans will have to go somewhere else, or at least the non-rich ones will. If that happens at one bank, it's not a big deal. If it happens all over the banking sector, hello 1929.

It's the middle class that gets hurt by the contraction the Fed is fighting.

In order to access the TAF, banks should be required to make a certain number of low rate fixed mortgages or be required to lower interest rates on their credit cards to 10% or 12%. Right now, the bailout is not having any effect on the general economy.

Banks have made plenty of loans (to non-rich people) when they were in receivership. Northern Rock in England is still making loans. In the U.S., many banks have gone into receivership through the years and they continue to make loans. So the effort to take hostages here simply doesn't work.

On the issue of a panic, there can be problems, the question is which assets the panic applies to. If the panic is primarily one concerning complex derivative instruments, then you make get some banks that are in effect locked up by their inability to get credit. This is probably what we would be seeing now, absent the government's intervention. In my world, the Fed's step in, put the banks into receivership and straighten up the books. If the banks resist, then they just let the panic continue a bit until it becomes clear that the banks can't pay their debts and they are literally forced into bankruptcy.

It fun and easy.

Apparently lenders are urging homeowners in danger of foreclosure to tap their 401ks to make their mortgage payments. Unless homeowners are taking a hardship loan from the 401k to cover themselves in short-term emergencies, throwing money from 401ks into houses that will eventually go into foreclosure anyway is just dumb. Let the house go; keep the cash. In addition 401ks can't be attached to pay off creditors in bankruptcy, so it's protected cash for those who are having serious financial problems.

One problem is that the "irrational fear and lack of confidence" is not so irrational. The bubble was irrational and the loans and notes secured with assets with bubble inflated prices are, in not worthless, are probably pretty near that.

We are screwed about no matter what happens. The moment can only be redeemed if the opportunity is taken to establish a New New Deal, with progressive taxes, universal health insurance, an appropriately valued dollar, an export oriented economy, infrastructure investment, restore Federal support for basic science to the levels of the 1950s and 60s, and regulation of Financial sectors so scoundrels are not making billions on other people being chumps (see Mr. Schwartzman at http://www.msnbc.msn.com/id/23591813/).

In the mean time, real wages are going to fall pretty dramatically between unemployment, out-sourcing, and inflation.

Dean,
Let's have some accurate facts: Feds currently only accepts the Fannie Mae and gov't agency type MBS as loan collaterals.

They are not accepting privately-issued MBS. Second, Feds will use a collateral margin (cushion) on the MBS--not a dollar for a dollar.

The subsidy comes in the form that institutions have liquid funds on low rate.
If MBS value declines further, institutions will need to pony up more MBS to maintain that collateral margin.

The MBS value is priced regularly (of course with high volatility now).
Not exactly all counterfeit.

Oh, I am more than a little stunned that none of your readers knew about this important fact and point this out.

Yes, institutions might not be able to use the same MBS to get good percentage of cash (loan to value ratio) and at such good rate.

Is this bad enough to say counterfeit money? If the MBS declines in value, write-down will be made to the collateral and more will be needed to keep a safe margin. This initiative will motivate lenders to lend more to businesses who will use the funds to hire more workers.

"It fun and easy."

Are you suggesting, then, that there would be no wider consequences to letting the banks fail? Would not the specter of seeing the likes of Citigroup go into receivership shake confidence in the American economy? Or is that just a myth perpetrated by large corporations seeking government handouts? Are there any historical parallels?

James,

In their statement, the Fed explicitly stated that they would accept non-agency private label MBS as collateral:

"The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS."

http://www.federalreserve.gov/newsevents/press/monetary/20080311a.htm

Dean,
Are the securities that can be pledged to borrow from the Fed being discounted? Some of these insturments cannot possibly have a full dollar for dollar value. No?

Dean,

Thank you. It's good to know that there are still sane and ethical economists out there. This blog is like a breath of fresh air.

Dean,

Thanks for the additional info. Rating agencies has been criticized and rightly so. I would think an AAA-rated instrument doesn't become worthless overnight. Yes, it will subject to price volatility just like other AAA-rated investment but there's a collateral cushion and the Fed will ask for more collateral if needed.

At least they demand private-issue be AAA, huh?

The NY Times says the Fed is giving a haircut to some of the securities they take. I hope its by a safe margin..
Ratings agencies haven't downgraded the 'AAA' yet.

James wrote, At least they demand private-issue be AAA, huh?

Re "AAA": As was said in The Princess Bride: "You keep using that word. I do not think it means what you think it means."

Are you suggesting, then, that there would be no wider consequences to letting the banks fail? Would not the specter of seeing the likes of Citigroup go into receivership shake confidence in the American economy? Or is that just a myth perpetrated by large corporations seeking government handouts? Are there any historical parallels?

Oops.

In other words, is there any just solution to this scandal which is fair, balanced and practical. That is, one that makes the predators pay without negatively impacting those not directly involved in the subprime slime.

Enquiring minds really want to know.

As far as I know, you are one of the first bona fides that have publically stated that it would be okay to allow a few of these bastards to go into recievership. All the talk seems to be smoke and mirrors but generally repeats the mantra "too big to fail, remember 1929".

My gut tells me that the bailout movement is way overdone and is creating a wake of panic. IMO, emergency (panic) rate cuts by the Fed have unnerved the markets, increased the credit crunch, and emboldened avaricious financiers who are apparently going for the throat of smaller creditors. These people are not humbled, and they need to be. It is absolutely unconscionable that republican welfare queen banks are still paying common dividends. There certainly seems to be way too much speculative capital for playing games with the commodity futures.

The reason the MBS market is collapsing is because the income stream is collapsing, borrowers are walking away. Private sector renegotiation of prices and loans are off the table as long as the banks believe the Fed will bail them out. IMO, owners of MBS must become resigned to taking a 30 pct capital haircut and satisfied to write new, fixed, assumable loans on revalued properties at say, 5 pct. Real AAA stuff.

Thanks for the straight talk. Many economists seem way too squishy.

newcomer wrote, Are you suggesting, then, that there would be no wider consequences to letting the banks fail? Would not the specter of seeing the likes of Citigroup go into receivership shake confidence in the American economy? Or is that just a myth perpetrated by large corporations seeking government handouts? Are there any historical parallels?

I would assume the RTC (during the S&L cleanup) often functioned as a receiver, and while my history may be wrong, my recollection is that the damage was done by the crisis but not by the cleanup.

Besides, on theory, Dean's proposal should be more comforting to the markets, as long as we factor out the fact that market participants themselves are typically right-wing greedoids who will be emotionally upset at their fellows not getting huge government handouts. Why more comforting? Because (a) recapitalization will be backed by Uncle Sam, who has very deep pockets, and (b) the process can be made completely transparent. I would assume that one of the problems right now is that no one knows how bad off the major actors are, which is contributing to the liquidity crisis aspect of the current crisis.

Newcomer wrote: In other words, is there any just solution to this scandal which is fair, balanced and practical. That is, one that makes the predators pay without negatively impacting those not directly involved in the subprime slime.

Why worry about those who benefited from the housing/stock bubble who did not, or could not, participate directly in its appreciation. None of these non-participant whose primary assets are their homes were complaining when their home-values were rising to unprecedented levels over the past 4/5 years. Nor when their nest eggs were likewise rising. So if they whine when these values go down -- that is, inflated values they didn't work to achieve in the first place (namely, easy money) -- where is the injustice in that?!

Let the weak banks go into receivership. Let the chips fall where they may. It's likely to be a very hard road whether we bail them out with taxpayer money, or simply let them fail. At least we would have the satisfaction, as a Republic, of knowing we did the right thing.

By the way, whatever happened to the notion of acquiring wealth the old fashion way -- actually WORKING for it?

Check this anti trust background in regard to bailing out banks with taxpayer dollars; is The Fed breaking the law?

Let me just conclude by saying that the terms of the rescue package engendered by the Fed also raise troubling questions of financial concentration and antitrust. As a group working together, the new owners can have a greater impact on markets than in competition with one another. In this regard, it should be understood that the Fed's unprecedented extension of the too-big-to-fail doctrine to a hedge fund does not insulate the fund and its new owners from the constraints of the Sherman and Clayton acts.

The bailout may involve a tendency toward concentration that the Justice Department has an obligation to review.

HEDGE FUND OPERATIONS

THURSDAY, OCTOBER 1, 1998
U.S. House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.

http://commdocs.house.gov/commit.../ hba51526_0.HTM

Should The US government bail out American corporations?

Does corporate America share its profits with the tax payers? The answer is absolutely not.
Do they share the profits with their employees? The executives are paid millions.
The US Government should bail out all corporations large and small is that right? The answer is no. If it is a viable business, they can raise the money from investors, if not, let them close shop.
If the government decides to bail them out if should be at a cost (like shares in the company) where the government will make money and have a say in running the company. Even better have a public referendum where the voters decide.
Carmakers want money from the government; the financial institutions want money - where does it stop?
It is about time corporate America should learn they have to stand on their own feet. Where is corporate America financial responsibility?
They claim the government is abusing its financial responsibility; it seems Corporate America is no better. They also go to their workers to take a pay cut, is that fair? It seems the little guys are the ones that always pay the price for corporate financial abuse and miss-management.
Other corporations in the world are not asking to be bailed out - they go out of business.
Jay Draiman
PS
The corporate barracudas have no conscience they will step on anyone, stab anyone in the back and fudge the numbers to climb up the corporate ladder and receive the hefty bonuses.
As family values have declined in the last half a century so has corporate integrity and honesty, it seems that corporate America will do almost anything for the buck ($) no holes barred.
What a shame that corporate America has sunk so low.
The government is no different, honesty and integrity is a foreign language, they only serve the special interest groups. (We all know why).
What happened to the American people who placed their trust in the government? (The public officials they voted for).
We are faced constantly with another corporate or governmental scandal of wrongdoing. When is the American public going to wake up and demand an honest government and honest corporate America? Americans wake up before it is too late.
Jay Draiman