Perhaps more importantly, it is very important not to get into the habit of allowing one party to deficit spend on terrible ideas and cleanups of these terrible ideas (Iraq & the deregulatory bailout), and then using it as a rationale to avoid vital investments in America's future (infrastructure, healthcare reform).

Nobody gets to play the "it's fiscally irresponsible to fix healthcare" card after this mess.

Why isn't any politician asking for windfall tax on wallstreet. Not to talk about Hedge Fund Tax of 50%.
How about End of Year Bonus Tax.

US spends $1 trillion on defense a year.
not to talk about the two wars. No democrat is going to mention that.

Stop The Bailouts!

Please sign it. Not much else matters at this point.

http://financialpetition.org/petition-nobail.shtml

It is one thing if our government borrows the money (from foreign entities, for example) which it is going to use, and another if it simply creates the money, which it has the power to do.

Why is being proposed here? The first increases the national debt, obviously, while the second would seem to presage future inflation.

Or am I confused?

That should be "which" is being proposed here.

Luke: I'd say it is a mixture of both. It isn't as if the U.S. gov is going to hold some massive bond auction to cover the cost of this; they will "print" money, that is exchange value from the Treasury to the businesses involved, on the assumption that future trade and currency purchases will eventually cover it.

How about some obvious, common sense safeguards?

1) Treasury gets extremely dilutive warrants from any bank that touches this facility. This is what happened at AIG: the taxpayers may lose a lot of money, but at least Wall Street's profit from the scheme is minimized and the taxpayers get something back in a best-case scenario.

2) Executive compensation is capped at any bank that touches this facility. Nobody makes more than 10x or 20x the median employee, and no more stock options. Maybe even a clawback for ill-gotten gains during the bubble. Executives don't go along? Push them out.

3) A huge new program for the Justice Department to prosecute mortgage fraud and securities fraud for everyone that caused this problem, from Angelo Mozilo and investment bankers all the way down to speculators who committed fraud on their loan applications.

Another question re executive compensation. As I understand it, a lot of the multi-million dollar bonuses at places like Lehman and AIG were based on a misrepresentation (to the board and shareholders) of the annual profits. Premiums paid to the banks to cover default swaps were counted as income, while the potential for default was grossly undervalued. Shouldn't these guys have to give these bonuses back?

Dean (or anyone),

Re: The bailout will clearly carry a big bill, likely in the $500 billion to $1 trillion range.

Do you have, or could you recommend, an analysis producing that cost range or any other? I'd like to see what assumptions are made, given how much uncertainty there is regarding the true value of the mortgage-backed securities involved. thanks.

Dean / anyone,

As follow-up to my comment above, to be clear, I'm asking about the ultimate cost, net of whatever returns flow to the government from loans made or assets purchased.

Nice point about when the cost of the bailout occurred.

Something else you should add to your analysis: a lot of this is zero sum, so, in some sense, a lot of the "costs" people are talking about aren't really costs we should be worrying about.

For instance, people who overpaid for a house are mirrored by people who were overpaid for their houses. So current occupants of big houses transferred money to the people who sold their houses to them, most notably retirees who moved to rentals or much smaller houses.

For people who built houses, there may have been no loss since money was spent and a house built. That is not obviously a bad thing. There might have been some inefficiency because the costs of building was driven up by the demand and too many houses were built, but that is a much smaller cost than the cost of the houses built.

In mortgage lending, there was no net cost since group A gave money to group B who are not going to give it back (because they gave the money to the people who sold them their houses). There are externalities which are costly, such as the possible breakdown of the financial system and the very real psychic costs of worrying about your mortgage, but this is (hopefully) not equal to the loss numbers being thrown around.

Also, your desire to give mortgage holders a break could easily be done in a free-market way. Mortgage holders should be treated like any other parties to a financial contract. The bank made a non-recourse loan to them on collateral which cannot support the loan anymore. Rational re-negotiation would write down the loan to the new equity and reduce the interest payments accordingly. Government could help grease the skids to this outcome. You don't have to sell this as social do-gooding, it is something companies do all the time. The home-owner has every right to walk away from the loan the banks willingly made. This is a potent threat and so the banks should write down the loan. Walking away is a big pain for the homeowner and the bank, so the efficient outcome is renegotiation.

Thinking in this way suggests that the real objective here is not to minimize the "costs" which aren't really costs; the objective is to work through who should bear these losses with a minimum of damage to the financial system.

Here, it baffles me as to why people seem to assume that bondholders should be protected from losses on their investments. Bonds go kablooie all the time, and bondholders know that. I don't see why we have to give any of these bondholders or institutions money. And a lot of the bondholders are foreign. Why should American taxpayers give money to foreign bondholders?

It seems like we should just allow institutions to start up a fresh bank with fresh capital and leave the old assets in the old bank to be run off as best they can. The old bondholders get as much money as the old assets will generate, and take their lumps from any shortfall. The equityholders, of course are out of luck. So, it seems like the government should be smoothing the path to let this happen, perhaps by providing liquidity for the new, solvent banks. Managment of failing banks should, of course, be fired and sued en masse somehow. Not sure how, but the old equityholders have good grounds to sue and have the authority to fire.

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