"Do we want to live in a system where profits are private, but losses are socialized?"

[ProSense]

Doug Elmendorf for Treasury Secretary

He writes:

Concerns about the Treasury Rescue Plan: One approach is to purchase mortgage-related debt or other troubled securities.... Yet this approach has significant disadvantages.... First, the affected debt instruments are quite heterogeneous, which makes setting appropriate prices and quantities very difficult.... A second problem with buying troubled debt is that it provides the most help to the financial institutions that made what are, in retrospect, the worst investment decisions.... Third, this approach saddles taxpayers with significant downside risk but limited potential upside gain....

An alternative... is for the government to make equity investments in a wide cross-section of such institutions. For concreteness, suppose that the government offered to make an equity investment in every firm regulated by a federal or state banking regulator equal to 10 percent of the market value of the company as of September 1st in exchange for a 10 percent equity stake in the company. (The 10 percent figure is illustrative. As with the first approach, a judgment about the appropriate total amount of government funds would need to be made.)... he government would not need to determine the appropriate prices and quantities of individual mortgage-related securities, it would not be providing a greater reward to companies that have made the worst investments, and it would gain the opportunity for taxpayers to receive a higher return if the financial system recovers more strongly. Still, objections can be raised.

<....>

Luigi Zingales for Deputy Secretary:

The Paulson RTC will buy toxic assets at inflated prices thereby creating a charitable institution that provides welfare to the rich—at the taxpayers’ expense. If this subsidy is large enough, it will succeed in stopping the crisis. But, again, at what price? The answer: Billions of dollars in taxpayer money and, even worse, the violation of the fundamental capitalist principle that she who reaps the gains also bears the losses.... Since we do not have time for a Chapter 11 and we do not want to bail out all the creditors, the lesser evil is to do what judges do in contentious and overextended bankruptcy processes: to cram down a restructuring plan on creditors, where part of the debt is forgiven in exchange for some equity or some warrants. And there is a precedent for such a bold move. During the Great Depression, many debt contracts were indexed to gold. So when the dollar convertibility into gold was suspended, the value of that debt soared, threatening the survival of many institutions. The Roosevelt Administration declared the clause invalid, de facto forcing debt forgiveness. Furthermore, the Supreme Court maintained this decision. My colleague and current Fed Governor Randall Koszner studied this episode and showed that not only stock prices, but bond prices as well, soared after the Supreme Court upheld the decision. How is that possible? As corporate finance experts have been saying for the last thirty years, there are real costs from having too much debt and too little equity in the capital structure, and a reduction in the face value of debt can benefit not only the equityholders, but also the debtholders....

Forcing a debt-for-equity swap or a debt forgiveness would be no greater a violation of private property rights than a massive bailout, but it faces much stronger political opposition. The appeal of the Paulson solution is that it taxes the many and benefits the few. Since the many (we, the taxpayers) are dispersed, we cannot put up a good fight in Capitol Hill; while the financial industry is well represented at all the levels. It is enough to say that for 6 of the last 13 years, the Secretary of Treasury was a Goldman Sachs alumnus. But, as financial experts, this silence is also our responsibility. Just as it is difficult to find a doctor willing to testify against another doctor in a malpractice suit, no matter how egregious the case, finance experts in both political parties are too friendly to the industry they study and work in.

The decisions that will be made this weekend matter not just to the prospects of the U.S. economy in the year to come; they will shape the type of capitalism we will live in for the next fifty years. Do we want to live in a system where profits are private, but losses are socialized? Where taxpayer money is used to prop up failed firms? Or do we want to live in a system where people are held responsible for their decisions, where imprudent behavior is penalized and prudent behavior rewarded? For somebody like me who believes strongly in the free market system, the most serious risk of the current situation is that the interest of few financiers will undermine the fundamental workings of the capitalist system. The time has come to save capitalism from the capitalists.

The author of the blog:

James Bradford DeLong (b. June 24, 1960, Boston) is a professor of economics at the University of California, Berkeley and a former Deputy Assistant Secretary of the United States Department of the Treasury in the Clinton Administration. He is also a research associate of the National Bureau of Economic Research, and is a visiting scholar at the Federal Reserve Bank of San Francisco.<1>

DeLong is co-editor of The Economists' Voice,<2> and has in the past been co-editor of the widely read Journal of Economic Perspectives. He is also the author of a textbook, Macroeconomics, the second edition of which he coauthored with Martha Olney. He writes a monthly syndicated op-ed column for Project Syndicate.

[BlooInBloo]

1. Excellent thought of course, hard to turn into an actual production-talking-point....

Because the pushback ad is as stupidly obvious as it is effective: "Democrats: they're coming for the profits of private citizens like Joe Average and Alice R Bigot and Pete S Stupid. Don't let them take your hard-earned profits."


Obviously it doesn't help in the least to whine about "but that's not what we MEAN by the phrase!".

[mrJJ]

2. We're Screwed

Pulson's BLANK CHECK

The man overseeing the bailout is the ex-CEO of Goldman Sachs, a Wall Street Company. He helped cause the crisis.
Paulson helped obtain the SEC exemption which allowed brokerages to increase leverage to 60:1 from 12:1.
The money is Paulson's to use for buying commercial and residential mortgages and mortgaged backed securities as he chooses. No one has any oversight over him, and he can pay any price he wants to, including face amount of the debt.
Courts cannot review his decisions, not can any regulators. He has to report to Congress once every six months.
He gets 700 Billion dollars to use as he sees fit, looking after the taxpayer is a "consideration" not a requirement.
Bet on that 700 Billion dollars being gone before January 20, 2009. Bet on Treasury asking for more.
That is $2,324 dollars per man, woman and child in America
There is no bailout for mortgage holders. Banks get bailed out, but not ordinary people.
Banks and brokerages made record profits these last eight years. Ordinary Americans barely broke even.
In 2007 Wall Street paid itself bonuses equal to the raises of 80 million Americans.
Banks bailed out by this plan need make no changes in how they do business.
Banks bailed out need not replace the management which drove them into insolvency.
Shareholders and bondholders of such banks do not lose a cent.
The securities which caused this crisis are still allowed.
Expect the 700 billion dollars to increase inflation, especially in oil.
Bush is asking you to trust his administration with 700 billion after spending 580 billion on the Iraq war. Do you trust him?

http://firedoglake.com/2008/09/20/paulsons-blank-check/#more-31853

[IndianaGreen]

3. This bailout has no relationship to socialism as I understand it

What we got here is the transfer of debt from the rich to working men and women, taxpayers, in the form of bailouts using tax funds. This has no relationship to socialism as I understand it. In a socialist society, the concrete priorities of the vast majority of the population guide it, and the exploitation of workers for private gain is severely limited or ended.

The working people of the United States just had billions of dollars of debt dumped on them. What the response to the crisis does prove is that there is always enough money available when the political will of those with power is applied. Good lessons to keep in mind when dealing with expanding social security benefits, winning single payer health care (HR676) for all, and providing work at union wages for everyone who wants to work, and more.

[ProSense]

4. He didn't say it was socialism. n/t