[Vision2020] Debate about the bailout

Bruce and Jean Livingston jeanlivingston at turbonet.com
Fri Sep 26 10:17:40 PDT 2008


Scrutiny of important bills is always a good idea!  

And I agree wholeheartedly that the Patriot Act was passed too quickly with too llittle debate, and that Butch Otter was right to vote against it.  

I was writing primarily to advance two notions: first, that this financial bailout plan is very complicated, hard to understand, and not to be solved in an instant without adequate debate and reflection; and second, that Senator McCain ought to debate tonight, regardless of whether a deal had been reached.

Happily, Senator McCain has agreed to appear and debate tonight.

Bruce

With McCain in fold, White House debate is on 
By John Whitesides, Political Correspondent 16 minutes ago 

OXFORD, Mississippi (Reuters) - Republican John McCain ended the suspense and said he will attend the first of three debates with Democrat Barack Obama on Friday, setting up a showdown that could help decide a tight White House race.   



http://news.yahoo.com/s/nm/20080926/ts_nm/us_usa_politicsnews_8

  ----- Original Message ----- 
  From: Sunil Ramalingam 
  To: vision2020 at moscow.com 
  Sent: Friday, September 26, 2008 9:35 AM
  Subject: Re: [Vision2020] Debate about the bailout


  Bruce,

  I won't pretend that I have an understanding of this issue.  But I do have a memory, and I recall this administration rushing a major piece of legislation through: The 'Patriot' Act.  Without much (if any) review Congress abdicated their responsibility and rubber-stamped the bill.  The sky was going to fall if it didn't get passed.  Butch Otter gets credit for voting 'No' on it.

  Now again there's a rush to get this through.  This time it doesn't affect anything as meaningless as our rights, it's money, so it's getting more scrutiny.  Good.  

  I'm not saying that perhaps it isn't necessary.  I do want Congress to examine it and debate it before they pass it.

  Sunil


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  Date: Fri, 26 Sep 2008 07:47:44 -0700
  From: jeanlivingston at turbonet.com
  To: vision2020 at moscow.com
  Subject: [Vision2020] Debate about the bailout

  The nation has tried to rush to a bailout solution based on the seeming consensus that the financial markets, credit in particular, will collapse or freeeze to our great and lasting detriment if a "deal" is not obtained this week.

  Senator McCain "suspended" his campaign and refuses to participate in tonight's scheduled debate unless the deal, or at least an agreed structure of the deal, is reached before it is time to fly to Mississippi for the debate.  He, too, seems to accept the concept, touted by bureaucrats and Wall Street economists alike and reiterated by politicians of all stripes, that an immediate agreement upon a deal is absolutely crucial.
   
  We are trying in one week to structure and agree upon the largest financial deal in our history.  George Will aptly termed this phenomenon as acting like "lemmings in reverse," as everyone rushes pell mell away from the proverbial cliff, from which lemmings suppose! dly leap  as they blindly follow the lemming in front of them.  It seems to me that getting a deal of this magnitude done well in a considered fashion is more important than getting it done this week.  That idea of "getting it right" seems to be taking root.  Note the article reprinted below, which talks at length about the split in "expert" opinion on how to structure the bailout.  

  All that being said, it appears that a deal may not be reached this week due to the complexity of the situation and well meaning politicians, conservatives and liberals alike, now struggling to "get it right."  In my opinion, debate on this issue and "getting it right" is paramount.  

  For me, the importance of "debate" on the issue also means getting the two presidential candidates discussing it openly in public for the nation to hear, tonight.  

  If a deal in Congress is reached today in time for the deb! ate tonight, wonderful.  If a deal is not reached, I think Senator McCain ought to hop on that plan and attend the scheduled debate, notwithstanding his offer to "put the nation first" by sitting in Washington.  Certainly, getting the deal done right in Congress is important.  But skipping an hour and a half presidential debate -- when the financial markets will be closed for the next two days -- makes no sense to me.  Skipping the debate does not materially advance getting the deal done right in a time frame that matters.  We need to hear what Senator McCain has to say, and why his ideas are better or worse than Senator Obama's.  As debate grows about the wisdom of the structured bailout deal being proposed, the need for debate by our presidential candidates likewise grows.

  Bruce Livingston

  Away from Wall Street, Economists Question Basis of Paulson's Plan

  By Neil Irwi! n and Cecilia Kang
  Washington Post Staff Writers
  Friday, September 26, 2008; A01


  The Bush administration's pitch for a sweeping bailout of the financial system has centered on two simple premises: that the economy could suffer a crippling downturn if action is not taken very quickly and that this action should consist of the government buying troubled mortgage securities from banks and other institutions.
  But many of the nation's top economists disagree with one or both of those ideas, even as many top political leaders have swung behind them.
  Wall Street economists have mostly endorsed Treasury Secretary Henry M. Paulson Jr.'s plan, or a variation thereof.
  But almost 200 academic economists -- who aren't paid by the institutions that could directly ! benefit from the plan but who also may not have recent practical experience in the markets -- have signed a petition organized by a University of Chicago professor objecting to the plan on the grounds that it could create perverse incentives, that it is too vague and that its long-run effects are unclear. Sen. Richard C. Shelby (Ala.), ranking Republican on the Budget Committee, brandished that letter yesterday afternoon as he explained his opposition to the bailout outside a bipartisan summit at the White House. The petition did not advocate any specific plan, including that offered yesterday by House Republicans.
  Economists tend to agree that the nation's economy is at serious risk as the flow of credit threatens! to freeze. Just yesterday, the interest rate at which banks lend to each other rose steeply, as it has every day this week, suggesting that lenders are hoarding cash. History shows that when this happens, a broad economic crisis can follow, for instance, the Great Depression and Japan's decade-long recession in the 1990s.
  "If nothing is done, the potential for these markets to seize up in a big way is definitely there," said Frederic S. Mishkin, an economist at Columbia University who was a Federal Reserve governor until last month. "When you look at the history of these crises, when things spin out of control, the cost to fix it later goes up exponentially."
  But many others with a deep theoretical knowledge of finance and experience in government are ske! ptical of the structure of Paulson's plan -- and the speed with which it has been crafted.
  The critics can be roughly divided into two camps. One group thinks money should be directly infused into banks, which should allow it to trickle down through the financial system to borrowers. A second group thinks the government should buy individual mortgages, thus helping ordinary Americans more directly, with the benefits trickling up to the banks.
  The plan promoted by Paulson and Fed Chairman Ben S. Bernanke is somewhere in between: buying up packages of mortgages and hoping that the benefits spread both up to banks and down to households.
  "The plan is a trickle-down approach from banks to Main Street," said Alan S. Blinder, a professor at Princeton University. "But if you! reduce the flood of foreclosures and defaults" -- which he would have the government do by buying loans directly and then renegotiating the terms -- "it will make mortgage-backed securities worth more."
  That might help ordinary Americans but would be extremely difficult to administer. The government would have to make decisions on the foreclosure and resale of individual houses all over the country. Still, many economists with left-of-center political views favor some variation of this approach to the plan endorsed by Bush.
  "There is a kind of suggestion in the Paulson proposal that if only we provide enough money to financial markets, this problem will disappear," said Joseph Stiglitz, a Nobel Prize-winning economist. "But that does nothing to address the fundamental problem of bleeding foreclosures and the holes in the balance sheets of banks."
  Coming from the other direction, more conservative economists worry that by having t! he government buy mortgage securities, the Paulson plan would manipulate prices in that market without getting at the nub of the problem: that banks do not have enough capital and are having difficulty raising any on private markets.
  In a sign of how the debate over the economy has shifted in recent weeks, some conservatives, even as they argue for a relatively limited government role, are calling on the government to invest public money in private banks.
  "The root of the issue is recapitalizing banks," said Glenn Hubbard, dean of Columbia Business School and a former chairman of President Bush's Council of Economic Advisers. "That could be done more efficiently through the government injection of preferred equity. Then the market coul! d figure out the prices of the assets."
  Many of these critics don't care for the assumption behind the administration's plan that the market is now pricing these mortgage securities incorrectly, a problem that the government intervention aims to fix.
  "The premise appears to be that the market is irrationally pessimistic," wrote Greg Mankiw, a Harvard University economist and another former Bush economic adviser, on his blog this week. "That might be so. Nonetheless, one has to be at least a bit skeptical about the idea that government policymakers gambling with other people's money are better at judging the value of complex financial instruments than are private investors gambling with their own."
  Some conservatives are now arguing, notably, that the government should be investing in banks.
  Many economists fault the Bush administration and C! ongress for moving so quickly on the bailout package without allowing more time for debate. That sentiment was reflected in the petition organized by John Cochrane of the University of Chicago. (None of the economists quoted here were signatories.)
  "I totally disagree that this needs to be done this week. It's more important to get it right," Blinder said.
  Moreover, some economists said the proposed $700 billion may not be enough to address all the problems stretching across the financial landscape. "You only show up if you can win, and this is not that package," said Simon Johnson, a professor at Massachusetts Institute of Technology and former chief economist at the International Monetary Fund. "This cannot be the ultimate, deci! sive solution if you are not addressing the underlying cause."
  The plan is short on details, instead giving the Treasury secretary wide latitude to determine how to execute the purchases of mortgage securities.
  "I'd like to see how they see the evolution of an end game. There are still many questions," said Myron Scholes, a retired professor at Stanford University and Nobel Prize winner. He said how long the government holds the assets and how they are later resold would be the keys to determining whether the plan works.
   




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