Twofish's Blog

September 21, 2008

Thoughts about the Paulson plan

Filed under: china, finance — Tags: — twofish @ 1:44 pm

It’s actually quite simple really.  Congress gives the Secretary of Treasury a $700 billion blank check to do whatever he thinks he should do to fix the problem.  One reason I think that he is trying to get this done now is that it’s not clear who exactly is going to be using that power, and it’s going to be much harder to get people to support something once they realize that their guy isn’t going get to use the power.

The thing that bothers me is the term “Gulf of Tonkin Resolution.”  I’m quite worried that this transfers a huge amount of power to the Secretary of the Treasury without much oversight.  The powers are theoretically limited to two years, but the bill lets the Treasury Secretary write contracts that may likely bind the United States for quite a bit longer than that.  I’m especially worried that the powers in the bill will be used before the new President takes office. Part of what I’m trying to figure out is what the conspiracy theorists will say in about a year (hi Naomi Klein) and set things up so that they will have less ammunition.

If the mortgage assets get auctioned off to banks and private equity firms that make a large amount of money on this, then I don’t want there to be a “well Paulson and those evil banks planned this all along” mantra.  One thing is that it is likely that banks and private equity firms will make a large amount of money on this.

Right now people are willing to get rid of anything they can.  It’s called a “fire sale.”  It’s likely that they are going to end up selling some very good assets at very cheap prices because they just want out.  In crisis, people want cash right now, so have a house on fire, you can make a lot of money by paying for the assets, putting out the fire, and then reselling the house, which is what I think is going to happen.  The thing about a lot of these assets is that they are actually worth reasonable amounts of money if you are willing to hold them for 30 years or so, but they are almost worthless if you want cash now.

Personally, I think that there ought to be some changes that the next administration puts in:

1) soak the rich – This is a taxpayer supported bailout so we need to hit the right taxpayers.  A surtax on salaries over $1 million/year, capital gains surtaxes on profits over some large number (say $300,000/year) would help put the pain where it should be put.  Also a large tax on golden parachutes would be useful.  If a company has to pay an executive $15 million to leave then fine….  It would be good to take say $2 million and put it into a fund to clean up that executive’s messes.

2) easier personal bankruptcies – first there is this issue of social fairness.  Why can’t ordinary people wipe out their debts if the big banks can.  There is also a more important reason.  If the big banks had been hit by a huge wave of early bankruptcies and foreclosures, this would have given them a much early signal that maybe they were doing things that were stupid.  As it is the lack of bankruptcies meant that you can people stuck paying loans that they the couldn’t pay and it was going to end up in tears.

3) higher capital requirements – People are talking about “more regulation” but the question now should be “what types of regulation.”  The big one I think are higher capital requirements.  The problem with bans on things like complex derivatives is that they are easy to get around.  Statements that you must not do something cause people to find all sorts of clever ways to do it.  However, if you say that you must have X% of capital reserve and then define things careful so that when people cleverly try to get around the regulation they end up doing useful things, then when things go bad you have an insurance fund that you can go to.


1 Comment »

  1. Twofish,
    I happened to read your comments on Brad Setser’s site today and was intrigued so hit the link to your site. Trying to get a better understanding of what the latest plan is about. You have some interesting things to say, obviously. I enjoy the writings of Naomi Klein, personally I don’t consider her a conspiracy theorist. But you may observe her writings from a different perspective than mine. Anyway, I’m enjoying reading your posts.

    Comment by Oso — September 22, 2008 @ 1:09 am

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