Waiting For The Bailout Bill
While I wait for more details about the bailout bill, a few general points.
First: some people write as though we’re being asked to trust the Bush administration about the existence of a crisis. This isn’t true. It’s not like the runup to the war in Iraq, where a lot of the crucial information was classified and we had to take the government’s word for it. In this case, a lot of information is out in the open, and lots of people, many of them not otherwise sympathetic to the administration, are very scared. Barry Eichengreen notes that “we are not going to see 25 per cent unemployment rates like those of the Great Depression”, but he thinks over 10% of the workforce could well end up unemployed. That’s a world of hurt; and it’s not counting the trillions in vanished assets, etc.
Second: if I were Henry Paulson, I would have spent at least the last year working out the best possible solution to the problems we now face. But I am not Henry Paulson; I’m a citizen wondering how I should ask my representatives to vote. I therefore have to face a very different question, namely: which of the alternatives that can be enacted in the time available to us would help most? The best alternative we can get might not be the best alternative there is. But it matters more to figure out which of the options we actually have is best than to figure out which we would enact if we were benevolent tyrants and could do whatever we wanted.
Third: we also need to bear in mind that whatever plan we end up with, it will be executed by the Treasury and Fed we now have. This matters because it’s not obvious how (for instance) Paulson would implement a plan he fundamentally disagreed with. I assume that there are some differences (e.g., reporting requirements) that he would implement without question, and others (e.g. nationalizing the banking and mortgage industries) that he might have a harder time with. (The problem need not be that he would not be trying in good faith to implement what Congress passed. Anything Congress passes will leave some room for people to exercise their judgment, and people who think that Congress’ entire approach is fundamentally misguided will be unlikely to do the best possible job of implementing it.)
Fourth: I have precisely no interest in bailing out investment bankers and hedge fund managers, per se. It’s not that I have anything against them; I just don’t think that spending a ton of money to rescue very wealthy people from the consequences of stupid choices that have put us all at risk is a worthwhile goal for government. By the same token, though, I am not interested in punishing them per se either. I am interested in making sure that ordinary people have as much protection as possible from the economic troubles that lie ahead. If getting them this protection requires that I let the head of WaMu waft off into the sunset in his golden parachute, then so be it. I care much, much less about what happens to him than about what happens to small business owners, construction workers, families whose home values are dropping just when their paychecks are cut, kids whose parents lose their jobs, and seniors whose retirement plans go up in smoke.
Fifth: That said, I think there are very good reasons to include serious cuts on executive compensation in any deal that gets made. Matt Yglesias has noted one of them:
“If we limited executive pay for bailed out institutions — say by forcing executives to work on government pay scale — then firms’ managers would have a strong incentive to avoid taking taxpayer money unless it was genuinely necessary. Banks that would mere prefer to get bailed out because it would enhance their profits won’t do it if taking the bailout means a big cut in executive pay. But institutions that would actually collapse absent a bailout will take the deal because they have no choice.”
Relatedly, imposing limits on the compensation of executives whose firms are bailed out would help to lessen the problem of moral hazard. The firms that are bailed out might not have to face the full consequences of their employees’ stupid decisions, but if their executives did, that might be enough.
But there’s another reason to include serious limits on executive compensation in any bailout we pass. It’s always a good idea to try to ensure that people are behind what the government does. But there are some times when it’s absolutely crucial. Going to war is one; this is another. One thing our representatives should do is to explain, as clearly as possible, why letting the financial system collapse would be in no one’s interest. But another is putting serious limits on executive compensation in place. People simply will not support this package as long as they get to read headlines about executives at firms that we have had to bail out getting seven- or eight-figure bonuses; nor can I think of any reason why we should be expected to.
Finally, while we’re considering the possibility that we might be facing an economic depression, it might be a good idea to recall the last one. Mark Thoma has posted some audio links to interviews with people who lived through it; this one and this one are particularly good. I’ve put a few graphs and pictures below the fold.
At a job bureau (more photos at same link):
Food for thought.