No major newspaper would run any op-ed from me. I gave up and sent one to American.com, which you can see here. The bottom line:
The financial bailout isn't as bad as Main Street thinks. It's worse.
I think I'll just paste the other one below the fold.
Next, I am going for a long bike ride. You might want to look up a quote from August 1914 about "the lamps are going out all over Europe. We will not see them lit again for a long time." I'm sure a commenter will be able to locate the exact quote and the speaker, an English minister whose name eludes me.
Much of Europe was happy and optimistic when war was finally declared. Many people are happy today that war that has been declared on free markets. Looking at the bright side, it could be worse. This war does not involve sending millions of young men to fight in trenches and launch human wave assaults against machine guns.
UPDATE: If you've still got morbid curiosity, the indefagitable Charles Duhigg of the New York Times has dug up the dirt on Fannie. A great suits vs. geeks story. Pointer from the equally indefagitable Mark Thoma, the last defender of the GSE's. I would offer to debate him on the proposition, "the secondary mortgage market is a good thing" (I would be taking the contrary position), but the debate would be too one-sided to be interesting.
Right after the bailout vote, I happened to be down at Cato, so they got my initial reaction for a podcast. I am afraid to listen to it.
I happened to be at Cato to attend a briefing by John Brynjolfsson. He offered what I call the geek's perspective. One point he made is that default risk affects interest rates much more on short-term debt than on long-term debt.
Suppose that consols (if you don't know what a consol is, think of a 30-year bond instead) with no default risk yield 5 percent. If you are offered a consol with a default probability of 10 percent, you would accept a yield of approximately 5.5 percent (a 10 percent higher yield). But if we were talking about a one-year risk-free rate of 5 percent, then for a security with a 10 percent default probability an interest rate as high as 15 percent would have a lower average return than the risk-free security. When you start looking at one-month commercial paper, the risk-adjusted interest rate gets much higher, and for even shorter term money it is higher still. So the "astronomical" yields that people are talking about on TED spreads and such are really not so big. They reflect relatively small increases in estimated default probabilities.
He also thinks that the dollar's rally during the crisis was temporary. I think there is a decent chance that the dollar will come under severe pressure some time in the next several months. It's not a good time to be raising interest rates to defend the dollar, either, considering that we're almost surely in that recession that people have been expecting for months.
Playing Liar's Poker with Your Money
by Arnold Kling
Two decades ago, Michael Lewis wrote a profile of the Wall Street gunslingers who traded mortgage-backed securities. He call his book Liar's Poker.
I think of the mortgage securities market as a poker game, being played in a stateroom on a ship called the U.S. Economy. Because so many players have lost most of their chips, the poker game is in danger of grinding to a halt. The players have rushed out of the stateroom, screaming, "Emergency! Emergency! If the poker game doesn't revive, the ship is going to sink! All the passengers need to give money to the ship's Bursar so that he can get join the game and get it going again!"
It is highly unlikely that the buoyancy of the U.S. economy depends on the liveliness of the Liar's Poker game of mortgage securities trading. We should resist panic reactions and emergency bailouts.
These are strange times. It used to be that when Congressional leaders announced, "We have a deal," it meant that they had enough votes to pass a bill.
It used to be that warnings about a coming Depression were issued by crackpots and members of the lunatic fringe. Today, prominent members of the political, financial, and journalistic establishment are warning of a Depression, and those of us who resist their panic solutions are accused of being crackpots or lunatics.
Our economic ship does find itself in troubled waters. One iceberg is the high price of oil. Another iceberg is the large decline in household wealth due to lower home prices. On the horizon, according to many economists, lies another iceberg, represented by a potential decline in our terms of trade. We have been enjoying cheap foreign goods for years. At some point, we could face a dramatic increase in the hours that an American has to work in order to afford a bottle of French wine, a pair of Italian shoes, or a television manufactured in China.
Bailing out the mortgage securities industry will not help us to navigate through these icebergs. If the economy does suffer catastrophic damage, though, we may look back on the bailout as something akin to giving priority access to rich people in boarding lifeboats on the Titanic.
The danger to the economy is a credit squeeze. Suppose you have a thriving restaurant business, and you want to expand to a new location. In ordinary times, it would be easy to find a bank willing to help finance your expansion. Today, however, one sees some articles indicating that good borrowers are facing problems; however, other stories indicate that credit is flowing to worthy borrowers with little difficulty.
Suppose that we do experience a credit squeeze. How do mortgage securities cause such a squeeze?
The problem for a bank holding mortgage securities is that the value of those securities may have fallen. Accounting rules dictate that the bank's balance sheet must reflect the current market value of its securities. The accounting losses deplete the bank's capital, so that regulations require the bank to curtail lending in order to comply with capital requirements.
There are three ways for policymakers to address this problem. The most risky and least effective approach is the Paulson plan, as modified by Congress. The idea to assemble a pool of funds with which to bid up the prices of mortgage securities. The U.S. Treasury would take hundreds of billions of dollars of public funds in order to join the table at Liar's Poker.
Another approach, which would work more quickly, would be to suspend the rules that require banks to mark securities to market values on their balance sheets. The problem with this approach is that it puts a blindfold over the eyes of regulators. The agencies that oversee banks lose the ability to recognize when a bank is in trouble and needs to be shut down.
A third approach is called capital forbearance. Regulatory agencies would issue new capital rules that would permit banks to make good loans without having the required capital. There is still some risk to taxpayers, because banks would have a lesser capital cushion. However, this is by far less risky than having the government play Liar's Poker with mortgage securities.
Why do the bailout plans focus on the riskiest, least effective approach for avoiding a credit crunch? Because Wall Street firms like Goldman Sachs get huge fees and trading profits from Liar's Poker, and they make very large campaign contributions to key Congressmen and Senators.
No one knows whether there is any public interest being served by the bailout. We do not know whether the ship is in danger, or whether other policy measures would do a better job of ensuring the safety of the ship. What we do know is that some big, important campaign contributors are desperate to see government join the Liar's Poker table.