Arnold Kling  

Elizabeth Warren

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talks for ten minutes without saying much that I disagree with. Quite remarkable. Note particularly at the very end, when she suggests that her gut feeling is that the "dinosaurs" helped by Paulson's bailout may not have been as critical to the economy as he assumed.

That is a big issue, in my opinion. And many Progressives (not all, as Warren illustrates) seem to want to side with Paulson, and especially with Ben Bernanke, in deciding to save the dinosaurs. I wish we could have a clean, nonideological way of answering that question.

What I propose is looking at whether Treasury and the Fed make a profit on their bailout moves. I think if they do make a profit, then this vindicates their view that this was a liquidity crisis, and government stepped in where markets were in a panic. If instead the Fed and Treasury take a loss, then this suggests to me that they were trying to cover up bad investments by the dinosaurs, and the case for the extraordinary intervention becomes much more problematic.


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COMMENTS (9 to date)
Shayne Cook writes:

One of the commenters noted that the host talking-head got his last sentence wrong - "... I'm glad the 'too big to fail' world ended in September last year ...".

In fact, as Warren indicated, the "too big to fail world" is still alive and still too big to fail as a result of the Fed/Treasury/Government actions of last September. Not to mention the fact Warren initially emphasizes that the "toxic assets" are also still there, replete with all of the original (and perhaps more) toxicity.

So why was the "bailout" done in the first place? Oh yeah, I remember now - to preclude a recession.


As an aside, another commenter suggested Elizabeth Warren for Treasury Secretary. An excellent suggestion, as far as I can tell.

tjames writes:

Isn't it possible that it was a liquidity crisis, but that Treasury and the Fed, having no good way to value the assets, and also buying in a panic, just overpaid for them? In other words, isn't it possible they were right, but will still take a loss?

Overall, I like what Elizabeth Warren had to say, particularly about the funny business with Mark-to-Market. One of the Econtalk podcasts - I think with Acemoglu, but I'm not sure - noted that if banks are insolvent under mark-to-market, the response should be something other than letting them lie about this. In other words, force them to mark to market so we have the best possible picture of the true worth of the assets today, but address the insolvency in some other way. This is preferable to 'mark-to-solvency', which is what seems to be going on now, and which distorts/hides information from the market.

El Presidente writes:

What's behind door #3?

If they don't make a profit, it might also be because the federal effort has been too small, as Krugman has suggested. Jumpstarting without repairing/replacing the alternator may only get you as far as your next breakdown. An insufficient effort in the right direction may still fail to achieve a net positive result.

Shayne Cook writes:

Arnold, your test of profitability may well not be sufficient. In the first instance, "profit" is an accounting fiction and in many cases isn't realizable. In the second instance, even a realizable "profit" is only of value to those it is distributed to.

For example, many publicly traded companies post a "profit", but the earnings are not distributed to the shareholders for their use - neither in the form of dividend distributions nor in the form of stock price appreciation.

In context with the "bailout bill investment", I would require that any claimed "profit" be both realized and applied to: 1.) retire ALL the original $700 Billion public debt, 2.) retire ALL interest costs accrued in conjunction with that debt, AND 3.) retire a non-trivial additional portion of public debt, not associated with the bailout debt.

Until that happens - especially #3 - any "profit" claimed would indeed be a fiction.

Floccina writes:

The thing that bothers me about the saving of the dinosaurs is their niche would most likely would have been taken up by something much better. IMO their old ways of doing business are dying.

Niccolo writes:

Well, much of that talk seems to assume that the policy makers were considering what would be best for the economy and NOT what would be best for their interests.


The reason for the extraordinarily undemocratic bailout bonanza was probably more public choice than irrational economics, to be honest.


Of course they needed to paint it with fear to pass it, but that doesn't mean the fundamental reason for its existence was anything other than keeping their pals afloat.

Kevin writes:

Ex post profits are not evidence of a correct decision at the time. Nor are ex post losses evidence of an incorrect decision.

Some people win at keno. Some casinos lose at it.

aaron writes:

El Presidente, but overfilling your brake-fluid reservior when you have a coolant leak doesn't make things better.

El Presidente writes:

aaron,

Nice. Is that Keynes too? :-)

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