Thursday, September 25, 2008
A less bad bailout plan
NB: I didn't say "good", just "less bad." From my perspective, "Good" plans would be to prosecute what fraud there may have been (I think to a lesser extent than most folks, but it should be identified and prosecuted1) and otherwise leave it alone or if *something* must be done, modify Fannie Mae regulations to do what the market is doing anyways, i.e., increase downpayment requirements, tick up interests rates to reflect more realistic default probabilities, and let the companies that screwed up take their knocks.
Wouldn't it be better to make this taxpayer money available for loan, let the institutions buy them at whatever price the market will bear, and take back collateral as was done with AIG? I realize this will mean companies holding truly worthless paper will fail, but shouldn't they fail anyway?
And won't they eventually fail anyway (i.e., wouldn't propping them up just postpone the inevitable)?
This is partly ideological (my priors are a disposition towards leaving the free exchanges of free people alone) and partly because I don't think there's a credit crunch.2,3
So why link to the less bad plan if I think it's inferior to what I think should be done? Because my plan (the minimalist plan) has little to no chance of happening and "less bad" is preferable to bad.
1. I think this is a consensus position, though in what might not be consensus, I think that neither a borrower nor a lender should be free of investigation. (to spin Polonius's advice)
2. See, e.g., this MR post where Alex notes the currently growing retail loan markets which is inconsistent with a credit crunch.
"As Robert Higgs points out consumer loans are up, commercial and industrial loans are up, even real estate loans are up. Overall, total bank credit is up with just a slight sign of leveling off in recent weeks. So where is the credit crunch?3. The argument that there will be a run on the banks is slightly more compelling, but only slightly. Because what is meant is not banks qau banks (i.e., what will impact "Main Street"), but money markets. But to me, this argues for providing the option of FDIC - like insurance for other deposits (moving forward), not a $700 billion bailout.