Climate, the Bailout, and the Blame Game

I’ve been watching a variety of explanations of the financial crisis. As a wise friend noticed, the only thing in short supply is acceptance of responsibility. I’ve seen theories that place the seminal event as far back as the Carter administration. Does that make sense, causally?

In a formal sense, it might in some cases. I could have inhaled a carcinogen a decade ago that only leads to cancer a decade from now, without any outside triggers. But I think that sort of system is a rarity. As a practical matter, we have to look elsewhere.

Socioeconomic systems are at a constant slow boil, with many potential threats existing below the threshold of imminent danger at any given time. Occasionally, one grows exponentially and emerges as a real catastrophe. It seems like a surprise, because of the hockey stick behavior of growth (the French riddle of the lily pond again). However, most apparent low-level threats never emerge from the noise. They don’t have enough gain to grow fast, or they get shut down by some unsuspected negative feedback.

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There's always something more pressing …

One reason long-term environmental issues like climate change are so hard to solve is that there’s always something else to do that seems more immediately pressing. War? Energy crisis? Financial meltdown? Those grab headlines, leaving the long-term problems for the slow news days:

Google trends - climate change vs. bailout

Google Trends

In this case, I don’t think slow and steady wins the race. The financial sector gets a trillion dollars in one year, and climate policy gets the Copenhagen Consensus.

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Kids on the Bailout

I got a silly chain email, which proposed taking the $85 billion needed for the AIG bailout and distributing it among all 200 million taxpayers, so that we’d each get $425,000 to play with. I decided to test this idea on my boys, who are seven and eight. Ignoring the fact that $85B divided by 200M is $425, not $425,000, we had a conversation about what would happen if the government distributed half a million in cash to every American:

Kid1: That would be generous.

Kid2: That would be hard. There are like 150,000 people just in Bozeman.

Me: Where would the government get that kind of money?

Kid1: Make it (by printing).

Kid2: Steal it from another country.

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Bailout MetaRoundup & Alternatives

MetaRoundup:

Several of the economics blogs I read have had useful roundups of bailout commentary. A few I find found useful:

Do we need to act now? on Economist’s View

9/26 Links on Economist’s View

NYT Economix’ analyst roundup

Greg Mankiw’s roundup of commentary

Update 9/29:

Real Time Economics’ Secondary Sources

Update 10/1: 

Greg Mankiw with more commentary

Alternative Plans:

Economists Against the Paulson Plan

Brad de Long on Krugman on the Dodd plan

WSJ Real Time Economics’ Text of Lawmakers’ Agreement on Principles

Thomas Palley on Saving the Financial System

Marginal Revolution on the Republican plan to rescue mortgages instead of buying mortgage assets

Marginal Revolution with a Modest Proposal (finding and isolating toxic assets)

Update 9/27:

Marginal Revolution with substitute bridges

Greg Mankiw with a letter from Robert Shimer with a nice analysis, including problems with Paulson, the lemons problem, and the Diamond, Kaplan, Kashyap, Rajan & Thaler fix

Update 9/28:

Real Time Economics on securitization

Brad deLong on nationalization (the Swedish model)

Update 9/29:

The Big Picture with Stop Targeting Asset Prices

Marginal Revolution asks, is the Sweden plan better?

Bailout without Representation

The NYT has the draft text and an explanation of the Bush administration’s $700 billion bailout proposal. It audaciously creates a budget authority almost as big as the federal government’s total discretionary spending and bigger than every on-budget agency, seven times the California state budget, without any checks and balances at all:

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

We used to dump tea in harbors for things like this.

A New Method of Macarony Making, As Practiced at Boston

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A modest bailout proposal

The Fed has just doled out over $300 billion in loans to bail out Bear Stearns and other bad actors in the subprime mortgage mess. It’s hard to say what fraction of that capital is really at risk, but let’s say 10%. That’s a pretty big transfer to shareholders, especially considering that there’s nothing in it for the general public other than avoidance of financial contagion effects. If this were an environmental or public health issue, skeptics would be lined up to question whether contagion in fact exists, whether fixing it does more harm than good (e.g., by creating future moral hazard), and whether there’s a better way to spend the money. Contagion would have to be proven with models, subject to infinite scrutiny and delay. Yet here, billions are doled out with no visible analysis or public process, based on policies invented ad hoc. Perhaps a little feedback control is needed here: let’s create a bailout fund, supported by taxes on firms that are deemed too big to fail by some objective criteria. Then two negative feedbacks will operate: firms that get too large will be encouraged to split themselves into manageable chunks, and the potential beneficiaries of bailouts will have to ask themselves how badly they really want insurance. Let’s try it, and see how long the precautionary principle lasts in the financial sector.

Update: Paul Krugman has a nice editorial on the problem.

And if financial players like Bear are going to receive the kind of rescue previously limited to deposit-taking banks, the implication seems obvious: they should be regulated like banks, too.