Tuesday, September 30, 2008

Easterbrook on the "Bailout"

Update 10-2-08:

Here's a picture that sums up how I really feel about the "bailout":

A number of people have asked me what I think of the Wall Street "bailout" (that hasn't happened yet.) I'd love to take the time to write out exactly what I think, but

1.) I'm not an economist, so, ultimately, who cares what I think? and
2.) As evidenced by my not blogging of late, I really don't have the time.

However, Gregg Easterbrook is an economist, and a damn good one who also has the common courtesy to both make sense and communicate clearly. So, as an economist, he added a note about the "bailout" to this week's Tuesday Morning Quarterback, his weekly football column at ESPN.com's Page 2. Since it pretty well sums up what I'm thinking, and comes from someone who - unlike yours truly - actually knows something about economics, I thought I'd share it with whoever still drops by from time to time to make sure I'm still not writing:

As Congress continues to debate whether they are going to hand over $700 billion of your money to the wealthy who screwed up Wall Street and the banking industry, you will be relieved to learn that top executives of the bailed-out firms temporarily will be limited to a strict $500,000 a year in tax-subsidized income. Surely you receive $500,000 a year in tax-subsidized income, don't you? Anyway, supposing we assume the bailout is required, here is what bothers me about the plan so far: Taxpayers don't get stock, what they get is warrants that can be exchanged for stock, and nonvoting stock to boot. This means that once media attention switches to the next crisis that everyone will claim in retrospect to have seen coming, the Wall Street rich can quietly lobby to have the warrants never called, thus keeping the entire bag of gold for themselves. Even if the warrants are called, taxpayers get no voting positions -- meaning the boards of directors of the bailed-out firms can do anything they damn please with taxpayers' money.

A week ago, Warren Buffett rescued Goldman Sachs by injecting $5 billion in capital. Did Buffett bargain for warrants that can be exchanged at an unknown later date for nonvoting shares? No: He is not a fool. Buffett gave Goldman Sachs $5 billion in return for senior preferred stock, the kind that votes and also is more valuable than ordinary shares. That is to say, he used his money to buy something. Goldman can now employ the cash to fix its liquidity problems. The United States Congress and the White House should use the public's $700 billion to buy something, namely senior preferred shares. Why are Congress and George W. Bush not simply following the road map laid out on this problem by the smartest investor of our era? Either Congress and the president are a bunch of blithering fools -- or what they actually want is to insure the public's money is never seen by the public again.

Unless the average taxpayer gets something of significant value for any bailout, this is nothing less than a reverse Robin Hood scheme, a stealing from the poor and the middle class to give to the rich, who the government has decided have an inalienable right to be rich, even when they invest foolishly and recklessly.

That doesn't mean that the government should do nothing. It just means that whatever is done should first and foremost aid the general public, whose funds are being used here.

I've got more to say, of course, but I need to put Adam to bed now. So, back to my regularly scheduled life.


Update: 10-1-08, 11:39 AM

Here's an article on a much better plan, being floated by George Soros.

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