I am watching the Greta/Gingrich interview and am very happy to hear that Gingrich has jumped on board to suspend mark-to-market (for the record, I want to abolish it but a suspension is good for now).
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TrackbackDid anyone notice that the DOW ticker plummeted as the Democratic Caucus had their press conference?
Update: DOW suffers worst point loss in history but did not make the top 10 in percentage terms.
Conclusion: Markets react poorly to political “food fights” because they show political uncertainty.
Comments rss TrackbackThe bailout failed 205-228 in the House.
House Republicans vote 2-1 against the bailout.
Comments rss TrackbackFrom Greg Mankiw’s Blog:
The Treasury proposal to rescue the financial system has gotten a lot of grief lately, especially from the community of economics professors. A smart friend, who knows more about this topic than I do, emails me his response to the critics:
Academic economists don’t like the Treasury plan, but nearly all of the Wall Street economists are for it. You don’t have to be all that cynical to say that the Wall Street economists are talking their book. But I’d like to think that there is at least in part a sense in which they are more attuned to the reality of the situation in credit markets — that last week we were a day or two away from a breakdown of the financial system.
Here are three common critiques from the academics and journalists and what they are missing:
1. “Treasury must overpay for this to work because otherwise you are not injecting new capital, only adding liquidity.”
Treasury is talking with the experts you would expect — prominent academics who have designed auctions. It’s complex because there are so many different MBS, but Treasury is committed to get the market price as best as it can. It will not intentionally overpay. But the assertion that the plan will not boost capital is wrong. If Treasury gets the asset prices exactly right next week when the reverse auction starts, those prices will be higher than the prices that would have obtained before the program was announced. That difference means that by paying the correct price next week we will be injecting capital relative to the situation ex-ante. Treasury does not need to overpay. And the taxpayer can still see gains — say if the announcement and enactment removes some uncertainty about the economy and asset performance, but not all. Then prices could rise further over time. But the main point is that it is not necessary to overpay to add capital. I think Krugman is a leading purveyor of the “they must be intending to overpay” assertion.
2. “Taxpayers will be better off if Treasury gets warrants.”
This is essentially the assertion made in David Leonhart’s column in the NY Times on Wednesday. And it again illustrates that we would all be better off if high schools taught the Modigliani-Miller theorem. MM implies that the price of the asset (again,assuming the auction gets it right) will adjust to offset the value of any warrants Treasury receives. In this case of a reverse auction, imagine that the price is set at $10. If Treasury instead demands a warrant for future gains of some sort, then the price will rise in the expected amount of the warrant — say that’s $2. Then the price Treasury pays for the asset will be $12. Some people might prefer to get $12 in cash and give up a warrant worth $2 in expected value. Fine, that’s a choice to be made. But the assertion that somehow warrants are needed is simply wrong.
3.”The plan should be to inject capital instead.”
This is the Luigi Zingales criticism. Again, that’s a fine plan and might be a good idea. But that’s a complement to an asset purchase plan, not a substitute — and it’s one allowed by the Treasury proposal and indeed envisaged in some cases. But that will take much longer to implement than an asset purchase. That’s why it’s a complement not a substitute — Treasury needs to act now. The particular ideas from Zingales et al that there should be a forcible capital injection are pure ivory tower, unfettered by the practicalities of legality, enactment, or implementation.
Comments rss TrackbackRepublican Sen. Jim Bunning of Kentucky came out swinging during a hearing on Capitol Hill Tuesday, calling Treasury’s plan for the biggest financial bailout since the Great Depression “un-American.”
From Bunning’s prepared statement:
The Paulson proposal is an attempt to do what we so often do in Washington—throw money at a problem.
We cannot make bad mortgages go away. We cannot make the losses that our financial institutions are facing go away. Someone must take those losses. We can either let the people who made bad decisions bear the consequences of their actions, or we can spread that pain to others. And that is exactly what the Secretary proposes to do—take Wall Street’s pain and spread it to the taxpayers. The plan has not even passed, and already Americans are paying for it because of the fall in the dollar as a result of all the new debt we will be taking on.
I know there are problems in the financial markets, and I share a lot of the same concerns that our witnesses do. However, the Paulson plan will not fix those problems. The Paulson plan will not help struggling homeowners pay their mortgages. The Paulson plan will not bring a stop to the slide in home prices. But the Paulson plan will spend 700 billion taxpayer dollars to prop up and clean up the balance sheets of Wall Street. This massive bailout is not the solution, it is financial socialism, and it is un-American.
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