No Deal

I hate to say this, but looking at the plan as leaked, I have to say no deal. Not unless Treasury explains, very clearly, why this is supposed to work, other than through having taxpayers pay premium prices for lousy assets.

As I posted earlier today, it seems all too likely that a “fair price” for mortgage-related assets will still leave much of the financial sector in trouble. And there’s nothing at all in the draft that says what happens next; although I do notice that there’s nothing in the plan requiring Treasury to pay a fair market price. So is the plan to pay premium prices to the most troubled institutions? Or is the hope that restoring liquidity will magically make the problem go away?

Here’s the thing: historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets. The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the RTC. The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

I hope I’m wrong about this. But let me say it again: Treasury needs to explain why this is supposed to work — not try to panic Congress into giving it a blank check. Otherwise, no deal.

RAJIV CHANDRASEKARAN: This is a book [Imperial Life in the Emerald City] that attempts to shine a light on a whole other set of fiascos in the American effort to occupy Iraq. You know, we all know now about the disastrous consequences of failing to send enough troops there to stabilize Iraq after the U.S. invasion, the Pentagon’s failure to anticipate the growth of the insurgency.

But what I write about is the whole other litany of mistakes that were made by American civilians who were there, from Ambassador Paul Bremer on down. It’s a series of what I think are blood-curdling stories: the people who showed up in Iraq, a country with 40-50 percent unemployment, and said, ‘Hey, this place needs a flat tax. It needs tariff reduction. It needs all sorts of other neoconservative economic solutions. It needs all of its government-run industries to be privatized’; the people who showed up and said, ‘There are traffic jams here. We’re going to fix that by giving them a new traffic law’; the people who showed up and said, ‘They need new intellectual property laws. They need new laws governing the types of seeds their farmers can plant’; the sort of crazy micromanagement that took place there.

Meanwhile, the more important tasks of actually rebuilding the country, of trying to find sustainable ways to increase electricity generation, to rebuild shattered hospitals and schools, to provide clean drinking water. All of those vastly more important tasks were sort of relegated, because the folks who came there saw Iraq as a terrarium for a number of neoconservative policies that they were never able to implement here in the United States.