Hangin at the AEI
I spent the morning down at the American Enterprise Institute Conference on "Bailouts" (AEI Pre Conference Summary Below). My notes by panelist:
Adam Lerrick:
1) bailouts coming so quickly he can't keep up,
2) bailout designs are political not economic,
3) policy wonks are always one bailout behind,
4) Rule 1: A successful bailout must bring overwhelming force, Rule 2: Must preserve incentive and discipline. The $700 billion was not nearly enough. It will take $3 trillion. (He is talking psychology here. He doesn't necessarily think that all of the current $700 billion will be spent. Think about it. When the Congress is screwing around with wooden arrows, you know that they aren't taking things seriously. $2 trillion nominal will get some attention and convince the investing public that the time to address the problem has come.)
5) preserve system, not institution,
6) are in information not liquidity crisis - lots of cash around, massive printing has been ineffective
7) crisis will end when asset prices reach reasonable levels,
8) longer delay the adjustment process than longer the pain; Japan government allowed banks to sit with the toxic loans on their balance sheets,
9) once upon a time Citi was sitting on a bunch of bad Argentine debt. The CEO woke up one morning and decided to write it down to zero. Citi went up 20% that day,
10) have big time conflicting goals (under TARP): 1) Treasury should buy the toxic loans low in order to protect the taxpayer (in which case the banks won't sell them) and 2) if you want banks to function (recapitalize) then you need high prices,
11) future regulation is a joke; institutions always figure a way around regulations - need disclosure, disclosure, disclosure
Pollock:
1) prices need to drop to levels where the speculators come in
Mendelowitz (prime player in Chrysler bailout):
1) Mendelowitz went through a very interesting history of the Chrysler bailout. My painting with a broad brush - that bailout worked because Chrysler was a small isolated entity. IMO today's mess is not amenable to a Chrysler type bailout. BTW: From an insider POV it sounds like Iacocca was an arrogant, presumptive a*&hole,
Lachman
1) Making fun of economists while addressing bailouts: If something first works in practice, an economist will ask if it works in theory,
2) Relating recent conversation with Paul Volcker: The situation is very complicated. If the wrong policy steps are taken, we are headed right back into the '30s,
3) Bernanke is not dialed in. Hinted yesterday about a rate cut at the month end, then did it overnight. Not showing much confidence or a firm plan,
4) Our current policy is purely reactive. We have no strategy.
5) We have adverse loops in spades...falling house prices reduce bank cap ratios reduce lending reduce house purchases reduce house prices etc, ad nauseum. Absolutely must have outside intervention to break the cycle.
6) Paulson plan won't work - sorry didn't get the details
Pollock
1) At any time one balance sheet collapsing can be managed. Today they are all collapsing simultaneously.
V. Reinhart
1) Three rules of a bailout: a) you should never do a bailout, b) if you break Rule (a) then be consistent, and c) if you break Rule (a) and Rule (b) then be prepared to pay and pay and pay and pay,
2) Anecdote: Lehman had a bunch of as yet unpackaged mortgages sitting on the cutting room floor. Post Bear, Lehman quickly swept the stuff up, packaged it into a product called "Freedom Bonds" and presented it to the Treasury as collateral,
3) To date the government has certainly not been consistent,
4) Under a bailout, the government tends to preserve the traditional hierarchy of debt over equity. When a bailout becomes apparent, investors tend to buy the bonds and short the daylights out of the equity. Ergo, when the government started bailing out the banks, it telegraphed the all clear to short signal to the world. The government then banned bank shorting long after the barn door was open and the horse gone. (Personal comment: You can make a fortune just watching the government and reacting. I never thought of this one, but life's for learning.)
Link:
aei.org
The Theory and Practice of Bailouts
Start: Wednesday, October 8, 2008 9:00 AM
End: Wednesday, October 8, 2008 11:00 AM
Bailouts are the order of the day. The current series started in England with the British government bailing out Northern Rock, a mortgage lender experiencing a run. Then, in this country, came Bear Stearns, Fannie Mae and Freddie Mac, and AIG, followed by a $700 billion Treasury Department hedge fund of mortgage-backed securities. Germany, the Netherlands, Belgium, Ireland, and Iceland have also joined in the bailout parade.
Conceptually and historically, how should we think about government bailouts in times of financial panic or crisis? Are there patterns of successful versus unsuccessful interventions? What are the practical problems to consider? How will we get the bailout interventions to end? These and other relevant questions will be discussed by AEI economists Desmond Lachman and Adam Lerrick; Allan Mendelowitz, a director of the Federal Housing Finance Board; and Carmen M. Reinhart, a professor of economics at the University of Maryland. AEI’s Alex J. Pollock will moderate.
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Also. The video from last week's "What Lies Beyond the Credit Crunch" is now up on the AEI website:
aei.org |
