My Response To Flynn

Michael Flynn has another good post on Reason. Here's part of it:

"To paraphrase Mencken, this solution is neat, plausible, and wrong. The first failing is something that is only now being openly stated: Treasury expects to pay some unknown premium above any current market price for mortgage-backed securities (MBS). We don’t know what the premium will be nor how it will be determined. Well, in a sense we do. It will mostly be determined by politics, not economics. This is the foundational flaw in the Treasury plan.

Once signed into law, Treasury would begin a process to determine the assets it will buy and the manner it will set a price. Like everything in government, this is a moment that is lobby-able. Expect swarms of financial services lobbyists, investor groups, housing advocates, and others to try to game the system for their individual clients or members. The further away from economics these decisions are made, the more risk there is for taxpayers. The higher the premium over any current market price, the longer the government will have to hold the assets.

The risk here is particularly high given the complicated and rather opaque nature of the financial instruments involved. Few on Wall Street, let alone in Washington, understand these products. I have strong reservations about whether federal bureaucrats have the capacity to appropriately price and manage these instruments. Apparently, I’m not the only one with these doubts. The bailout would authorize Treasury to bypass normal contracting rules and hire outside private firms to handle the purchases and manage the toxic assets. That these private firms have ongoing relationships with the banks selling the bad assets creates one hell of a conflict of interest."

These are great points, which I have been making as well.

However, here is where I disagree with him:

"Probably the most troubling is the proposal to give the government equity stakes in the companies participating in the bailout. It’s bad enough for the government to purchase these companies’ bad debt. The bailout, however, would make the government an owner in the companies themselves. This is unchartered territory, and raises lots of troubling questions. Would the government get seats on the board of directors? How would the government dispose of the equity? When? Will there be firewalls to prevent government, or government officials, from using the equity stake to influence the business decisions of the company?"

My idea is that this is necessitated by the requirement that the deal optimally protect the taxpayers interests. My idea is that the government would eventually get out of these businesses by selling them or the government's interest in them. I feel that this is a clear and clean proposal, far less amenable to lobbying and other problems dealt in by complexity in any hybrid plan.