A Fun, If Unlikely, Proposal

An interesting article on Reason also recommended on Marginal Revolution:

"Such simple measures—raising the capital ratio requirements of investment banks, eliminating implicit guarantees to government-sponsored enterprises, suspending mark-to-market accounting back in 2006, and extending tax cuts on capital gains and dividends into the future—would have allowed the market to continue to reorganize its financial sector at absolutely no cost to taxpayers.

That being said, if the president and Congress were dead set on addressing the lack of cash in the economy, they still could have done so in a way that would have achieved the goal of injecting liquidity into the banking system while exposing taxpayers to far less uncertainty.

How? By taking the $700 billion they plan to give to Wall Street and sending checks worth $3,600 to the 191 million U.S. taxpayers. Such checks would then have to be deposited into some type of retirement account or be subject to the IRS's premature IRA distribution rules.

The most risk-averse people would invest this windfall into relatively safe money market funds, thereby preventing the credit crunch predicted by the pundits. Some would buy instruments such as mutual funds, which would sustain the market. Savvier investors, or at least those with a high risk threshold, would profit from the low prices on Wall Street to purchase stock in distressed banks."

Read the whole post, which I find interesting and basically like. And yet, here's my one note response to all such plans:

Don the libertarian Democrat | October 8, 2008, 2:26pm | #

"When the federal government guarantees bank loans or assets, banks have less incentive to evaluate loan applicants thoroughly, but they do have an incentive to engage in riskier behavior than they would otherwise undertake."

Bingo! That's what I've been saying all along.

The reaction of the credit markets to the failure to bailout Lehman showed that the market players were expecting a bailout. The real analysis needs to take into account the real world implications of government interventions in financial crises. Without a clear understanding of what that role will be, it's hard to know exactly what investors are relying on in making many of their decisions. If they're assuming government intervention, one can assume that their decisions are different than if they weren't.

Again, we also need to know the actual assumptions that various parties in this crisis were relying on. If a government bailout is one of them, that seems very important to me to know.

The real question is whether or not government will intervene in situations like the current one. Without an answer to that, it is very hard to determine what will actually occur in the real world, or what a rational policy should be.

There's no point going on and on about the free market without knowing the actual assumptions and restrictions we're laboring under.

Is This Plan Free Market?

Here's Steve King on why he voted against the plan:

"The good news is that we have several options that don’t rely on taxpayers to bailout Wall Street. The FDIC can work with banks to ease capital requirements to help them weather the storm. The SEC can modify fair value accounting so that assets aren’t worthless during times like these, but can be valued on the basis of their true economic value. There is also a proposal to let private investors fund the bailout through Guaranteed Recovery Bonds, or to set up insurance programs to ensure Wall Street bankrolls its own recovery. "

Hey Steve, the FDIC, SEC, and your other programs seem to involve the government. Even tax breaks involve government action, with no assurance they will give enough inducement for private businesses to buy these troubled assets.

When the government uses private businesses to accomplish a result, the government is still involved. Somehow, I feel the taxpayers will still be the final guarantor of these ideas if they don't work.

Am I wrong?

How I've Approached The Plans Being Put Forward

I am a libertarian Democrat. As such, I'm interested in working within a party which can actually change our government over time. Perhaps I am also simply more comfortable culturally in the Democratic Party Coalition.

In any case, I accept that there is a difference between politics and political theory. Politics is the art of the possible. Political Theory is the view of the government that you would ideally like to see.

In the current crisis, I acknowledged two plans as having some merit, and fulfilling my requirement that any plan be clear and understandable:

1) A totally free market plan.

2) A version of the Swedish Plan.

In my mind, there are three points that are informing my views on which plan to favor:

A) There will be a government intervention of some sort, undoubtedly large.

B) Because crises such as these bring about government intervention.

C) If there is government intervention, it should be for as broad a purpose as possible and be as thrifty with the taxpayers money as possible.

Based on these assumptions, I favor a version of the Swedish Plan.

It's not that I don't see other plans as possibly working, but hybrid/compromise plans are generally:

1) Easier to manipulate by special interests.

2) Harder to determine what worked and what didn't.

3) Riskier financially.

That's how I've approached this crisis.

A Few Points About The SEC And The New Bill

Today, the SEC adopted one of Anthony Randazzo's proposals from the free market proposals I recommended:

"Third, the SEC should suspend the "mark-to-market" accounting rules for long-term assets that are driving firms into bankruptcy. Essentially, these regulatory rules are forcing firms to value their assets at much lower prices than what they would be worth long-term. The intent of mark-to-market regulation was to keep firms from overvaluing themselves and deceiving investors. Instead the law has artificially devalued financial institutions as a whole, which hurts their investors. As Steve Forbes noted recently, "The mark-to-market mania of regulators and accountants is utterly destructive. It is like fighting a fire with gasoline."

This accounting clause has significantly contributed to the bankruptcies (or near bankruptcies) of Lehman Brothers, Merrill Lynch, AIG, Bear Stearns, Morgan Stanley, Citigroup, Washington Mutual, and many others. In order to keep firms from overvaluing themselves, Newt Gingrich has proposed a three-year rolling average mark-to-market policy.'

Here from the Washington Post:

"Under intense political pressure, regulators for securities and accounting standards this afternoon issued what they called a "clarification" to provisions that have come under fire from bank executives and some lawmakers for contributing to the credit crisis...

The standard, also known as "mark to market," has led portfolios to plunge in recent months as banks affixed fire sale prices to their assets, a move that sometimes required them to raise still more capital to meet regulatory requirements. The measure also led to clashes between corporate executives and independent auditors over how low the markdowns should be forced to dip. "

Also, I backed this proposal from Jim Harper of Cato which looks to be in the new bill:

"And from the “This May Make Some Sense” department, there’s H.R. 6986, which would raise the maximum Federal deposit insurance coverage to $200,000. This seems to update the amounts covered by federal deposit insurance not in response to the crisis, but in response to the possibility that it could be needed. Nice to see someone possibly getting ahead of the curve, rather than following along behind it. But I have to say “least bad” is not high praise . . ."

Here from the NY Times:

"But those Democratic opponents did say that they would be willing to back an increase to $250,000, from $100,000, in the amount of a bank deposit that would be insured by the federal government — an idea that on Tuesday gained fast currency as a consensus change in the initial plan.

Mr. Obama and Mr. McCain early Tuesday both embraced the deposit insurance proposal, sparking a bit of a political tiff over who deserved credit for initiating it. House Republicans claimed to have offered the insurance increase in weekend negotiations over the plan only to have it rejected."

I might also add that Randazzo advocated tax breaks, but probably not these being considered:

"The Senate tax bill would cost more than $100 billion and extend and expand many individual and business tax breaks, including tax credits for the production and use of renewable energy sources, like solar energy and wind power. The bill would also extend the business tax credit for research and development, expand the child tax credit, protect millions of families from the alternative minimum tax and provide tax relief to victims of recent floods, tornadoes and severe storms.

Members of the House and the Senate say the bill would create tens of thousands of jobs and reduce the nations’ dependence on foreign oil. But the two chambers have been at odds over whether and how to offset the cost of extending the many tax breaks covered by the legislation. The major obstacle has been Representative Steny H. Hoyer of Maryland, the majority leader, and other centrist Democrats."

Maybe Randazzo would be for the business tax breaks.

"Second, Congress could cut corporate taxes and small business taxes in general. Trimming taxes for "the rich" opens up new capital to be invested in a struggling economy. At a time when investor confidence in the stock market is low, a tax cut for businesses would encourage innovation and entrepreneurial activity. The effects would be similar to that of a stimulus package, only without the government's involvement or a redistribution of wealth."

More about this new bill as I find out more about it, and understand it.