Friday, September 19, 2008

Notes on the bailout 

With great humility I once again offer a series of thoughts on the developments of the last couple of days. As has been evidenced in the comments in recent days, we have many readers smarter than me, so consider this a place to start the discussion.

  • The first estimates of the cost of the breathtaking bailout proposal are from $500 billion to $1 trillion. It sounds like a lot, and it is.

  • The first estimates are almost certainly wrong, but they are not necessarily too low. The early estimates for the savings and loans bailout in 1989 were $159 - $300 billion, depending on how one counted. Ultimately, the cost to the taxpayers came in at $123 billion. (Note that the ex ante and ex post numbers that I found are not perfectly comparable, but I believe they are directionally true.) If history is any guide, therefore, the first estimates may turn out to be the worst estimates. Do not forget that Henry Paulson and Richard Shelby are, like the rest of us, prisoners of their own mood.

  • The original estimates for the S&L bailout came to 2.9% of 1989 GDP (link is an Excel file of nominal and constant GDP). If this intervention costs $500 billion, it will amount to about 3.5% of twelve-month trailing GDP through June 30, 2008. If it costs the full trillion smackeroos, it will amount to 7% of June 2008 GDP. We came through the 1989 RTC deal in fine shape, especially compared to the Japanese who did not own up to their problems. Will the greater burden of this mess hurt us more than the last one did? That's the question.

  • Everybody likes a stock market rally. The question is whether the rally in the financial stocks particularly was sparked by short covering on account of the new SEC rule that Larry Kudlow hates so much, or was it because the stockholders of the big financial institutions believed that Paulson's new deal would bail them out? If the latter, then the rally depends on Paulson doing the wrong thing. If the former, then hold on to your hats when the ban on short sales expires.

  • Speaking of the ban on short sales, will not the question of extending it beyond October 3 become an enormously difficult issue for Republicans? If the case for continuing the ban is anything other than rock solid the Democrats will almost certainly accuse the SEC of "playing politics" with the short sale rule if the SEC extends the ban past election day. If the rule is not extended and the shares of financial stocks fall once short-selling resumes, then the Democrats will blame the SEC for not having extended the rule. You read it here first.

  • That should be a good start.


  • Will the incremental growth in GDP cover the cost, or a lot of it? Probably depends how Keynesian you are.


    By Blogger D.E. Cloutier, at Fri Sep 19, 11:33:00 PM:

    The whole problem makes me remember the Japanese temple builder Kongo Gumi.

    The story:

    "The End of a 1,400-Year-Old Business"

    The lesson:

    "To avoid a similar demise, evolve as business conditions require, but don't get carried away with temporary enthusiasms and sacrifice financial stability for what looks like an opportunity."


    BusinessWeek, April 16, 2007


    By Anonymous Anonymous, at Sat Sep 20, 09:45:00 AM:

    Anyway the demacrooks can squander our money on bailing out two of their biggist suporters  

    By Anonymous Anonymous, at Sat Sep 20, 10:10:00 AM:

    Bailing out what? Has anyone one seen a comprehensive and readable report about what is really in this plan?
    The problem is based in greed and and the ability to use loopholes to separate risk from reward. I believe that ALL financial institutions pay huge bonuses to a surprising percentage of their staff. This has to stop!
    The mortgage lending business made bad loans to folks who never could afford the deal (I loved the 105% mortgage with no money down). Those folks still can't afford the deal and any bail out for them, as individuals, simply again splits risk from reward.
    And, of course, next in line at the government window will be the airlines and the auto manufactures, each wanting huge amounts to pass on to their union employees.  

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