Are Economists wrong or is Paulson deaf?

When the bailout plan first draft leaked to the media, a lot of economists are against it and most of them support an idea of purchasing equity stakes in the banking-financial firms. Here is what a group of five economists from the University of Chicago's Graduate School of Business (Diamond, Kaplan, Kashyap, Rajan and Thaler) have suggested back then:

"......The first could be accomplished by adopting much of the Treasury plan, perhaps with Mr. Dodd's proviso. The Treasury would buy assets through a reverse Dutch auction or some variant, but without any intent to overpay. The idea would be to jumpstart the market by establishing trading prices.

The second component, raising capital, could be achieved in other ways, for example through a mixture of a mandate and an offer of partial government support. The authorities could require all regulated financial institutions, no matter how well capitalized, to present plans to raise 2% of their assets in additional capital over the next quarter to preserve the stability of the financial system. This increased capital will not represent an increase in the permanent level of required capital for bank holding companies, but instead give institutions the extra capital that will allow them to lend. ......"

Notice that the economists never really completely rejected the idea of purchasing the troubled assets, which Paulson announced on November 12, 2008 that :

"Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending. But other strategies I will outline will help to alleviate the pressure of illiquid assets. "

The Dow (DJIA) fell over 400 points on that day and as the Detroit 3 failed to prove to congress that they are worth saving and Citigroup fell deeper into trouble, the Dow declined close to 7500 points.

Then, on Monday Nov. 24, 2008, the bailout plan on Citigroup involves some kind of insurance on the toxic assets, and on Tuesday, Nov. 24, 2008, Fed and the Treasury put together a 800 billion package to facilicate lending in the consumer credit market.

So, what's that claim of no TARP money for toxic asset all about?

As Chris Probyn put it: "The government has subtly reversed course. The original idea of the bailout was to remove toxic assets from the balance sheets of banks. That was subsequently abandoned but they are getting back to it. ......"

The systemic risk of the Detroit 3 going into bankruptcy

That risk is very close to the dangerous ramification of my failure to appear in the most recent episode of Ugly Betty. The strategy for the 3 auto makers to persuade the congress to give them a bailout money is to dress themselves up in the banking industry Halloween costume by arguing that if they fail, then their suppliers will fail as well thus unemployment will shoot up, which can drag the American economy into even deeper recession. In sum, their failure will pose a systemic risk for the economy.

I have to say I cannot buy this argument. The bankruptcy is really a overhaul of the current business model of the Detroit 3, which is a function of the recession: sweeping out the bad apples. The production lines or say, the physical capital of the auto industry will still have value and the production will resume once the reorganization of the auto industry is done. This is a necessary process for the US auto industry itself and let the economy do its job, please!

la Drama Obama

"No Drama" Obama created a lot of drama in picking his cabinet members these days. The final picks are rolling out day by day. I think the "rumor leak -> media discussion -> Obama pick" process actually gives Obama a lot of opportunity to gather opinions on the personnel choice for free.

Smarter Government and the Detroit 3

“Our aim should not be more government, It should be smarter government.”, said President Bush to world leaders. But is Obama's current push on the bailout of the Detroit 3 a smart move? If the Detroit 3 get exactly what they want, other industries will line-up in the front of Obama's White House for the next round of freelunch for their executives. The government can do a lot of things to help the auto-workers in trouble but bailing out the 3 falling companies as they want it will only reward stupidity, miopic business visions and encourage laziness.

Market place on the Economoy from NPR

An economist who saw it all coming.

Economy rebalancing China-US trade

Meltzer is on the demand side!

See his plan on Greg Mankiw's Blog: The Meltzer Plan.

I have previously suggested a little more policies on how to boost demand in the housing market.

Gas price and the energy crisis

The gas price in Columbus, OH last week could be as low as $1.74/gal on Sinclair and 161. With a price this low, I doubt the urge to implement a plan to develop alternative energy sources can sustain for long. The current financial crisis creates more needs for federal money than ever but on the other hand the federal government has very limited resources as borrowing money become harder when other countries start to their own stimulus efforts.