The Bailout Plan version 2.0

CNN Money has posted a very simple plain English summary of the new version of the bill for those who aren't up to reading the original.

Economists Paul Krugman and Brad Delong provide some assessment of the new 100+ page long plan. Krugman weighed in with this evaluation initially.

Section 113, MINIMIZATION OF LONG-TERM COSTS AND MAXIMIZATION OF BENEFITS FOR TAXPAYERS, is where the rubber meets the road -- it's where the plan says something about how the deals will be done.

As I read it, Treasury can
(1) conduct reverse auctions and suchlike
(2) buy directly -- but only if it gets equity warrants or, in companies that don't issue stock, senior debt

My view is that (1) will be ineffective but also not a bad deal for taxpayers -- firms that can afford to will dump their toxic waste at low prices, the way some already have on the private market, and taxpayers may end up making money in the end. Firms in big trouble will probably stay away from the auctions. The plan's real traction, if any, is in (2), which is a backdoor way to provide troubled firms with equity -- and the bill seems to say that taxpayers have to own this equity, although I wish it was clearer how much equity will be judged sufficient.

Not a good plan. But sufficiently not-awful, I think, to be above the line; and hopefully the whole thing can be fixed next year.

After being informed that the version he looked at wasn't the most recent, Krugman said he'd update his comments after reviewing the correct one. In the end, there evidently wasn't that much difference between the two he reviewed as he said, "I don't, in the end, have much more to say about the plan. It passes my test of no equity, no deal; that, plus the danger of financial panic if it doesn't go through, makes it worth passing, though celebration is not in order."

Krugman posted a followup this morning noting that he's being approached with 2 main questions:

(1) Was it really necessary? (2) Shouldn't Dems have tossed the whole Paulson approach out the window and done something completely different?

His answers are: 1 - yes with some explanation of why and 2 - this is more complicated but I understand why the Dems did what they did. Starting over from scratch probably wasn't realistic at this point.

Brad Delong follows along with Paul Krugman noting that it's better than a jab in the eye with a Lawn-Dart. From there he moves onto highlighting a piece by Larry Summers with these two questions.

How Much Will This Cost? How Does This Constrain the Policy of an Obama-Biden Administration?

Larry Summers's answers are "not much" and "not at all." I agree.

The Financial Times published the column "Taxpayers can still benefit from a bail-out" by Larry Summers. The whole column is worth reading but I thought this paragraph was worthy of note:

In the meantime, it is necessary to consider the impact of the bail-out and the conditions necessitating it on federal budget policy. The idea seems to have taken hold in recent days that because of the unfortunate need to bail out the financial sector, the nation will have to scale back its aspirations in other areas such as healthcare, energy, education and tax relief. This is more wrong than right. We have here the unusual case where economic analysis actually suggests that dismal conclusions are unwarranted and the events of the last weeks suggest that for the near term, government should do more, not less.

Summer's point is in contrast with the conservative non-economists who have decided to jump on the rightwing bandwagon placing all the blame for the current crisis on the 1977 Community Reinvestment Act. Matt Yglesias has addressed this bit of wingnuttery.

I've linked to Robert Gordon's debunking of this point several times, but now let me add this other debunking from Ellen Seidman that I hadn't seen before. And, again, recall that not only is it false to say that CRA caused the bad lending, but completely irrespective of who or what caused the bad lending absolutely nobody forced financial firms to make large, highly leveraged bets on the loans. It was conservatives who blocked regulation of credit default swaps. It was conservatives who watched as the housing bubble developed and it was conservatives who blocked any action to try to ensure a soft landing once the bubble popped. It was conservatives who said we had to make the taxes of the ultra-rich individuals who brought this problem upon us as low as possible. It was conservatives who blocked efforts to curb predatory lending and it was conservatives who blocked efforts to investigate fraud more robustly.

Bonddad aka Hale Stewart also addressed this point along with some of the other theories that are being floated by the chattering classes about the origin of the crisis. He then goes onto lay out the sequence of events as documented by some very reputable publications. It's worth some time if you want a relatively jargon-free explanation of why this free-fall in the finance world occurred.