What are the alternatives to a bailout?

I'm troubled by the instant bipartisan consensus that the the government must bail out the investment banks. It reminds me of the run-up to the Iraq war when every discussion was framed in terms what should be allowed to happen before we invaded, not whether overthrowing Saddam Hussein could solve anything.

Remember that the Democrats are just as beholden to the financial services sector as the Republicans. It's not coincidental that the options on the table all involve bailing out these companies. At this point, the Democrats are arguing for a bailout, plus executive pay controls, mortgage-related bankruptcy reforms, and maybe an economic stimulus package.

My question is this: What if the government were to take the $700 billion to $1.5 trillion set aside for the bailout and put that money into programs to help those hardest-hit by the meltdown and Americans in general.

For example, progressives often note that pension plans would be decimated without a bailout. If that's the worry, why not invest in retirement security for our people directly? An extra $700 billion in the Social Security trust fund would cushion a lot of retirements.

These are our tax dollars. We can either invest them for our future, or we can buy a lot of worthless paper to bail out reckless banks. Ultimately, bailouts just set us up for more crises by proving, once again, that the government will cover the losses of big business.

Maybe a bailout is necessary, but I troubled that no one seems to be articulating the case explicitly or considering alternative options.

Update: David Johnston has more good questions for journalists to ask about the bailout.

Comments

[The Phantom]

Short term there may be no alternatives to bailouts

Which, as discussed, can sometimes make money for the government

Long term, discussions need to be have as to why these events happened and how to ensure they are not likely to happen again

[Cass]

I agree with you that we should be having a much, much wider debate here. As noted on another thread, though, the spectrum of respectable discussion in our politics runs from A to B, so its unlikely such an idea will ever be heard away from blogs like this and your local public access channel. We've been conditioned not to think outside the narrowest of boxes, with the result in this case that we're both going to be thoroughly fleeced and that few of the underlying problems will actually be dealt with.

"The government should be providing the market with a controlled landing while appropriating as many of the profits as possible, given that it is assuming all of the risk; unfortunately, the bailout actually seems designed to allow quick resumption of the status quo. Two years from now, somewhat chastened and with leveraging back to 10 to 1 instead of 30 to 1 or more, the moguls of Wall Street will be dreaming up new ways to bamboozle people, create systemic risk, and cash in; John McCain is already pushing privatization of Social Security, Wall Street’s wet dream.

"The price for the rescue of the status quo, in a country already in trouble because of its lack of willingness to invest in the future and in the welfare of the average citizen, will be a sour atmosphere of fiscal retrenchment in Washington; expect that for years to come significant spending on universal health care, vital infrastructure, development of alternative energy sources will be all but politically impossible; the only thing likely to be exempt from extreme fiscal discipline will be money for war."

(www.empirenotes.org/september08.html#22sep081)

[Eric Jaffa]

It's not the job of the government to give cash-for-trash when a corporation makes a bad investment.

Corporations are supposed to lose money on their bad investments. If Goldman Sachs goes out of business, smaller investment banks will take its place.

If Congress needs to be seen doing something about the economy, they could pass a stimulus package building roads.

They could provide money to homeowners who bought deceptive mortgages.

They could expand Medicare.

[The Phantom]

But if AIG went bust, there would be no good alternative for many of the things they did. You could have a systemic meltdown

[Eric Jaffa]

The Phantom -

What product does AIG sell which no other corporation sells?

[JohnL]

The NY Times has an article about what Sweden did in similar circumstances.

[Uncle Kvetch]

I claim no expertise on the subject, to put it mildly. But I like what I read from Bernie Sanders yesterday.

expect that for years to come significant spending on universal health care, vital infrastructure, development of alternative energy sources will be all but politically impossible

In my darker moments I fear this is more feature than bug--i.e., that we're seeing Grover Norquist's "starve the beast" finally brought to fruition in all its glory. As the blog cited by Cass correctly points out, the only things that won't be squelched with a simple "We can't afford that!" will be more tax cuts for the rich, and more war.

[The Phantom]

I'm in the insurance business.

They offer certain Liability and Property coverages for difficult risks that their competitors simply cannot or will not do.

I cannot be more specific, but trust me on this.

The only "alternative" might be one or two insurers who would write the "risk" at ten times the price -- and could not handle the volume

There would be an immediate, and harmful, impact on corporate America. The corporate insurance market, led by AIG for the past 25 years by AIG, would be in severe disruption and large price increases.

The impact for the economy would be very bad, and some economic activity would cease ( big construction projects, tough product liability risks, etc etc )

[The Phantom]

Eric

And again, as respects the normal insurance business- AIG has been very profitable at it. None of what they do there has been "irresponsible".

What brought them low was credit default swaps operation in London. There is an immense amount of intellectual capital and know how in their domestic operation. I hope that it survives well into the future.

[Mutant Poodle]

I refer to this as crisis marketing - creating a sense of urgency (whether real or manufactured) in order to short-circuit any deliberation about what might be best. It's exactly what Bush did leading up to the Iraq war.

I actually don't know if some kind of bailout is necessary, which is all the more reason to try and go slow. If it could wait until after the election (politics likely to drive bad policy, after all) that would be ideal, but I don't know if the promise of help coming soon is enough to keep things sane for six weeks.

[Count Zero]

I hope I never hear another Republican complain about Socialism when this is the biggest Socialist bailout of American corporations the US has ever seen.

The Administration is fleecing the taxpayers for their buddies in the corporate world one last time before they go. Que Sera, Sera. "Yes, Some people call you the elite, I call you my base. ..."

[Cass]

And of course, the reason we have a megacorporation like AIG is because- in line with all these other forms of right-wing insanity- the government has refused to enforce anti-trust laws already on the books.

If a corporation is truly "too big to fail" it suggests to me that that corporation either needs to be broken up, or have its functions assumed by the government. Anything else and you're going to end up with, in Lindsay's words, socialized risk and privatized profit.

[mudkitty]

So what happens if the bailout doesn't work?

This is the biggest financial swindle in the history of mankind.

As far as the Bush Administration heading out the backdoor laughing at the rest of us, after they already plundered the ssi trust fund, and drove the country into deficit, selling our debt to "communists" this just adds insult to injury.

The Bush Administration wants to award a $700 billion blank check to major fuck ups and crooks, and they want ONE man with the sole dictatorial ability to do what ever he wants with that money (or what ever they say.)

I thought Florida 2000 was bad.

I thought 9/11 was bad.

I thought invading Iraq was bad.

I thought after Katrina, it couldn't get any worse.

Well, anyway, you see where this is going.

It would be a relief to say that this is the final "fuck you" from the Bush/Cheney Administration, but I'm still in fear of an October Surprise.

[FungiFromYuggoth]

Didn't AIG already get bailed out? What does AIG have to do with the next multi-billion dollar bailout?

I call distraction.

[The Phantom]

AIG did get bailed out, but its part of the overall discussion.

Cass, if you want someone to provide broad lines of insurance and financial products to really big global corporations, that compamy is going to have to be big and global itself.

The alternative is to have a bunch of small domestic companies who can't get the job done, facing competition from a few foreign owned insurers ( Allianz, Swiss Re ) that also can't get the job done.

And again, it is noted that the Feds lost nothing on the Chrysler and NYC bailouts and that they probably made money on the resolution trust process.

[Eric Jaffa]

Mutant Poodle -

I agree with "go slow...wait until after the election."

Bush claimed that Iraq was a crisis which Congress must act on before an election.

The "Iraq War Resolution" passed Congress in October 2002.

That turned out badly.

Congress shouldn't let themselves be rushed.

They should consider legislation slowly and carefully.

[The Phantom]

They should be careful, but November 5 is far too long to wait. They will not wait that long.

[FungiFromYuggoth]

Phantom, a quick poke around the Internet indicates that RTC cost the federal government $125 billion. That's not breaking even, or making a profit. I'm not impressed with your level of knowledge here.

[Eric Jaffa]

The Phantom -

If stocks drop more before November 5, the good stocks will eventually go back up.

Congress can wait until after the election.

[The Phantom]

I don't care so much about stocks per se.

I care about the economy as a whole and a general slowdown of economic activity that could be really hard to reverse...

[Doyle Saylor]

Greetings All,
I disagree strongest with Phantom above. The key question here is about what is broken? For example, a dollar collapse guts U.S. hegemony. That seems to be the current view of the Treasury Secretary, Paulson, to let the dollar go. That is one pillar of U.S. power. Two is the war on terror which is a failure despite republican claims of winning the war in Iraq.

These bailouts like Majikthise points out are being pushed just like the Iraq war. The offer of help on mortgages is a bandaid. In effect polarizing wealth more and more as a matter of principle. The fact that this will probably pass in Congress does not prove the need. It proves the continuation of things as they are while things gather momentum in chaos. Fundamentally people like Phantom support the course of the U.S. that has led up to this moment. These must be done is not true. Rather what needs doing is to look at the twin pillars of U.S. power, the dollar as a world currency, and the use of our military to extend power in the global system rather than by economic means of development.

I don't expect to persuade Phantom, but I do think the support for the pillars of U.S. power are the problem we must overcome. We are being asked to sacrifice our ability to adjust to global warming for example by these bailouts. Which is more important? Banks or global warming? My own values tell me we cannot ignore global warming.

[Cass]

"Cass, if you want someone to provide broad lines of insurance and financial products to really big global corporations, that compamy is going to have to be big and global itself.

"The alternative is to have a bunch of small domestic companies who can't get the job done, facing competition from a few foreign owned insurers ( Allianz, Swiss Re ) that also can't get the job done."

If domestic companies can't the job done, and foreign companies can't get the job done, I don't know what the competition's going to be about.

In any case, this is exactly the response I'd expect from a conservative. No, you can't you regulate that... that's a terrible idea... hands off!! Just fork over your money. And don't worry; it'll all pay for itself, if it doesn't make us rich rich rich! (I remember that line about the Iraq war a few years ago.) Best of all, these firms will feel free to run themselves into the ground again in a few years, knowing the taxpayer will come to the rescue; and we'll have another money-making bailout on our hands!

[The Phantom]

Cass

Put the bottle down

Doyle

Nice argument, but saving the economy will take precedence over throwing money at Al Gore's pet panic.

[FungiFromYuggoth]

Talking Points Memo has a section from Bernake's testimony today where he says that the advantage to the bailout is that taxpayers will pay high prices for these mortgages rather than forcing the poor banks to sell assets at fire sale prices.

They're still insisting this is a liquidity crisis. These people shouldn't be trusted with sharp scissors, much less $700 billion in unregulated funds.

[Michael Schmidt]

"Al Gore's pet panic." That's enough to make me disregard everything Phantom has posted. It was scientists' pet panic long before it was Al Gore's. I've been worrying about it since 1983, long before I even knew who Al Gore was.

I'm in the middle on this bailout thing. I'm not sure it's a good idea to wait, but giving Paulson a blank check is a mistake. Let's get some equity, like Sweden did.