Collapse. Best time for a vacation.

So, the U.S. House has discarded the plan to save the U.S., and really by some extension, the world economy. The markets have collapsed. It was never an ideal plan in the first place. The insane right wanted changes that had nothing to do with economics, and everything to do with Bizzaro World ideology. So they were out. Ordinary citizens saw the price tag and balked, rightfully so — but because very few people know anything about detailed economics, people really don’t understand why having a functional banking system is an important thing even for them. So they were out. Economists mostly said it was the wrong plan to start with, but we needed something to save the economy, and the weekend’s changes were enough to make it palatable. So they were mostly in, holding their nose. Democrats were stuck being responsible, and got a lot of votes for a second- or third-best plan, but it wasn’t enough. They got stabbed in the back by House Republicans, to use a phrase that has some propaganda value over here.

What next? Collapse, anybody? Maybe there’ll be another attempt after the holidays, with a better plan. Or after the election. Maybe Sarah Palin will come up with something brilliant, and all economics students will be discussing the Moose Doctrine for a century to come.

I’m going on vacation to a village without Internet access for a week. Please don’t break the world completely while I’m gone…

Survey says…. $700 billion!

I somehow missed this a few days ago. From Forbes:

In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.

“It’s not based on any particular data point,” a Treasury spokeswoman told Tuesday. “We just wanted to choose a really large number.”

To be fair, they did have to pick a really large number, and part of the problem in this collapse is that there isn’t good information on the total value of distressed or illiquid assets, or even agreement on how to value them in the first place. The Treasury seems set on overvaluing them as a means to recapitalize the banks (because if the government actually paid market value, the banks wouldn’t get enough new capital to keep them afloat). A lot of economists think this is an atrocious idea unless the government gets equity in return.

Who’s voting a blank check for those #*%)%(

Here’s the silver lining to global financial collapse. It’s kept me from obsessing about Sarah Palin and McCain’s latest whopper for the last week. Except in the context of financial collapse, for which there’s been plenty of material.

What’s fascinating is watching this in the blogging era. Roughly a billion serious economists are online, and are writing about Paulson’s bailout plan in more or less real time. What’s emerging is partly politically driven (it’s getting very hard to find any economist, left or right, who’s seriously backing McCain), but also perhaps disturbingly divorced from traditional ideological divisions.

The (idiot) right doesn’t like the bailout because it’s not letting markets do their thing. I’m not sure there are many of these folks, outside the mouth-breathing politician class. Markets can fail catastrophically, and while this may seem like a salutory thing to some, if we’re living in a market-based economy, it’s not really a practical object lesson.

But a very large number of economist types seem to be seriously skeptical of the plan as presented, for two main reasons.

First, it gives the government — read, Bush’s executive branch and its successor, as advised by the Fed — virtually unlimited power to spend $700 billion without any kind of genuine oversight. Granted, most people  seem to be pretty happy with the way Paulson and Bernanke have played defense over the past few weeks. But imagine the lobbying that will go on. Remember the way that the Bush administration has staffed important agencies such as Iraq’s Coalition Provisional Authority, FEMA, or the Interior Department’s coke-snorting oil- and gas-royalty division.

The other arguments are tied closer to the economics. The massive sum will be used to buy the mortgage-backed securities that the financial sector has been binging on for years, and which no prudent investor will now touch with anything short of a gas mask and rubber gloves. Worse than Bayerisch Gammelfleisch, this stuff.

The short version of the theory is: Take these currently worthless “assets” off the financial giants’ hands. Instead, give them taxpayer money, filling their coffers with actual assets. This, in theory, makes them financially secure. Investors stop fleeing financial stocks. Banks once again start lending to each other, and to regular people trying to buy houses, start businesses, or conduct business in the ordinary credit-dependent way that makes the world economy tick. Best of all, in the end (as when the government bought distressed savings & loan assets in the 1980s), the “worthless” assets purchased today might actually turn out to have some value once the crisis passes, home prices stabilize, and people turn out to be able to pay their mortgages. Government sells them, the $700 billion or however much we laid out to rescue the financial system gets partly paid back, and everybody goes into the history books happy.

Yes. But.

One big question is how much the government is paying for the all-but-worthless assets. There are various opinions on what they’re worth. The market, for example, is currently pricing sub-prime mortgages as the rough equivalent of belly button lint. However, it’s unlikely that the banks are going to see it that way when they’re selling.

The Naked Capitalism blog quotes a reader who claims to be a congressional staffer thusly (read the full post here, it’s a very good critique of the plan):

Anyway, I wanted to let you know that, behind closed doors, Paulson describes the plan differently. He explicitly says that it will buy assets at above market prices (although he still claims that they are undervalued) because the holders won’t sell at market prices. Anna Eshoo pressed him on how the government can compel the holders to sell, and he basically dodged the question. I think that’s because he didn’t want to admit that the government would just keep offering more and more.

This puts the government in a tricky situation, and may perversely give the banks more power than they deserve. The government, once this is passed, is going to want to clean the mess up as soon as possible. Banks, by contrast, are going to want to get the best price they can for their trash. If they can manage to stay out of bankruptcy long enough, they’re going to be able to stick taxpayers for an unjustifiably high price.

Paul Krugman amplifies on this idea, arguing that the financial sector’s capital deficiency stems from hugely overleveraged (debt-financed) operations, rather than solely from the mortage-backed paper.

Even without panic asset selling, the financial system would be seriously undercapitalized, causing a credit crunch — and this plan does nothing to address that.

Or I should say, the plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.

There’s more, but this post is getting long.

So what’s all this mean? We need a massive plan, and fast. That much is evident. We’re teetering on the edge of chaos far worse than anything we’ve seen since the 1930s. The lesson from the Depression is that the Hoover government did precisely the wrong thing for years, cutting back spending instead of stimulating economic activity, and making a number of other mistakes that virtually no Econ 101 student would today. Bernanke knows this, and is playing the professor-with-power role to the hilt, to make sure that today’s government doesn’t make the same sins of omission.

But it’s worth remembering that this is a democracy, and that Congress should play a role. Safeguards should be in place, and some ability to make Wall Street firms, and individuals, bear the brunt of the cost for their own salvation. Negotiations are underway now, and Democrats are just getting back in the game. This thing probably shouldn’t be approved as is (This pissed-off email, purportedly from a leftie Congress member is great. Quote: “I don’t really want to trigger a world wide depression (that’s not hyperbole, that’s a distinct possibility), but I’m not voting for a blank check for $700 billion for those mother fuckers.”).

Interesting times.

To be fair, we can see Canada from the States

From a McCain staffer today (via Huffington Post):

MIAMI — Move over, Al Gore. You may lay claim to the Internet, but John McCain helped create the BlackBerry.

At least that’s the contention of a top McCain policy adviser, Douglas Holtz-Eakin. Waving his BlackBerry personal digital assistant and citing McCain’s work as a senator, he told reporters Tuesday, “You’re looking at the miracle that John McCain helped create.”

There are many things to be said about this. But aside from simply being high on the idiot scale, it misses a fairly obvious point. The Blackberry is Canadian, created by Ontario’s Research in Motion.

Reminds me of the (I think) French ambassador’s comment after the whole “Freedom fries” incident: “Actually,” he said. “They’re Belgian.”


David Foster Wallace apparently hung himself in his Los Angeles apartment this weekend. In his best book, Infinite Jest, he’d written with a horrifying clarity about depression, addiction and failure. In the context of a not-quite-science-fiction near-future, in the Year of the Depend Adult Undergarment (the U.S. has started offering years for sponsorship), in which large chunks of New England have been turned into a waste dump and forcibly ceded to Canada, and a group of wheelchair-bound Quebecois terrorists are seeking a lethally addictive film to use as a retaliatory weapon. A lot going on.

Maybe uniquely, he had an ability to write with incredible empathy about emotional swamps, while making it rib-splittingly funny and moving at the same time. It’s hard for me to remember laughing as hard at any other book; and yet the same book was full of deeply sympathetic character studies and an analytic eye that dissected or prophesied about modern media culture as well as anything I’ve ever read.

His later fiction never reached that peak (though if you haven’t read his essays, go right now and buy them all). One story in particular, the Depressed Girl, annoyed me, because it seemed he’d lost or willfully abandoned the sympathetic insight he’d had into emotionally drained or clinically depressed people.

Now maybe I understand it differently. That was the side of himself that he hated and feared. And which ultimately killed him.

Charlie Rose has a few interviews posted with him from the 1990s. The one here, following the publication of A Supposedly Fun Thing I’ll Never do Again is heartbreaking, given the context.