One predictable consequence of a massive bailout for investment banks is strong political pressure to provide similar handouts for others. The New York Times reports that big financial firms are starting to lobby for an even wider bailout than the already hefty $700 billion plan proposed by the Bush Administration:
Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it.
Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages. At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees. Nobody wants to be left out of Treasury’s proposal to buy up bad assets of financial institutions.
“The definition of Financial Institution should be as broad as possible,” the Financial Services Roundtable, which represents big financial services companies, wrote in an e-mail message to members on Sunday. The group said a wide variety of institutions as varied as mortgage lenders and insurance companies should be able to take advantage of the bailout, and that these companies should be able to sell off any investments linked to mortgages.
Congressional Democrats are arguing that the feds should bail out homeowners with mortgages they can't pay. Meanwhile, as George Will reports, the troubled auto industry also wants to get in on the act. No doubt, other industries will also try to get in line for their own handouts.
I realize, of course, that there are various arguments distinguishing the bank bailout from these other proposed bailouts. But as a matter of practical politics, it may be difficult or impossible for the federal government to resist the pressure. The general public is "rationally ignorant" about politics and economics and doesn't understand the subtle economic arguments that supposedly prove that the bank bailout is a good idea while other bailouts aren't. Many voters will think that if we are going to bail out a bunch of greedy Wall Street bankers, the "little guys" should get some goodies as well. The combination of ignorant public opinion and interest group lobbying will almost certainly ensure that this bailout goes far beyond its initially envisioned scope.
Senior Conspirator Eugene Volokh's classic article on "The Mechanisms of the Slippery Slope" is relevant here. We have a combination of what Eugene calls an "attitude-altering slippery slope" (a bailout for one industry makes public opinion more receptive to others as bailouts come to seem "normal"), an "equality slippery slope" (if banks get a bailout, many voters will think that "it's only fair" if industry X gets one too), and a "political power slippery slope" (as more interest groups become dependent on government largesse, the relative power of the pro-bailout groups will increase and that of their opponents will be reduced, thereby paving the way for further handouts).
These slippery slope dangers should be kept in mind as we weigh the potential risks of the bailout. They aren't the only relevant factor, but they do deserve greater consideration than they seem to have received so far.
UPDATE: As co-blogger David Bernstein points out, the homebuilding industry is now among those clamoring for a bailout of their own.
All Related Posts (on one page) | Some Related Posts:
- The Bailout and the Market:
- Does the Stock Market Fall Prove that the Bailout Would have Been Worth it? - Round II:
- Poof!...
- A Homebuilder Bailout?:
- A Bailout in Every Pot:
- Do Low-Probability Catastrophic Risks Justify the Bailout?...
- A Simple Argument Against the Bailout:
- Gary Becker's Doubts About the Wisdom of the Bailout:
- Crony Capitalism:
So why on earth would people support more of what they don't like?
So why on earth would people support more of what they don't like?
Even if this is true, it doesn't affect the "equality slippery slope." If the bank bailout passes, many voters will still think it's only fair if other industries get one too. In addition, it's still possible that a measure a plurality of voters initially opposed will still come to seem "normal" over time. Note that only 37% of the public actually opposes the bailout in the poll you cite, while 35% is undecided. If the bailout passes, many of those undecideds might join the supporters in thinking that the bailout is a good idea, or at least an accepted part of the political landscape.
Finally, other polls might show greater support for bailouts, depending how the question is worded.
Me too! Reward responsible people who happen to have debt before rewarding people who bought more house than they could afford or who made dumb loans.
Gimme! Gimme! Gimme!
That was yesterday. It's up today :-)
Those were yesterday's numbers. Today the opposition has gone up:
Both telephone surveys (Sunday evening and Monday evening) were conducted by Rasmussen.
We seem to be racing towards the Soviet model of an administered economy where prices are determined on political considerations not by markets. The Soviets too said the alternative was worse. How is the Bush-Paulson-Bernake axis not the vanguard of US communism?
I'm a bailout supporter because, not being an ardent free-marketer, I'm more willing to bet on the expertise of my fellow pro-regulated-marketers than of the expertise of people like Ilya who were already ardent free-marketers. And the genuine experts who are generally supporters of moderately regulated markets seem to be in agreement that some kind of major bailout is necessary to avert an enormous financial crisis. If it takes $700 billion to prevent another Great Depression, I'm willing to pay it even though I'm in a relatively high tax bracket.
Ilya, incidentally, doesn't even count as a person with relevant expertise from my point of view because he's a law professor with a master's in political science. He's not an economist or business professor. He doesn't work in the finance industry and according to his CV he never has. He doesn't have an MBA or even a bachelor's in finance. In other words, he has at most a bit more relevant experience or training than I do.
Wait - if they are very successful, and not weak/troubled, explain to me again why we are bailing them out?
Seriously, is there going to be any provision in the legislation that limits the bailout to firms that are actually in trouble?
Who are these experts? Paulson, who as head of Goldman Sachs presided over the firm that created the financial "weapons of mass destruction." The "experts" Paulson and Bernake kept telling us since 2007 that the problems were contained, but they weren't. There were plenty of "experts"too in the 1920s that advised the government before the Great Depression. Where were the "experts" when the housing bubble was expanding. Greenspan? Remember his statements about "froth" in some local real estate markets? A few people did warn us like Roubini who the experts called "Dr. Doom" and ridiculed him. Peter Schiff of EuroPacific Capital also warned about the housing bubble and the coming collapse of the financial system. He got ridiculed too.
Sorry but most of these "experts" seem to have been asleep or compromised by big bucks from Wall Street (this means you Alan).
Huh?
The only real question to be settled, apparently, is whether the wealthy will own their banks at the end of the day (Republican plan) or whether the government will own the banks (and maybe the assets they provided capital for) at the end of the day (Dodd plan).
We have some real asshats for business and political leaders in this country. We're looking at suddenly, without forethough, nationalizing perhaps 20% of the economy after a couple rushed legislative sessions. This is just remarkable. Remarkably stupid. I hear that credit card companies and student loan debt holders are lobbying to get in on the deal too. Lovely. It's not enough we're going to be picking up the tab for the people on our block living above their means, and for the bankers who profited from that, but we're maybe going to have to cover people with bum credit cards, and those who don't want to pay back their student loans? Above and beyond the fiscal issues, more and more people are revealing themselves to be loathesome amoral scum. Rothbard is looker better by the day.
Now, where do I sign my opposition? Anyone is aware of any petition or signature drives (in addition to contacting my congress reps)? Thanks!
With respect to executive pay, again, I'm not going to get into specific, point-by-point details on what our views are on that, other than the Secretary of Treasury said it would make more difficult to make this plan work and effective if you provide disincentives for companies and firms out there who are holding mortgage-backed securities and other securities from participating in the program. You have to remember, these are not all weak or troubled firms that own mortgage-backed securities. A lot of them are very successful banks and investment houses that have done very well, have been responsible, are holding performing assets that have value. They were not necessarily irresponsible players, and so you have to be careful about how you deal with them."
So this isn't about rescuing failing banks, but also helping he successful ones. Tell me why this is necessasry to save the banking system?
I'm sure that for every utterance of the word "billion" there is a Wall Street schemer who is thinking of some way to divert a small fraction into his own pocket.
But this just convinces me that this is just a transfer of wealth from the middle class to the wealthy. People who don't like gov't redistribution of wealth should be up in arms.
'Paragons of capitolism', maybe?
Actually, for the past 28 years, we have been racing AWAY from the New Deal.
There's a reason we didn't have panics from 1936 to now.
For us old New Dealers there is not much to enjoy about this, but watching the Shikago Boyz trying to explain why their ideas didn't cause this mess is at least amusing.
I've got a couple pitchforks and a bench grinder to sharpen them up.
Not that these attitudes are not rational, or even to be expected from these guys, but I'd be a bit more enthusiastic about the plan if it were going to help more civic minded people. One or two more Morgans and one or two fewer of the guys we got would go a long way to helping sell the thing politically.
Bingo. The truth is that if the banks actually had to take market prices, the bailout would not help them; they'd be insolvent or otherwise unable to meet regulatory capital requirements.
So Paulson is put in the position of having to lie for them. And he's lying very badly. Witness his statement that Treasury didn't include anything about oversight in its original proposal because it would have been "presumptuous" (oversight being Congress's job).
How do you possibly reconcile that with the proposed Section 8, which would have explicitly eliminated oversight by Congress?
The man is lying through his teeth. Good ideas don't require telling lies to sell them.
Bottom line is that the Administration can't be trusted. Anybody who does is a SUCKER.
We have been racing away from New Deal securities industry regulation, but towards administered prices.
Huh?
Hint: Investment banks deal in market risk, while commercial banks deal in credit risk.
The independent directors should be exempt so as to preserve their incentive to have the firm participate in the bailout if it is good for the firm.
Let the market be really free- if foreclosure and failure was good enough for the homeowner, it should be good enough for the bank. Thoes who bought financial instruments they did not understand deserve the same mercy as those who got into mortgages they did not understand.
The hypocrisy of so-called "free market conservatives" is apalling.
If there is to be a bailout, I wouldn't be averse to adding very stringent conditions intending to reduce the moral hazard, including tough pricing, equity stakes, restrictions, intrusions, etc. So far as I'm concerned the more strings attached the better, so long as things are temporary and the government sells the stuff back into private hands. I'd rather have no bailout then a no-strings-attached free-money handout.
Perhaps the stockholders would have some influence in that case.