The Times says today that because of the failure of the Bailout Bill, Treasury and the Fed will have to dig deeper into their toolkits, which really means just lending more and more money to distressed firms.
“We have a lot of money to play with,” said Kenneth Rogoff, an international economist at Harvard. “As long as foreigners have a lot of confidence in our ability to solve our problems, we can borrow the $1 trillion to $2 trillion [!] we need to solve it.”
Wait, don’t they need a statute from Congress? Apparently not: they just borrow more and more money from whoever is willing to provide it, namely, foreigners. Which makes one wonder what exactly the Bailout Bill was supposed to accomplish. It may be that technically, Treasury and the Fed cannot purchase mortgage-related assets (actually, I think the Fed can); but they can, as we saw in the case of AIG, lend money to firms and take security interests in their assets, including mortgage-related assets, and then take over those firms when they default, as many of them will. Perhaps, existing statutory authorities to lend to distressed firms don’t give them as much flexibility as the plan gave them (maybe the difference is that everything has to take place through the Fed, rather than through Treasury, but they appear to cooperate closely with each other anyway), but they also needn’t worry about oversight, limiting executive compensation, and the rest of the constraints that the Bill contained.
The Times article suggests that the main risk from this arrangement is that foreign lenders will stop lending to Treasury because they fear that our government will never pay them back. I suppose that this is the true significance of the failure of the Bailout Bill. If Congress won’t support the lending program ex ante by enacting that bill, then foreign lenders might infer that Congress won’t support the lending program ex post by raising taxes to pay off government debt, and the entire house of cards collapses. However, I suspect that the United States remains a pretty good credit risk. If I am right, then the failure of the bill means that the resolution of the crisis will be more costly and cumbersome than it would otherwise be, and will take place with less oversight, but not that the government will sit around and wait for the “correction” to take place. If I am wrong, then we are headed for dark times. The libertarian option is simply not on the table.
Update:
More from David Zaring, with links to others on this topic.
The markets seem to think that the US gov't is a better credit risk than pretty much anything else out there. The yield on a 1-month T-bill remains almost zero (in other words, investors are basically paying the government to hold their money) and the yield on 5- and 10-year bills remains at par with (if not below) expected inflation (5 and 10 years at 2.7% and 3.6%, respectively).
If the government can borrow at 2.7%, that's basically free money.
The Fed can, see section 14 of the Federal Reserve act. The Fed can purchase basically anything that Board of Governors previously establishes guidelines for. Back in the late nineties when the government was in surplus and the treasury halted 30yr auctions, the board of governors adopted new broad guidelines for the FOMC.
Bernanke talks about this in a speech from 2002. You might find it historically interesting.
And no amount of shouting from the people seems to make a difference. It was private money and proivate profit... therefore, let the loss be private as well. Otherwise, Fannie and Freddie become the NORM of our system, and we all see how well that went...
And what is it that's going to give them this confidence, especially after this week's appalling performance?
Time for them to double down and buy $750 billion in some bonds, bills, and notes from the Treasury.
1) Do nothing; Congress has spoken; everyone should go back to their districts/states and campaign; don't return until after the election; let the chips (stocks, homes, credit markets) fall where they may; or
2) The Democrats should draft the most hyper-partisan bailout bill imaginable; include everything left out of the compromise (affordable housing fund, strict caps on compensation, mortgage bankruptcy changes, etc.); give the Republicans nothing in the bill; pass it with their Democratic majority only; dare the President to veto it. The Republicans had their chance and blew it.
I prefer #2.
"...pass it with their Democratic majority only..."
This may indeed be a real problem to do. If the Democrats load up the bill with pork, etc, one wonders if Blue Dog and more conservative Democrats would vote for the bill.
Yeah, but would Dubya have the cojos to veto after all his huffing and puffing about how important the bailout is?
Don't you realize that's already happened? From Bloomberg News-- Fed Pumps Further $630 Billion Into Financial System (Update3)
I agree with deepthought. Let the Dems own this bill. W. will sign it.
While I won't look a gift horse in the mouth, let me make it clear I intend for the Democrats to reap the benefits of a successful restructuring bill (the first mistake of the Administration was to use the word "bailout"), and to send the Congressional Republicans back into the wilderness for a generation.
Compromises with ideologues (and as a whole the House Democrats are not ideologues) are rarely successful.
It is easy to believe a philosophy that treasures a formless, leaderless, voluntary but ultimately choatic economic system in the good times. Watching that philosophy's adherents abondon it and cast about for Strong Leaders (Pelosi? Bush? Barney Frank? McConnell?) to impose a solution to save us from ourselves is pathetic and depressing. What was true in prior centuries is still true.
(not accusing Professor Posner of being a libertarian and turncoat b/c I don't really know; just saying...)
Andrew? Andrew Mellon? Is that really you? Where you been all these years, big guy?
While apparently the guiding light for several commentors on this blog (this and other posts), there is no evidence Mellon ever said these words, outside of Hoover's memiors, which may be self-serving.
I'm the last person in the world to defend Herbert Hoover, but I see no reason to believe he was lying.
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