Monday, September 22, 2008

Acronym Time

I was a little late to pick this up, but the Paulson plan is now "TARP" -- the Troubled Asset Relief Program, a phrase taken from Secretary Paulson's statement on Friday. Apparently, some commentators had already taken to using this acronym soon after the statement came out. I have to say, the word "Relief" sounds a lot like welfare. Not very encouraging for those who held some hope that the only major objective was to increase liquidity.

I criticized Matthew Yglesias last week for objecting to bailouts in general (and even to the Fed's actions to mitigate the effects of non-bailouts) in the absence of programs to help ordinary people. The more I think about the TARP, though, the more I appreciate his point (at least in this particular case, which didn't exist yet when he wrote that post).

Apparently, we're planning to giving welfare payments (in the form of inflated prices for their assets) to bankers. This isn't really even necessary, but the only alternative might be to compel them to sell at fair prices. As I argued this morning, compelling them to sell at fair prices is a perfectly reasonable policy from a capitalist point of view, but I realize it's not likely to get much support from those who like to minimize government interference in markets. (In this case, though, arguably, it would be government interference for the purpose of mitigating the ill effects of other government interference, so perhaps a minarchist shouldn't particularly object.)

If we're giving welfare to bankers, rewarding them for their imprudent behavior -- well, at least reducing the punishment that markets have visited upon them for their imprudent behavior -- shouldn't we also be giving welfare to people who really need it? There is a moral hazard issue for ordinary people, too, but it's no worse than the issue for bankers. Yes, Democrats, let's attach some aid for Main Street to this Wall Street bailout. Either that or do it right -- make it a fair asset swap and liquidity injection instead of a bailout -- by giving Treasury the authority to force banks to sell at prices it deems fair, and by mandating that it use that authority when the taxpayer's interest so requires.

11 Comments:

Anonymous steve kyle said...

so what is wrong with acquiring an equity stake in the companies that are bailed out? That would seem to solve the problem though of course it leaves the government owning still more of the private sector.

Mon Sep 22, 04:43:00 PM EDT  
Blogger knzn said...

Acquiring an equity position is fine, but the Treasury also needs the authority to force a bank (perhaps only under certain specified circumstances) to accept such a bailout (which of course implies the authority to dictate the terms, subject to some general fairness requirement). In some cases, the bank has an incentive to refuse the bailout (so as to avoid losing equity) even when a bailout would clearly be in the interest of the bank's creditors and the overall health of the financial system -- another instance of the moral hazard faced by stockholders with limited liability.

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