Saturday, March 21, 2009

We are so screwed

The overarching theme of this blog is:
1.) Bad policy has predictably bad consequences;
2.) Politics is about the drama, not about rational calculation and planning;
3.) Therefore, Bad Policy results in Political Storms, during which the People kinda sorta wake up to malfeasance as they experience the consequences and witness a moral fable acted out on the political stage.

The case of AIG and the bonuses illustrates the concepts quite well. The substance of the Bush-Paulson-Bernanke policy, which resulted in a no-fault takeover of AIG and the funnelling of $180 billion in government money to big banks, is not being called into question. The drama is about one-tenth of one percent of the big bucks, delivered to individuals in the form of bonuses.

The drama is what really matters. It has a relationship to policy, but it is a tenuous, almost mystical relationship of "meaning", not a relation of function or substance. The drama is more about revealing attitudes and stewardship, among the powerful elite. The point of the fable is always the moral.

Now Mr. Geithner prepares to deliver his bank plan. The same basic stupidity and dishonesty is on display. And, the economists and liberal pundits -- who we trust to assess the functional substance of the plan -- are spewing dramatic summaries.

Neither the reviews nor the plot summary is pretty.

Paul Krugman -
"Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.

This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.

What an awful mess."

Dean Baker | The American Prospect:
"The failure of people like Ben Bernanke and Timothy Geithner to recognize the $8 trillion housing bubble led to this crisis. It appears as though they somehow still don't understand it. . . . their continued failure to understand the housing market could cost taxpayers trillions of dollars and further damage the economy."

Yves Smith:
"If this isn't Newspeak, I don't know what is. Since when is someone who puts 3% of total funds and gets 20% of the equity a 'partner'? . . .
"And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!

Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone's eyes to glaze over."

Ezra Klein | The American Prospect:
"It's probably a bad sign that the administration leaked the details of their full banking plan in a Friday night newsdump. And reading it, you can see why. . . . Most expected that the harsh reaction to the skeletal structure Geithner originally unveiled would force substantial changes. That doesn't seem to have happened. . . . This public-private strategy is far more complicated than either the toxic assets strategy or full nationalization. If it goes forward, we're going to see a situation in which the taxpayer is the counterparty to an investment they don't understand and won't really have agreed to. If it goes bad -- and it really might go bad, and the details might prove galling in much the way that AIG's bonuses did -- the byzantine approach could well leave voters feeling tricked. That risk might make sense if this were the only viable path forward. But it's actually hard to imagine the set of questions you ask that ends in this particular answer."

John Cole of Balloon Juice sums up:
"If this were a medical emergency, it appears it would look something like this:

The Illness- reckless and irresponsible betting led to huge losses
The Diagnosis- Insufficient gambling.
The Cure- a Trillion dollar stack of chips provided by the house.
The Prognosis- We are so screwed.

If these guys are right, this will be the undoing of the Obama administration. Better enjoy this four years, libs."

Matt Taibbi : Rolling Stone: "It's over — we're officially, royally fucked."

Atrios of Eschaton with a shorter John Cole: "We are so screwed."

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