Why is the feature being called a bug?

[catsittingstill]

Some of the modifications that have been proposed to the Paulson Plan for the Wall Street bailout are:

1) rescue with ownership--in return for the 700 billion, the government gets equity (stock) in rescued companies, which the government can then sell when the companies are doing better, to get some or all of our tax dollars back or even make a profit.

2) clamping down on executive compensation (which frankly looks pretty outrageous to me--remember that the average American makes about 2.5 million dollars in a lifetime, when you're looking at those salaries) for a year or two after the rescue.

The explanation for why we shouldn't do these things?

They would discourage companies from taking advantage of the bailout.

Correct me if I'm wrong, but isn't it standard practice to make sure that entities don't get government money unless they actually need it?  So wouldn't measures that discouraged companies from sucking up taxpayer dollars if they weren't actually hurting, be a feature?  You know, as opposed to a bug?

Comments

[admnaismith.livejournal.com]

I'm a moron. I still have hope that the whole thing won't happen.

Apparently, the fringe right in congress, which, unlike Bush, still has to face the voters, is so accustomed to their "individual responsibility" answer to everything that they can't resist shitting on all the uppity, presumptuous peasants who don't know their place and who dared to try to buy homes for themselves, and so they and their base are chanting no bailout, nohow solely in anticipation of the pleasure of watching foreclosures on the irresponsible peasants. It's all they know how to do. The fact that doing so may be right and popular for other reasons is just cake frosting. So they're in the "no" column and yelling hard about it.

In fact, the less-than-fringe right is coming to realize that campaigning on the "fiscal responsibility" that conservatives used to stand for may well be the thing to save their asses in November, and so they aren't pushing hard for a yes vote either. They hope Democrats will carry all the water and take all the blame.

Neocons, including Bush, will settle for nothing less than pre-emptively emptying the entire treasury and giving it to wealthy neocons in preparation for an Obama Administration, so that Obama cannot afford any liberal reforms like healthcare.

Some few Democrats, like my own DeFazio and Marcy Kaptur, know what's what and are appealing to New Deal principles to bail out homeowners instead of the banksters. They won't be on board either.

A majority of Democrats are lining up to capitulate, as usual. However, the partisan Democrats want to wait four more months until Obama's treasury secretary will be the one to make decisions, and the ones who want action now know that they'll have to justify themselves at the polls, and insist on some oversight, and some relief for the hard-hit poor--the exact thing that the neocons cannot accept at all.

So the two forces that would inflict this on us cannot agree. Because of Republican foot-dragging, the bailout cannot pass without large majorities of Democrats, and anything passed by Democrats will have anti-neocon strings that Bush will veto.

Hence, no deal.

That's my probably overoptimistic take on it, anyhow.

[stevemb.livejournal.com]

There is also the McCain grandstanding factor -- by stalling matters for long enough for him to ride in on his white horse, his allies also stalled matters for long enough for these various positions to harden and for people to get themselves too far committed to back down.

And now he's in the position of Syndrome in The Incredibles, finding that the menace he'd set up in order to defeat it and look like a hero has spun out of his control.

[occams_pyramid]

http://www.craigmurray.org.uk/archives/2008/09/text_of_george.html

[phillip2637.livejournal.com]

I've had moments when the whole situation makes me think of National Lampoon's "If you don't buy this magazine..." (http://en.wikipedia.org/wiki/Image:Natlamp73.jpg) thing. What you've highlighted makes it feel less like paranoia. :-}

I wonder how much of the proposed money is needed to keep companies in business vs. how much is compensation for a theoretical shortfall compared to a speculative budget.
(Analogy: Although I have no use for software pirates, companies that claim losses based on retail price times number of cracked copies in existence don't impress me with their logic either.)

[billroper]

As I was explaining to daisy_knotwise last night:

What's going on with this particular point is what's known as an "agency" problem. In this case, the company executives are acting as agents for the other stakeholders in the company which would include the shareholders, the bondholders, and the other employees. In theory, the agents should make the decisions that benefit all of the stakeholders. In practice, they have a tendency to make the decisions that will benefit them.

In this case, an executive who was looking at having his pay severely limited in exchange for reducing the risk to the other stakeholders by accepting the bailout might make the decision that the risk was acceptable even if the other stakeholders thought he was a lunatic. The only checks on this particular agency problem are the board of directors (which is frequently a rubber stamp for the CEO) and a proxy fight by the shareholders (which is difficult, time-consuming, and expensive).

I actually agree with the argument that it's equitable to impose some caps on executive compensation in the wake of a bailout, but it's important to understand the agency problem involved when you're figuring out what the rules are supposed to be.

[catsittingstill.livejournal.com]

I realize that a deep sense of disgust is not actually a guide to morality. Broccoli, for instance, is not immoral, despite the fact that it disgusts many people.

Nevertheless, the idea that we must spend extra taxpayer dollars, and accept a smaller chance of ever getting paid back, in order to bribe well-paid executives to do the job they were hired, and paid their enormous salaries in better times, to do--in other words to do what's best for the company...

Well, that's pretty disgusting. Disgusting enough that I think a lot of people are going to find it very hard to swallow.

[billroper]

Let's pick another example of an agency problem then.

Democrats have the majority in the House and the Senate and seem to have the votes to pass this bailout plan. However, they currently say that they will refuse to pass the bailout plan unless there are a sufficient number of House Republicans who also vote for it. There seem to be a substantial number of House Republicans who are not convinced that this is the best plan.

Clearly, if the Democrats are convinced that the bailout plan is the right thing to do, they should vote to pass it with or without Republican votes, as that would be the best thing for their stakeholders. However, they believe that would not be the best thing for them; thus, they are withholding their votes.

(By the way, these posts were not an attempt to lure you into a trap -- I didn't even think about the second post as an example of an agency problem until I saw your response. Agency problems exist everywhere and while I wish that they didn't, I can't wave a magic wand and make them go away.)

[catsittingstill.livejournal.com]

Actually I think the agency problem here might just as reasonably be laid at the door of the Republicans. What's best for them personally is to make the Democrats do all the heavy and unpopular work of bailing out Wall Street--which wouldn't *need* bailing out if it weren't for deregulation--and then to take the Democrats to the cleaners at the polls for fixing the problem.

I think this business of socializing losses disgusts Democrats just as much as Republicans if not more. And I think it's just as unpopular with their constituents, if not more. So if one side is going to have to swallow hard and eat, um, mud stew, even for the good of the country, they damn well want the other side to eat a share of mud. It looks to me like they're not even asking them to eat a *fair* share of mud. If that's an agency problem, it surely runs both ways.

And it doesn't make the prospect of spending extra tax dollars to bribe corporate executives to do their jobs any more palatable. In fact, I think I do see a certain similarity here--neither the Republicans, nor the theoretical corporate executives who avoid a needed bailout, are willing to do the jobs they were hired/elected to do. If this makes the Democrats unwilling to sacrifice themselves for the good of the country and, after the elections, the Republicans, well, that sort of unwillingness is catching.

[billroper]

The unwillingness of the conservative Republicans in Congress to sign onto a plan which arguably socializes a large chunk of the American financial sector is arguably consistent with their basic philosophy, so I'm not necessarily willing to lay blame at their door in this case. If I understand correctly from at least one source (Michael Barone), the conservative Republicans would prefer to insure the bad mortgage debt and collect premiums from the holders rather than have the government take on the debt itself.

This may or may not be a better approach, but it's at least more consistent with their beliefs than the bailout originally proposed.

[catsittingstill.livejournal.com]

Normally insurance works by averaging rare but catastrophic losses out over a large number of people, most of whom are at slight risk of loss, but don't actually lose anything over a given time period. It works because the insurance company has a good idea what the losses in any given year will be, and because there are a lot of people who are at a small risk of losing, but don't lose, who can also pay premiums.

If we knew how much the CDOs and CDSs were going to lose, we wouldn't be in this fix. And if we had a lot of banks who probably wouldn't lose anything to spread the premiums out over, we wouldn't be in this fix either. So I don't see how the insurance idea can work.

[randwolf.livejournal.com]

The insurance plan is an invitation to yet more fraud on the part of the financiers. That plan also includes zeroing taxes on income which is earned, not by work, but by appreciation of assets alone. This is not consistent with any economic philosophy other than that of thieves and arsonists.

[billroper]

By the way, it's not entirely clear to me that the current mess is the result of deregulation. I think that the problem may be the failure of two regulatory efforts and a subsequent market failure.

But I think I'll take that post to my own blog. :)

[tigertoy.livejournal.com]

I'll have to wait for your post to see what you're on about, but in general, regulatory failure includes making bad rules as well as failing to make or enforce good ones. Overall, we do not need *more* regulation in this country; we have way too much. We do, however, need considerably *better* regulation in almost every area where money is involved.

[catsittingstill.livejournal.com]

Um--part of the problem as I understand it is repealing a law that separated investment banks and regular banks that was passed in the '30s after the Stock Market Crash and the Bank Runs. So that would be deregulation. Daily Kos had an article that covered this more fully; I'll see if I can find it tomorrow.

[billroper]

You might note that both Morgan Stanley and Goldman Sachs, which were pure investment banks, converted themselves into bank holding companies so that they can pursue regular banking activities. That was within the last two weeks and they did it to try to survive this fiasco.

The repeal of that law may have been part of the solution to the problem rather than part of the cause.

[randwolf.livejournal.com]

BTDT, and it didn't work. The whole period 1880-1930 is a demonstration of how unregulated capital markets fail. With all due respect, you sound like someone who can't admit his side is wrong, and I wish you'd stop.

[tigertoy.livejournal.com]

As long as the agents are subject to human failings, the only general solution to the agency problem is to be sure the system is structured so that the stakeholders are more involved. The reason the financial sector gets into the mess it's in is that very few shareholders are in a position to really be aware of what the individual companies they nominally own are up to. Because corporations are so big and complex, it's beyond any single person to really know what's going on in even one of them. But thanks to the idea of diversification, almost no investors large or small devote all their money and thus their oversight to a single company -- they divide their money, their concern, and their attention across many, meaning that their agents at each one have an easy time hiding their shenanigans.

In politics, we still have the problem that the system is too complicated for the stakeholders to understand. The issues are as myriad as investment choices in the financial sector, but we're all inevitably diversified because the decisions our elected agents make on all those issues affect all of us. There is a further problem with the agents we choose to help us with the problem of overseeing the politicians. Most of our information sources are motivated by concerns other than really keeping us informed. Commercial news media are worried about keeping the ad money flowing, and their parent companies are worried about keeping costs down. Alternative sources are for the most part much more about pushing a political agenda than reporting the full story, and we generally only listen to the ones whose agenda we agree with.

[stevemb.livejournal.com]

That argument ignores the psychological component of a market panic. When that element is considered, it is evident that a plan passed with bipartisan support is not equivalent to a technically identical plan imposed by one party over the other's opposition. The former is clearly more capable of inspiring confidence, which is probably more important in the immediate term than any effects of the new cash infusions and policies on the mechanics of the market. It is thus perfectly rational to conclude that the former is in the national interest and the latter is not.

[billroper]

I hadn't got around to mentioning yet another side of the agency problem. There's a quote I'm fond of that appears to be from Robert Heinlein: "Man is not a rational animal. He is a rationalizing animal." It's possible for the person responsible for almost any agency failure to rationalize it away in one way or another as being the "rational" response to the situation.

See above. :)

[catsittingstill.livejournal.com]

I think Steve has a good point. If you're seriously trying to reassure the market, it makes a difference whether the Republicans are on board or not.

If you're trying to accuse him of rationalizing instead of being rational, I'm not sure that's a productive direction to take this discussion, since anyone is open to that accusation.

[billroper]

I am saying that anyone in an agency situation can rationalize their behavior.

As far as it making a difference to the bailout if the House Republicans are on board or not, I simply disagree. Pelosi and company have run roughshod over them during this entire session of Congress (much as the Republicans did to them before that); I see no reason to believe that their cooperation is vital for any reason other than to avoid giving the Republicans a campaign issue.

The Democrats could, of course, rationalize that giving the Republicans a campaign issue is bad for the country; in fact, that it's worse than failing to bailout the troubled financial sector. That would be an interesting argument...

[catsittingstill.livejournal.com]

I haven't noticed any running roughshod. Why, we haven't even invoked the nuclear option yet. Haven't even threatened to.

[catsittingstill.livejournal.com]

Actually, I should note that, although it's disgusting, it may in fact be necessary.

But.

We should have some sort of safeguard to ensure that companies that don't actually need to be bailed out don't line up at the government trough. If we're not going to do that by requiring equity stakes and CEO pay limitations, we need to give some thought to how we *are* going to do that.

[randwolf.livejournal.com]

I think Roubini, who called this, has a better idea: broadly, support the people who are about to lose their houses, and give money to the deserving banks by way of shares which pay the government first, so that the bailout doesn't become a giveaway to the people who helped make the mess. His proposal is linked here. However, it is behind a paywall, so I haven't seen the whole thing.