The world shouldn't pay ransom to Somali pirates; clearly the ransoms paid lead to more piracy.
The US shouldn't pay ransom to Wall Street; ransoms paid will reward past reckless behavior and incent reckless behavior in the future. They won't "save the ecomomy".
I'm sure you're getting as tired of reading about the bailout as I'm getting tired of writing about it – but it just won't go away. Congresspeople are now saying that constituent pressure against the bill in waning while fear of "doing nothing" is growing. Apparently they think we've changed our minds if we don't write them one more email. We should do that.
The longer there is hope for a bailout, the longer it will be before financial people work on getting the flow of money moving through the economy again. Dragging this out is poor leadership even if the current President and both his would-be successors think otherwise.
Instant analysis of stock markets is taken as an indication that the bill is needed. In fact no one knows why markets move up and down in the aggregate. I bought stock AFTER the bailout bill failed because I thought the failure of the bill was good for the economy. The Dow Jones went up the day after it went down. Newspaper headlines said it went back up in hopes that the bill would be revived; but I bought in hopes that the bill was dead; maybe other people did as well. The Dow Jones is down today despite the news that the Senate will vote tonight on a slightly revised bailout bill but European markets are up; could that be because it is bad news for Americans who will pay for the bailout if the bill passes but good news for Europeans who get the benefits, such as they are, without paying the price? I don't know and I don't believe anyone who claims to know. I do know that economic policy shouldn't be made by watching the stock market any more than a company should be run with a minute-by-minute focus on its stock price.
BTW, some of the purported improvements made to the bill are more show than substance:
- Turns out that the "limit on executive pay" limits business tax deductions for the five most senior executives of some companies which participate in the bailout to the first $500,000 of annual compensation. Of course, unless the companies are profitable, tax deductions don't matter. Moreover, do you really believe that executives will forgo compensation merely because their employers can't deduct them? Did they forgo extreme compensation their companies couldn't afford?
- The limits on golden parachutes do seem to have more teeth for companies which sell over $300,000,000 worth of junk to the Treasury.
- Speaker Pelosi's promise that the bill now contains assurance that losses won't be borne by the taxpayers consists of language requiring the next administration to come up with a plan for dealing with any losses years from now.
With each day that passes, it become more and more clear that the bailout is more designed to benefit those who don't need it than those who will need help in tough economic times. This article from the WSJ explains how auto finance companies will be bailed out – this is in addition to the $25 billion in low-cost loans for the auto manufacturers themselves. "…since GMAC and Chrysler Financial are both controlled by private-equity group Cerberus Capital Management LP, each is now being run to maximize profits, not auto sales," says the Journal. So, if the government buys the bad loans from the Cerberus-run companies, that will save Cerberus from losses it's already incurred – basically by loaning too much on gas-guzzlers but won't help car sales or consumers with underwater car loans. Why would we want to do that? This is the kind of thing that happens when panic is used to sell hasty passage of a bad bill. Full disclosure: the business decision I regret most was agreeing with and supporting a Morgan Stanley recommendation that the public company I founded and ran be merged with a Cerberus-owned entity.
This post is about Warren Buffett's ransom demand. He doesn't need help either.
I'm not against Paulson's proposed bailout just because it'll reward the wrong people; I believe that both in the short and long term this bailout will be bad for the economy because it puts much-needed capital where it is least likely to do much good. Tinkering with the bailout proposal won't fix this. Now What? suggests 10 ways to help the economy without a Wall Street bailout.