I get why we need to do something. The markets were having a crisis of confidence at the end of last week. They were seeing a downward spiral of failed banks, frozen credit, declining house values, more foreclosures, etc.
That said, what is being proposed is a half-solution. We are basically giving Hank Paulson a taxpayer-funded credit card with a $700 billion credit line, to go shopping in the market for bad debts. There are no rules on what he can buy, how he decides to value what he buys, and at what price he buys it. It's a credit card, plain and simple. No wonder that boosted the spirits of Wall Street. LIttle Orphan America is putting its entire fate in the hands of Daddy Warbucks, er, Hank Paulson.
The question for this diary, hwoever, is - why do we have to do something by this week?
The question relates to how we view the problem. If, as John McCain suggested earlier this week, the "fundamentals of the economy are strong," then what happened to the markets was fundamentally a problem of psychology. A crisis of confidence, as Bush has stated. Announcing a bailout plan can lift those spirits - everyone loves a shopping spree!
Of course, if the problem is fundamental (i.e., the housing assets are fundamentally overvalued), then a shopping spree isn't going to do anything more than provide temporary relief, at great cost.
The reality is more likely in the middle: there are fundamental problems with the way these complex financial products have been valued, and how they should be valued. The models used by the quantitative analysts working on Wall Street may be insufficient to address the subjective aspects of risk forecasting. This doesn't mean that the underlying assets don't have value - not everyone is going to default on their mortgages and even if they do, houses still have value - but perhaps these financial products are too immature to handle the wilder swings of the business cycle. There is a fundamental problem, but at the same time, what is happening right now is, in some part, psychological.
The thing is: the market knows, and has known for quite a while, that these the valuation models for these asset-backed securities are off-kilter, out of whack, and that they don't stand up well in bad weather. The market wasn't smarter last Wednesday than it was last Monday. What happened at the end of this week was, in part, panic selling. The market saw some shoes dropping, and reacted.
So, it was right for the Treasury Department to say that it was going to do something dramatic - go on a big, $700 billion shopping spree.
That said, now that we've temporarily calmed the markets simply by making the announcement, why do we have to have something in place by early next week? Why can't we take more time to truly suss out alternatives and get some real oversight and accountability into the process?
So long as there is a realistic chance that there will be a bailout in some form, and that the details just need to be hammered out, shouldn't that solve the psychology problem?
It's like when your kid has a tantrum. Crying, screaming, cursing you out. Perhaps you feel bad - you promise your kid, "hey, why don't we go get some ice cream!" Kid stops crying. Kid waits for you to take him for ice cream... And then you say, "... after you finish cleaning your room/doing your homework..." Mean parenting trick, but it's basic psychology. You should probably take your kid for ice cream, but no reasno why you can't extract something out of it after making the promise...