Thursday, October 16, 2008

Missing Link

Treasury Secretary Paulson was on Larry Kudlow's show last night. CNBC has the video. This exchange took place at 9:00 in:

KUDLOW: So many people want to know--I mean, I get this, I hear this, people stop me on the street, callers on my radio show on Saturdays--how can you get the bankers to deploy the government capital that you are injecting? I mean, for example, the yield on the preferred is 5 percent. Their cost on the preferred is 5 percent. Now, they've got--some of them have preferred stock that's 11 percent in yield. They have bonds outstanding that are 7, 8, 9 and 10 percent.

Mr. PAULSON: Yeah.

KUDLOW: What's to stop them from getting the new government money at 5 percent and retiring the outstanding paper that's much more expensive rather than deploying this new capital in the economy for the purposes you've just described?

Mr. PAULSON: Well, that's a--that's a key question, and let me say, even before that, the reason we set the terms where they were set, we didn't think this term should be set at the--what the market would demand in a crisis situation. That's why the government's coming in to begin with. We wanted the terms to be like that you would have in a normal situation. Now, the way you get bankers to deploy the capital--because they know it's their job to deploy the capital, making the loans which are so vital to our economy, the way you get them to do that is they've got to have, first of all, plenty of capital; they've got to be well capitalized. Secondly, they've got to be confident in the system. They've got to be confident that as the money flows between and among banks that they've--they're confident in that and confident in the strength of the system. (Magical thinking at its finest. - Max)

KUDLOW: Rather than pay down their own debt.

Mr. PAULSON: And--oh, listen, they're not going to be paying down their own debt. This is--they're--this--the regulators understand that, and they understand.
Unless Paulson made them an offer they couldn't refuse, what's to stop the banks from using taxpayer's money for whatever they want?

1. Give banks lots of taxpayer money.
2. ...
3. Liquidity is restored.

11 comments :

Patient Renter said...

Man that's pretty brutal.

I hope some members of Congress see the interview or the transcript. Clearly, the plan is incomplete.

Deflationary Jane said...

Exactly, it was a total bailout with zero responsibility for the banks. The only reason we even got preferred stock in the banks is because Gordon Brown made paulson look bad.

Nooge said...

Word on the street here is there is an "offer they cant refuse" element to it. Lobbyist friend of mine says the implicit agreement with the banks is - OK boys, the money is yours, the power is yours, go "fix it".

Oh and if you dont deploy that $$$, have fun going in front of the Senante Banking Comittee and explain to Shelby & Company what you are doing. In orther words, do what we say or the senate is going to regulate the shit out of you in ways you cannot even imagine.

In the past this sort of veiled threat has caused various groups to come to jesus and clean up their acts - better to regulate yourself than have someone come in and do it. The choice is the banks - lets see what they do.

Bryan said...

Knee jerk cynicism is perhaps no more useful than that kind of credulous enthusiasm which produces supporting evidence spontaneously, when none else is to found.

Let's just see how it goes, shall we?

Max said...

Knee jerk cynicism

Ha! So directly quoting the Secretary of the Treasury is cynical? We should not just see how it goes! These guys are throwing taxpayer money down the drain without a clue if it will help!

Give me one reason we should trust Paulson and "see how it goes," when by his own words, he doesn't have a freakin clue?

Bryan said...

I was intending to rip more on the nooge, than you, Max. Although I do not disclaim the "knee jerk cynicism" jibe. Quoting unscripted speech generally produces hilarious results. I actually agree with you that the approach--which goes lamely unexplained by Paulson--will not help ultimately. We've got a patient (the economy, speaking generally) that has been eating bacon and grease and been 150 lbs overweight for fifty years, and now finally the system is shutting down and he is going into cardic arrest, and we're trying to save him by ill-performed chest compressions and forcing healthy greens down his throat (and a healthy dose of--as you put it--magical thinking). He's on his way out, friends.

But I'm always distrustful of the impulse to raise effigies of figures who can now do no right in our eyes. Schadenfreude can be pleasant, but it can also lead us to close our ears to the wisdom of erstwhile enemies (when and if it appears). Forgive me, but I put no more stock in the absurd ramblings of unscripted speech (I would be mortified by the transcripts of some of my own conversations, I'm sure...as I am of some of the things I've actually written and edited) than I do in the sunnily enthusiastic, but utterly unsupported (that I can see) "word on the street" rhetoric.

But I'm willing to absorb both sides and--seeing that I can now do little but vote to effect outcomes and live very prudently--see how it turns out. Trust Paulson, don't trust Paulson, be cynical, don't be cynical, be optimistic, don't be optimistic. I'm not sure that our take will matter, unless there really is a lever to pull here. If you're right, and I think you probably are, then I wish you were in power. But if you are not, and I am not, and we've told our representatives how we feel, what is there to do but "see how it goes"? Blog I suppose, but you've got that covered.

I would only add this to the discussion: I get the increasing sense that the vortex we are now caught in is stronger than we had imagined before. I do believe that credit will ease up, compared to the complete freeze of previous weeks, but the more endemic problems aren't going to be solved by $700B of taxpayer dollars. It's going to take a hell of a lot more effort than that. Bailouts aren't really the answer to the larger problem. Reality, that awful barbarian, has finally landed on our shores, set to ravage. In that larger view, I guess the bailout concerns me less.

Nooge said...

"but the more endemic problems aren't going to be solved by $700B of taxpayer dollars."

That looks to be true too. A second $300B backage looks to be on its way as well. The rationale? Spend 300B to offset at least 300B in tax revenue.

Right now, it looks like the green light is on to spend with abandon. China seems willing to buy our crappy dollar. In fact everyone does at the moment. In a world full of steaming turds of economies, ours smells the least.

Nooge said...

Sorry, that should have said:

Spend 300B to offset at least a 300B LOSS in tax revenue.

Take heart though, our debt as a percent of GDP was far larger in the 1950s than it is now, or will be with all the bailouts on tap. We saved our way out of that one - lets hope we can recreate the event here.

Nooge said...

Apparently Paul (look at my fancy Nobel Prize) Krugman seems to think it "might" be working too.

http://krugman.blogs.nytimes.com/2008/10/17/hints-of-spring/

Bryan said...

But he adds:

"PS: But the bottom is falling out of the real economy — it’s only the purely financial side that’s looking slightly better."

Which was precisely my point. I KNOW credit markets are thawing, if not as fast as the polar ice caps. Bonds, which could hardly be priced a couple weeks ago, are now finally starting to squeeze through. There has been much rejoicing around here, over meager gains. I am glad, though.

Having said that, I'm with Klugman on the PS. Credit crisis averted? Maybe, and if so, great! But the "big one" is coming. We're like little mechanics running around the giant machine while it fall apart, gears flying all around...if we saved the transmission we deserve congratulations, the cylinders are about to blow, the gaskets are shot, and the timing belts aren't timing jack. The rest of the machine is still falling apart. I'm not sure that there will be any more dramatic days, but down down down will be our marching song for a while. The downward suck will claim many businesses which are now wiping their brows and smiling at their deliverance (knock on wood) from the credit crisis.

Anonymous said...

so...

People who bought homes at todays prices will not be able to sell them at the same prices next 5-10 years?

If they could get it at the price they bought, wouldn't they lose money on transaction cost? Upkeep? etc...?

It doesn't make sense to buy.