Am I taking crazy pills?

I look at WSJ.com and the headlines are:

Bank Capital Gets Stress Test
Citi Group Is Near Deal to Boost US's Stake
Chrysler Executives Meet with Obama Task Force
Taxes, Spending Cuts to Fund Health Plan: $318 Billion Tax Hit Proposed

My first reaction is: Wow, that's pretty inconsistent--pump money into banks and auto manufacturers in the wake of "selling" a massive stimulus package to the nation, all to get people spending money again... and then propose a plan with a cost of over $1 Trillion Dollars and admit up front to at least $318 Billion Dollars of tax increases.  That cannot possibly be harmonious.

On closer inspection, there is in fact no incongruity.  The head lines might as well have been:
Blue Steel
Ferrari
Le Tigre
Magnum

THEY'RE THE SAME PLAN!  I FEEL LIKE I'M TAKING CRAZY PILLS!

First, the Stress Test.  Nobody says it better than Timothy Geithner:  Nationalization is "the wrong strategy for the country and I don't think it's the necessary strategy."  Some banks may need "exceptional support," but the best outcome is if the banks "are managed and remain in private hands."  Newsflash: The banks are implicitly guaranteed by the federal government if "implicit guarantee" is not any empty set.  THEY'RE NOT PRIVATE!  It didn't work with Fannie and it didn't work with Freddie and it won't work now.  Learn your lesson, listen to The Economist: Bad Bank now.

Second, the de facto nationalization of Citibank.  The US government is getting ready to boost their stake to 40%.  Recall, we are not "nationalizing" any banks, according to the Secretary of the Treasury.  Nevertheless, according to the WSJ story: "Citigroup officials expect to face intensified political pressure from lawmakers and federal agencies to modify lending policies and make other changes that could dent profits. . . . [T]he company already has caved in to political pressure. Last month, Citigroup bucked the rest of the industry and endorsed legislation to let bankruptcy-court judges modify the terms of troubled mortgages -- a move that executives have acknowledged would take a toll on Citigroup's bottom line."  The bank has already taken $45 billion dollars.  Let's face it, its no longer independent.  ITS NOT PRIVATE!  The WSJ concludes: "Individual lawmakers are also likely to start clamoring for things such as loans to finance hometown projects."  Let's call the bank "Citi Mae" and get it over with.  (Incidentally, this story points out a number of cross-border legal complications to the nationalization-bad-bank solution.  It turns out it may destroy value in the absence of diplomatic finesse.)

Third, the alleged rescue of Chrysler.  The restructuring plans from both Detroit automakers leave something to be desired.  GM is wildly optimistic, and yet still plans to burn $18 Billion Dollars this year.  Chrysler, inexplicably, looks in better shape according to the numbers they present (maybe we should bail them out, they seem to have magic powers).  The government, however, cares more about flying cars: "While the task force will focus much of its attention on evaluating restructuring paths for GM and Chrysler, a key consideration is whether bailing out the struggling duo could further the White House's energy policy," reports the WSJ.  So, building fuel efficient cars, not an efficient capital structure, is the name of the game.  That's fine on its own terms, but its not a bridge loan to a private company.  This is not Chrysler 1979.  It is not just a restructuring to preserve jobs.  Using putatively private firms as vehicles to advance political agendas makes them NOT PRIVATE!

Fourth, spending money we don't have on health care we do need.  I don't want to get into a debate about what kind of health care reform is best.  I think it goes without saying that the best kind is the kind we can afford.  The Fed is throwing money around that it may or may not get back, the Treasury is spending Billions of Dollars on banks and debtors, and Congress is spending Billions More Dollars on bridges-to-some(no?)where.  I can't shout that health care reform isn't private because we all know that already--that's the whole point.  This action, fulfilling the campaign promise to deliver on health care, is the unifying theme to all these "plans."  It is public policy in motion.  Like hybrid cars.  Like looser cramdowns and lower rates on credit cards.  Like increased, albeit insolvent, lending for the sake of lending.

None of this is a "bailout."  None of it is an objective attempt to stop economic turmoil.  It is just politics as usual.  What is really crazy is the idea that we will have a balanced budget before cars really do fly.  The WSJ also reports that some people in economic distress and facing foreclosure are being preyed upon by fraudsters who offer to help homeowners but really only strip their homes of equity and leave the suckers for the soup line, but the story is not actually about the US government.

Please, someone tell me why I should be happier.

Comments

[Karen Bradshaw]

Recent headlines indicate that the bailout funds continue to fuel supposed economic growth which, as of yet, is failing. What does this tell us about where we stood a few months ago. What if no bailout funds --not a single dollar-- had been given to private companies? Based upon the amount of capital infused into the economy today, it seems almost unimaginable how intensely different our national and economic landscape would appear today without massive and continuing bailout funds.

But, was it really that bad? Starting at a position in, say October or September, what if the government had done nothing? Would there bread lines? Runs on banks? Massive unemployment? It is difficult to say. To be honest, none of us --not even financial experts or forecasters-- could know for certain.

The question that seems more worthy of asking is whether the amount of money we've seen spent today directly correlates to what would have been needed had the government not become involved? This is to ask if, by infusing money, the government has in some way increased the amount of capital necessary to solve the problem? The answer, here seems almost inarguably to be "yes." There likely exists a premium that the government is paying due to the short term moral hazard of the availability of bailout funds, opportunistic behavior, overstated need, political posturing and satisfying interest groups. Estimating the amount of the premium would be fascinating; it would capture the short-term cost of a bailout, which is in some ways very different than the amount of money paid. My guess is, the figure --which represents purely lost funds and not this designed to help the most needed industries or create a positive return on investment -- would be staggering.