Who owns Congress?

The real derivative in play this week is the financial contribution to members of Congress in return for future favors. While there is no official, if unregulated, market in hedges against congressional revolts against finance, insurance and real estate (FIRE) speculation in the free market of members of Congress, the New York Stock Exchange’s gyrations are obviously tending in that direction at the moment. FIRE has been buying congresspersons for several decades. Not so many years ago, former House Speaker Newt Gingrich (R-GA) was preaching to America about the wisdom of Samuelson’s 101 Economics text, the intellectual equivalent of pre-DNA biology. It is a long, degrading story. The main target was American unions and the main tactic was “globalization,” i.e. the off-shoring of millions of American jobs. Meanwhile, Wall Street was peddling the illusion of universal home ownership, “the ownership society” promoted by our president, the neo-crusader.

John Kenneth Galbraith’s 1954 reflections in The Great Crash 1929 are instructive:

Historians and novelists always have known that tragedy wonderfully reveals the nature of man. But, while they have made rich use of war, revolution, and poverty, they have been singularly neglectful of financial panics. And one can relish the varied idiocy of human action during a panic to the full, for, while it is a time of great tragedy, nothing is being lost but money...Governments were either bemused as were the speculators or they deemed it unwise to be sane at a time when sanity exposed one to ridicule, condemnation for spoiling the game, or the threat of severe political retribution. In our own day, we can devoutly wish that we may be spared the technically superlative disasters we have prepared for ourselves in order to enjoy the minor vicissitudes of the business cycle -- of prosperity and depression and inflation and deflation if we are so favored, we can count on some future period of prosperity carrying us on into a mood of exhilarant optimism and wild, speculative frenzy..."--Galbraith, The Great Crash 1929

9-30-08

San Francisco Chronicle

Lawmakers scramble to revise bailout bill…CHARLES BABINGTON and JIM KUHNHENN, Associated Press Writers

http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2008/09/28/national/w15... [1]

(09-30) 11:54 PDT WASHINGTON (AP) --

Congressional leaders, with advice from their parties' presidential nominees, scrambled Tuesday to come up with changes that will allow them to sell the failed $700 billion financial bailout to rank-and-file members...

MarketWatch.com

Crude-oil futures climb past $100 after steep decline

Traders still hopeful on rescue plan; prices set for 29% third-quarter loss...Myra P. Saefong & Polya Lesova

http://www.marketwatch.com/news/story/crude-oil-futures-climb-past-100/s... [2]

SAN FRANCISCO (MarketWatch) -- Crude-oil futures climbed past $100 per barrel Tuesday amid hopes that a bailout financial package will get another chance after being defeated in the House of Representatives Monday. But after tumbling more than $10 a barrel in the previous session, prices were poised to suffer a loss of around 13% for the month...

Financial Times

Financials lead revival as house prices tumble...Alistair Gray in New York

http://www.ft.com/cms/s/6210d2f0-8ee8-11dd-946c-0000779fd18c,Authorised=... [3]

US stocks on Tuesday repaired some of the damage from the previous session’s historic slump, but remained on course for their worst monthly performance in ten years.

The market rallied on hopes that Washington would revive a plan to bail out the banking sector after Senate leaders insisted that a deal would be forthcoming...

Washington Post

Stock Markets Up as Investors Await Congressional Action...Renae Merle

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/30/AR200809... [4]

Stocks surged in trading this morning, regaining ground after a record sell-off yesterday, but investors remained wary as they await government action on a rescue plan for the financial sector...

New York Times

Credit Strains Worsen; U.S. Stocks Surge...MICHAEL M. GRYNBAUM

http://www.nytimes.com/2008/10/01/business/01markets.html?_r=1&hp&oref=s... [5]

And Tuesday brought calm to Wall Street, and higher share prices.

The Dow Jones industrials gained about 348 points in early afternoon trading, far from offsetting the 777-point decline on Monday but still a respectable showing, given the uncertainty lingering in the market. The Standard & Poor’s 500-stock index, a broad measure of major companies, rose 4.1 percent... Investors may be hoping that Congress will head back to the negotiating table and pass a revised bailout bill by the end of the week, a notion advanced by President Bush in a televised statement on Tuesday before markets opened in New York...

The Guardian (UK)

London and Wall Street rally but banks feel the painPresident Bush: 'The consequences get worse every day if we do not act'...Graeme Wearden, Zoe Wood and Andrew Clark in New York

http://www.guardian.co.uk/business/2008/sep/30/marketturmoil.globalecono... [6]

Shares in London and on Wall Street bounced back today amid optimism the rescue plan for the US banking sector could be revived following last night's shock rejection by Congress...

Los Angeles Times

Roughly one-third of Monday's dramatic losses are recouped as buyers seek bargains...Walter Hamilton

http://www.latimes.com/business/la-fi-markets1-2008oct01,0,5933823.story [7]

9:19 AM PDT, September 30, 2008

NEW YORK -- The stock market partially recovered today from its dramatic plunge a day earlier, as bargain hunters emerged and hopes flickered that Congress would pass a revamped version of the $700-billion rescue package for the financial system this week...

Crooksandliars.com

Economists To Nancy Pelosi: Don’t Rush Wall Street Bailout...Logan Murphy...9-25-08

http://www.crooksandliars.com/2008/09/25/economists-to-nancy-pelosi-dont... [8]

(This letter was sent to Congress on Wed Sept 24 2008 regarding the Treasury plan as outlined on that date. It does not reflect all signatories views on subesquent plans or modifications of the bill)

http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_pro... [9]

To the Speaker of the House of Representatives and the President pro tempore of the Senate:

As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:

1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.

3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.

For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.

Signed (updated at 9/27/2008 6:00PM CT)

Acemoglu Daron (Massachussets Institute of Technology)

Ackerberg Daniel (UCLA)

Adler Michael (Columbia University)

Admati Anat R. (Stanford University)

Ales Laurence (Carnegie Mellon University)

Alexis Marcus (Northwestern University)

Alvarez Fernando (University of Chicago)

Andersen Torben (Northwestern University)

Baliga Sandeep (Northwestern University)

Banerjee Abhijit V. (Massachussets Institute of Technology)

Barankay Iwan (University of Pennsylvania)

Barry Brian (University of Chicago)

Bartkus James R. (Xavier University of Louisiana)

Becker Charles M. (Duke University)

Becker Robert A. (Indiana University)

Beim David (Columbia University)

Berk Jonathan (Stanford University)

Bisin Alberto (New York University)

Bittlingmayer George (University of Kansas)

Blank Emily (Howard University)

Boldrin Michele (Washington University)

Bollinger, Christopher R. (University of Kentucky)

Bossi, Luca (University of Miami)

Brooks Taggert J. (University of Wisconsin)

Brynjolfsson Erik (Massachusetts Institute of Technology)

Buera Francisco J.(UCLA)

Cabral Luis (New York University)

Camp Mary Elizabeth (Indiana University)

Carmel Jonathan (University of Michigan)

Carroll Christopher (Johns Hopkins University)

Cassar Gavin (University of Pennsylvania)

Chaney Thomas (University of Chicago)

Chari Varadarajan V. (University of Minnesota)

Chauvin Keith W. (University of Kansas)

Chintagunta Pradeep K. (University of Chicago)

Christiano Lawrence J. (Northwestern University)

Clementi, Gian Luca (New York University)

Cochrane John (University of Chicago)

Coleman John (Duke University)

Constantinides George M. (University of Chicago)

Cooley, Thomas (New York University)

Crain Robert (UC Berkeley)

Culp Christopher (University of Chicago)

Da Zhi (University of Notre Dame)

Darity, William (Duke University)

Davis Morris (University of Wisconsin)

De Marzo Peter (Stanford University)

Dubé Jean-Pierre H. (University of Chicago)

Edlin Aaron (UC Berkeley)

Eichenbaum Martin (Northwestern University)

Ely Jeffrey (Northwestern University)

Eraslan Hülya K. K.(Johns Hopkins University)

Fair Ray (Yale University)

Faulhaber Gerald (University of Pennsylvania)

Feldmann Sven (University of Melbourne)

Fernandez, Raquel (New York University)

Fernandez-Villaverde Jesus (University of Pennsylvania)

Fohlin Caroline (Johns Hopkins University)

Fox Jeremy T. (University of Chicago)

Frank Murray Z.(University of Minnesota)

Frenzen Jonathan (University of Chicago)

Fuchs William (University of Chicago)

Fudenberg Drew (Harvard University)

Gabaix Xavier (New York University)

Gao Paul (Notre Dame University)

Garicano Luis (University of Chicago)

Gerakos Joseph J. (University of Chicago)

Gibbs Michael (University of Chicago)

Glomm Gerhard (Indiana University)

Goettler Ron (University of Chicago)

Goldin Claudia (Harvard University)

Gordon Robert J. (Northwestern University)

Greenstone Michael (Massachusetts Institute of Technology)

Gregory, Karl D. (Oakland University)

Guadalupe Maria (Columbia University)

Guerrieri Veronica (University of Chicago)

Hagerty Kathleen (Northwestern University)

Hamada Robert S. (University of Chicago)

Hansen Lars (University of Chicago)

Harris Milton (University of Chicago)

Hart Oliver (Harvard University)

Hazlett Thomas W. (George Mason University)

Heaton John (University of Chicago)

Heckman James (University of Chicago - Nobel Laureate)

Henderson David R. (Hoover Institution)

Henisz, Witold (University of Pennsylvania)

Hertzberg Andrew (Columbia University)

Hite Gailen (Columbia University)

Hitsch Günter J. (University of Chicago)

Hodrick Robert J. (Columbia University)

Hollifield Burton (Carnegie Mellon University)

Hopenhayn Hugo (UCLA)

Hurst Erik (University of Chicago)

Imrohoroglu Ayse (University of Southern California)

Isakson Hans (University of Northern Iowa)

Israel Ronen (London Business School)

Jaffee Dwight M. (UC Berkeley)

Jagannathan Ravi (Northwestern University)

Jenter Dirk (Stanford University)

Jones Charles M. (Columbia Business School)

Jovanovic Boyan (New York University)

Kaboski Joseph P. (Ohio State University)

Kahn Matthew (UCLA)

Kaplan Ethan (Stockholm University)

Karaivanov Alexander (Simon Fraser University)

Karolyi, Andrew (Ohio State University)

Kashyap Anil (University of Chicago)

Keim Donald B (University of Pennsylvania)

Ketkar Suhas L (Vanderbilt University)

Kiesling Lynne (Northwestern University)

Klenow Pete (Stanford University)

Koch Paul (University of Kansas)

Kocherlakota Narayana (University of Minnesota)

Koijen Ralph S.J. (University of Chicago)

Kondo Jiro (Northwestern University)

Korteweg Arthur (Stanford University)

Kortum Samuel (University of Chicago)

Krueger Dirk (University of Pennsylvania)

Ledesma Patricia (Northwestern University)

Lee Lung-fei (Ohio State University)

Leeper Eric M. (Indiana University)

Letson David (University of Miami)

Leuz Christian (University of Chicago)

Levine David I.(UC Berkeley)

Levine David K.(Washington University)

Levy David M. (George Mason University)

Linnainmaa Juhani (University of Chicago)

Lott John R. Jr. (University of Maryland)

Lucas Robert (University of Chicago - Nobel Laureate)

Ludvigson, Sydney C. (New York University)

Luttmer Erzo G.J. (University of Minnesota)

Manski Charles F. (Northwestern University)

Martin Ian (Stanford University)

Mayer Christopher (Columbia University)

Mazzeo Michael (Northwestern University)

McDonald Robert (Northwestern University)

Meadow Scott F. (University of Chicago)

Meeropol, Michael (Western New England College)

Mehra Rajnish (UC Santa Barbara)

Mian Atif (University of Chicago)

Middlebrook Art (University of Chicago)

Miguel Edward (UC Berkeley)

Miravete Eugenio J. (University of Texas at Austin)

Miron Jeffrey (Harvard University)

Moeller, Thomas (Texas Christian University)

Moretti Enrico (UC Berkeley)

Moriguchi Chiaki (Northwestern University)

Moro Andrea (Vanderbilt University)

Morse Adair (University of Chicago)

Mortensen Dale T. (Northwestern University)

Mortimer Julie Holland (Harvard University)

Moskowitz, Tobias J. (University of Chicago)

Munger Michael C. (Duke University)

Muralidharan Karthik (UC San Diego)

Nair Harikesh (Stanford University)

Nanda Dhananjay (University of Miami)

Nevo Aviv (Northwestern University)

Ohanian Lee (UCLA)

Pagliari Joseph (University of Chicago)

Papanikolaou Dimitris (Northwestern University)

Parker Jonathan (Northwestern University)

Paul Evans (Ohio State University)

Pearce David (New York University)

Pejovich Svetozar (Steve) (Texas A&M University)

Peltzman Sam (University of Chicago)

Perri Fabrizio (University of Minnesota)

Phelan Christopher (University of Minnesota)

Piazzesi Monika (Stanford University)

Pippenger, Michael K. (University of Alaska)

Piskorski Tomasz (Columbia University)

Platt Brennan C. (Brigham Young University)

Rampini Adriano (Duke University)

Ray, Debraj (New York University)

Reagan Patricia (Ohio State University)

Reich Michael (UC Berkeley)

Reuben Ernesto (Northwestern University)

Rizzo, Mario (New York University)

Roberts Michael (University of Pennsylvania)

Robinson David (Duke University)

Rogers Michele (Northwestern University)

Rotella Elyce (Indiana University)

Roussanov Nikolai (University of Pennsylvania)

Routledge Bryan R. (Carnegie Mellon University)

Ruud Paul (Vassar College)

Safford Sean (University of Chicago)

Samaniego Roberto (George Washington University)

Sandbu Martin E. (University of Pennsylvania)

Sapienza Paola (Northwestern University)

Savor Pavel (University of Pennsylvania)

Schaniel William C. (University of West Georgia)

Scharfstein David (Harvard University)

Seim Katja (University of Pennsylvania)

Seru Amit (University of Chicago)

Shang-Jin Wei (Columbia University)

Shimer Robert (University of Chicago)

Shore Stephen H. (Johns Hopkins University)

Siegel Ron (Northwestern University)

Smith David C. (University of Virginia)

Smith Vernon L.(Chapman University- Nobel Laureate)

Sorensen Morten (Columbia University)

Spatt Chester (Carnegie Mellon University)

Spear Stephen (Carnegie Mellon University)

Stevenson Betsey (University of Pennsylvania)

Stokey Nancy (University of Chicago)

Strahan Philip (Boston College)

Strebulaev Ilya (Stanford University)

Sufi Amir (University of Chicago)

Tabarrok Alex (George Mason University)

Taylor Alan M. (UC Davis)

Thompson Tim (Northwestern University)

Troske Kenneth (University of Kentucky)

Tschoegl Adrian E. (University of Pennsylvania)

Uhlig Harald (University of Chicago)

Ulrich, Maxim (Columbia University)

Van Buskirk Andrew (University of Chicago)

Vargas Hernan (University of Phoenix)

Veronesi Pietro (University of Chicago)

Vissing-Jorgensen Annette (Northwestern University)

Wacziarg Romain (UCLA)

Walker Douglas O. (Regent University)

Walker, Todd (Indiana University)

Weill Pierre-Olivier (UCLA)

Williamson Samuel H. (Miami University)

Witte Mark (Northwestern University)

Wolfenzon, Daniel (Columbia University)

Wolfers Justin (University of Pennsylvania)

Woutersen Tiemen (Johns Hopkins University)

Wu Yangru (Rutgers University)

Yue Vivian Z. (New York University)

Zingales Luigi (University of Chicago)

Zitzewitz Eric (Dartmouth College)

TPMCafe.talkingpointsmemo.com

Why Bail? The Banks Have a Gun Pointed at Their Head and Are Threatening to Pull the Trigger…Dean Baker…9-29-08Dean Baker

http://tpmcafe.talkingpointsmemo.com/2008/09/29/why_bail/ [10]

If you have a real story, you don't have to make up phony stories. That's pretty straightforward.

I've heard lots of phony stories. Much of the country's political and economic leadership has been running around raising the prospect of the Great Depression and a breakdown in the banking system (I actually had taken the latter seriously). These stories are absolutely not true.

There is no plausible scenario under which the no bailout scenario gives us a Great Depression. There is a more plausible scenario (but highly unlikely) that the bailout will give us a Great Depression. There is no way that the failure to do a bailout will lead to more than a very brief failure of the financial system. We will not lose our modern system of payments.

At this point I cannot identify a single good reason to do the bailout.

The basic argument for the bailout is that the banks are filled with so much bad debt that the banks can't trust each other to repay loans. This creates a situation in which the system of payments breaks down. That would mean that we cannot use our ATMs or credit cards or cash checks.

That is a very frightening scenario, but this is not where things end. The Federal Reserve Board would surely step in and take over the major money center banks so that the system of payments would begin functioning again. The Fed was prepared to take over the major banks back in the 80s when bad debt to developing countries threatened to make them insolvent. It is inconceivable that it has not made similar preparations in the current crisis.

In other words, the worst case scenario is that we have an extremely scary day in which the markets freeze for a few hours. Then the Fed steps in and takes over the major banks. The system of payments continues to operate exactly as before, but the bank executives are out of their jobs and the bank shareholders have likely lost most of their money. In other words, the banks have a gun pointed to their heads and are threatening to pull the trigger unless we hand them $700 billion.

If we are not worried about this worst case scenario (to be clear, I wouldn't want to see it), then why should we do the bailout?

There has been a mountain of scare stories and misinformation circulated to push the bailout. Yes, banks have tightened credit. Yes, we are in a recession. But the problem is not a freeze up of the banking system. The problem is the collapse of an $8 trillion housing bubble. (It was remarkable how many so-called experts somehow could not see the housing bubble as it grew to ever more dangerous levels. It is even more remarkable that many of these experts still don't recognize the bubble even as its collapse sinks the economy and the financial system.) The decline in housing prices to date has already cost the economy $4 trillion to $5 trillion in housing equity. This would be expected to lead to a decline in annual consumption on the order of $160 billion to $300 billion.

Given the loss of housing equity, I have actually been surprised that the downturn has not been sharper. Homeowners had been consuming based on their home equity. Much of that equity has now disappeared with the collapse of the bubble. We would expect that their consumption would fall. We also would expect that banks would be reluctant to lend to people who no longer have any collateral.

This is the story of the downturn and of course the bailout does almost nothing to counter this drop in demand. At best, it will make capital available to some marginal lenders who would not otherwise receive loans. We should demand more for $700 billion.

For the record, the restrictions on executive pay and the commitment to give the taxpayers equity in banks in exchange for buying bad assets are jokes. These provisions are sops to provide cover. They are not written in ways to be binding. (And Congress knows how to write binding rules.)

Finally, the bailout absolutely can make things worse. We are going to be in a serious recession because of the collapse of the housing bubble. We will need effective stimulus measures to boost the economy and keep the recession from getting worse.

However, the $700 billion outlay on the bailout is likely to be used as an argument against effective stimulus. We have already seen voices like the Washington Post and the Wall Street funded Peterson Foundation arguing that the government will have to make serious cutbacks because of the bailout.

While their argument is wrong, these are powerful voices in national debates. If the bailout proves to be an obstacle to effective stimulus in future months and years, then the bailout could lead to exactly the sort of prolonged economic downturn that its proponents claim it is intended to prevent.

In short, the bailout rewards some of the richest people in the country for their incompetence. It provides little obvious economic benefit and could lead to long-term harm. That looks like a pretty bad deal.