A few notches down
Commenting on his piece in Mint, V Anantha Nageswaran says (in an email) that at the time he wrote it, he had expected the US Congress to approve Treasury Secretary Henry Paulson’s $700 billion bailout plan. In the event, the lower house voted it down, but he expects Mr Paulson to come back with a new version.
Four conditions must be met in any government rescue:
(a) Those who need to be bailed out, get bailed out and no one else.
(b) They must be bailed out of their losses but if they make gains, they go to the supplier of the bailout.
(c) Those who created the conditions that brought about the bailout should be punished and removed and their privileges—golden parachutes, bonuses and suchlike—stripped.
(d) Others who took the risk of investing in such an enterprise with such management share the pain and contribute to the bailout. Risk-taking means bearing losses too.Unfortunately, the Paulson Plan failed the test.
In the end, the rejection of the vote is a positive. It rejected a flawed plan. It could now become slightly better. Unfortunately, because it was a flawed product to start with, it won’t get a lot better. That is why sometimes the slate needs to be wiped clean. [V Anantha Nageswaran]
In his Mint piece, he contemplates a new international exchange rate regime.
The problems that the US and the rest of the world face today with credit destruction and crisis were caused by the “Bretton Woods II” exchange rate regime. In that regime, many countries kept their exchange rates in a quasi-peg to the dollar and lent to US households, which borrowed heavily. That has to be played out all over again for the bailout plan to work. In other words, the US is expecting to repeat Bretton Woods II to solve the problems created by Bretton Woods II. That does not sound like much of a solution but more like the creation of a new, bigger problem. [Mint]
I am not exactly sure what Sri Nageswaran means by repeat Bretton Woods II – presumably that $700 bil bailout will be funded by non-US or foreign money. I really doubt that. Just last week the yield on T-bill was 0%. In any case, it’s up to the “many countries” to play with their exchange regimes.
With regards to (c) shhhh…don’t say that out loud. The guys who created the mess are the people (and friends of the people) who are now apparently fixing the problem….
Has Mr.Nageswaran read the entire 110 pages of the “Paulson proposal”?
I don’t believe that the proposal failed any “test”. It failed because many Congress persons facing elections [Republicans and Democrats] do not wish to see primary challengers. Period.
But now that the market has dropped 800 points in one day, I would bet that the same proposal, with minor tinkering to provide cover for the vote changers, will pass on Thursday.
Happy New Year to any chosen people who read this excellent blog.
Btw, Of the 133 Republicans and 95 Democrats who voted against this bailout, I would bet more than 90% are facing re-election.
The other 10% are pure menschen.
Trilok,
perhaps you’d take a look at this first.
90% is only among the ‘vulnerables’ incumbents who voted heavily against – 38 in all ; still doesnt explain the others, about 50% who still voted ‘nay’.
maybe they genuinely dint like the plan.No?
I think most of the points which Mr. Nageswaran mentions were actually there (taxpayer getting profits, partial rescinding of golden parachutes etc.) in the final bill except a part of his point (d) – that investors be forced to raise money, which was Raghuram Rajan’s suggestion also. In any case, they will suffer losses because the anti-Midas touch of the “bailout” should lower share prices of the “saved” entity.
The reason the bill fell was simple – the American people did not like it.* Moreover, the conservatives hated such a big intervention and there are also rumors that some Democrats wanted the bill to tank to help Obama’s poll numbers.
Unfortunately, Mr. Nageswaran is right that a new bill might as well be “worse”. The Dems would re-insert a lot of irrelevant special-interest leftist earmarks which the Reps had managed to clean the first time, but now would be tougher to oppose because of the gravity of the situation.
* As an aside, this again shows the strength, for good or bad, of the representative democracy of India. Also notice the strong intra-party democracy and the lack of stringent anti-defection laws which clobbers dissent. Kudos to the American political system
I meant the “representative democracy of America”, not India in my previous comment.
I wish that was a Fruedian slip…
Vivek,
Thanks, I did take a look at it, and I am relieved nobody took me on with a wager.