2008
2008-09-25-Bailout-Breakdown
Bailout Breakdown
Washington Post Editorial, 2008-09-25
The fine points of financial reform can wait.
For Congress, the immediate task is to
avert economic disaster.
[1]
IT HAS BEEN a week since President Bush’s economic team rushed to Congress
to warn that the country was
within days of
financial collapse --
and to urge lawmakers to adopt a drastic bailout plan to prevent it.
A bipartisan consensus in favor of action quickly formed,
but as the president addressed the nation last night,
that cooperative spirit seemed to be giving way to conflict.
Congress and the administration were struggling to resolve legitimate questions,
such as the true cost to taxpayers of the plan, estimated at up to $700 billion,
and less central concerns,
such as whether regulatory and legal reforms should be linked to it.
As a day of gloom and high political drama wore on,
the Republican and Democratic nominees jumped in:
Sen. John McCain announced he was suspending his campaign to join the negotiations,
and after a call from Mr. Bush,
Sen. Barack Obama also agreed
to join the talks with congressional leaders at the White House today.
[2]
The stakes could not be higher:
The president laid out in far more graphic terms than ever before
just what the country is facing.
He spoke of “danger” to the entire national economy
and the potential loss of “millions” of jobs.
It is
a scenario not contemplated since 1929.
This catastrophe can be avoided, and it will be
if government promptly and effectively addresses
the immediate cause of financial distress --
the toxic build-up in unmarketable mortgage-backed securities
on bank balance sheets.
Treasury Secretary Henry M. Paulson Jr. has suggested
a program to buy the distressed mortgage-related securities.
Alternatives are imaginable, but this is the one on the table,
and it is conceptually credible.
Treasury could recoup much of the cost as the market recovers;
indeed, by jump-starting a market,
the plan could draw private capital into distressed securities.
[3]
Beyond its price tag, there are two legitimate concerns about the plan,
both amenable to compromise at the White House talks.
The first issue is ensuring that taxpayers do not get fleeced.
By its nature, the plan asks government to pay above-market prices;
the whole point is that
no market exists for most of these securities at the moment.
Congress and the Bush administration should create an option for the Treasury
to take equity in institutions to ensure more taxpayer protection.
[4]
The second issue is oversight and accountability.
Seeking maximum flexibility,
Mr. Paulson asked for all-but-unreviewable power; Congress rightly recoiled.
But there are other ways
of making sure that the program runs honestly and efficiently
without subjecting it to lawsuits
or microscopic review by multiple federal agencies.
As the president hinted last night, a control board,
with full access to Treasury’s books
and chaired by a figure of unquestioned integrity
such as former Federal Reserve chairman Paul A. Volcker,
could do the job.
Many in Congress, along with the presidential candidates,
want to limit the pay of executives whose institutions get federal relief,
and Mr. Paulson yesterday agreed that “we must find a way to address this.”
[5]
These are the essentials.
On other matters --
relief for mortgage holders, regulatory and bankruptcy reform --
there will be plenty of time later for debate, and, if necessary,
additional legislation.
But for now, the president, Congress and the candidates
need to stay focused on what’s really important:
preventing financial Armageddon.
2008-09-27-Bailout-Politics
Bailout Politics
Washington Post Editorial, 2008-09-27
Partisan bickering threatens Main Street and Wall Street.
[1]
THE COUNTRY is in
grave economic peril.
Government intervention is necessary to avert
a credit market collapse.
If ever there were a time for politicians to rise above
partisanship and petty squabbling, this would be it.
Rubber-stamping the plan proposed by
Treasury Secretary Henry M. Paulson Jr. and
Federal Reserve Board Chairman Ben S. Bernanke
would have been an unwise abdication of congressional responsibility.
Instead, however, the opposite could happen,
and it would be far more dangerous.
The toxic brew of presidential and congressional politics,
topped off with a dose of ideological dissension,
threatens to derail an agreement that seemed within reach just a few days ago.
A breakaway faction better known as the House Republicans
is pushing a completely different plan whose merits are dubious
and that in any event arrives on the scene far too late.
If
the house is on fire,
starting to build a better fire engine a week after the first alarm
is hardly the sensible approach.
[2]
Sen. John McCain (R-Ariz.), the Republican presidential nominee,
poured gasoline on this volatile mess with his announcement that
he was suspending his campaign to deal with the financial
crisis.
Whatever Mr. McCain’s intent, the inevitable effect was
to inject presidential campaigning into an already difficult situation.
Last night’s first presidential debate,
with the financial crisis appropriately front and center,
was certainly not devoid of political jabs.
Sen. Barack Obama (D-Ill.), the Democratic nominee, described the meltdown as
“a final verdict on
eight years of failed economic policies promoted by George Bush,
supported by Senator McCain.”
[3]
But the candidates toned down their finger-pointing;
instead, both sounded hopeful notes about reaching quick agreement.
Neither, though, was willing to be candid about
the financial implications of
the meltdown
for his priorities as president.
Mr. Obama said some retrenchment was needed
but then proceeded to tick off his wish list of spending on
energy, health care, education and tax cuts.
Mr. McCain pinned his hopes on unspecified spending cuts
and the overblown problem of earmarks.
Asked by moderator Jim Lehrer
how he would lead the country out of financial crisis,
Mr. McCain said that “the first thing we have to do
is get spending under control in Washington,”
which would be nice but is not exactly relevant to the immediate problem.
[4]
The candidates returned last night to
their essential agreement about the necessary elements of a bailout package.
Congressional negotiators would do well to keep that in mind
as the negotiations proceed this weekend --
and not to succumb to the false notion of
a divide between Wall Street and Main Street.
The reason to bail out Wall Street
is not sympathy for the masters of the universe who have lost their millions
but an understanding of
the inextricable links between Wall Street and the mainstream economy.
In this terrible situation,
what’s good for Wall Street
is good for America --
and that, after all, is the reason to commit the massive sums involved.
[5]
Democratic congressional leaders and the Bush administration
are close to agreement on
a bailout plan with reasonable provisions
for accountability and protection of taxpayers’ interests,
principles on which both Mr. Obama and Mr. McCain agreed last night.
Given the grass-roots uproar over the bailout,
House Speaker Nancy Pelosi (D-Calif.)
understandably wants cover from House Republicans
before jumping off this cliff.
But if that is not forthcoming,
Ms. Pelosi and House Democrats must be willing to take the political heat
and pass the package with Democratic votes.
Politics must stop at the edge of
a financial collapse.
2008-09-30-Congressional-Neroes
Congressional Neroes
Republicans and Democrats fiddle as the economy burns.
Washington Post Editorial, 2008-09-30 (Tuesday)
[1]
IF THE UNITED States
does experience an economic catastrophe in the months and years ahead,
and if future historians wish to identify the date on which it began,
yesterday may turn out to be as good a candidate as any
for the title of Black Monday.
Despite agreement
among the White House and Democratic and Republican congressional leaders
on a financial rescue package,
back-benchers from both parties scuttled the plan in the House yesterday,
by a vote of 228 to 205.
Amid news of spreading financial distress in Europe,
the Dow Jones industrial average plunged more than 777 points.
Yet the gathering darkness is as much political in nature as economic.
Just when it seemed
that American democracy had at least temporarily
conquered its ugliest habits of partisanship,
that the people’s elected representatives
were about to make a tough decision in the long-term national interest --
pique and polarization carried the day.
...
[3]
We understand that
angry constituents have been bombarding members of Congress
with e-mails and phone calls protesting the bailout.
We understand that
the bill did not offer enough breaks for homeowners to please the populist left
and that
it contained too much federal intervention to please the populist right.
That’s what happens in a compromise.
Given the poor marketing of a proposal
whose advertised $700 billion price tag will probably never materialize in full,
and given the fact that
the rapidly developing credit crisis has not quite been felt on Main Street,
we are not surprised at the angry correspondence from voters --
or, rather, from certain self-selected voters.
But among the 133 Republicans and 95 Democrats who voted no yesterday,
there are certainly some who know better,
and their lack of political courage is stunning.
Perhaps their votes will help them get what they want in November:
a return trip to Washington.
But if this foolish result is not undone soon,
the ensuing economic woe could make every House member’s reelection victory
seem Pyrrhic indeed.
2008-10-02-Americas-Second-Chance
America's Second Chance
The House has one more shot at making financial order out of chaos.
Washington Post Editorial, 2008-10-02
[1]
AMERICA is the land of second chances, so it is fitting that
the House of Representatives should get an opportunity to redeem itself
for its reckless rejection of the financial rescue package on Monday.
Last night the Senate approved a revised version of the plan,
not altering its fundamentals but perhaps providing enough political cover
for House Republicans and Democrats to change their votes.
Since 228 House members voted no on Monday, at least 12 must switch
(lest Speaker Nancy Pelosi have to cast a deciding vote).
We hope they will;
in fact, in a responsible legislature, the vote would not be close.
[2]
The case for the plan,
known formally as the
Troubled Assets Relief Program (TARP),
does not hinge on its perfection.
As we have said,
it is possible to imagine alternatives,
some of which, such as a direct federal purchase of bank equity,
might prove more effective at a lower cost to taxpayers.
Or they might not.
The point is that
TARP is the only plan on the table that has both
a reasonable chance of political success and
a reasonable chance of economic success.
Under the circumstances,
which at the moment include a mounting worldwide financial collapse,
we do not have time to run
a legislative seminar on the theory and practice of financial rescue.
[3]
Furthermore, TARP, as modified by Congress
after Treasury Secretary Henry M. Paulson Jr. initially unveiled it,
is a plausible proposal.
The Treasury
would purchase currently unmarketable assets from the financial sector,
clearing out the accumulated junk paper
that is destroying confidence and the flow of credit.
Though TARP seeks $700 billion in ultimate authority to buy assets,
the likelihood is that the Treasury will pay less than that,
because
(a) its purchases
might jump-start a private market and
(b) the government
might be able to resell securities for more than it paid.
There would be significant oversight
and an option for the government to take equity in the firms it aids.
[4]
Make no mistake:
This rescue will probably cost the government, i.e., the taxpayers, money --
a lot of money.
At least initially, the government will overpay for the assets it buys,
if only in the sense that there is no market at all for them at present.
The government will face politically difficult conflicts of interest.
Its accumulation of mortgage-backed assets,
on top of the de facto nationalization of Fannie Mae and Freddie Mac,
means it will be in a position to modify many thousands of loans,
but the better the deal Uncle Sam cuts distressed homeowners,
the greater the hit to the taxpayer.
[5]
And, of course,
the government will pay for TARP with borrowed money,
adding to this country’s already worrisome national debt.
When you strip away all the rhetoric, pro and con,
TARP amounts to
a deliberate but as-yet-unquantifiable reduction in our future wealth --
for the sake of our present stability.
It is an attempt to buy the whole country a second chance --
to buy time for banks, Congress and, yes, individual American households
to make painful but overdue corrections.
If that sounds like a bad deal,
consider the fact that these hard choices are unavoidable,
no matter what the House does today.
And then ask yourself whether it would be better to make them
in an atmosphere of relative order
or amid the chaos that looms --
but which we can still at least try to prevent.
2008-10-20-Is-Capitalism-Dead?
Is Capitalism Dead?
The market that failed was not exactly free.
Washington Post Editorial, 2008-10-20
[1]
IS THIS the end of American capitalism?
As financial panic spread across the globe
and governments scrambled to contain the damage,
reality seemed to announce
the doom of U.S.-style free markets and President Bush’s ideology.
But this is wrong in two ways.
The deregulation of U.S. financial markets
did not reflect only the narrow ideology of a particular party or administration.
And the problem with the U.S. economy, more than lack of regulation,
has been government’s failure to control systemic risks
that government itself helped to create.
We are not witnessing a crisis of the free market
but a crisis of distorted markets.
[2]
It’s true that the Bush administration has stood for
light regulation of capital markets.
But it did not invent this approach.
By the middle of the last decade,
experts across the spectrum believed that U.S. financial institutions
faced outmoded restraints on their ability to innovate.
Thus, the Clinton administration,
supported by then-Federal Reserve Chairman Alan Greenspan,
refused to tighten regulations on financial derivatives,
memorably dubbed “financial weapons of mass destruction” by Warren Buffett.
The 1999 repeal of the Glass-Steagall Act,
a Depression-era law separating commercial banking and investment banking,
passed with overwhelming bipartisan support in Congress
and was signed into law by President Bill Clinton.
[3]
We’ll never know
how this newly liberated financial sector might have performed
on a playing field designed by Adam Smith.
That’s because
government interventions of all kinds,
from the defense budget to farm supports,
shaped the business environment.
No subsidy would prove more fateful than
the massive federal commitment to residential real estate --
from the mortgage interest tax deduction
to Fannie Mae and Freddie Mac
to the Federal Reserve‘s low interest rates under Mr. Greenspan.
Unregulated derivatives known as
credit-default swaps
did accentuate the boom in mortgage-based investments,
by
allowing investors to transfer risk
rather
than setting aside cash reserves.
But
government helped make mortgages
a purportedly sure thing in the first place.
Home prices seemed to stand on a solid floor built by Washington.
[4]
Government support for housing was well-intentioned:
Homeownership is a worthy goal.
But when government favors a particular economic activity, however validly,
it must seek countervailing control
to ensure the sustainable use of public resources.
This is why banks must meet capital requirements
in return for federal deposit insurance.
Congress did not apply this sound principle to Fannie Mae and Freddie Mac;
they were allowed to engage in profitable but increasingly risky activities
with an implicit government guarantee.
The result was that
taxpayers had to assume more than $5 trillion of their obligations.
Contrast U.S. experience with
that of Canada,
where there is no mortgage interest deduction
and the law requires insurance on
any mortgage over 80 percent of a home’s purchase price.
Delinquency rates at Canada’s seven largest banks are near historic lows.
[5]
The new capitalist model that emerges from this crisis
must operate according to more consistent principles.
The Fed should set interest rates
with the long-run value of the dollar in mind.
Government must be more selective about manipulating markets;
over the long term,
business works best when it is subject to market discipline alone.
In those cases -- and there will and should be some --
in which government intervenes on behalf of social goals,
its support must be counterbalanced with taxpayer protections and regulation.
Government-sponsored, upside-only capitalism
is the kind that’s in crisis today,
and we say:
Good riddance.
2008-10-27-Welfare-for-Detroit
Welfare for Detroit
Should lower-paid workers help subsidize those averaging $56,650 at GM?
Washington Post Editorial, 2008-10-27
[T]his [proposed] bailout [to Detroit]
taxes the less well-off to protect the relatively privileged.
The average individual General Motors production worker,
whose job would be saved by the bailout, makes $56,650 per year,
according to the Center for Automotive Research,
and that doesn’t count better-paid, white-collar types.
Meanwhile, half of all households--
which typically include more than one earner --
make less than $50,000 per year.
Where’s the justice in that?
2009
2009-01-05-Terms-of-Trade
Terms of Trade
Why the U.S. lost manufacturing jobs, and how it can replace them.
Washington Post Editorial, 2009-01-05
2009-01-07-patience
Dr. Obama's Cure
In treating the U.S. economy, the president-elect is wise to be patient.
Washington Post Editorial, 2009-01-07
The third-best reform
How Congress ducks the problem of tax-free health insurance
Washington Post Editorial, 2009-10-25
...
If there is one thing on which economists across the political spectrum agree when it comes to health-care reform, it is the unfair and counterproductive effect of the special tax treatment given to employer-sponsored health insurance.
…
Employer-provided health insurance is tax free, no matter how generous. This is an artifact of World War II-era wage controls; employers attracted workers by offering insurance in lieu of pay increases. It has grown into the largest single preference in the tax code and the second largest -- after Medicare -- federal cost for health care: some $250 billion annually.
The impact of treating these forms of compensation differently is to shift money that would have gone to workers in the form of wages into health coverage. This in turn encourages people to consume more health care than they would have without the tax preference, driving up health costs. It is regressive because it represents a bigger benefit to earners in higher-income tax brackets. It is unfair because it gives those with employer-sponsored insurance a tax break not enjoyed by those who purchase coverage on their own with after-tax dollars. In short, it is the single most sensible source of financing for health reform.
The best approach would be to eliminate the tax-free treatment and use the money to provide tax credits.
…
This is anathema to labor, which explains the House Democrats’ revolt. One argument is that it is unfair, as the House Democrats’ letter put it, “to middle-income Americans that have forgone wage and salary increases for strong insurance benefits.” But most existing collective bargaining agreements will have expired by the time the provision takes effect, so that mix can be renegotiated; if that is not enough, why not simply exempt existing union contracts? Another argument is that this approach penalizes workers in high-cost states and high-risk industries, along with older workers. However, the finance committee bill sets thresholds 20 percent higher in the 17 most expensive states for the first few years. Similarly, it sets a higher cap for retired workers 55 and older and for those in high-risk jobs.
Labor’s answer is that these exemptions are not generous enough. But its basic position seems to be that its members should continue to forgo wage increases to obtain increasingly costly insurance -- and, more fundamentally, that union members should not have to ante up a dime from their generous benefits to ensure that others get basic coverage.
...
2009-11-01-on-Volckers-proposal
Moral hazards
No one has a sure fix for the 'too big to fail' dilemma.
Washington Post Editorial, 2009-11-01
Policymakers seem to have rejected
former Fed chairman Paul Volcker’s proposal
to separate commercial banks,
which would enjoy a measure of government guarantee
in return for heavy regulation of their risk-taking,
from investment banks and other non-bank financial players,
which would be free to trade in risky assets
on the understanding that there would be no bailout.
In theory, this would clarify market signals,
thus restoring market discipline.
Yet even under this plan
the market might try to call the government’s bluff.
When it comes to solving the dilemma of too-big-to-fail,
no one has a certain template --
and all participants in the coming debate
would be well-advised to remember that.
2009-11-04-spending
Mr. McDonnell's victory
Washington Post Editorial, 2009-11-04
[T]wo of the most successful, best-respected and most popular
of Virginia’s governors in the past quarter century --
Gerald L. Baliles (1986-90) and
Mark R. Warner (2002-06) --
raised taxes to put the state’s finances on a surer footing
and invest in
the long-term health of its roads, bridges, school and public safety.
It’s worth noting that Mr. McDonnell’s margin of victory in Northern Virginia,
where traffic is worst and transportation is the dominant issue,
was slimmer than it was statewide.
But many Northern Virginians supported him,
seeing him as a problem-solver and a pragmatist
who could reverse the deterioration of the state’s roads, bridges and rails.
Sustainable health reform
Washington Post Editorial, 2009-12-20 (Sunday)
THE HEALTH reform proposal working its way through Congress
represents a major risk, above all to the nation's fiscal well-being.
But it also offers a major opportunity
for America's fiscal and physical health alike.
Depending, of course, on the final shape of legislation,
we believe that the risk is worth taking.
We hope 60 senators keep the process alive
by voting for the bill now before them.
...
2010
010-01-19-Anger-over-Wall-Street-bonuses
Cool anger over Wall Street bonuses by governing how they're handed out
Washington Post Editorial, 2010-01-19
[2]
How much is the right amount to pay a Wall Street trader?
Perhaps no one “deserves” $5 million a year to swap bonds,
especially when the financial industry has performed badly.
But no one “deserves” $5 million to bat .220 for a last-place baseball team, either.
There is simply no objective, scientific answer to such a question.
Therefore,
it is best left to market forces and the decisions of private-sector figures,
such as executives and the boards of directors
who are supposed to hold them accountable, on behalf of shareholders.
Over time, firms have found that bonuses --
performance-linked portions of company revenue added to a base salary --
are the best way to reward and retain talent.
2010-05-22-Ms-Merkels-mistake
Angela Merkel's mistake: Battling the financial markets
Washington Post Editorial, 2010-05-22
WE UNDERSTAND that
the bailout of Greece and other Southern European fiscal miscreants
is unpopular in Germany,
whose taxpayers will shoulder much of the cost.
We further understand that Angela Merkel, the German chancellor,
had to appease public opinion
to win approval for the bailout in Germany’s parliament.
Still, her government’s sudden and unilateral ban on
“naked” credit default swaps
this week was not the way to do it.
It was so transparently
political
and, in policy terms, so
irrational
that it raised doubts about Berlin’s leadership in the euro crisis.
Whatever short-term domestic political benefits it had
were offset by the damage it caused, and may yet cause,
on financial markets across the world.
Naked credit default swaps enable speculators to bet on
the future value of financial instruments they do not own.
...
[German Chancellor Merkel] seemingly does not fathom that
naked credit default swaps can provide an early warning system --
in the absence of which profligate entities, such as Greece's government,
may be enabled to extend their profligacy.
...
Ms. Merkel needs to remind herself that
“markets” are mostly made up of
money managers doing their best
to protect pension funds and other savings of ordinary people.
2010-07-31-Dangerous-Curve-Ahead
CBO's deficit forecast shows need for early action
Washington Post Editorial, 2010-07-31
2010-10-20-Bernanke-quantitative-easing
Ben Bernanke hopes his risky plan will perk up the economy
Washington Post Editorial, 2010-10-20
...
The deeper fear is that QE2 (quantitative easing)
is a cyclical solution to a structural problem.
Many corporations are flush with cash already
but simply don’t see enough opportunities for profitable investment
within the United States.
The list of reasons include
households with too much debt;
political and policy uncertainty;
a growing mismatch between the skills of unemployed U.S. workers
and the available work; and
a broader shift in economic dynamism from the developed to emerging markets.
2011
2011-08-31-Free-trade-forever
Free trade must not be a casualty of the currency wars
Washington Post Editorial, 2011-08-31
Labels: economy, Washington Post
