Tuesday, September 30, 2008

So, what will happen on Thursday? The WSJ (which favors a bailout) worries that:
One option is that Democrats will tell Mr. Paulson that they can pass his plan with more liberal votes, but that their price has gone up. This would mean more of the tax, spend and regulate provisions that House GOP leaders stripped out before their rank-and-file headed for the exits. These would only raise the price for taxpayers of the Treasury rescue and, if the equity provisions were too onerous, make the Paulson plan far less workable.
I'm hoping for the following alternative:
If Mr. Paulson wants to be a statesman, he could offer a Plan B that avoids giving Treasury such a big blank check. Instead, he could propose more public capital for the Federal Deposit Insurance Corp., which would do more of the creative financial plumbing it has done over the last week. (See here.) This will have to happen next year anyway, and the FDIC has long experience protecting taxpayers for public capital injections through preferred stock and warrants.

Monday, September 29, 2008

My best guess is that this is a good thing, especially since Congress could change its mind in as soon as Thursday.
In a stunning vote that shocked the capital and worldwide markets, the House on Monday defeated a $700 billion emergency rescue for the nation's financial system, ignoring urgent warnings from President Bush and congressional leaders of both parties that the economy could nosedive without it...
More than two-thirds of Republicans and 40 percent of Democrats opposed the bill. In all, 65 Republicans joined 140 Democrats in voting "yes," while 133 Republicans and 95 Democrats voted "no."

Sunday, September 28, 2008

Casey Mulligan says "Since World War II, the correlation between the inflation-adjusted commercial paper yield and subsequent inflation-adjusted growth of GDP per capita is zero." I haven't made up my mind yet, but I really want to believe Prof. Mulligan's corollary, "The Treasury and the Fed should let Wall Street drown alone, to be replaced by new financial service providers who can swim as robustly as are non-financial American businesses."

Friday, September 26, 2008

From the Washington Post, the best case against a bail-out:
Banks throughout the United States carried on with the business of making loans yesterday even as federal officials warned again that their industry is on the verge of collapse, suggesting that the overheated language on Capitol Hill may not reflect the reality on many Main Streets.

Thursday, September 25, 2008

Steven Landsburg argues that we don't need a bail-out.
In the 1930s, a wave of bank failures did make it hard for borrowers and lenders to find each other, and the consequences were drastic. But times have changed in at least two relevant ways. First, the disaster of the 1930s was caused not just by bank failures, but by a 30% contraction of the money supply, which is something today's Fed can easily prevent. Second, as any user of match.com can tell you, the technology for finding partners has improved since then. When a firm wants to raise capital, why can't it just sell bonds over the web? Or issue new stock? Or approach one of the hedge funds that seem to be swimming in cash? Or borrow abroad?

I find this argument very appealing; I just don't know enough about the financial sector to evaluate these empirical claims. For example, Greg Mankiw has posted an anonymous defense of the Paulson plan, claiming that Wall Street economists better understand the situation than other economists, and that action truly is needed. And the posts over at Calculated Risk sure sound scary.

What's also scary is that I don't think Congress is any better at determining whether a bailout is needed than I am.

I was expected just to read bad news today. Instead, I learn that "Democrats to let offshore drilling ban expire."

Wednesday, September 24, 2008

Finite implications of transfinite math

Harvey Friedman has a dream in which the large cardinal axioms of set theory are used all the time, not just by set theorists, but also by combinatorialists (or "finite-set theorists" as I like to think of them). I share his dream. How do we get there? Here's Friedman's strategy:
The general strategy for using large cardinals in the integers is as follows. We start with a discrete (or finite) structure X obeying certain hypotheses H. We wish to prove that a certain kind of finite configuration occurs in X, assuming that H holds. We define a suitable concept of completion in the context of arbitrary linearly ordered sets. We verify that if X has a completion with the desired kind of finite configuration, then X already has the desired kind of finite configuration. We then show, using hypotheses H, that X has completions of every well-ordered type. We now use the existence of a suitably large cardinal Lambda. Using large cardinal combinatorics, we show that in any completion of order type Lambda, the desired kind of finite configuration exists. Hence the desired kind of finite configuration already exists in X.
If you follow the link, you see in detail a particular instance of this strategy. The question is, why hasn't this been done more often? Is it a sociological problem or a mathematical problem?

Tuesday, September 23, 2008

The initial mega-bailout (or is it tera-bailout?) proposal by Paulson is NOT good. It's getting a little better. Perhaps I should say it's getting less bad; the big improvement I'm hoping for is the taxpayers getting equity in the companies that are bailed out. (Normally, I oppose the government owning big chunks of the financial industry...)

Update: A long list of bad things about Dodd's alternative proposal.

Monday, September 08, 2008

"The Bush administration seized control of the nation’s two largest mortgage finance companies on Sunday..."

It was either this or a friendlier bail-out that would created a much worse moral hazard in the future.

"Alan Greenspan, the former Federal Reserve chairman, and Lawrence H. Summers, a Treasury secretary under President Bill Clinton, along with many other critics, have long maintained that the companies were too powerful politically and financially, and that their huge portfolios posed enormous risks to the financial system."

What other American institutions are too big to fail? For such institutions, our typical options are Bell-style break-up (if we act early), heavy government regulation, and ever recurring bail-outs. (For example, I worry a little about the future whenever I read about defense contractors merging. I haven't read about one of these mergers in a while, but after our presence in Iraq decreases significantly, I won't be surprised to read about these again.)