We can now confirm a major outbreak of democratic accountability in Washington this week. When I wrote my first op-ed of the week, which appeared in the Washington Post on Tuesday, my fear was that the Treasury would get exactly what it asked for in its, let's say, rather succinct proposal to establish a government-owned and Wall Street-managed $700 billion hedge fund.
Instead, there has been a great deal of debate and some pretty serious pushback from Capitol Hill, but also from a wide range of others—I've been amazed at some of the supportive conversations I've had in the past 24 hours with people across the political spectrum. In retrospect, a social movement, no doubt short-lived, but pretty energized and well focused, sprung into being sometime over the weekend. But it wasn't until we all opened the papers on Tuesday morning that it was clear what was going on. A lot of people said: hold on, we're in a hurry but there is no need to stampede, so let's take a bit more time and argue out some of the key alternatives.
The negotiations are obviously still ongoing, at several levels, so we really don't know where this is going to end up. I think there will be a package, with a headline value in the region of $700bn. There will obviously be more accountability and oversight.
In particular, there may well some more transparency on what prices are paid for the securities vs. what can by any reasonable measure be construed to be "market prices." It's this implicit degree of overpayment that will really determine the degree of bailout, and should be used to think about how much quid pro quo the government can get. My proposal on this point, which appeared on the Financial Times' on-line edition Wednesday is that the government get redeemable preferred shares. But there are several other reasonable ways to handle this. The more general point, that the taxpayer should receive some participation on the upside, seems to be getting across.
I'd also like some more taxpayer protection on the downside. And I think the scheme could be structured with more long-term loans to banks and less outright purchases. There is a lot of interest in this possibility and, hopefully, it will remain an option under the legislation. But I am somewhat concerned that this piece will not get implemented.
At the same time, the package still seems unlikely to be comprehensive. I haven't heard anything in the discussions, and didn't see anything in the President's address last night, that indicates taxpayer money is going to be used to help restructure mortgages. And I'm worried that any systematic bank capitalization scheme will end up being a month late and a few hundred billion dollars short.
I see some renewed nervousness in the markets overnight, at least in terms of the future for some large financial institutions. At this moment, I still think the markets will wait (5 days?) for a sensible package, and they will stabilize—at least for a while—once they see it in action.
But will any of this fundamentally change the direction of the world economy? That's the next big question. I'm discussing that this morning on the Diane Rehm show (WAMU/NPR); I think there will be a pretty wide range of opinions. It will also obviously be the central topic at and after the Peterson Institute's Global Economic Prospects, which will be discussed tomorrow (Friday, September 26).