Greg Mankiw has posted a careful email from Rob Shimer explaining why the bailout plan (whether 700 or 350 billion) is a bad idea. Note that Rob does not argue against any government action. Nor would I. He echoes the thoughtful idea that beyond the obvious moves that the Fed and other agencies have been making to prevent bank runs, banks should be forced to recapitalize (they could also be forced to stop paying dividends, although he does not mention this). By making them all do this, this solves the lemons problem that is freezing financial markets, and may also force the truly insolvent banks out into the open.

In a nutshell the problem is that the decline in assets (mortgages) that banks hold means that they are now undercapitalized. The banks willing to offer the best deal to investors to raise more capital are those in the greatest trouble. This means that any attempt by any bank, no matter how solvent, to raise capital serves as a red flag to the market. If all banks are required by the government to raise more capital, then it is no longer the case that raising capital means a bad balance sheet, so it becomes possible for good banks to raise capital.

I want to add on other thing to the "Ben had more information than anybody who signed the anti-bailout letter." Ben is certainly a smart guy. And he certainly has more information than we do. But: if he has information that the situation is catastrophic then now is the time to tell us what it is. There was another letter writer on Greg's blog who seemed to argue that without a bailout firms weren't going to be able to meet their payroll come Tuesday. That shows such an abysmal level of ignorance that I can't fathom why Greg published it. Of course everyone who signed the anti-bailout letter wants firms to meet their payroll on Tuesday or any other day. And every single one of us knows that whether or not that happens has nothing to do with whether or not the bailout plan is approved. The only smart thing about that letter write is that he chose to remain anonymous.

The Senate Jucidiary committee has reported a bill that will assign the Department of Justice the obligation of enforcing copyright. In an unusual outbreak of common sense, the Department of Justice opposes the bill arguing that it is for the private sector to enforce intellectual property through civil law.

It is interesting and little known that history is repeating itself. From chapter 2 of our book:

At the turn of nineteenth, the music industry was different from the one we are familiar with today. No CDs, no mass concerts, and no radio and TV rights. The core source of revenue was the sale of printed sheet music, which was carried out worldwide and on a very large scale. We learn, for example, that in Britain alone about twenty million copies were printed annually. The firms carrying out this business were not large multinationals as today, but family owned companies, such as Ricordi in Milano, which, nevertheless, managed to reach also foreign countries. Apparently these "majors" managed to collude quite efficiently among themselves. The records show that the average script sold in the U.K. for about a fourteen pence. Then piracy arrived, as a consequence of two changes: the development of photolithography, and the spread of "piano mania", which increased the demand for musical scripts by orders of magnitude. Pirated copies were sold at two pence each.

Naturally the "authorized publishers" had a hard time defending their monopoly power against the pirates, enforcement costs were high and the demand for cheap music books was large and hard to monitor. Music publishers reacted by organizing raids on pirate houses aimed at seizing and destroying the pirated copies. This started a systematic and illegal "hit and destroy" private war, which lead, in 1902, to the approval of a new copyright law. The latter, surprise, surprise, made violation of copyrights a matter for the penal code, putting the police in charge of enforcing what, until then, was protected only by the civil code.

...

But the police campaign did not work either. After a few months, police stations were filled with tons of paper on which various musical pieces were printed. Being unable to bring to court what was a de-facto army of "illegal" music reproducers, the police itself stopped enforcing the copyright law.

The eventual outcome? The fight continued for a while, with "regular" music producers keen on defending their monopoly and restricted sales strategy, and "pirates" printing and distributing cheap music at low prices and very large quantities. Eventually, in 1905, the king of the pirates, James Frederick Willett, was convicted for conspiracy. The very same leader of one of the music publishers associations, and the man who had invented the raids, launched the Francis, Day & Hunter's new sixpenny music series. Expensive sheet music never returned

America Must Rescue the Bonuses at Goldman Sachs

First a link to the Economist's Voice on the bailout plan. (Link deleted because the articles are not accessible without a subscription.) Then this:

From: Minister of the Treasury Paulson Subject: REQUEST FOR URGENT CONFIDENTIAL BUSINESS RELATIONSHIP

Dear American:

I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.

I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused need for large transfer of funds of 700 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.

I am working with Mr. Phil Gramm, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.

This is a matter of great urgency. We need blank check. We need funds as quickly as possible. We cannot directly transfer funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for reliable and trustworthy person who will act as a next of kin so funds can be transferred.

Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive confirmation of transfer, I will respond with detailed information about safeguards that will be used to protect the funds.

Yours Faithfully Minister of Treasury Paulson

Here is the proposed bill. Read it. It says simply that the Treasury secretary is given a 700 billion dollar credit line and told to go out and play the mortgage backed security market, appointing whoever he chooses, and buying and selling without any oversight, concurrent or retroactive. Can I imagine a better prescription for political corruption? I'm not imaginative enough. I'm imaginative enough to think that however good the intentions of the (politically appointed) Secretary might be, the people who do the buying and selling will feel sympathetic to their friends and will want to do what they think the boss man would "want them to do" towards his friends. Some will not give in to the temptation. Others will. And on the other side those who receive lesser bailouts will think that it is unfair and driven by politics - regardless of whether or not it is.

Even the financial markets being bailed out currently seem skeptical of the totally unfocused nature of the plan.

Bear in mind also: with this kind of stake it is easy to make money and it is also easy to crush firms. The AIG bailout may have already done that. AIG stock lost over 100 billion with the Federal bailout. Best estimates of current housing market losses falling in the financial sector is on the order of 2-300 billion. That doesn't account for future losses, but it also measure peak to current time, and not all houses were purchased at the peak. As far as I can tell the AIG mortgage exposure was in insuring mortgage backed securities, so they don't seem to have been leveraged beyond their exposure to the fall in housing prices. That means unless they are responsible for about half the losses in housing, there has been a wealth transfer from AIG shareholders to the Federal government.

Naked Capitalism

Diamond and Kashyap who know a great deal about these markets.

The Corner isn't as a rule very good on economic issues, but this is a thoughtful post.

Mankiw has good links and coverage

Marginal Revolution has some good posts and links

If there is a thoughtful consensus it is: this is a power-grab by Treasury with down the road consequences we'll live to regret. I haven't read anyone, including those in favor of some sort of bailout, who argue that we need something this extreme.

Even if we accept that a massive bailout is needed, it seems easy enough to add minimal protections:

1. give them less money and let them ask for more later if they need it; they can't possibly spend it all at once anyway

2. make them write rules subject to congressional approval for how they are going to spend the money

Insofar as time is an issue, requests for more money or approval of regulations can be made fast-track (like trade agreements) in which Congress agrees in advance to an up-or-down vote.

The fact that there is nothing like this in the proposed regulation seems to me very revealing. Moreover, Congress would probably like nothing better than to wash their hands of the mess so if things go wrong they can blame somebody else, and so they can't be accused of fiddling while Rome burns.

IP is one form of government enforced monopoly. A great deal of government regulation of the private sector serves the same purpose. (Medical licensing boards? Hairdresser licenses?) Try entering into the investment banking business and see how far you get...A nice post discusses the story - pretty well understood among economists - of how regulations that emerged during the "progressive" era supposedly to protect consumers and average people served instead the interests of large would-be monopolists.

All of which is apropos of the current financial bailout. I am naturally skeptical about government intervention in the market. It is a fact that some of the current crisis has been caused by government intervention in mortgage markets through implicit guarantees for the big GSE's. What sort of policy is it to create a private entity, give them implicit guarantees, then turn them loose to drive their competition out of business, and fatten their own purses? I am doubtful that in the absence of government intervention the banking sector would collapse, although there would be some short-term pain while it restructured itself. And while I'm happy that the stock-holders in insolvent financial institutions aren't being rescued, I don't see why the bond-holders should get off scott free. Still an argument can be made that the government needs to fix what it broke.

The current planned bailouts, however, seem to be government at its worst. The people who get bailed out are those who have the monopoly power. A few small fry are left to go bankrupt, while the really big ones get government guarantees. They also get fewer competitors, and the promise of regulation to keep competitors out in the future. The large players that are bailed out also are the ones that face the greatest moral hazard: they have the ability and the incentive to structure portfolios that promise high returns in exchange for a small probability of failure exactly when the government can be counted on to bail them out.

The obvious question is: given that the problem is inability of individual mortgage holders to pay their mortgages or sell into a falling housing market - why not bail them out? If tax money is going to be spent to mitigate private losses, why not mitigate the private losses of the small-fry? Individual mortgage holders have debt structures that are quite transparent. Nor do they have the ability to structure portfolios that promise great returns in exchange for a small probability of failure so great it demands government intervention. So of all the people involved the individual mortgage holders seem to face the least moral hazard.

Why not start, in fact, by reverting the current bankruptcy law to its state before the prior reform? The change in the bankruptcy law - to make it easier for creditors to collect after bankrutpcy - seems to have been a give away to lenders plain and simple. That is, it was a massive change in the structure of existing debt. It seems to be the lender equivalent of retroactive copyright extension. One can imagine a combination of a change in the bankruptcy law to strengthen the negotiating hand of individual mortgage holders, combined with a requirement for government assumption of bad mortgage debt that the bad loans be renegotiated with borrowers.

Sadly, nothing like this will happen, and the real message is clear: When the politically connected buddies of high government officials are threatened, the government steps in and bails them out. It's enough to make a right-wing economist become a left-winger, or perhaps just an anarcho-capitalist.

via Svetoslav Trochev

Here is prime example that shows how the patents are 'promoting' the progress.

I guess the new BMW will have new option. "Paper map for North America"! :))

Since there has been a lot of discussion John suggested rather than having it all as comments to a single post, I create an open thread for general discussion. I will try to set up an open thread each Monday for whatever IP topics catch the imagination and see how it goes. So go ahead, and post away comments to this posting on whatever IP/Monopoly topics you'd like.