The current proposal to rescue Wall Street from its follies, all 102 pages of it. Chances are in a document of that length that will be approved in about 12 hours there are some easter eggs. If you have the time to look and spot any, post a comment.

I've now read it in a manner of speaking. It does not seem that different than the original bill. He gets $350 billion with no questions asked which he can do pretty much as he pleases with, with another $350 if he asks and Congress does not veto it within 10 days or 15 days, depending on which part of page 51 you believe. The oversight provisions appear weak with actual oversight being done entirely by the executive branch plus the chairman of the Fed. The congressionally appointed "oversight" committee seems to be limited to writing a report about regulatory reform. The Treasury which has been backstopping money market funds - not a bad idea under the current circumstances - now seems to be prohibited from doing so. There are some modest provisions about CEO compensation, workouts for homeowners, and authorization to operate a security insurance program.

The basic objection to the bill is it is likely to cost a lot of money without accomplishing a great deal. That isn't solved in the details. Beyond that, the bill is surprisingly weak in the details. My interpretation is that this is that Treasury got what they wanted, with a bunch of rhetoric and cosmetic stuff put in so that Congress can say they got the taxpayer a better deal.

One of the great downsides of monopoly is a mathematical result known as Jensen's inequality that says that a lot of small mistakes aren't as bad as a single big mistake. One of the bad things about monopoly is that a mistake by a monopolist much worse than a bunch of smaller mistakes by competitors. At the moment there is a financial panic. Unfortunately the panic seems most widespread in the biggest entity of all, the U.S. government. As a result they are about to be stampeded into making an enormous mistake. The level of insanity defies the imagination. Rumors fly, each more absurd than the last - and are seized upon and repeated by supposedly responsible Senators and high ranking officials of the executive branch as a rationale for panicked approval of a nonsense plan. Reading the blogs - often quoting supposedly knowledgeable and trustworthy people - we find utter nonsense. If we don't approve the plan right away you won't be able to get money from your ATM. Firms won't be able to meet their payrolls. And on and on and on. To debunk the obvious: Washington Mutual failed Thursday night. Washington Mutual ATM cards (of which I own several) function as usual. Individual bank accounts are federally insured up to $100,000 per bank. The normal process of bank closure does not prevent bank customers from accessing their funds. As to payroll: I do not doubt that some firms of various sizes are going to fail to meet payroll and go bankrupt next week. It is likely that a few of them would have been able to survive if credit was more widely available at the moment, and a small subset of those might be able to survive if the bailout is passed by Monday morning. But most firms do not meet payroll by short-term borrowing; the fact that banks are reluctant to lend to each other does not have much impact on their ability to make short term loans to customers, and so on.

Yes: there can be cascading bank failures and that is a bad thing. But it does not happen instantly, not tomorrow, not next week, not next month. Here is a graph of bank failures during the Great Depression which we supposedly face again if we don't approve this ridiculous plan immediately.

I got this from a publication of the Federal Reserve Board. The point of the graph is simple: the banking system didn't fail all at once during at the beginning of the Great Depression: there was a continuing series of bank failures stretching over years. Meaning that there was plenty of time to think through a policy response. And it bears emphasis: at the beginning of the Great Depression the Federal Reserve did exactly the wrong thing: it failed to provide liquidity to the system and allowed the money supply to contract. It is the documentation of this in the Monetary History of the United States for which Milton Friedman and Anna J. Schwartz are justly famed. At the moment the Federal Reserve has been carefully, and largely quietly, doing exactly what it is supposed to do - namely exactly the opposite of what it did at the beginning of the Great Depression.

Let's be clear: the only casualty of having a sensible and rational debate about how big the problem is and what needs to be done will be the Congressional vacation - and only for members of the relevant committees at that. Maybe if they think this is a $700 billion dollar problem and a possible Great Depression they should consider canceling that? I really can't think of a worse reason for a policy blunder of this magnitude than Congress was eager to take a break.

Come on folks: get a grip.

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.

Great piece by Frank Shostak, chief economist of M.F. Global and one of the best Austrian economists around: Can the Rescue Plan Fix the US Economy?, on LewRockwell.com.

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.

Sam Diaz brings us news that Mac clone maker, Psystar, is suing Apple right back link here. He quotes the president of Psystar, "It's not that people don't want to use Mac OS X, but they're not open to spending an exorbitant amount of money for something that's essentially generic hardware."

Its case rests on the charge that the EULA (end user license agreement) the buyer of the software "agrees to" when he opens the package, requires that he use it on a Mac. That is obviously a restraint of trade, but courts have allowed it in the past.

So this is an important case and probably will be long fought by lots of companies which have a stake in the result.