Chuck Schumer Makes Sense; Heads Explode

Ladies and Gentlemen, for your amazement, I present to you the rare and unusual sight of Chuck Schumer, making sense, refusing to grandstand, and offering pertinent, decent questions of Henry Paulson with regard to the proposed bailout. Yes, I was surprised, too.

For those of you who can’t watch, Schumer is, in this video, asking Paulson why, since the Treasury Department is only planning on buying up about $50bn worth of bad loans per month, the bailout plan can’t take the form of a $150bn ceiling with a plan to reconvene and assess the efficacy of the plan in January. Paulson stammers, mutters something about market confidence, and fails to answer the question.

It was something to see. Really. And more to the point, this seems like a damn fine question to me. Why isn’t this a viable option? As Matthew Yglesias notes, we are faced now with two options:

1. If we do absolutely nothing in response to the current situation, terrible things will happen.

2. Unless we do exactly what Hank Paulson proposed over the weekend, terrible things will happen.

These are, clearly, very different claims. And (1), while perhaps open to debate, is a lot more plausible than (2). But proponents of the Paulson Plan have an obligation to either make the case for (2), or else to canvass some alternative ways of doing (1) and explain in clear terms why the Paulson Plan is superior to other alternatives. Merely citing the urgent need for action is a transparent effort to foreclose debate.

No arguments from me on that point.

FILED UNDER: Economics and Business, , , ,
Alex Knapp
About Alex Knapp
Alex Knapp is Associate Editor at Forbes for science and games. He was a longtime blogger elsewhere before joining the OTB team in June 2005 and contributed some 700 posts through January 2013. Follow him on Twitter @TheAlexKnapp.

Comments

  1. Zelsdorf Ragshaft III says:

    I do not think anyone should have access to that much money, my money and your money without somekind of strict oversite. Henry Paulson has done nothing to give me the confidence necessary to entrust him with Seven Hundred Billion dollars ($700,000,000,000.00). Just who does he think he is? No judicial or adminstrative oversite. BS.

  2. anjin-san says:

    I think there is emerging bipartisan consensus that giving up anything near that kind of money without oversight, accountability and checks and balances is an act of lunacy.

  3. Alex Knapp says:

    Anjin –

    Yeah, I’m pretty shocked about that myself…

  4. anjin-san says:

    I have to pat myself on the back, I suggested exactly what Schumer is proposing earlier today. It just seems to make sense.

    Give us almost a trillion dollars with no accountability? I don’t think so Bubba…

  5. just me says:

    Well I think after the initial “we must do something now, let’s hand over some money” idea, cooler heads started to realize that while money might be needed a blank check without any oversight is not.

    I am not at all comfortable with giving money without oversight, and I am still not 100% even behind the idea of giving over that kind of money period.

    Although I must say a congressman given the opportunity to grandstand and not taking it is a date to put down on the calendar-I thought congressman in front of cameras always was some kind of signal for them to start up with the grandstanding.

  6. Dave Schuler says:

    The financial crisis isn’t one of liquidity but one of confidence. The ceiling will have the effect of reducing the level of confidence raised by a bailout plan.

    I have no idea whether a bailout plan is necessary at all and, I suspect, neither does anyone else although the worried look on Ben Bernanke’s face suggests it may well be. Nor do I know whether the bailout plan as requested will be effective and, once again, I suspect that nobody else does either. I wish somebody would give the specifics and connect the dots so I could actually arrive at a reasoned conclusion. Perhaps nobody knows and it’s just fear talking. Perhaps giving the details would aggravate the situation.

    I think that Congress should either add a few additional provisions for oversight and other modifications but largely pass the requested measure as is on a timely basis or vote it down outright. Otherwise they’re simply meddling while preserving plausible deniability.

    IMO that’s the real root cause of the mess: a lack of willingness to take the responsibility that one was hired to take.

    I would hope that, if a bailout really is necessary and Congress delays past the time when the needed bailout could have been effective or Congress modifies the bailout so that it doesn’t have the required effect (most of which is to instill confidence), that Congress would get the blame. Unfortunately, that’s a forlorn hope because of Congress’s diluted responsibility. Nearly everybody already hates Congress but likes his or her own Congressman.

  7. just me says:

    Nearly everybody already hates Congress but likes his or her own Congressman.

    Not me-okay I like my senators, although one of them is almost sure to lose this November.

    I can’t stand my congressman and will gladly vote against him in November, but I suspect he will get to stick around another two years.

  8. Dave Schuler says:

    The rate at which incumbents are returned to Congress is 90%+.

  9. Anderson says:

    Dave S, I don’t buy the notion that the market’s delicate, vulnerable psyche requires that we donate $700B to Wall Street, to bolster its “confidence.”

    I don’t think anyone really understands what creates “confidence,” any more than the daily jabber about why the price of [stocks/oil/whatever] fluctuated up/down on a given day.

    One could just as well argue that a more limited ceiling, with the assurance that Congress, the Treasury, and the Fed will be monitoring the situation with more $$$ if needed, will bolster confidence.

    Heck, when you get to playing the “confidence” game, then arguably all the market needs is for Paulson and Bernanke to say, “Wow, we LOVE Dodd & Schumer’s plan!” and — voila! — confidence.

  10. Dave Schuler says:

    I’m not sure I understand the point of your comment, Anderson. Are you asserting that there’s no need for any intervention?

  11. Bithead says:

    That Schumer wants something should be your first clue that whatever it is, is suspect.

  12. Anderson says:

    Dave, I’m increasingly skeptical of the need for a bailout, but my point is that the basis for a bailout cannot be “confidence,” because you can justify ANYTHING by the appeal to “confidence.”

    If there’s a need for a bailout, it’s because of specific impending failures that pose particular dangers to the economy.

    I don’t think that the public is going to go for “you have to mortgage your children’s future because some Wall Street guys were sloppy and greedy and now they say they’ll take the economy down with them” … much less, “because the Great God CONFIDENCE will be appeased by our burning $700B on the altar of Finance.”

  13. Heck, when you get to playing the “confidence” game, then arguably all the market needs is for Paulson and Bernanke to say, “Wow, we LOVE Dodd & Schumer’s plan!” and — voila! — confidence.

    In this confidence game, I think we’re the ones getting played…

  14. Dave Schuler says:

    If there’s a need for a bailout, it’s because of specific impending failures that pose particular dangers to the economy.

    That’s been spelled out pretty thoroughly. The danger is that lenders stop lending, not because they don’t have money but because they’re afraid they’ll lose what they lend. That actually happened on Tuesday and Wednesday so it’s not just a case of crying “Wolf!”.

  15. Ben says:

    My solution is a lot cheaper. It involves horse whips and stocks (the wooden kind).

  16. anjin-san says:

    That Schumer wants something should be your first clue that whatever it is, is suspect.

    Sure bit, sure. After all, Schumer is an Evil Democrat© & an Evil Liberal©. He is probably using his mind control rays right now to co-opt Republicans who only want what is best for America…

  17. Anderson says:

    The danger is that lenders stop lending, not because they don’t have money but because they’re afraid they’ll lose what they lend. That actually happened on Tuesday and Wednesday so it’s not just a case of crying “Wolf!”.

    Welllll, if the danger is that lenders won’t lend to bad risks, I don’t quite see how that is a problem. More like “how the system is supposed to work.”

    See Alex Tabarrok, “Where Is the Credit Crunch?”:

    A credit crunch does exist in the sector of the market based on short-term, asset backed securities. In addition, interbank lending is unusually risky. But in light of what I have just said the “credit crunch” takes on a new meaning and potential new solutions are suggested. The first question I have is this. Investment banks were selling these securities and using the money to lend to whom? I do not know the answer. But let’s suppose that the money being raised in these markets was being lent to productive businesses. If so, then any solution should focus on feeding those businesses that are starved for credit.

    I look at the situation as follows. Banks are bridges between savers and investors. Some of these bridges have collapsed. But altogether too much attention is being placed on fixing the collapsed bridges. Instead we should be thinking about how to route more savings across the bridges that have not collapsed. Government lending may be one way of doing this but why lend to prop up the broken bridges? Instead, why not lend directly to the investors who are in need of funds? After all, if these investors exist and have valuable projects that’s where the money is! Let the broken bridges collapse, taking the shoddy builders with them. Instead focus on the finding and rescuing the victims of any credit crunch, the investors who need funds.

    Now here is a hypothesis. It may be that there just aren’t that many firms in need of funds. First, one reason that bank lending is up may be that firms with good projects have already turned to the substitute bridge of ordinary bank loans. Second, I wonder how much real lending was actually being generated by asset backed securities. Could it not be that most of the funds generated were used to buy more asset backed securities? (The growth in these securities is certainly suggestive of that possibility). If that is the case then it explains why the real economy has been remarkably resilient to the “credit crunch.”

  18. PD Shaw says:

    As Matthew Yglesias notes, we are faced now with two options:

    That’s not fair. Paulson has said in the above clip and elsewhere, here is my proposal, it’s up to Congress to decide. This is not being presented as my way or the highway. Paulson has presented a serious plan and it deserves a vote.

  19. Bithead says:

    Sure bit, sure. After all, Schumer is an Evil Democrat© & an Evil Liberal©. He is probably using his mind control rays right now to co-opt Republicans who only want what is best for America…

    Well, let’s se, Anjin;
    Did he vote against the attempt to get F&F back to heel in ’05? I think you’l find he did.

    Did he vote for CRA? I think you’ll find he did.

    As Kirkorian says today:

    But we’re in this mess, ultimately, because our political elites thought it was good social policy to encourage banks to give mortgages to uncreditworthy people, resulting in what Sailer months ago called the “Diversity Recession” (if this doesn’t work, make that the Diversity Depression). In other words, if poor people in general, or blacks or Hispanics in particular, were less likely to be approved for a mortgage, the only possible reason was racism or classism or whatever.

    And I submit that since Schumer was in this thing up to his neck, following his advice now is at least logically questionable, if not morally.

  20. Alex Knapp says:

    Bithead,

    Rather than make arguments based on the argumentum ad hominem fallacy, perhaps you’d care to enlighten us as to what, specifically, was wrong with Schumer’s question?

  21. The danger is that lenders stop lending, not because they don’t have money but because they’re afraid they’ll lose what they lend.

    If that’s the case, instead of giving $700 billion to the knuckleheads responsible for this mess to buy bad debts in hopes that this will bribe them into lending again, why not just set up a completely new bank unburdened by dubious assets and $700 billion in deposits?

  22. Steve Verdon says:

    1. If we do absolutely nothing in response to the current situation, terrible things will happen.

    However doing something is also a terrible thing.

    1. We simply can’t afford this bailout, at least on the government’s books.

    2. It sets up serious moral hazard and adverse selection problems.

    3. When you prop up a house of cards you are still left with a house of cards.

  23. Michael says:

    The financial crisis isn’t one of liquidity but one of confidence. The ceiling will have the effect of reducing the level of confidence raised by a bailout plan.

    Then let’s do it the other way, approve the full $700b, but put a monthly cap of $50b, with the option for Congress to suspend, reduce, or end the program in January (and every 3 months after that).

    Or how about this, we allot $350b to buy those assets, but only if the company files bankruptcy. That way the strong banks that don’t need the bailout won’t take it, and the weak ones who don’t deserve it will be gone, the government spends enough money to provide an economic cushion, and that should leave more financial confidence in the companies that were able to survive.

  24. Dave Schuler says:

    Then let’s do it the other way, approve the full $700b, but put a monthly cap of $50b, with the option for Congress to suspend, reduce, or end the program in January (and every 3 months after that).

    Extend that to six months and I’d have no complaint about it.

  25. anjin-san says:

    Then let’s do it the other way, approve the full $700b, but put a monthly cap of $50b, with the option for Congress to suspend, reduce, or end the program in January (and every 3 months after that).

    Sounds like a plan.

  26. Michael says:

    Extend that to six months and I’d have no complaint about it.

    Then you’re still out $300b before you can put the brakes on it. I’d rather guarantee only $150b at a time.

    If we do it for 6 months, we’ll only have one opportunity down the road to make corrections, so the stakes in 6 months will be as big as they are now. If we do 3 months, we can cut back to $30b/month from January-March, with the option of increasing it for April-June if need be.

  27. Bithead says:

    Rather than make arguments based on the argumentum ad hominem fallacy, perhaps you’d care to enlighten us as to what, specifically, was wrong with Schumer’s question?

    WIth Schumer’s record what I’ve said hardly qualifies as insult. And I think Polson answered Schumer’s question prety well when iwas asked, and so there’s not much to add, save that the stopgap will give the Democrats more chance to try and load things onto the solution… something they’re already keen on doing.

    for all the added crap they’re loading the poposal up with, you’d think their attitude is that the 700B doesn’t go far enough.

  28. Dave Schuler says:

    Then you’re still out $300b before you can put the brakes on it. I’d rather guarantee only $150b at a time.

    You’ve rejected your own proposal? Just rhetorical, then? A device towards a reductio argument.

    No. As I said in my first comment, the problem is one of confidence and to ensure a level of confidence we’ve got to underwrite the whole shebang.

  29. Michael says:

    You’ve rejected your own proposal? Just rhetorical, then? A device towards a reductio argument.

    What? I’m reiterating exactly what I proposed in my initial argument: $50b/month, re-evaluated every 3 months. In that last post I was giving my reason for going 3 months at a time, which is that it would give us 3 opportunities to change course, while yours would give us only one such opportunity.

    No. As I said in my first comment, the problem is one of confidence and to ensure a level of confidence we’ve got to underwrite the whole shebang.

    Then why even suggest re-evaluation after 6 months? If we can re-evaluate, but we can’t change, what’s the point? If anything less than the “whole shebang” will cause a failure in confidence, then we have no choice but to accept Paulson’s proposal, but I don’t accept that premise. However, if giving away only $699 billion won’t cause the collapse of the entire economy, then maybe $500 billion won’t either, and maybe $350 billion will only cause bad and not terrible consequences.

  30. The fact that Senator Schumer can be reasonable makes his act even more tiresome and insulting the rest of the time.