It's a familiar phrase to anyone who regularly reads legislation. Most people would call it "pork." It's the extra stuff that goes into a bill to make it palatable to legislators who are not totally in favor of the main purpose of the bill. These items are not necessarily enough to convert a staunch opponent, but enough to get those on the fence to come to your side. It's a political application of the economist's old friend, "thinking on the margin."
With that as prelude, I offer you this link to the bill passed by the Senate and now before the House. It is now 442 pages long. Thepork "other purposes," begin on page 110 and continues for the next 330 pages (there are a couple of essentially blank pages at the end). The math works out nicely to be 75% "other purposes" by volume though not by money.
Ever since this latest and most intense phase of the ongoing crisis began a few weeks ago, I have been convinced of the need for a coordinated approach to unclogging the credit markets. Efforts to manage the specific incidents (AIG, WaMu, etc.) have been generally pretty good--if pretty good means that there have been no runs on banks and no catastrophic failure of the financial system. In fact, as I have pointed out in a couple of media interviews lately, the response of the FDIC has been superb. So far, they have my vote for the "most valuable player" in the handling of the situation. Because of their experience and efficiency in handling bank failures, I would fully support a measure that would guarantee that FDIC continues to have access to the Treasury to meet its mission. FDIC was created for just this sort of thing, so let's utilize them.
But there is a limit to what FDIC can do. The Fed can do a little bit more. They have the authority to respond to emergencies by lending to entities outside their normal purview. While there is always a danger that such authority could be used unnecessarily, in my estimation they have acted responsibly thus far. But even the Fed is limited to the role of responding to emergencies rather than acting entirely proactively. To act more proactively, that is, to systematically purchase troubled assets in a way that many think needs to be done, requires Congressional authority. And that's why we're here having this discussion.
There are, however, many reasons to be cautious about granting that authority. Obviously it requires transparency and oversight. Provisions that limit golden parachutes and give the taxpayer a chance to share the upside are also unobjectionable to me. Assessing financial institutions for a portion of the costs is also a good idea. Handing the Treasury Secretary a blank check would clearly be a very bad idea.
The biggest problem right now is clearly a lack of information (asymmetric information as well, but in some cases it is truly lacking). It is evident from the TED spread and other data that lending among the major institutions is being constrained by uncertainty over how to assess counterparty risk. This is not healthy, and it's not going to go away until some more information is revealed. Any bailout package should be designed with that in mind. If the Treasury is allowed to take some of the bad assets off of a bank, it may send a signal to counterparties that they are less risky. This would help to get funds moving again.
And let me just head off anyone who would say that we don't need to "get funds moving again" because that's what got us into that mess. That's just wrong. Getting the counterparties creditworthy again will not create an undue amount of moral hazard. This market has been slammed--big time. Getting the funds moving in a more normal way will not bring about a return to subprime, interest only, no-doc loans. At least not for a long time, and in that time we can talk about smart regulation to prevent that from happening again.
In summary, here's what I like about the proposal going through Congress:
Things I don't like as much:
Things I just don't like:
Is this legislation better than nothing? All week I've been wanting to be able to say yes, but I am finding it difficult to do so. There is something to be said for having a plan in place in case we need it in the next three months that Congress is out of session. And yet, I find myself disappointed in the process and not that crazy about the final product.
There is no doubt in my mind that on balance this legislation is worse than what was voted down on Monday, but this one might actually pass. That's how Congress works. This legislation is not something that we urgently need to prevent a depression, and it simply will not prevent whatever recession may be in the works. If it passes, it might reduce some of the anxiety in the credit market sooner. If it fails, the Fed will probably be called on to use its emergency lending authority again. The latter is not optimal, but it is probably workable.
The really sad thing is that the "other purposes" are not really out of the normal realm of business. While it grates at me, it is part of the legislative game. But if you think that facilitating price discovery and getting institutions to show their cards well help reduce counterparty risk, then this might be the best plan you'll get. It's not a solution. A solution seems very far away at the moment. But it's probably marginally better than doing nothing and hoping for the best.
And I think I'll just leave it at that.
For today's other commentary, see Arnold Kling (who has had very good material lately) and Tyler Cowen (with whom I am in general agreement).
UPDATE: King Banaian doesn't like the increase in the FDIC limit either. He is worried about the moral hazard and that it would lead to banks taking more risks to try to recover their losses (as in what led up to the S&L crisis). He's right about that. I still think the temporary aspect of it makes it worse. Let me be clear. I think the limit should be increased permanently to adjust for inflation, but it does not need to be done in this bill. It is not an urgent matter. And furthermore, if and when the limit is raised, the insurance premiums paid by banks should increase as well. In the meantime, the present practice of the FDIC in insuring the first $100,000 with certainty and making any decision to insure deposits beyond that on a case-by-case basis is sufficient for now.
With that as prelude, I offer you this link to the bill passed by the Senate and now before the House. It is now 442 pages long. The
Ever since this latest and most intense phase of the ongoing crisis began a few weeks ago, I have been convinced of the need for a coordinated approach to unclogging the credit markets. Efforts to manage the specific incidents (AIG, WaMu, etc.) have been generally pretty good--if pretty good means that there have been no runs on banks and no catastrophic failure of the financial system. In fact, as I have pointed out in a couple of media interviews lately, the response of the FDIC has been superb. So far, they have my vote for the "most valuable player" in the handling of the situation. Because of their experience and efficiency in handling bank failures, I would fully support a measure that would guarantee that FDIC continues to have access to the Treasury to meet its mission. FDIC was created for just this sort of thing, so let's utilize them.
But there is a limit to what FDIC can do. The Fed can do a little bit more. They have the authority to respond to emergencies by lending to entities outside their normal purview. While there is always a danger that such authority could be used unnecessarily, in my estimation they have acted responsibly thus far. But even the Fed is limited to the role of responding to emergencies rather than acting entirely proactively. To act more proactively, that is, to systematically purchase troubled assets in a way that many think needs to be done, requires Congressional authority. And that's why we're here having this discussion.
There are, however, many reasons to be cautious about granting that authority. Obviously it requires transparency and oversight. Provisions that limit golden parachutes and give the taxpayer a chance to share the upside are also unobjectionable to me. Assessing financial institutions for a portion of the costs is also a good idea. Handing the Treasury Secretary a blank check would clearly be a very bad idea.
The biggest problem right now is clearly a lack of information (asymmetric information as well, but in some cases it is truly lacking). It is evident from the TED spread and other data that lending among the major institutions is being constrained by uncertainty over how to assess counterparty risk. This is not healthy, and it's not going to go away until some more information is revealed. Any bailout package should be designed with that in mind. If the Treasury is allowed to take some of the bad assets off of a bank, it may send a signal to counterparties that they are less risky. This would help to get funds moving again.
And let me just head off anyone who would say that we don't need to "get funds moving again" because that's what got us into that mess. That's just wrong. Getting the counterparties creditworthy again will not create an undue amount of moral hazard. This market has been slammed--big time. Getting the funds moving in a more normal way will not bring about a return to subprime, interest only, no-doc loans. At least not for a long time, and in that time we can talk about smart regulation to prevent that from happening again.
In summary, here's what I like about the proposal going through Congress:
- Wall Street shares the cost (see pages 9-12 of the legislation)
- Limits on executive compensation
- Making the $700 billion available in tranches
Things I don't like as much:
- A temporary increase in the $100,000 per account limit on FDIC insurance to $250,000. Why? I don't like fiddling with such important institutions on a temporary basis. That figure is due for an upward adjustment due to inflation (and an increase in the premiums banks pay). Why not do that and make it permanent? (UPDATE: But don't do it during the crisis, see below).
- Ability of the Treasury to suspend mark-to-market rules. Why? Similar reasoning. I rarely would favor a temporary change in rules that are meant to foster transparency. Mark-to-market may be flawed, but I'm afraid that temporarily suspending it right now would only add to the confusion.
Things I just don't like:
- "...and for other purposes" Why? You figure it out. (Look at page 294 for an example.)
Is this legislation better than nothing? All week I've been wanting to be able to say yes, but I am finding it difficult to do so. There is something to be said for having a plan in place in case we need it in the next three months that Congress is out of session. And yet, I find myself disappointed in the process and not that crazy about the final product.
There is no doubt in my mind that on balance this legislation is worse than what was voted down on Monday, but this one might actually pass. That's how Congress works. This legislation is not something that we urgently need to prevent a depression, and it simply will not prevent whatever recession may be in the works. If it passes, it might reduce some of the anxiety in the credit market sooner. If it fails, the Fed will probably be called on to use its emergency lending authority again. The latter is not optimal, but it is probably workable.
The really sad thing is that the "other purposes" are not really out of the normal realm of business. While it grates at me, it is part of the legislative game. But if you think that facilitating price discovery and getting institutions to show their cards well help reduce counterparty risk, then this might be the best plan you'll get. It's not a solution. A solution seems very far away at the moment. But it's probably marginally better than doing nothing and hoping for the best.
And I think I'll just leave it at that.
For today's other commentary, see Arnold Kling (who has had very good material lately) and Tyler Cowen (with whom I am in general agreement).
UPDATE: King Banaian doesn't like the increase in the FDIC limit either. He is worried about the moral hazard and that it would lead to banks taking more risks to try to recover their losses (as in what led up to the S&L crisis). He's right about that. I still think the temporary aspect of it makes it worse. Let me be clear. I think the limit should be increased permanently to adjust for inflation, but it does not need to be done in this bill. It is not an urgent matter. And furthermore, if and when the limit is raised, the insurance premiums paid by banks should increase as well. In the meantime, the present practice of the FDIC in insuring the first $100,000 with certainty and making any decision to insure deposits beyond that on a case-by-case basis is sufficient for now.
According to Calculated Risk, all that "for other purposes" stuff is what they left in after stripping the bill and nserting the rescue parts. (http://calculatedrisk.blogspot.com/2008/10/curious-about-wooden-arrows-for.html)
That's not how I read what shows up on THOMAS when you look up the bill.
http://thomas.loc.gov/cgi-bin/bdquery/z?d110:HR01424:@@@L&summ2=m&
That link should give you the summary of the bill as it was passed in the House (H.R. 1424). A spending bill has to originate in the House, so they had to take a bill that had passed the House and been reported to the Senate. This bill had been read twice and placed on the legislative calendar under General Orders, which meant it was eligible for floor consideration. If you look at the version that passed the House and the version that passed the Senate, you will see that they are completely different. The intersection of the two is the empty set.
Nothing is by accident.
CORRECTION: I misspoke. The intersection is not the empty set. The mental health part of the bill is still there. (At about page 304 or so, I missed it the first time.) Actually, it looks more like the intersection of the two is the original bill. They didn't take anything out that I can tell (I haven't done a careful side-by-side comparison though.)