James Galbraith on the Financial Crisis

First in Harper’s:

5. The Democrats say they are not going to give the administration a blank check, but there’s a lot of pressure to do something. What sort of conditions should be attached to a bailout?

The Democrats have a strong hand. The voters weren’t born yesterday; they understand that it’s a Republican administration in power. Some of the problems are difficult to solve. Executive compensation is clearly a legitimate concern; it’s incredible that Lehman Brothers set aside a $2.5 billion bonus pool as it was going into bankruptcy. On the other hand, what do you do about it? If you tell these people they have to work for $400,000 a year–that’s a lot of money to you and me, but a lot of them are going to say, “See you on the ski slopes, pal.” But what Congress can do is make sure the companies have to turn over any information that the Treasury wants from the companies, including the computer code. If the government is going to buy assets of dubious value, it needs to know that the companies aren’t selling it the worst of the worst, just as you have the right to inspect a used car before buying it.

6. How long is it going to take to fix the situation? And what about the bigger financial crisis?

There’s nothing that can put this right in six months. No bailout can achieve that, but the difference between three years and ten years is important. The Treasury is going to end up with a large portfolio of properties. The government needs to set up the equivalent of draft boards in communities to make a review of properties and see how to keep people in their homes: offering them sustainable payments or converting mortgages into rental contracts, or simply demolishing homes that have been wrecked or that have fallen into irreparable disrepair.

Also in The American Prospect:

Many are concerned with the fiscal implications of this bill, so let me turn to that question. Despite the common use of language, the capital cost of this bill does not involve “taxpayer dollars.” It authorizes a financial transaction, exchanging good debt (U.S. Treasury bills and bonds) for bad debt (the “troubled assets”). Many of those troubled assets will continue to earn income for some time, perhaps a long time. The U.S. Treasury commits itself to paying the interest on the debts it issues. The net fiscal cost — which is also the net fiscal stimulus — of this bill is the difference between those two revenue streams. Given the very low rate of interest presently prevailing on Treasury bills, this is likely to be somewhere between $20 billion per year and zero from the beginning, even if the Treasury were to issue all $700 billion in new debt at once. It is a mistake, in short, to count the capital cost as a “cost to the taxpayer.” This is not the war in Iraq. In the longer run, of course the Treasury will incur capital losses on the assets it acquires. The entire purpose of the bill is to overpay for bad assets, so as to give financial institutions a chance to recapitalize themselves.