The Corner

The Bailout Vote

I’ve only done two posts on the bailout. They make the case that the (now modified) Paulson proposal is the worst possible course of action, other than any available alternative. In John Boehner’s pungent formulation it’s a “crap sandwich” for which the members of his caucus should, reluctantly, vote (though I suspect the phrase he used behind closed doors was a little more….alliterative).

It seems to me that the biggest cost of this proposal is not the direct expenditure. The government would commit to up to $700B to buy and then re-sell some assets. How much they would recoup is unclear, but history suggests that it is far from impossible that this would be close to break-even. How is it possible that the Treasury could avoid paying more than they are worth if the bailout is to help the banks at all? Because the fact of the Treasury being available to buy them changes their market value.

Before we get too excited about this seeming magic, however, we should remember – as I went into in greater detail a prior post – that the ideological costs of this are likely to be extremely heavy over time. This is a terrible precedent on many levels. Further, we can’t be sure that there really would be a cataclysm without the bailout, nor can we be sure that this will be enough to avoid one if it’s coming. We are making a bet to lower the odds of a bad outcome. It’s just that the severity of a Great Depression is sufficiently bad that it is a worthwhile bet to make. But we will pay dearly for it for many years. In this way, the bailout should be seen as one move in the course of a long and unpredictable campaign.

Seen in this light, the wrangling over the past week has really been about laying down markers for the later stages of this campaign. The initial proposal aggressively omitted normal oversight, which was presumably a negotiating tactic by Paulson, who, remember, has spent a career as a really good I-Banker. Adding this has been a substantial positive. Upon a quick, non-expert read, I think that the other changes to the bill are mostly fig-leaves. They are still useful as signals, however, in that they identify where each side is going try to go over the next few years. Whether through luck or skill, the House Republicans, have pushed this process just about to the breaking point, but not beyond it, and have gotten a number of such concessions.

But now it’s time to swallow hard and vote for the bill.

Jim Manzi is CEO of Applied Predictive Technologies (APT), an applied artificial intelligence software company.


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