Things are getting worse

Luke’s recent LHC post has goaded me into making sure other important events do not pass without appropriate comment.

The talk about town is all of the US government’s proposal to nationalise (or ‘go all European on,’ as I predict it will soon be derided) the parcels of extremely bad debt owned by important financial companies; my mother, for instance, describes it as ‘bad’ in her most recent weekly letter. It seems to me that the text of the legislation becomes more penetrable if one replaces the phrase ‘mortgage-based assets’ with ‘chocolate’.

Sec. 5. Rights; Management; Sale of Chocolate.

(a) Exercise of Rights.–The Secretary may, at any time, exercise any rights received in connection with chocolate purchased under this Act.

(b) Management of Chocolate.–The Secretary shall have authority to manage chocolate purchased under this Act, including revenues and portfolio risks therefrom.

(c) Sale of Chocolate.–The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any chocolate purchased under this Act.

(d) Application of Sunset to Chocolate.–The authority of the Secretary to hold any chocolate purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a chocolate under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Dire stuff; if you are reading this post, you are affected by this proposal. Though the market reaction to the announcement of the plan on Friday was extremely positive, the American political-economic blogaxis (too polar to warrant the term ‘sphere’) has now metastasised in a unified bloc of opposition, with each end trumpeting objections along their idealogical fault lines.

Of course, it is not the place of this blog to editorialise, especially when there is chocolate to be bought; the purpose of this post is to direct attention to a lengthy and cogent discussion of the legislation and reactions to it, though I do not endorse their opposition whole-heartedly.

Update (ca. 9pm BST) An off-blog dispatch from B. M. Jackson spurs me to sketch out those fault lines a little more; he suggests Greenwald, who unsurprisingly (and understandably) zeroes in on the ‘no-oversight’ clause:

Put another way, this authorizes Hank Paulson to transfer $700 billion of taxpayer money to private industry in his sole discretion, and nobody has the right or ability to review or challenge any decision he makes;

one of Greg Mankiw’s friends makes the same point with a bit more outrage:

Has more money ever been given with fewer restrictions on how it is used? Ever?

Greenwald also quotes Atrios, who seems to have assimilated his Chomsky without difficulty. One could go on, and indeed Sullivan does. But all one needs to know is contained inside the fresher-level summary from Jim Manzi, followed by the comments of an allegedly well-placed reader of Yves Smith:

[JBJ: This is Smith, then her reader indented below] Yet as we discussed, the plan makes no sense unless the Orwellian “fair market prices” means “above market prices.” The point is not to free up illiquid assets. Illiquid assets (private equity, even the now derided CDOs were never intended to be traded, but pose no problem if they do not need to be marked at a large loss and/or the institution is not at risk of a run). Confirmation of our view came from a reader by e-mail:

…Anyway, I wanted to let you know that, behind closed doors, Paulson describes the plan differently. He explicitly says that it will buy assets at above market prices (although he still claims that they are undervalued) because the holders won’t sell at market prices. Anna Eshoo pressed him on how the government can compel the holders to sell, and he basically dodged the question. I think that’s because he didn’t want to admit that the government would just keep offering more and more.

Photo by Flickr user ansy used under a Creative Commons license.

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