Monday, November 24, 2008

Big price tag, little information

I used to think that the government had some super secret bag of statistics that I was not privy to. They – Bernanke, et al., Paulson and Treasury, Inc. – are running around like chicken with their heads cut off, and for each moving part that could potentially cause disaster – the government adds to the list.

Now, it’s the outcome of the Citigroup bailout, which from my reading is a single-institution Treasury Asset Relief Program (TARP) that was not approved by our elected officials in Congress with no actual money switching hands....yet. The bailout includes the government “providing protection” against $306 billion of Citi’s securitized assets.

Here is the joint statement by the Fed, the Treasury and the FDIC:
The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access, and capital.

As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup's balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.

In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC's mortgage modification program.

With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.
Mish Shedlock provides a nice list of the terms of the “agreement” here.

RW: It seems that the Treasury, the Fed and the FDIC say the same thing over and over again when they defend some huge bailout – in this case, $306 billion worth "committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth".

Wouldn’t you like to see a cost/benefit analysis of the government’s decisions to bailout these financial firms? A nice quantitative investigation of how many jobs would be slashed and aggregate income lost had the government not stepped in. In lieu of a cost/benefit analysis for the Citi deal, we do get this:
We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks. The following principles guide our efforts:
* We will work to support a healthy resumption of credit flows to households and businesses.
* We will exercise prudent stewardship of taxpayer resources.
* We will carefully circumscribe the involvement of government in the financial sector.
* We will bolster the efforts of financial institutions to attract private capital.
RW: There is entirely too much power sitting in the hands of seven individuals: the five members of the Fed’s Board of Governors, the Treasury Secretary Henry Paulson and the Chairman of the FDIC Sheila Bair.

These actions are being taken without the blessing of the public. Elected officials certainly have their shortcomings, but they are nevertheless elected. Bernanke and Paulson were nominated by the President and ratified by the Congress. It’s like making a copy of a copy of a copy.

Bloomberg put all of the numbers together and came up with $7.4 trillion (hat tip reader Paul Cox). BTW: Bloomberg updated this article to read $7.7 trillion. This is the amount of taxpayer money that the U.S. government is gambling with via lines of credit, liquidity, TARP, currency swaps, and everything else under the sun. Last time I checked, the U.S. economy was worth $14.4 trillion .

If the string of government bailouts is the “best thing to do,” then so be it. But the Fed and the Treasury have been sufficiently opaque about their policy choices, which leads one to question their actions.

Rebecca Wilder


  1. Paul Cox is right - see previous post - something is not right. Are you getting the feeling that this is just "monopoly" money that the Feds are playing? There have got to be more Citi's out there to be saved about which we know nothing. Maybe that is the Feds intent - to keep another big one from dropping like the stone (Citi). Nothing like owning preferred shares in a corpse.

  2. Isn't there something in the constition about congress controlling the purse? How do they even have the authority to spend taxpayer money like this?

  3. RW writes:
    [There is entirely too much power sitting in the hands of seven individuals: the five members of the Fed’s Board of Governors, the Treasury Secretary Henry Paulson and the Chairman of the FDIC Sheila Bair.

    These actions are being taken without the blessing of the public. Elected officials certainly have their shortcomings, but they are nevertheless elected. Bernanke and Paulson were nominated by the President and ratified by the Congress. It’s like making a copy of a copy of a copy.] Any way you try to factor this, the product is awkward, but on the issue of 'accountability' the concentration of power in the US is no more than in most democracies. The difference is in the power to affect the Globe.

    What I find most troubling is that the 'rules of commerce' have completely changed overnight.

    The cause of 'fiscal conservatism' has been tossed aside like an unwanted toy in the face of 'imminent starvation'. One can't help but be led to question: 'Was it just a toy all this time'?

    Yesterday's 'Conservatives' are today's Interventionists. Or are they?

    Nigel Lawson writes in today's FT:
    [...][Given that we are facing – at least in the UK – the worst recession since the war, it might be thought that the bigger the fiscal boost, the better. That would be a serious mistake. The truth is that the smaller the fiscal boost, the better.

    The rationale for what Alistair Darling, the chancellor – and, to a greater or lesser extent, his opposite numbers across the world – will be announcing goes back to Keynes, who has been enjoying something of a revival lately. However, while undoubtedly an economist of great insight, the Keynes of the General Theory made two significant, if understandable, mistakes. The first was his conviction that under-consumption, and indeed quasi-slump, were the default condition of free economies. It is not surprising that, writing in 1935, he believed this to be the case: even before the disaster of the early 1930s, the 1920s had been a miserable decade, with UK unemployment stuck at about 10 per cent or more – year in, year out. However, the experience of the 60 years since his untimely death has proved this not to be so.

    It was this mistake that caused him to adopt an unfortunately cavalier disregard of the dangers both of inflation and of excessive credit boom.

    His second mistake was to believe that fiscal activism was required because monetary policy was ineffective. This, too, has been invalidated by events. It is, for example, striking that, with the exception of Nazi Germany, which was for various reasons a special case, it was Britain that recovered faster than any other major nation from the 1930s slump. It did so largely on the basis of cheap money and a balanced budget.][...]

    He goes on to make some surprising claims, and I'm not in a position to doubt his claims any more than anything can be doubted at this time...which is not saying much depending on which end of the stick supplied by our respective governments that one beats themselves with.

    Further to RW's posting of "Even Canada, the King of fiscal responsibility,...":

    [OTTAWA — If Prime Minister Stephen Harper is serious about a stimulus package for Canada's economy, he'd best act quickly and decisively, with a generous plan that will bolster confidence and encourage spending on Canadian goods, economists say.

    “The sooner the better,” said Avery Shenfeld, economist at CIBC World Markets.

    Finance Minister Jim Flaherty has suggested that this Thursday's economic update won't contain major fiscal stimulus measures, and that those announcements will come in the full budget early next year.

    That's too long to wait, Mr. Shenfeld said. The U.S. economy is deteriorating so rapidly that it's certain to hurt Canada deeply, he said. Since government stimulus packages usually take a while to have any effect on the economy, a delay in government action would cause needless suffering in Canada.

    “If you wait till the spring, you're potentially throwing in stimulus far too late,” added Derek Holt, vice-president of economics at Scotia Capital Inc. “We've got to move really quickly.”

    The classic way for a government to stimulate a flagging economy is to pump money into infrastructure. Road-building and government-funded construction can create jobs through one-time projects that increase spending on local materials and provide the country with something it actually needs - without creating a long-term spending problem for the government.

    And that's the way Ottawa should go now, economists say.

    “Historically, the evidence suggests that infrastructure has the biggest bang for the buck. The only problem is the delay,” said Mr. Shenfeld.

    “Given the lags, it would be better if we weren't waiting until [U.S. President-elect Barack] Obama takes office in late January, or a Canadian budget in February, to get on with that task,” he added in a note to clients.

    Indeed, in the Throne Speech earlier this month, the federal Tories flagged infrastructure as a key way to pump government money into the economy. And Mr. Harper is quickly changing his tone how urgently stimulus is needed.

    On the weekend at a summit in Peru, Mr. Harper said Canada is slipping into recession, and said “unprecedented” fiscal stimulus is being considered. In circumstances like these, running a deficit is “essential” to get the economy moving again.][...]

    More points are made in the article, albeit it is fortunate for Canada that the banks are in relatively good shape. Buying 'toxic debt' never was a realistic option for this nation, not matter what your politico/economic stripe.

    But notice the conversion of Harper the Conformist, to Harper the Heretic, as that relates to conservative economic principle.

    Now I'm not a Neo-Con or Reactionary Conservative, but I am a Fiscal Conservative, and it is odd that suddenly the goal posts have not only moved...they've disappeared!

    RW's alluding to 'opaque' policies at the Fed is a very astute take on the inability to 'see' what is going on from a number of perspectives.

    It would help to see the figures, but in the absence of those figures, one is forced to state: "It doesn't add up". I wish I could be more logical...but in a vacuum...?

    What I can state with a degree of certainty is that the old 'Infrastructure Investment' argument still makes sense. As to the rest?

    The TV Show 'Lost' is suddenly simple in comparison.

    Please note: I had to publish as Anonymous as I'm continually having problems with 'Identity' aspect.
    (Yes, it goes back to early childhood)

    There is an intermittent clash with Linux OS. After being rejected some six times, I get the message!

  4. Oops! Previous 'Anonymous' is Stephen Saines

  5. Does anyone else feel like these bailouts are rash and feeble? The government needs a long-term plan, rather than trying to jump-start matters. They need to set a goal and see their idea through successfully!

    I think another vital note from this bailout is that we now see the magnitude of this recession. We all should take the necessary steps to recession-proof our lives. In order to do so, I think a realistic estimate of the amount of money we need to cut back on is relevant. Additionally, we all should have a clear vision of our altered future- many people are still living as if we’re in the .com boom of the 90’s! Here’s a great resource I found helpful when reorganizing my future: This kit actually outlines how to create a vision of your goals and dreams and explains how to execute them with success.

  6. Hi Stephen,

    Good to hear from you.

    You said, “The cause of 'fiscal conservatism' has been tossed aside like an unwanted toy in the face of 'imminent starvation'.”

    I cannot agree more. In the U.S., the Fed and the Treasury have ostensibly put their forces into tackling the financial crisis when there is a recession underway. Have they stopped to think that had a similar amount of resources been dumped straight into the U.S. economy – essentially forcing an expansion - that the financial sector would react and stabilize? But now, we get to fix the financial system and the economy, which is going to cost a lot more.

    You also said, “I had to publish as Anonymous as I'm continually having problems with 'Identity' aspect. There is an intermittent clash with Linux OS. After being rejected some six times, I get the message!”

    That’s what you get for being a techie. I know nothing about operating systems and thus use Vista (I know). But that seems to work just fine in Microsoft’s monopoly of software.

    Thanks for reading!


    p.s. I think that anonymous here agress with you!

    Thank you anonymous for your comments!

  7. Ah! But Rebecca...I'm computerize illiterate. I just keep pressing buttons until the damn thing works. As a last resort...and I mean *last*...I read the instructions.

    My electronic acumen is old school. I specialize in vacuum tube amplifiers. They're warm, they light up...They're Alive!

    As you correctly noted, the latter Anonymous was not I, but writes very well and makes good points.

    I'm seeing a clear string through most of these posts, and I've only been reading for a few days: I think most of us take solace in the forum aspect of your blog, in finding like-mindedness amongst others. I think most of us come to blogs like this to get some answers, some semblance of finding out "you think the same? You have a degree in this field, you study this for a living, and yet you too have nno definitive answers? Thank God for that. I thought it was just me".

    I'm a pretty guy, we all seem to be in this 'forum', and as much as any of us can rhyme off the 'pat party line', we all know it is superficial double-talk. You don't have to be an economist to realize that. Sixth sense alone tells you that even though you have achieved anywhere near terminal velocity, you've fallen through the bottom of the box, and you are accelerating downwards (velocity is increasing at a geometric rate).

    I understand much of what you describe, Rebecca, by paralleling with physics. This is intuitive understanding.

    It takes an Economist to describe and quantify though, in that particular discipline. As odd as this may seem: it is reassuring to read your take on things. Reminders of 'known unknowns..etc, etc' save that he didn't seem to know that much.

    You don't have to be a Neo-Con to be a Fiscal Conservative! I think, in fact, that a Great Society can be more easily supported and afforded with fiscal constraint than otherwise!

    God knows waste is the greater product of extremes. Our grandparents were right in many respects.

    Which brings me to Flaherty.

    RW and some other posters are well aware of the man...but be *very* aware of this (and yet again, the US and Canada are closer than just cousins, I'd say we're direct siblings. Many lessons can be had cross-border due to parallax and vector positioning alone! Sometimes you can see more in a mirror reflection than you can by direct sight-line.)

    I am not a Neo-Con supporter, albeit Harper et al have been somewhat better this time around (the need for survival dictates they rule more from center, a message all too familiar to you Republicans if you want power again)

    Flaherty's background is not good!
    [Wednesday, February 20, 2008
    It's called a deficit Mr. Flaherty...
    You're one to talk about fiscal responsibility Mr. Flaherty.

    You didn't show it in Ontario when you lied and left the new government with a huge deficit to clean up, and in 2 short years you have burned through what the liberals had built up federally, after cleaning up the despicable mess left by the last conservative government.

    I have heard conservatives prattle endlessly about how NO, it was Trudeau. Well I have one question. Why didn't Mulroney fix it? He had certainly the time in office to do it!

    It was the liberals who fixed it. And, it was the liberals that fixed it in Ontario too. That is a fact that no conservative can question.

    So Mr. Flaherty, tread carefully, because we will be watching as you plunge this country into debt in a few short years. And I will gladly, remind the conservatives I see pontificating right now about how their lying heroes are the right ones for the job. I predict that I will be rubbing their noses in it in the not so distant future.][...]
    Flaherty lashes Ontario for 'lack of vision'
    Globe and Mail Update
    February 20, 2008 at 10:35 AM EST
    Toronto — Federal finance minister Jim Flaherty sharply criticized the Ontario government Wednesday for its reluctance to cut business taxes, and what he called a “lack of vision.”

    The McGuinty government suffers from a “lack of leadership, a lack of vision and a lack of economic stewardship,” he said in an early morning speech in Toronto to the Canadian Federation of Independent Business. The provincial government “fails to understand the long-term benefits of tax relief,” he added.

    The business tax burden is putting Ontario manufacturers at a disadvantage, Mr. Flaherty said. It is also driving away new business investment.

    [b]Bailing out individual industries “is just the kind of protectionism that hurts trade and kills jobs” he said.[/b]

    On wednesday, Mr. Flaherty sharply criticized the Ontario government Wednesday for its lack of vision and reluctance to cut business taxes. (Reuters)]

    I bit hyped, but you get the point. Further to this, a Federal Commons Watchdog, akin to the US GAO, *appointed by this very government* stated that this gov. had caused the deficit to occur, by reducing taxes!

    What a dog's breakfast, in all respect to such a wonderful animal

    This is all quite confusing, isn't it? Which is exactly the point! Up is down, black is white, and trust no-one on their superficial claims.

    Now I happen to like Obama. the World in aggregate likes him, but I grown ever concerned about the sense (or not) of spending our way out of this (RW is exactly right. We're all in this together. Sure different siblings have different lives, but we are an extended family. Canada and the US especially. We're far closer in many respects than the EU nations.

    There is one distinct difference though as that pertains to this discussion:

    When the heating goes off (euphemistically speaking) we are dressed far warmer up here to deal with the situation. We're all going to be thrown out in the snow, the question is, how are we to survive? For Canada, the options are necessarily far simpler: In most respects, move with the US in co-ordinated like fashion.

    There's real irony in that the Liberal Party is far better equipped historically and philosophically to deal with a Dem Regine in the US. We're working on it!

    Meantime, I hope someone can light a fire under Harper. He'd best start by eating his hat...

    Make no mistake! Monies must be spent, but that does not infer in the least the adage "buying your way out of recession". It can't be done! Just look at the numbers.

    Incentive, however, is priceless.

    I leave it that for now, my purpose at this time is to produce parallels for RW's excellent leads.

    Stephen Saines

    (Still can't get this ^%$#^&(_ identity thing to work)

  8. Ummm...
    [I'm a pretty guy, we all seem to be in this 'forum']

    So far, the proof of that is earned only by Rebecca, she has posted her picture. That is a typo on my part, I meant 'pretty smart'. That is now in question....

    I'm going to have to sign-up again, can't figure out the Identity bit (it doesn't want to accept my password)(now I'm really open to jibes...sexual and intellectual) so if you see some form of my real name, it is me...I hope.


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