Legal Commentary

Economic Chicken

By Professor University of Miami School of Law

Brad is optimistic about the long-run effects of the bailout: won’t cost us too much, won’t constrain an Obama administration too much.

This is good. Instinctively I like to outsource my macro worrying to Brad, Robert, and a few others.

But.

But.

Brad also told me years ago not to worry about the dollar no longer being a reserve currency (although to be fair he did worry — a lot — about the deficit). I think that the decline in the willingness of foreigners to hold dollars is part of the problem the Fed faces today - we can’t borrow much more. So I face the problem of having to think for myself.

And I don’t much like the latest draft of the bailout plan. It’s not as bad as versions 1.0 and 1.1 — they brought the APA back in for minimal judicial oversight, there are going to be warrants or other equity stakes — but even version 1.2 is a missed opportunity on multiple levels, and it feels like the country (and the Democrats) got rolled yet again.

Where’s the surtax on the people who got us into this mess? (And don’t get me started on bonuses and parachutes.) Where’s the bankruptcy mortgage cramdown to spread some windfall to the improvident middle class instead of just to the wildly improvident upper class? And what’s to be done about the moral hazard?

If I were in Congress, I’m not at all sure I’d vote for this. Of course, the looming threat that if you don’t All Hell Will Break Loose is indeed worrying. Responsible people can be forgiven for caving in the face of somewhat credible threats of doom, even if those threats come from an administration whose track record on Threats of Doom inspires no trust. But there also are sensible voices out there telling us that the crisis isn’t going to get worse in the next few days and that this isn’t even the second best answer, even if it’s no longer the very worst answer.

And if there’s going to be a game of economic chicken, how come the banks always win, and I always lose?

Full post as published by Discourse.net on September 28, 2008 (boomark / email).