Framing the Bailout

Last night I talked about how poorly the bailout plan was framed by political figures and government officials; since the policy was never clearly explained to the American public, they were against it. This lead to House members who might be facing a tough reelection to vote against the plan... and now a lot of people in the House (and John McCain) and Hank Paulson have a lot of egg on their face. So TPB offers up a little advise to Hank Paulson, members of the House, and any other government official as how to sell the bailout to the American public.

1) Change the Name of Plan - as I said last night, bailout sounds too risky—a last ditch effort without thinking everything though. McCain, who now has a lot to lose with yesterday's failure, has already realized this by calling it a rescue. At this point, I don't think it needs to get fancier than that; as long as policy makers are no longer calling it a bailout I think this problem has been resolved.

2) Explain to the Public Why They Need the Money - As the The Swamp reported today, Hank Paulson and company went about the bailout all wrong:

As the fingerpointing continues following the House's failure to pass the $700 billion bailout, a lot of blame is going to Treasury Secretary Henry Paulson Jr. for first trying to run roughshod over Congress and the sensibilities of taxpayers until he realized that approach was doomed to failure.

No one bothered to tell the American public why they needed handover $700 billion. Paulson and Congressed failed to explain what the money was for and who were to recieve it. By taking this approach, policy makers allowed opponents to frame the issue by focusing on executive pay and how it was bad investments by the guys and gals on Wall Street that lead to this mess. 'Main Street should not have to bail out Wall Street' became the simple rallying cry.

What Paulson, or someone who has fiscal/financial authority in the eyes of the American public, needs to explain is why this money is needed. It shouldn't be too hard, "Over the past few years a lot of people made bad investments, but we are not asking for money to bailing them out for their mistakes. Instead, we need the $700 billion to rescue the American economy from a liquidity crisis—right now businesses are finding it difficult to borrow money from other companies, which means they are having a hard time paying their bills or investing in their business, and maybe even pay employee wages. The money will be used to inject cash into the economy to help increase the flow of money between businesses and avoid anyone from having a pay check bounce."

I think this is the key for supporters of the bailout now—to frame the issue as a personal matter. Your pay check may not cash on Friday if something isn't done. That will get peoples attention even if it is a bit alarmist. But it's a much better message than "give me $700 billion because I said so."

-- Finally, I fould this to be a decent read and worth at least looking at.

Framing the Bailout

This morning I considered the bailout to only be a formality. Not a perfect solution, but eh, it sort of had to happen. Some disagreed. But most people I know who know a thing or two about this stuff i.e. markets and capitalism—not to mention an economist I like to call Gary Becker—saw the bailout as a necessity. I agreed.

So when I found out this afternoon that the bailout was voted down by the House, I was shocked. Now what? I didn't get it... why was it voted down? Why would a member of Congress vote it down? Sure there is going to be opposition, but this thing kind of sort of has to be passed in some way shape of form. Is/was it perfect? Of course not. But it had to be passed just too keep the economy afloat... and then it wasn't.

I called my father and at some point in the discussion, my mind went back to 6:35 this morning when on the train three people were talking about the bailout and all three agreed that the guys who were going to get the money from the government didn't need it. It was their fault after all. I stood there thinking, 'if only it was that easy'. I sort of wanted to launch into full Mr. Know-It-All mode, but it was 6:35 in the morning.

As my father and my conversation progressed, the reason for the failure of the bailout became more and more obvious—it was a poorly framed issue. When I say 'poorly framed' what I mean is that a policy like this has to be sold to the people, and the sellers of the bailout did a horrible job at marketing the plan. Framing is simple, it's pretty much taking something complicated and explaining it in a sentence or two. The details are for later in the conversation. Framing the issue is simply putting the policy in the best light and making it easy to understand. Catch-phrases work "Ending welfare as we know it"; however poorly framed issues are almost always deemed to failure, privatizing social security anyone? How about the Clinton heath care plan... but back to the bailout, it was a poorly framed issue:

1) The name, bailout sounds too reckless, like a thrown together plan from a Western, a 'it will never work, but if it does, it will be cool!' sort of idea from a bad action movie. The plan should have been called something else—a life jacket/life saver (sorry I'm tired as hell) or 'government investment' both might have worked—in order for the policy to succeed. And Nate Silver over at 538 backs me up on this.

2) The real problem is that the bailout was never explained in an easy way for people to understand. People see the "D.C. wants to give Wall Street $700 billion" headline and they think, 'Why? The Wall Street guys are the ones who made the bad deals!'. And they're right.

But we're way beyond that at this point. This isn't about being over leveraged, giving out mortgages to people who didn't deserve one, or even executive pay any more. But no one in the Bush Administration, the Fed, Congress, or even economists themselves are saying this. Instead they're talking about how we need this and then saying things no one understands (as NPR pointed out today).

So what is needed in order for this to pass, is for someone, anyone, to explain what Hank Paulson wants Congress to do in order to help the U.S. economy. In other words, someone has to frame the issue and sell it to the American public, or else you 'll get what happened today—any member of the House in a close race voting against the plan.

So how do you sell it? That's tomorrow, I'm tired and need Hines Ward to catch one more pass to put my fantasy game away.

Shock

I'm in shock. I know no one ever wants to give away $700, let alone $700 BILLION, but the House rejecting the bailout is shocking. I really don't know what else to say other than, if you don't have a government job right now, start saying prayers and writing letters to your Congressman/woman to pass the bailout.

More soon...

Palin and Policy

This might be a series of posts over the next five or six weeks... Sarah Palin and her effect on policy in this election. I couldn't agree more with what was said in the 538 blog last night:
"The crisis also plays terribly with the Palin pick, because it's increasingly clear that regardless of the way she connects or doesn't connect with someone on the personality level, she doesn't pass the laugh test for qualification. I don't mean that in as partisan way as you might think. Analytically, she's obviously not qualified. It's inarguable. But prior to the crisis it was much easier to imagine a world where she could skate by for 60 days not facing questions and having an American Idol election. Now, I think people are honestly scared by the economic circumstances, and it may shock independents into refusing to take that risk of a McCain-Palin ticket."

No matter what you think of Sarah Palin, Sean from 538 is right about two things about Ms. Palin:
1) She isn't qualified at the moment.
2) The economic crisis and her interview with Katie Couric has made this painfully obvious. Conservatives are left making weak excuses as to why Ms. Palin is obviously unqualified... because she wasn't called Governor Palin she flopped like a fish out of water with Katie Couric?

We could debate the political implication of the Palin pick, but I'm not that interested in that—yes, it solidified the GOP base and yes, Ms. Palin was at least four years away from having any business in a Presidential race—because the Palin pick, a month later, isn't interesting for political reasons any more.

It is interesting for policy reasons. When Sarah Palin was chosen by McCain, the election, which was already treading away from the issues, officially became about politics, the phony culture war, style, and image. Clearly, Obama's campaign has always been about style and image, but he at least sort of backed it up with substance. The Palin pick was all style and no substance.

But a funny thing happened along Wall Street two weeks ago, and in the last week to ten days the election has swung back to issues. Now substance is more important than style. In theory, this should help McCain as long as he can continue to distance himself from President Bush. McCain is more of the substance candidate than Obama, if only because McCain has been in the Senate longer than about 20% of America has been alive (for the record we were 14 months when John McCain was elected to the Senate). Obama critics have been saying for years now "where's the beef" when it came to Obama's policies and ideas. It was a valid question if only because Obama doesn't have a long track record on pretty much anything.

But the financial crisis has exposed McCain more so than Obama—in part because McCain sticks his foot in his mouth when it comes to talking about the economy (or doesn't make any sense). But the financial crisis also hurts McCain because Palin, The Style Candidate, has no substance when it comes to discussing something as big as what's taking place on Wall Street and in D.C. Her lack of pretty much any experience is so glaring that every time you see a McCain/Palin image, her name looks like a mistake and probably creates a lot more anxiety than calm. Joe Biden may be a walking, talking "stupid sound bite", but he can get away with such mistakes because everyone knows that Biden has some substance to what he says and what he's done.

It no longer matters if Sarah Palin believes in dinosaurs or if she wants to teach creationism in school (note: Palin was born and raised Catholic, but she appears to have left the Church and no one really knows what the hell she is). Those are style issues. Substance issues like the financial crisis exposes Sarah Palin as a style pick. And most of America can see right through the style because of the lack of substance in a time when thought and reason is needed.

I don't think John McCain ever wanted Ms. Palin to be his Vice President. He got stuck with her, needing a Hail Mary, he was forced to choose her by the party up and ups. "She'll bring the base together John," they probably told him. And she did. And as long as the election wasn't about issues, she was the perfect pick. But the McCain people should have seen this coming, maybe not the Wall Street near collapse, but some major issue taking the forefront of the campaign. It isn't 1996 or 2000, there are so many issues that the country HAS to deal with that eventually one of them would pop up and grab the headlines. And that's what happened, and now John McCain is left with a VP who is only dragging him down. This effects him politically and from a policy perspective... he not only has to find his own policy positions but he also has to make sure this Vice President actually has a policy position and that the American public buys it.

Debate #1

I was supposed to meet up with some high school friends and go to our Homecoming football game... but they bailed and I found myself in the back room of Jimmy's watching the debate with about 50 undergrads, a few black men, and the bartenders.

So what did we learn from tonight's debate? Well... John McCain talks about how great he is a little too much. And Obama meanders far too much in his answers, it takes him six sentences to say what he could say in two. In other words, this was an utterly boring debate. A draw. Tonight was best summed up by a friend who said on the phone afterwards, "I guess they both did what they needed to do, McCain didn't look old and Obama looked Presidential."

That sums it up well. Neither candidate hurt himself tonight. But at the same time, they wasted 90 minutes of our time saying nothing of any sort of interest. The only time that I was sort of interested was during the Iraq talk (mainly because it's the only major policy difference between the two men). The bar laughed in a condescending, snarky way at a few of McCain's responses... and after McCain said, "when I was released from prison" one of the black guys in the bar got off his stool and did one a 'what the fuck' sort of things as if he lost a bet, which brought down the back bar... but in truth, the smart souls watching the White Sox game in the front were louder and apparently more into the game than anyone was into the debate.

So what to take away from the debate tonight?
1) McCain used existential in a way that you normally don't hear when he said, "... if Iran acquires nuclear weapons, it's an existential threat to the state of Israel." Not incorrect usage, just a word you don't hear every often unless you're at Jimmy's talking about Camus.

2) Obama used irony correctly when he talk about Iran and Iraq.

But that's all I've got. Policy wise, a disappointing debate. Neither one said anything all that interesting... they were more interested in being "right" about what they said than anything else. Yawn.

For more check out 538... they always do a good job. I'm a fan of the Trib's Swamp blog which always does a good job, they think it was a draw also. And if you think anyone of them said something and you went, he's full of shit, here's always a good place to go.

John McCain believes he can save the American economy just by showing up

McCain's announcements yesterday that he was suspending his campaign and that he wanted to reschedule the debate with Obama on Friday in order to deal with the economic crisis is puzzling for a bunch of reasons.

First, how does one suspend a campaign? Is he no longer taking donations? Is everyone working for the campaign taking the day off? Of course not... so the campaign suspension is in name only. But I'm not here to spend too much time on politics.

More puzzling is that he's doing all this so that he can go to D.C. to fix the economic crisis... but here's the really weird part. John McCain isn't on either Senate committee that is dealing with this mess—the Committee of Banking, Housing, and Urban Affairs or the Finance Committee.

As any student of American politics can tell you, the work of Congress is done in committee. And without a seat at the table, McCain's influence is little. In other words, McCain is showing up to the party a few hours late and isn't bringing anything to drink on top of it.

This seems to me to be an obvious political ploy. Will it work? Time will tell, but it's a curious decision since it's highly unlikely McCain's input is needed (or wanted) to reach a deal.

From a policy stand point it's a dog and pony show... and McCain would better serve the country by not bringing any more distractions to an already tense situation.

Moral Hazard and the last few months

I'm not sure where to start since there's so much going on... so I'll just do a bunch of posts and see how many I can get though over the next few hours.

As Congress debates (aka does the political posturing dance) the bailout plan, I have to say I'm pretty much sold on it. Is it perfect? No. In fact, if it was only one company, I'd be all against the bailout. But seeing that we're talking about some really big and important companies, I don't think the government really has a choice. And Gary Becker agrees with me (or more like I agree with Gary Becker).

But as Becker points out, what the bailout does is create a huge moral hazard problem. And by huge, I'm talking $700 billion huge. The lesson learned by these companies is that they can continue to take on bad risks and over expose themselves... and if things don't work out the government will be there to bail them out. As Becker points out, "On the one hand, the equity of stockholders and of management in Fannie and Freddie, Bears Stern, A.I.G., and Lehman Brothers have been almost completely wiped out, so they were not spared major losses." But on the other hand, these companies have been allowed to survive even though they had been acting irrationally (i.e. stupid and over exposing themselves) and while a lot of people lost their jobs and a lot more lost a lot of money, they didn't lose all their money. As Becker continues, "bondholders in Bears Stern and these other companies were almost completely protected implies that future financing will be biased toward bonds and away from equities since bondholders will expect protections against governmental responses to future adversities that
are not available to equity participants."

So what has happened is that it looks like the Bush Administration (with an assist from Congress) has created one of the biggest moral hazard problems in human history. Sure, I could go back in history and find other times when the government bailed out a private company or deemed a corporation as too big to fail, but what has taken place over the last few months is unprecedented. I'll say it again, $700 billion dollars of tax payers money will be handed out to a bunch of companies who going under because of their own short sighted stupidity... in other words it's their own fault. But the government is riding into hopefully save the day... at the cost of $700 billion.

(And no one really can imagine how much money $700 billion is, but $700 billion is more than the GDPs of the Netherlands, Taiwan, and Poland; in theory the U.S. government could just buy these conturies instead of bailing out those companies).

But back to moral hazard, it does bring up an interesting debate that Richard Posner sort of digs into... how much blame should be placed on the government? In the case of Fanny and Freddie... a lot. Everyone at both of these quasi-private companies knew that the U.S. government would bail them out of they messed up. And that's what they did. They had nothing to fear... if they could deliver insane profits for a few years it was worth it because they were never going to go down.

However, in the case of Bear Stearns, Lehman Brothers, and A.I.G., it's very hard to place any blame on the government (unless you want to argue about deregulation). There was little prior history or prior history to suggest that the government would come to the rescue of these companies if they went belly up. And I don't think if the Fed and Paulson knew that crisis would only get worse that they would have bailed out (i.e. forced JP Morgan/Chase to buy) Bear Stearns.

Anyway, a great piece from Becker and Poser on what has happened.

It's a question of how to, not have to...

This weekend while out with friends, the conversation gravitated to the mess on Wall Street. Most conversations went something like this:

Friend: I don’t care if it lowers our GDP growth from 4% to 3% for ten years, we need more regulation to avoid this.

TBP: How are you going to regulate what just happened?

Friend: Well… I don’t know much about finance.

TBP: Exactly. What happened was a bunch of guys and girls who thought they were a lot smarter than everyone else, over exposed themselves, and they got nailed because of it. I’m not sure how you regulate that efficiently. And I’m not sure how you go back in time and regulate what happened.

Or to put it another way you can't regulate a computer model. That’s why anyone and everyone appeared to have been buying mortgages two or three years ago—the computer models that they had created showed something like a 5% default rate. After a little cost/benefit analysis companies started handing out mortgages to anyone who could breathe, sign a contract, and was over 18.

But then reality set in and default was something like 8% or 10%.

And now everything is fucked. Okay maybe I’m being a little melodramatic, but things aren’t good. Everyone, even John McCain, wants regulation. But it seems to me that there is too much reaction and not enough contemplation taking place.

Let's go back to part of the reason we're in this situation right now, the computer models were wrong—so now what? Obviously some sort of oversight is needed—this is blatantly clear with A.I.G. where things got way out of hand with little government oversight. But how about those computer models, how do we regulated those?

I think the answer is simple: you don’t. If people and investors want to use them, then they can at their own risk. If the computer model turns out to be ‘wrong’ then well, let them fail. This means more accountability to the leaders of such companies. Sadly, there has not been to much of that thus far in the fallout.

Some sort of oversight is probably needed in the mortgage industry, but instead of regulation, I’d prefer to see something like we see with the FDIC (Federal Deposit Insurance Corporation) and banks, which the government guarantees $100,000 that any individual has in a bank. So in a good standing mortgage, the government provides some sort of guarantee to the bank and the home buyer, but the government does not do the same on riskier mortgages. Those are given out at the mortgage/bank’s own risk.

Is this a perfect solution? Of course not and it would be a very expensive policy to undertake. But the current system failed us, mainly because the computer models that were cooked up failed the people who cooked them up. The result? The American tax payer may be stuck with a $700 billion bill, though some don't think it will happen. I can't believe it won't be passed after every Senator says "shame on you Wall Street" and then gladly signs off on the deal as the Wall Street types then donate money to their reelection campaigns.

ANYWAYS, once that dust settles, it’s time to put the policy wonks in a room with the bankers and other lenders and figure out just how to prevent this from happening at such a huge level again.

SEC to ban short selling

I first read the headline in the Guardian this afternoon that the Brits were going to ban short selling. "Wow, stupid move," I thought to myself.

And then it happened here in the U.S.A.

Stupid would be an understatement.

First short selling. Conceptually, it is a little difficult—by shorting a stock or product, a person is selling a stock/product they do not own, and then buying it back. Obviously they are hoping that the price goes down... in effect it's selling high and buying low—the exact opposite of buying low and selling high.

Which has made the pictures of stressed traders on the floor sort of funny... some of these stock traders have probably made a ton of money this week by shorting stock or other financial products. If anyone is getting 'hurt' this week it's the average American's 401(k).

The SEC wants to put a stop to this. The question is why? And what does the SEC hope to accomplish?

Short spelling is not the reason why Wall Street suddenly found it self collapsing this weekend. They did that on their own by buying a lot of bad mortgagees and over exposing themselves to the real estate market. When that bubble burst, some companies—like Lehman went down—while others like Bear Sterns, Fanny and Freddy, and A.I.G. had to be saved by the U.S. Government.

So why does the SEC want to create an inefficient market? It's probably bad enough that the Fed and other Central Banks pumped in a ton of money today. But no why this? It doesn't make any sense.

To no surprise the SEC won't tell us what they're thinking... so I'll guess.

By banning short selling, or so they hope, they'll slow the fall in the stock market. Are they attempting to play politics with policy? Keep the stock market indices higher than they would be naturally to help out John McCain? Or do they actually believe that by banning short selling that the stock market will rise and everything will recover and in three months time they will have saved the U.S. economy? Coming from the Bush Administration... they probably do believe this just how the believed we could waltz into Iraq and everyone would love us.

But here's the problem... it is a pure market manipulation. And market manipulation is a very very very bad thing. Because eventually things will sort themselves out and it will be much worse than what we're going though at the moment.

This is potentially a very sad and bad day for the United States and the U.S. economy. And this is some of the worst policy making in the last 30 years. But then again, if the Bush administartion has been good at anything, it's bad policy.

The Fall Out Continues

A few good articles I've come across in the last few days:

-- A pretty good run down on the details/behind the scenes look at what did happen this weekend on Wall Street.

-- A "what just happened and why does it matter" from the Freakonomics guys. Also, it's interesting that Levitt is so candid in his "I'm just an economist, I haven't a clue what's going on". I think a lot of people expect economists to understand finance and be some sort of financial genesis... and I guess to a certain degree they do. But economics today is not really about numbers; economics today is the study of human behavior—why people make the choices they make and what our choices mean.

-- Politics and policy are interlinked in this country—even if I don't like it, 'dem da facts—so obviously I'll throw up some interesting political observations and musings. And with the election oh so close, expect a lot political links.

But polling results are starting to show a break for Obama, and now the question/headlines becomes/will become... is McCain in trouble? I think this is a bit of an over reaction (just like the Obama's in trouble! after the GOP convention). But if more polling results over the next week show a swing towards Obama then it goes to show how little of an impact the conventions have, how fickle short term polling data can be, and that no matter what this race is very tight. I don't think McCain is in a lot of trouble, but I was wondering how he would handle being in the lead. The past week, a week with him in the lead, has been less than encouraging. Maybe Obama taking the lead is the best thing for McCain...

-- Who says Obama hasn't done anything and hasn't actually done anything? To anyone who follows Illinois politics, getting this moving is nothing short of amazing.

-- Chuck Hagel, one of my favorite Senators, doesn't think Sarah Palin has the experience to be Vice President.

What About Inflation?

Eventually I'll get into who I am and all that jazz that might make me sound like someone with a bio that kind of, sort of knows what he/she is talking about.. explain the name of the blog and all that good stuff that people find so gosh darn interesting.

But seeing that the past few days have been a policy maker/analyst/dork's either dream or nightmare, I figure I might as well chirp in—that is after all what I set out in my mind to do.

There's a ton of articles and blogs out there waxing on and on about what's going on down in D.C. and along Wall Street. They're all saying the same thing in this order:
1) Wow.
2) Who knows where we'll go from here.
3) This is what happened.
4) What to do next?

But here's one thing I'm not hearing—what Federal Reserve chairman, Ben Bernanke did today (not cutting interest rates) should have been the policy months ago. You'll have to believe me when I said that inflation was a bigger cause of concern than bailing out Wall Street, but I've been saying it for months. The reasoning was simple: the worst had yet to come to Wall Street. Cutting interest rates was a short sided, 300 yard Hail Mary pass. Banks weren't going to be saved by lower interest rates since the housing bubble had already burst and it was probably too late... they could try to pass the buck on their bad investments, but who wanted them? Apperently only Bank of America... at way less than what the firms were worth a year ago.

Meanwhile, inflation was something the Fed could attempt to control. It's not as sexy, but it does matter. I know, inflation slowed in August (yay! finally!), however if the Fed had cut rates today I would have fully expected that inflation would be back on the rise even with lower oil prices. That hurts more Americans than keeping (Enter Wall Street Firm Here) afloat, or more percicely, keeping money cheap so that these Wall Street firms can live another month or four on their own before the go all Lehman on us.

I am no financial expert... I don't know where to put your money right now (short oil? Pray that the Volt really is the next big thing?) But I do know that from a policy stand point, inflation has been too high for too long—and it didn't need to be this way. The problems on Wall Street were obvious six months ago, but instead of getting inflation under control back then, the Fed hoped that they could kill two birds with one stone.

Unforutually, they missed both birds with that stone.

Up and Running

This is the first post of The Policy Boy, a public policy blog. I'll be here breaking down policy issues, topics, ideas, and any other curve balls that come up in our day to day lives.

Look for our first real post soon...