There's Plan B...And Then There's the Paulson Plan

The bloggers at Calculated Risk have this to say of Hank Paulson's $700 billion, taxpayer-supported financial bailout plan.

"A better plan would be transparent (all deals would be publicized), involve a share in ownership for the taxpayers, and have substantial oversight. We can do better."

Paul Krugman, of "Conscience of a Liberal" fame, says:

"Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal."

Christopher Caldwell, at the Financial Times, puts the blame on the American people's unrealistic expectations of asset prices (namely, that they will not go down), but adds,

"Panicked actions speak louder than words – and have more lasting consequences."

Economists like to quibble with each other, perhaps because they work in a field with a lot of room for second-guessing and hindsight-praising. But the truth is that we have to look at the underlying psychology of these bailouts: there have been so many, and they have all involved the taxpayers assuming massive financial risk.

George W Bush has demonstrated that he doesn't mind running up a deficit if it's for a good cause. I'm not sure I agree with Bush's thesis, or his definition of "good cause." But these bailouts are starting to take on a distinctly political flavor. The truth is that any president - or Cabinet - that allows major financial agencies to fail will forever be blamed if a Depression ensues. If, on the other hand, they stave off immediate crisis by buying trash assets at taxpayer expense, the blame for the eventual blowup will fall upon whomever happens to be in office at the moment. It's been done before with taxes - observe how conveniently Reagan transferred the burden of raising taxes to Bush Sr.

Meanwhile, the taxpayers are still screwed. The question is whether they're screwed now or later.

(I'm not saying that there aren't genuinely noble motives behind the bailout. Paulson, Bernanke et al no doubt believe that so long as they keep trying, the eventual fallout will be mitigated. Not avoided, but mitigated. The problem, as Krugman points out, is that we have no reason to believe they know what they're doing.)