No Blank Check

By Sean Carroll | September 21, 2008 6:41 pm

Strictly speaking, $700 billion dollars (a couple of dollars for every star in the Milky Way) is not a completely blank check. But it’s pretty close. And that’s what the Treasury Department is asking for to buy mortage-related assets (“toxic waste”) from failing banks.

There is plenty of reason to believe that something dramatic has to be done, before our entire financial system up and dies. Talk all you like about punishing the heartless capitalists behind the mess, but if a long string of banks goes belly-up, nobody will benefit.

But, as Paul Krugman says, this is not the right deal. Mostly because of this paragraph in the proposed legislation:

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

You’re kidding, right? Treasury Secretary Henry Paulson might be a smart guy, but he remains a cog in the Bush administration. The people who brought you the Iraq war, the Katrina response, Alberto Gonzales, Harriet Myers, and Guantanamo Bay. I don’t know about you, but when faced with a terrible crisis demanding immediate action, my first response is not “Let’s give those guys nearly unlimited power, with no oversight whatsoever.” An action that would be unique in American history, and possibly the largest transfer of power from Congress to the Executive branch ever.

More substantively, though, the plan is outrageous on the face of it. It is a feature of late capitalism that the government will occasionally have to bail out failing institutions. But typically the way that happens is for the government to simply take over the institution entirely, and sell off what it can. Here, the plan is to simply pay huge amounts of money for terribly bad assets — leaving the companies (and their managers) to get on with their lives and their valuable assets. As Josh Marshall put it: this is moral hazard on steroids. Taxpayers swallow the toxic waste, and Wall Street breathes a sigh of relief.

There’s no question that part of the idea here is “Something needs to be done in a hurry — let’s smash something through that gives us unchecked power, while everyone is panicking and not likely to ask too many questions.”

No economist, left or right, likes the plan. Obama is against the blank check, although doesn’t seem to be putting his foot down. McCain is thundering righteously against the robber barons on Wall street, as he has been doing — well, for at least the last week, before which he tended to thunder righteously against overzealous government regulators who were restraining Wall Street’s creativity. Change you can believe in.

  • fz

    I hate the current situation. I’ve been encouraged to call my elected officials and to to make donations to my candidate of choice to affect change (and I have). But we’re talking 700 billion dollars here–I feel silly thinking that my phone calls or modest donations will change anything.
    The truth is that the decisions have already been made behind closed doors by a small group of people very far removed from reality. That’s how most decisions are made in our government these days. We don’t matter anymore, it’s been a while since we did.
    I’m trying to hold onto my optimism but I find less evidence to justify it every day.

  • rww

    This is a trillion dollar looting of the treasury and it is a terrible thing. But there is an even worse ‘real economy’ reality behind it. We are a nation of consumers with declining real incomes. Housing inflation was the last buffer against a declining standard of living. It was foreseeable that someone would be left holding the bag and that would now be us.

  • George Musser

    It is the worst plan — except for the alternatives. An important point is that the economic damage has already been done: the country took on debt it couldn’t handle, massively misallocated its resources into McMansions and exurbs, and allowed Gilded Age inequalities of wealth to build up. We were going to pay no matter what.

  • Moshe

    Wow, you cannot make this stuff up…I a wondering though whether a clause like that can be legal. Normally you cannot sign a contract, or any sort of agreement, explicitly overriding the law, it will just be overturned in court. Of course, we now know the court only has so much power when the executive branch decides to massively violate the law, but it is still an interesting if irrelevant legal question.

  • Krugman’s Right

    I am not convinced that this will stop the inevitable downslide. The reason the models failed was a misbelief that people were rational actors. The specific flaw (not discussed below in the link) was that the models expected that people would cut other expenditures in order to keep their homes.

    Unfortunately, cutting other expenditures wouldn’t even be a “rational” answer for the individuals faced with losing their homes in this market.

    So now its being proposed that when the government comes in to rescue these companies, the companies will behave rationally.

    Are they HIGH?

    I think the additional requirement is that any company taking advantage of this deal needs to go into receivership (banks included). The company should be broken up and sold as appropriate.

    For more about the models see the below link:

  • mbecker

    as for the next president…

    mcCain has little moral high ground because philosphically he has been very anti-regulation past…

    and obama (and chuck schummer) supposedly have taken many large bushels full of wall street cash for campaign contributions…

    who knows where leadership will come from…

    as for the common folk, i know many people of both political persuasions that are truly outraged that we are bailing out the “master of the universe” financial wizards and their conspicuous consumption lifestyles…

    but who knows if even this can electrify the moribund electorate…

  • Elliot

    What is more frightening is the 477 trillion dollars in the derivatives market that is out there.

    I’m not too thrilled with this plan but I’d rather pay 700 billion for this than for a war.


  • helvio

    If they give Wall Street all that the money, with no conditions, then everything bad that happened before will happen again. Especially if this is done, Wall Street will always think that the Government will be there to fix their mistakes. I agree with the blank check to save the economy, but not if it’s given for free. There should be some way of making the companies pay back the money they’re “borrowing”, even if it takes a long long time to do it, plus the Government should have some power over these companies proportional to the money they’re giving away, to prevent them to repeat such mistakes.

  • B

    Does it matter? Money is nothing but a promise. The reason for the crisis is that lots of promises have been made that can’t be kept. The task is now to punish those who have made these promises and to clean up the mess asap such that as few innocent people have to suffer as possible. You can argue back and forth about laws and regulations and personal preferences, but eventually the question is not who does it, but who does it as fast, reliable, and efficient as possible. Financial systems don’t die. What dies is the trust in them. That’s why punishing people who don’t keep their promises is essential.

  • Krugman’s Right

    Okay, this economics lesson will have you rolling on the floor laughing

  • Bob Cavallo

    “There’s no question that part of the idea here is “Something needs to be done in a hurry — let’s smash something through that gives us unchecked power, while everyone is panicking and not likely to ask too many questions.””

    Is this plan for a bailout/powergrab taken straight out of Naomi Klein’s book Shock Doctrine? Grab power and make irreversible changes while the people and government are in a blur of panick from a natural or manmade disaster. Spending this much money will tie the hands of Presidents for a generation. You want health care reform, more money for science, rebuild the national infrastructure, to bad no money in the treasury, we gave it to the banks.

  • Pieter Kok

    Wow, that’s Patriot act all over again. Well, at least we get to pick our next postdocs from a substantially enlarged pool of talent…

  • TwisMinion

    Here’s the kicker for any one in doubt that this might be more than looting…

    The Treasury had asked that decisions not be reviewable by any administrative body or court.


    ok, something to laugh about please…

    Aside from a couple dollars for every star in the milky way galaxy it’s also…

    155 dollars for every year the planet earth has existed…

    140 dollars a year for every year the sun is expected to last for…

    2300 dollars for every American alive regardless of age…


    Ok this isn’t funny… silly math comparisons give too much perspective.

  • Haelfix

    Actually many economists are rather pleased about the bailout (well at least up to details), including rather famous ‘left’ leaning ones. Many ‘rightish’ economists also hate the idea, so the point is its not really down political lines this time (amusingly you have the republican presidential nominee actively lambasting wall street, and the democrat rather supportive thereof). Still, people are all over the place on how feasible or not the idea is.

    Bottomline, I don’t think anyone really knows what to make of it. So many things have gone against standard lore in the past few weeks, and the situation so unprecedented, that its terra incognito so to speak.

    I hate the whole moral classwarfare idea that some people insist on making of it. ‘eg corporate welfare and bailing the rich out’. Frankly, I very much doubt that its anything about that, and simply legit intellectual disagreement on how best to serve the economy and ultimately the US taxpayer.

  • John Merryman

    Maybe some of these economists should take some basic physics courses and review the concept of reaction/recoil. The full faith and security of the United State has become a large bubble of debt, so taking on 700 billion+ to save Wall Street from its debt only further burdens the dollar. These are the same people who thought our military was omnipotent and managed to get it buried in the Middle East. Believe it or not, but nothing is too big to fail, not even the US dollar. The stock market sank early last week, as everyone fled to treasuries, driving the yield to less then one percent. When this plan was proposed and the stock market shot back up, was that because everyone thought the worst was over, or was it because they were fleeing treasuries?
    The same people who say taxes are bad, happily borrow the necessary funds from investors. Where would this money be invested otherwise? Derivatives? Real estate? The problem with capitalism is that there has become way too much capital. Government borrowing serves to transfer value from taxpayers to bondholders. At what point do they foreclose on the government, as they foreclose on houses?

    Two essays I’ve written previously;

  • Neil B

    It is good to challenge the Paulson plan, and I think e.g. Krugman did a good takedown in “No Deal” out 9/20. Dodd’s plan is an improvement, but Dodd is flawed with having irons in this fire (still, “lesser of two evils.”) However, we have to stay on top of the after-the-fact blame game, which Republicans and allies want to blame on Democrats and liberal sentiments (like, the horrible impulse to make it easier for low-income/minorities to borrow money and own their own home (never mind that GWB constantly said he too wanted to support “the ownership society”, boost home ownership etc.)

    For example, this fairly blatant propaganda piece in Bloomberg news is trumpeted on Drudge, and now we see that Drudge is pushing Palin-McCain very hard (“sure” but it wasn’t so clear before, maybe “girl”friend Coulter is pushing him.) Note Bloomberg news very tied to finance world interests – BTW should Mike Bloomberg have ever been considered a great VP etc. choice considering his AFAIK involvement with that sector?):

    How the Democrats Created the Financial Crisis

    Kevin Hassett

    He blames it all on Fannie and Freddie, and the Democrats wanting to extend the pool of loan eligibles – to hell with repackaging, no income checking, phony ratings, etc., that are much more at cause for what happened. I warn you, this will get around and must be beaten back now, not later!

  • Speedy Gonzalez

    Preferred Shares

    In Europe we hold our breath. If all goes wrong, we will go down together. I don’t think you could talk about “mistakes” on Wall Street. The financial white sharks probably know what they are doing, and (shark) products like NINJA Loans (No Income No Job No Assets) indicate that this is a fact.

    A blank check may not be the right medicine for white sharks.

    The Nobel Laureate in Economics, Joseph E. Stiglitz says, “the champagne corks are popping on Wall Street, because they found a new sucker – the American taxpayers“.

    The solution, according to Stiglitz, is Preferred Shares:

  • Mark Hedges

    Yeah, way. Why not give $700 billion to forgive all debts to the Small Business Administration, and use the rest to pay teachers and build high-tech factories and distributed green energy systems to give us jobs and help us regain an export surplus. We might have to cut up our credit cards, but that would do far more good than letting failed laissez-faire economics continue. Besides, where does this $700 billion come from? You think the government has those assets? No, we’re borrowing it from China through T-bills. You think the Dragon’s going to forgive your mortgages when the U.S. goes bankrupt and has to turn over these “assets” i.e. your house to foreign countries to cover the maturing bills? Traitors in our midst. Get a rope.

  • TwisMinion

    hmmmm…. we could have built 35 LHC’s with that money….

    also it is…

    More than 2 dollars for every penny that has ever been minted by the US treasury…

    7 pennies for every cell in the average human body…

    If carefully stacked in pennies, the pennies would reach a height of 69 million miles, which would be enough reach the planet mars and continue for another 21 million miles into space… in the other direction the stack would pass both inner planets and reach more than two thirds of the distance to the sun…

  • changcho

    “There’s no question that part of the idea here is “Something needs to be done in a hurry — let’s smash something through that gives us unchecked power, while everyone is panicking and not likely to ask too many questions.””

    I believe this scenario is what N. Klein calls ‘disaster capitalism’…

  • http://yahoo Donna J. Bergevin

    I have no famcy words for the state of the economy. It seems to me that all of the people that stand to loose their huge appettites for all of the very expense and privileged way of life that they and their families live and crave for: For instance, private islands, private jets, lavious homes all over the world, and no other way of living is good enough for them will just kick back and watch the struggling people of this great country, loose their homes, loose their jobs and their cars. etc….. I am one of those regular americans that live from month to month and always struggle to get by. The children in my family get what they need because, like everyone else, worked and still do to make sure that they learn that the capitalistic privileged. (Those that feed off the hard working everyday people) that rob all of us, so they can live high on the hog, can sit back and say. “The American Government will make sure that we are OK.
    I find the wealthy privileged repulsive. They finance our homes, cars. clothes. and even our food. And if somethying goes wrong in our lives. Those privileged say. So sorry, to bad, pay up or your out in the street. Its just more money for them. Why should we help bale them out. They could give a damn what happens to us or our children and elderly. If all of the people of this country haven’t noticed, once we raise our families, and work hard all of our lives. When you reach the good old age of 65, you are no longer needed by these financial institutions and the younger population. All of the sudden, more financial giants, get richer, by saying. These elderly disposable people are of no use to society anymore. So now, this gives them the right to decide that they can now make huge amounts of money from these disposible human being by opening retirement communities and ripping off the rest of their money, retirement, social security(and I don’t even want to get started on that joke). What’s that word Obama used (BITTER) I could call it a lot of other things, but I guess that would politley discribe the condition. It is just a vicious circle that goes on and on. So I guess ( whatever these privileged robbers) can just kick back and know that the American Government will PROTECT them, or the world just can’t function with out their GREED. I hope they are all snug and comfortable in their fancy world. I really must quit or I could let my mouth get me in alot of trouble. Not even freedom of speech exist anymore, unless you have the finances to buy the time. Thank you very much DJB.

  • Sandy

    The government should not buy those assets. This is a game with moving pieces. The government’s current policy (helping, ad hoc) is good. Support institutions as needed. Get equity in them or provide insurance. Make the people who gained, pay.

  • TwisMinion

    Bring back the Glass-Steagall Act or, get ready for more three card monte…

    Here’s a big factor to why we’re in the mess we’re in…

    The Glass-Steagall Act was repealed allowing banking to be involved in securities and speculation and to sell bank assests as investment paper.

    Step 1. John Q gets a loan at a reduced interest rate, in two years it will double but by then he can refinance and avoid the higher rate. His debt to income ratio can’t justify the home with the rate increase but the bank goes by the low interest intro rate to make the loan, not the rate that will kick in later.

    Step 2. The bank, knowing that John Q is truly a high risk loan, sells his mortgage to a hedge fund for a small profit, thereby divesting themselves of any future risk. They do this with all of they’re riskier loans, keeping the less risky loans selling the others to the public via Wall Street. Rinse and repeat millions of times.

    Step 3. Housing market bubble pops, John Q. can’t get the lower rate refinancing on his home because the homes value didn’t increase and there is a negative equity situation now. So now he is stuck and the loan goes into default.

    Step 4. John Q. thankfully had invested his money wisely over the years into a 401K and so will be able to adjust to the rising costs.

    Step 5. Turns out John Q’s 401K mutual funds were full of bank mortgage paper and his 401K investments shrink considerably having been invested in his own mortgage, and soon there is no way to hedge his financial hemorrhaging, and is soon a renter with a bankruptcy and foreclosure.

    Step 6. Banks can’t sell off, unload their high risk John Q loan paper to John Q investors fast enough, and the pyramid falls leaving the banks holding much more of the high risk loans then they ever intended on actually assuming themselves…

    Step 7. Give as much money as possible to the short sellers who made money in step 1 and predicted step 6.

    Step 8. Demand that 700 billion of John Q’s tax dollars be given to the banks for the high risk loans they made and failed to unload onto John Q’s now depleted 401k that has rendered him home ownerless…

    So John Q lost $ on the house interest rate, lost $ on his 401k and is now asked to lose $ again in tax dollars… How many times must he pay for this house that he is no longer living in?

    Add to this that many big banks were gearing up hard money funds for the expected foreclosure market boom… and we can see that it was far from unforeseen.

    The word ‘looters’ comes to mind… But where is the John Galt in all this?

  • Speedy Gonzalez

    TwisMinion, sounds very much like the true story that you probably never will hear on primetime news. John Galt maybe got munched by the Utility Monster on the way to Dystopia.

    In the Stone Age you threw a rock in the head on the guy who got something you wanted badly. Then we had culture and civilization, prohibiting the “rock method”.

    Our brains though, have not changed much since the Stone Age, and many of us seems to have a lot in common with the good old savage. So what do savages among us do if they want something very badly, and don’t want to go to jail? Well, it’s quite simple, use paper and impenetrable words instead of rocks and you’re completely safe. One dollar, or billions, doesn’t matter as long as it’s done on paper.

    Maybe it’s time for the next step in civilization, legislate on global level against the “paper method”…

  • Chris Hutcherson

    Now that the Senate has passed the 700 billon bailout has Obamas destiny been sealed?


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Cosmic Variance

Random samplings from a universe of ideas.

About Sean Carroll

Sean Carroll is a Senior Research Associate in the Department of Physics at the California Institute of Technology. His research interests include theoretical aspects of cosmology, field theory, and gravitation. His most recent book is The Particle at the End of the Universe, about the Large Hadron Collider and the search for the Higgs boson. Here are some of his favorite blog posts, home page, and email: carroll [at] .


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