How Critical Is The Crisis?

David Cay Johnston says the press and the politicians shouldn’t be so credulous about the need for any sort of emergency measures:

The Administration has scared the markets and some key legislative leaders, but it has not laid out a coherent, specific and compelling need for this enormous proposal, which is the equivalent of a one-time 55 percent income tax surcharge. (Instead the money will be borrowed, so ask from whom and how this much can be raised so quickly if the credit markets are nearly seized up with fear.)

Ask this question — are the credit markets really about to seize up?

If they are then lots of business owners should be eager to tell how their bank is calling their 90-day revolving loans, rejecting new loans and demanding more cash on deposit. I called businessmen I know yesterday and not one of them reported such problems. Indeed, Citibank offered yesterday to lend me tens of thousands of dollars on my signature at 2.99 percent, well below the nearly 5 percent inflation rate. That offer came after I said no last week to a 4.99 percent loan.

If the problem is toxic mortgages then how come they are still being offered all over the Internet? On the main page AOL generates for me there is an ad for a 1.9% loan (which means you pay that interest rate and the rest of the interest is added to your balance due.) Why oh why or why would taxpayers be bailing out banks that are continuing to sell these toxic loans?

These are decent questions. As far as I know, a person with good credit (and possibly a person without good credit) can still get a mortgage tomorrow with ease. And banks are still handing out credit cards. Is it really so clear that a $700 billion bailout is necessary? What if, instead, we took some kind of more limited measure aimed at keeping money market funds up and running while spending $350 billion on fiscal stimulus to keep the economy moving and prevent more people from defaulting on their mortgage payments? Would that clearly be worse? I have no real idea, but I’m not sure what the basis for thinking the Paulson Plan of $0 of stimulus and $700 billion of bailout is the correct formula.

The talk this morning about the need to avoid “punitive measures” in order to not dissuade firms from “participating” in the bailout program makes me very suspicious. There’s a difference between a bailout package that’s genuinely needed and one that’s merely desired by Wall Street execs. If it’s necessary, then there shouldn’t be any need to make the bailout pot sweet. And if a punitive measure or two would dissuade firms from participating, then it doesn’t sound like this measure is really needed.

UPDATE: See also Roger Lowenstein’s article.

Note also that to question whether a $700 billion bailout is necessary is not the same as questioning whether or not there are some serious economic problems afoot. It’s literally to question whether or not it’s genuinely the case that there’s a specific problem so severe as to warrant a $700 billion bailout. My sense is that if two weeks ago Barack Obama had stood up and said “John McCain says the fundamentals of our economy are strong, but I think we need a $350 billion stimulus package” that the general reaction would have been to say “well, there may be some problems, but adding $350 billion in debt is too much.” Today, though, we need to spend $700 billion? But instead of spending it on middle class stimulus we need to overpay for securities held by wealthy financiers? Really? Maybe in the absence of a $700 billion bailout there really would be a serious economic problem . . . but then again $700 billion is a ton of money. There are lots of serious problems such that, if I asked for $700 billion to solve, I’d be told that $700 billion was way too much money.

Maybe Paulson’s right about this, but he should be made to spell out it and then his spelled-out explanation should be subjected to some scrutiny.