On The Other Hand...

Something does need to be done. I don't think a "wait until January" strategy is viable. The fourth quarter of 2008 is long enough that serious damage could be done to the US economy in that time. For example: the commercial paper markets are effectively dead (or perhaps more accurately, in suspended animation). This is VERY BAD. Look, lets say you run a business, oh, making ... bedsheets! Ok, you have a factory, you have to pay for your materials on a semi-regular basis, depending on what you are making and how much, plus there's usually 30-60 day window in any account payable. You get revenue from your accounts receivable on a semi-regular basis, since it depends on what you make, how much and again, there's the 30-60 days of fudge time on any bill. Over a year this all comes out in the wash and you make a profit (if you are a successful company), but you still have to make payroll every week. There will be times when you have a bunch of cash sitting around because you just got a $20 Million dollar check from K-Mart, and there will be times when you need to order $15 Million in raw materials but you won't get paid until next month. What to do?

Enter commercial paper. Think of it sort of like a giant corporate credit card, but one that can loan money too. So if you have a few extra million over the next pay cycle, you can get an extra 1/2% of interest on it while maintaining liquidity, and if you need to charge a few thousand tons of material, you can do that until you get that check from Linens & Things. This all works because we have a working economy, and I'm not worried that your company is going out of business next week, and there is lots of money out there (both from other companies and in "money market accounts") to insure liquidity. But as soon as people worry (especially banks) that they might not get their money back, the interest rates jack up and the amount of money shrinks. According to that Bloomberg article, the Commercial Paper market lost almost $95 Billion with a "B" dollars. There's a good chance that if I try to use that giant corporate card to make payroll, the market will just say "sorry, there isn't any money left." Now I'm looking for a short term loan from a bank... good luck. And if I don't make payroll, that's thousands or millions of dollars that doesn't get into the community for people to buy food and gas and new bed sheets and... mortgage payments! VERY BAD.

Another effect of the tightening of credit is the effect on government bonds (you know, those things you vote on to build schools, roads and, if you're unlucky, a tax payer funded stadium). Road work in Maine and a new emergency room in Billings, Montana are just some of the current victims. Even if a project does get funded, more of that cost will go towards paying interest, and less will go towards building that park or school or bypass. That hurts everyone no matter where you live.

All this is to say that while I'm not a supporter of THIS bill, I am not some sort of nihilist. It is true that SOMETHING needs to be done relatively soon, and if this is the ONLY way they can do it, it is probably better than nothing. I just don't believe that the conditional statement is true. I think a much better bill could be designed if the current proposal was thrown out the window and congress started from scratch. Best would be, I think, some combination of the "Swedish Solution" and a forced mortgage adjustment (see below), plus a real hard collar on executive compensation for any company that participated (to avoid the moral hazard problem, real collars now would make future decision makers want to avoid behaving irresponsibly enough to require a bailout).

But again, I'm not an expert at all. I'm just an interested layperson. Brad Delong, Dan Drezner, Tyler Cowen, Duncan Black and Calculated Risk. Everyone on that list has a PhD in Econ except for Calculated Risk, who is anonymous but is, in my estimation, eminently reliable.

UPDATE: And, wouldn't you know it, Clicking over to Tyler Cowen's Marginal Revolution brings me to this interesting post on Net Worth Certificates as an alternative bailout solution, leading to this interesting article.

Which is to say that there are LOTS of options out there, and the idea of using the "Paulson Proposal" as a starting point for negotiations is just foolish.