David Cay Johnston thinks maybe we don’t need this bailout after all—and that journalists aren’t asking the right questions. That we’re at risk of “repeat[ing] the failed lapdog practices that so damaged our reputations in the rush to war in Iraq and the adoption of the Patriot Act.” On a web site of Harvard’s Neiman Foundation for Journalism, he writes: “Don’t assume there is a case just because officials say there is.”
Now, David Cay Johnston is a great reporter. A great investigative reporter when it comes to the subject of taxation. So in my disagreement, I seek to be nothing but respectful. There’s a lot I could respond to, but for the time being let’s bracket the fact that in the run-up to the Iraq war we didn’t sit glued to our TV screens as the Dow Industrials dropped 400 points in a day or watch our neighbors put all their furniture on the front lawn as the sheriff came to seize their house. Instead, I will focus on this particular bit of skepticism:
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.
Here’s the thing. The plan Treasury secretary Hank Paulson and Federal Reserve chairman Ben Bernanke spent all morning and early afternoon talking about is meant to prevent all those awful Main Street things from happening.
Last week, in the wake of the near-collapse of insurance giant AIG and a money market mutual fund dipping below $1 a share (sacrilege for an investment meant to be akin to cash), the yields on 1- and 3-month Treasury bills actually dropped below zero. Investors were so scared that they were willing to, by definition, take a loss rather than invest anywhere less safe than the U.S. government. The Treasury’s decision to back-stop money markets and announce that a massive bailout plan was in the works calmed investors down. But if the hysteria had continued, we would have seen the effects in short order. Yes, even on Main Street. Loans to small businesses and car buyers and college students fall into the camp of “less safe than the U.S. government.”
And it’s not as though everyone is back to thinking things are hunkey doory. I’ll (re)share an anecdote about American Beacon, a firm that manages $30 billion in assets, which sent out word last week that institutions wanting to cash out of its money market fund would have to take at least part of their redemption in securities. American Beacon was seeing a lot of money leave its fund, which was a problem because there was such a flight to quality in progress—to Treasuries, basically—that the fund couldn’t sell its 3-month CDs at what it considered a fair price. Here’s some of my earlier post:
I asked American Beacon chairman William Quinn what happens now that confidence in money markets seems to have been restored, and he said: “We’re going to continue this policy until markets get back into fashion.”
In the meantime, American Beacon won’t be reinvesting in CDs when the ones it currently holds come due. They’re going to an all-cash all-cash portfolio: only investing in overnight instruments.
So no money for CDs, which banks sell to get money to lend to… oh. Maybe small businesses?
UPDATE: Felix Salmon goes to town on David Cay Johnston. He answers every question Johnston posed. One of those questions was not, however, the one the Independent asks in the comments section: why do we need all $700 billion committed right now? Why not start with a smaller number—$150 billion was suggested today in the Senate hearing—and see where it goes from there.
The answer, as Paulson explained, is that we don’t need $700 billion immediately. The Treasury would start small, with a tranche composed of easy-to-understand securities—regular old MBSs, probably, none of that fancy CDO squared stuff. Paulson said he wants the full authorization right off the bat, though, so that we’re not left needing more money while Congress is adjourned. Remember: after this week Congressmen head home to campaign. I suspect Paulson also knows that to best instill confidence in the market—and a lot of this is about confidence instilling—the number has got to be big.
Barbara!