Barry Ritholtz has a smart post up about the what-ifs of the bailouts. As he points out, the question is not between what the outcome is versus what it would have been had we done nothing. The question is what if the bailouts had been handled far differently—as in not in Wall Street’s every interest. Of course we’ll never know. But:
Imagine a nation in the midst of an economic crisis, circa September-December 2008. Only this time, there are key differences: 1) A President who understood Capitalism requires insolvent firms to suffer failure (as opposed to a lame duck running out the clock); 2) A Treasury Secretary who was not a former Goldman Sachs CEO, with a misguided sympathy for Wall Street firms at risk of failure (as opposed to overseeing the greatest wealth transfer in human history); 3) A Federal Reserve Chairman who understood the limits of the Federal Reserve (versus a massive expansion of its power and balance sheet).
In my counter factual, the bailouts did not occur. Instead of the Japanese model, the US government went the Swedish route of banking crises: They stepped in with temporary nationalizations, prepackaged bankruptcies, and financial reorganizations; banks write down all of their bad debt, they sell off the paper. Int he end, the goal is to spin out clean, well financed, toxic-asset-free banks into the public markets.
Thus, Bear Stearns is not bailed out by the Fed. Instead, the FOMC chair tells JP Morgan’s CEO “You have 9 trillion dollars in exposure to Bear derivatives. Instead of guaranteeing you $29 billion for a risk free takeover, we will start preparing a liquidation plan for Bear. And given your exposure to them, we best plan one for JPM too. (and if you don’t like that, you can kiss our ass).”
Tough talk, but the outcome would have been much better: JPM would likely have bought Bear anyway, if for no other reason than to prevent someone else from buying them, and forcing JPM into bankruptcy, to pick up their assets for pennies on the dollar. That would have set a much better tone for future bailout expectations, versus the massive moral hazard the Fed created with the Bear bailout.
The Sidney Hillman Foundation gave him the Sidney Award and talked to Luce about the piece:
What surprised you as you did your research?
I am continually surprised at how difficult daily life is for the typical middle class family in America. I’m in awe at how hard people work, how many jobs they do and yet how close their are to bankruptcy and ruin. In Europe we’ve been raised to think about America as a wealthy nation, which of course in aggregate it is. It is a constant shock to me to observe what a struggle life is for such large numbers of Americans to keep their heads above water.
— The Los Angeles Times is running smack into the teachers unions with a huge investigation of teacher performance in the Los Angeles Unified School District. This is a mega undertaking:
In coming months, The Times will publish a series of articles and a database analyzing individual teachers’ effectiveness in the nation’s second-largest school district — the first time, experts say, such information has been made public anywhere in the country.
This article examines the performance of more than 6,000 third- through fifth-grade teachers for whom reliable data were available.
The teachers union is calling for a boycott of the L.A. Times, which shows the paper is hitting a serious nerve. All the more reason for it to use this publicly available information to tell a story about what’s happening in L.A.’s schools.
Here’s what it’s found already by doing so:
Highly effective teachers routinely propel students from below grade level to advanced in a single year. There is a substantial gap at year’s end between students whose teachers were in the top 10% in effectiveness and the bottom 10%. The fortunate students ranked 17 percentile points higher in English and 25 points higher in math.
• Some students landed in the classrooms of the poorest-performing instructors year after year — a potentially devastating setback that the district could have avoided. Over the period analyzed, more than 8,000 students got such a math or English teacher at least twice in a row.
• Contrary to popular belief, the best teachers were not concentrated in schools in the most affluent neighborhoods, nor were the weakest instructors bunched in poor areas. Rather, these teachers were scattered throughout the district. The quality of instruction typically varied far more within a school than between schools.