The Guardian: Kenneth Rogoff on the GSE Bailout

Found via Naked Capitalism (go there for an introduction to the author/article).  Direct link to the article here.

Rogoff receives unanimous praise in the blog circles I frequent and I have found little grievance with anything that he has written.  His comments on The Great GSE Bailout of Aught Eight are certainly worth considering if for no other reason than that MANY others will be considering them.

I recommend reading the article in its entirety to anyone with even a passing interest in the subject (and who isn’t interested in what will be the defining act of the current recession?  Will this be known as the 2007 Housing Bubble?  Or the GSE Bust?).  The article is short but manages to touch on many important thoughts (which I will paraphrase then comment upon):

• The bailout served short-term interests.  The bailout effectively shifted many liquidity and volatility issues directly to the Federal government.  Of course, even the government cannot absorb losses indefinitely and further actions will need to be taken (or come to pass organically).  I can imagine the only course from this point on, barring a housing-industry-wide turnaround, has the printing press before the finish line.  An expanded money supply, will help to elevate housing prices (and reduce the fall required to attain a fundamentals-based equilibrium), as Rogoff observes has already occured.  It would serve to provide liquidity to the GSEs (and the insitutions that rely on the GSEs) which in turn could motivate increased consumer spending, both likely goals of the Fed and Treasury.
• The decline is large enough to necessitate the failure and merger of banks.  No disagreement here, but I do want to stress that further mergers could in fact be kicking the can down the road.  With the death of smaller and medium sized institutions, and their absorption by larger institutions, will we end up with an even greater number of “too big to fail” banks?  Will Wachovia, Wells Fargo, and Lehman (or whatever entities absorb them) all join the list of “too big to fail” banks if they are not on that list already?
• Privatized gains, subsidized losses.  A point that I find undermentioned in is that this bailout was argued as necessary due to how intertwined the financial sector finds itself, worldwide, and that a collapse of the GSEs could lead to a collapse in financial institutions around the world yet it seemed like few bothered (for reasons beyond me) to mention the flipside: The bailout of the GSEs is essentially a bailout of all of these connected companies (PIMCO being the most obvious example).  Perhaps it was too obvious to warrant frequent mention though this was mentioned frequently after the deed was done.  I’m personally not too fond of another perspective being provided only after the decision has taken place.  Regardless, if you are company that may fail, make sure to bring down as many others with you and you’ll land softly (taxpayers must feel just like those little Serta mattress coils).
• “Financial firms have dominated donor lists for all the major political candidates in the 2008 US presidential election“.  That’s an actual quote.  Am I being too cynical when I say that the thinking behind the The Great Bailout, as well as the lax vigilance that preceded it, will continue regardless who wins the election? (A previous post touching on the campaign contributions can be found here)
• Why not bail out the auto industry too?  Does he speak too soon, or is that sarcasm?
• Foreign entities may not be treated with the same mercy as the GSEs did.  I do not know if that is the case, however it certainly is a relevant point to consider.  I expect the bailout to, ironically, add to the opacity of the system now that the bar for intervention has been risen so far beyond the previous highwater mark, and with the repercussions from such an unprecedented move yet to echo out (CDS, as per the New York Times, are a concern, albeit likely limited, as per Mish).  The foreign capital injection that most readily comes to mind is the long-rumoured acquisition of part of Lehman Brothers Holdings Inc. by the Korean Development Bank, which (as I just learned as I was putting this thought to screen) seems to have been offically scuttled (Forbes).  How many foreign entities would want to invest with the unpredictability prevalent in the US financial system now?  As so many institutions have suffered major stock plunges since The Great Bailout, how willing will they be to sell major stakes in the company or issue new stocks to foreign funding sources at appealing levels below even these new lows?

And, to allow Kenneth Rogoff to close his thought:

“It is time to take stock of the crisis and recognise that the financial industry is undergoing fundamental shifts, and is not simply the victim of speculative panic against housing loans.”

… and the cow goes moo