This week’s Economist describes a difficult negotiation underway in Washington:
An impaired mortgage security might yield 65 cents on the dollar if held to maturity. But because the market is so illiquid and suspicion about mortgage values so high, it might fetch just 35 cents in the market today. Recapitalising banks would mean paying as close to 65 cents as possible. Those that valued them at less on their books could mark them up, boosting their capital. On the other hand, minimising taxpayer losses would dictate that the government seek to pay only 35 cents. But this would provide little benefit to the selling banks, and those that carried them at higher values on their books could see their capital further impaired.
If we want DC to drive a hard bargain and get taxpayers maximum value, we want them to lowball for $.35. But that would be self-defeating, as the economy would likely seize up. If we go for the $.65, we might be overpaying for them, rewarding Wall Street for its greedy stupidity at taxpayer expense.
There’s a spectrum here between what is “fair” and what will “work” — and what’s worse, we can’t know if/when we cross either threshold. It’s possible, as The Economist suggests, that $.65 will NOT work — AND yet still be perceived as unfair.
The thing that’s impossible for most American taxpayers to swallow with corporate welfare is exactly the same as for individual welfare: you (the taxpayer) will personally pay a certain amount of money for an uncertain and socially distributed benefit. It’s hard enough to convince Americans that we are our brother’s keeper when it comes to getting homeless people we can actually see off the streets with programs that we can understand (if not agree with). The bailout wants us to enact that same value with people who aren’t that sympathetic using mechanisms that even most economists are having a hard time articulating.