This posting will quickly veer far off the usual topics of this blog into political issues that I normally avoid like the plague. For once, the issues involved seem important enough to interrupt your regularly-scheduled programming. I hope to not ever repeat this in future postings.
Over the last 20 years I’ve seen an increasingly large number of colleagues, students and friends leave academia to go to work in the financial industry. Many were hired as “quants”, working on mathematically sophisticated models for valuing various financial instruments. During the same period, I’ve watched New York City change in dramatic ways, driven by the vast wealth flowing into the financial industry here. I’ve seen recent estimates that half the personal income on the island of Manhattan has been going to the 20 percent or so of the population that work in finance-related jobs. The effects of this wealth include something like a five-fold increase in apartment prices, with a modest two-bedroom apartment now selling for a million dollars. In many neighborhoods, a majority of the people on the sidewalks have a net worth above a million, and annual incomes of many hundreds of thousands of dollars. Not surprisingly, the streets are clean, buildings shiny and beautifully renovated, restaurants excellent and street crime non-existent. Banks have opened huge branches on every street corner.
For many years I couldn’t figure out where all this money was coming from. When I’d ask people about this, I’d get a list of some of the things generating investment banking fees, but none of these seemed to add up to something that could provide the profits necessary to pay million-dollar bonuses to tens of thousands of people. Over the last year or so, the so-callled “credit crisis” has started to make clear what has been going on, and I (like many others, I suspect) have spent more time than is healthy following the story as it has unfolded.
It’s a very complicated subject, but the most important part of it is relatively easy to understand, and there’s not much disagreement about this. Starting about 10 years ago, housing prices in the United States began to increase dramatically, fed by low interest rates, and easy credit. A classic financial bubble developed as people borrowed ever-increasing amounts of money to invest in housing, sure that prices would keep going up. You can make a lot of money very fast this way. In 2006, housing prices nationwide had increased by a factor of 2.5 over the past ten years. This was the peak of the bubble and since then prices are off by 25%. They will still have to come down another 25% or so to get back to pre-bubble levels (inflation-adjusted).
The fall in prices has made a lot of housing worth less than the loans secured by it. More and more people have mortgages that cannot be refinanced and that they sometimes cannot afford, leading to foreclosure, or to a strong incentive to just leave and give the housing back to the bank. It turns out that one of the things the quants had been doing was developing pricing models for complex ways to market the risk associated with these loans. One of the sources of the huge income coming into Manhattan was the fees that this generated. The models being used turned out to be highly flawed, dramatically underestimating the fall-out from the all-too likely end to the bubble.
Since more than a couple ex-string theorists were involved in this, there’s a temptation to make an analogy with the complicated failed models that they were trained in working on during their years in academia, but that would be highly unfair. Most of the flawed models were developed by people whose training had nothing to do with string theory, with the flaws coming from certain built-in assumptions. These assumptions were chosen because they allowed a lot of money to be made in the short-term, making many Manhattanites quite wealthy.
Now that the bubble has burst and it has become clear that the financial instruments created are worth far less than anyone had expected, the fundamental problem is that, absent some optimism about a turn-around in prices, it is likely that many US financial institutions are insolvent. Their assets may be worth less than their liabilities (depending on exactly how low housing prices go). As a result, their stock prices have collapsed, and no one is much interested in investing more money in them. The situation has gotten so bad in recent weeks that the normal operation of the credit markets is in danger of coming to a halt, as institutions stop trading with others out of fear that they will soon be bankrupt.
Today the Bush administration put out draft legislation to deal with the problem (see here). The solution proposed is strikingly simple: the Secretary of the Treasury will be given $700 billion to hand over to financial institutions in return for mortgage-related financial assets, as he sees fit. On news of this possibility the stocks of these institutions rose dramatically late Thursday and yesterday. Assuming that this is enough to make most of the insolvent institutions solvent again, this will allow them to return to business as usual and get the credit markets working smoothly again. If it’s not enough, presumably Congress will just be asked to increase the amount.
Of course the devil is in the details, especially those concerning how Secretary Paulson will distribute the $700 billion. The plan seems to be to bring this legislation to a vote within days, unlinked to anything that would change the way the finance industry operates, or change the incentives that led to the current disaster.
Personally I think that, as economic policy, this is a really bad idea, for a host of reasons I won’t go on about. But I’m no expert on these issues, so that opinion isn’t worth very much and it’s besides the point of this no-business-as-usual posting, which is the following:
The response to this that I have seen from Obama and the Democrats is extremely disturbing. Obama seems to be inclined to go along with this, as long as some aid to people who can’t afford their mortgages is tacked on. This also appears to be the attitude of the Democratic congressional leadership, which includes senators Schumer and Clinton, acting in their roles as representatives of the largest industry in New York City. On the other hand, McCain appears to be choosing to take the populist position of ranting against Wall Street. It is now a few short weeks until the election, and I believe this will be the defining issue that decides it. If Obama and the Democrats support this bailout of the financial industry and McCain resists it in populist terms, I think we’re in for four more years of irresponsible leadership. McCain has already done a good job of painting his opponent as an Eastern “elitist”, and I can’t believe he’s too stupid to take advantage of the opportunity the Democrats will hand him if they vote for this legislation.
So, call and write your congressional representatives and the Obama campaign now.
For good sources to follow this story, there are some excellent blogs, including Calculated Risk and Naked Capitalism. This is also the kind of story on which some of the mainstream media shines, so read the New York Times, Wall Street Journal, and Financial Times.
Update: I hope Obama is reading not the Sunday New York Times which seems to indicate that this bailout of New York’s main industry is essential, but Krugman’s blog instead.
Update: Maybe Krugman is reading Not Even Wrong….
My reading now of what is going on is that Obama and the Democrats are starting to get a clue, based on seeing a firestorm of oppostion to the bail-out. The danger that they would go along with it seems to be receding. They can read polls too….
Let me get this straight Amos,
I give my child gun parts. My child assembles a gun. My child loans the gun to his best friend. The best friend proceeds to shoot himself and my child…. but the problem has nothing to do with me giving my child gun parts??????
Now, i’m just a simple minded physicist, so there is a good chance i’m missing some important point, but it really seems like this is the argument you are trying to make.
@imho:
Then does it follow that Einstein is solely to blame for THE bomb? I doubt it.
A quant can make an assessment of the situation which the person consulting him is free to accept or reject. What is important is, at least he/she has a chance of making a falsifiable statement (which even an astrologer might, but perhaps not a string theorist 😉 )
The danger is when there is sycophancy (voluntary or otherwise), greed, hubris and herd behaviour, and when the problems encountered by lower level employees don’t reach the top. (See Andy S. Grove’s “Only the Paranoid Survive”) And also when a large number of people adopt the same strategy, and the profit margins all vanish, almost coherently, almost like a system at a critical point….
Peter:
Yes, you basically have it. Except that the “insolvency” thing is a lot more complicated. The issue is, no-one really knows what the debt derivatives (the CDOs, the CMOs) are worth because there’s no market for them. They may in fact be worth much more than currently shown on the banks’ balance sheets–a price that reflects the minimal trading taking place in the current illiquid market. Also, the fact that the banks’ balance sheet are so poor means that the value of OTHER credit derivatives involving those banks (such as credit default swaps, etc.) has radically declined based on the perceived greater credit risk of the banks. That was AIG’s issue.
That, combined with the idea that its now hard to borrow large sums for major transactions (which used to come from investment banks or bank syndicates), and that the risk of the banks defaulting on existing obligations, is the “spiralling” through the economy that everyone is talking about.
EricD:
I am quite familiar with Hayek and Mises, thank you very much. I did not (and do not) see any reflection of their thinking in your analysis, which still strikes me as naively monetarist.
You say: “What your account is missing is the fractional reserve nature of our system. The money lent out in mortgages did not come from depositors’ funds, it was created out of thin air and transferred off the balance sheets of banks (into SIVs) so that it ultimately did not even impair their reporting situation in regard to capital requirements. The loans were ultimately not backed by real capital and were made possible by the phony price signals (low rates) manufactured by the Fed.”
I’m sorry, but that is just factually incorrect. The money lent in the mortgages came either from depositors money or short-term loans, but it was lent with the (correct) expectation that the short-term loans could be repaid by selling the mortgages to investment banks. The banks purchased the mortgages, principally out of their own capital, with the (correct) expectation that the mortgages could be combined into debt derivatives and resold to qualified investors.
The “real capital” behind the mortgages was thus a real, and for a long time thriving and quite liquid, credit market in which many, many people (high-net worth qualified investors, institutional investors, hedge funds, governmental investment funds, etc. etc.) paid real money (“real capital”) to purchase loans.
The relationship between rates on that markets and the fed rate has been minimal.
Of course, it all became a bit more complex than this in the last few years as the derivatives themselves became complex (the invention of “Super Senior,” banks holding some slice of the derivatives on their own books, etc. etc.), but that’s basically it.
Some other good comments on the bailout:
Progressive Conditions for a Bailout
By Dean Baker
http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/progressive-conditions-for-a-bailout/
I do not agree with all of Dean Baker’s politics but he predicted and warned about the housing bubble for years and his editorial above has many good points.
IMHO:
“I give my child gun parts. My child assembles a gun. My child loans the gun to his best friend. The best friend proceeds to shoot himself and my child…. but the problem has nothing to do with me giving my child gun parts??????”
The credit markets aren’t gun parts. They aren’t inherently destructive. For decades, they’ve served the incredibly valuable economic function of making credit — the engine of growth in capitalist societies like hours — more readily available not just for consumers buying cars and houses, but also students taking out college loans, and most crucially companies investing in new technologies, new factories, new machines, etc.
“What went wrong?” is a serious question. It does not have an easy or obvious answer, and to be frank, I don’t think anyone knows yet. Even people (like, I think, me and my peer group) who understand both the finance and economic aspects of what’s taking place don’t claim to have a ready explanation of “why?”.
I don’t know if anyone here has made the point, but… either the banks are saved or bailed out by giving them money, say amount X, or they collapse, making an absolutely fantastic mess that costs about, hm, let’s say, MX for a not so smallish M. The moralities of the issue are besides the point at the moment. There will be plenty of time for that later.
Maybe the good folks in the US government just want to save their face by not making it look like they will just fall over without pondering the issue, or maybe they really are about to let the thing detonate for some ideological reason. We will see. It makes me a little nervous, though.
mario:
“The moralities of the issue are besides the point at the moment.”
There’s a practicality here, too. Its not as thought our government (or any) has a great record as a commercial investor.
The plan isn’t just to have Paulson authorized to buy depressed assets at above-market prices. These assets aren’t simple like equities or bonds, they have to be managed by someone. Basically, the United States is about to turn into the world’s largest asset manager and investment bank.
Interesting debate technique… Make up a completely outlandish analogy that’s completely unrelated to any of my comments. Then attempt to mock my original comments as if they were somehow represented by this completely outlandish and false analogy… In my little world we call this a straw man.
It’s almost as bad this logical masterpiece below:
Gun parts aren’t really gun parts. Gun parts aren’t inherently destructive. For decades, they’ve served the incredibly valuable hunting function of making dead food — the engine of growth in food eating societies like hours — more readily available not just for consumers eating goats and cows, but also students taking out cooked pork, and most crucially villages investing in new cooking techniques, new jerky manufacturing, etc.
Dude, that entire paragraph is content-less.
I just told you why… You gave you children gun parts. Your child used complicated mathematical techniqes to create a gun, which he then loaned to his best friend. The best friend then proceeded to shot himself and your child.
At this very moment, Paulson and Bernanke are trying to convince congress that removing the gunshot wound from your child will solve the problem…brilliant
Our best bet is to regulate the children.. err.. I mean wall street. This way we get maximum growth (without the gunshot wounds). I’ve been reading that this bust was coming since the late 90’s. These events were completely forseeable. The problem was that unregulated, capitalistic markets, with their quarterly demands for profit, have no room for moderation or prudence.
imho,
Enough, this has ceased to be an intelligent discussion of anything.
Amos,
The only real capital backing much of these securitized loans is capital held in money market accounts that invested in the commercial paper of credit vehicles, including Fannie and Freddie, spawned by the Fed’s loose monetary policy. But money market accounts are not treated as capital reserves — they are treated as cash and they are now being insured by the government whose only collateral is its ability to print money. Thus notes for this real capital have acquired an independent monetary character; the capital is being double counted.
EricD:
“The only real capital backing much of these securitized loans is capital held in money market accounts that invested in the commercial paper of credit vehicles, including Fannie and Freddie, spawned by the Fed’s loose monetary policy.”
I’m sorry, I just don’t understand that. The mortgagor issues a mortgage, and then sells it to a bank for cash. The mortgage is backed by the purchased property (assuming it is non-recourse). The bank puts the mortgage with a bunch of others into a special purpose vehicle, and then securitizes the revenue stream, which securities are sold to investors. So I just do not understand what you are trying to claim here.
“But money market accounts are not treated as capital reserves — they are treated as cash and they are now being insured by the government whose only collateral is its ability to print money. Thus notes for this real capital have acquired an independent monetary character; the capital is being double counted.”
Again, I really don’t get what you are saying. If a bank holds an investment in a money market account, why wouldn’t that count as part of its capital reserves? Maybe you’re right and it doesn’t, but I still don’t see how that would imply that reserve capital is being “double counted” or something has acquired an “independent monetary character.”
To be frank, at this point I have no idea at all what you are talking about, and I am now convinced that you’ve been spouting gobbledygook all along. I’m sorry I didn’t spot that earlier.
imho:
I wouldn’t reply since Peter’s put a kabash down, but you say “Our best bet is to regulate the children.. err.. I mean wall street,” which just begs for a response.
It isn’t enough to say “let’s regulate Wall St.” What is it exactly you want to regulate? What regulations should be put in place? In any event, financial companies are subject to pervasive regulation already.
Indeed, the reason CDOs worked is a regulation that limited certain investors to assets rated as “investment grade” by the credit rating agencies. The idea of the CDOs was to package lots of high-risk stuff together in a way that a slice of it became lower-risk and could get an investment-grade rating that allowed it to be sold to a wider range of customers.
I don’t mean to suggest that some new regulation is not called for. But the question remains: What do we regulate? What regulation do we put in place?
Personally, my instinct is that we should strategically encourage investment banks to move toward a salary-based rather than bonus-based compensation system. But that’s for complex reasons not worth getting into here.
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My understanding was it was a Ponzi-game which works like this.
A financial intermediary representative notices that two fellows have significant assets, sitting there earning not much revenues. So this intermediary says to both guys let me manage your assets & I will make you rich & I will only change a minuscule transaction fee for each transaction that makes you richer. So he says to the 1st guy, that 2nd guy’s assets are much undervalued so you should buy them & you will buy them by selling your current asset at an incredible profit. Of course, he says this to both asset owners & they exchange assets but they evaluate the assets at 10% higher value. They give 5% of the extra value in commissions & feel rich enough to buy extra goods with their extra profits. This goes on until all the value in the assets are spent & the intermediary is rich.
Of course, the game was very sophisticated in this case because the home buyers were given sub-par rate mortgages which meant the buyer paid below market level monthly payments for the 1st few years of the mortgage but the financial lender did not lose because this lost interest was added to the principal. As long as houses continued to gain value at 10% a year the game worked. Every few years the buyer would flip house, pay the commissions, & extract profits from the house without really putting anything into the house. The point that most people failed to get was that the 1st time house prices did not jump up 10% the game collapsed. An indefinite rise of 10% is not sustainable because it would eventually lead to 1 bedroom shacks costing millions of dollars. An indefinite 10% compounding leads to incredible price increases over short periods. Most people failed to recognize this fact. The few na-sayers were ridiculed. All the financial institutions felt they had to get in on the game or be left behind. Their shareholders all demanded the same returns as the front runners.
During the run up, the financial institutions made huge sums of money off the transactions costs so they seemed to be making money from nothing but in reality money was being extracted out of the housing sector by a Ponzi game. This money has to be made up somehow & I am not sure that we have seen the end of this yet. A lot of money has been extracted from the housing sector & I think house prices might tumble even further.
In my opinion, this was an issue of insufficient regulation of a basic human trait – greed. We are influenced by others & it is possible for us to rush into danger. Cogitative-dissidence causes us to lose track of real risk & we need laws that stop us from acting foolishly as a collective group. Most financial institutions have become incredibly leveraged & the so-called profits are being made are a very thin slice of these assets. It makes for huge profits on the way up but huge losses on the way down.
Salary levels for CEOs are a red-herring. As long as huge profits can be made by ignoring risk there will be those who follow this path. Once a few institutions start down this path and make incredible riches others are forced to follow even if it is obviously dangerous. Then, cogitative-dissidence sets in & we convince ourselves these inappropriate actions are justified.
We need a mechanism that allows risk to be evaluated properly or we need to prevent people from taking really risky actions.
PS: I think physicists were minor players in this game. The biggest problem with mathematicians/physicists is they see the economic world as a mathematical model. Unfortunately, people do not model so-well. There is strong evidence that collective human behaviour may be both chaotic and an unstable equilibrium.
What the hell, I’ll take a stab and can you tell me where I’m wrong.
A long time ago, in a galaxy far far away, access to low interest capital became doctrine. The gods of capitalism demanded that these traders take this practically free money and invest more more more. So the “masters of the universe”, running out of things to invest in, decided to invest in dirt, weeds, and poison ivy. But no one valued dirt, weeds, and poison ivy, so the “masters of the universe” decreed that we should mix beautiful artificial roses in with the dirt, weeds, and poison ivy. We will slice and dice our mixture and call these things CDOs. We will combine different CDOs and re-slice and re-dice to make even more CDOs. We will repeat until all CDOs are opaque black boxes filled with, what we believe is, some sort of greenish organic like material with small pieces of artificial rose. Ratings agencies will declare these organic material filled black boxes good. Exuberance will reign, we will flood the market with these black boxes and create a bubble. Time will pass, until one day some one will wake up and realize that these black boxes are filled of small pieces of artificial rose completely surrounded by fertilizer. The bubble will burst.
So how do we prevent this from occuring in the future? We start by turning the opaque black boxes into transparent boxes with detailed labels, and we require that the labels be updated frequently. Or in other words, we regulate risk management. Maybe it’s the credit ratings agencies that need to be nationalized??? An independent agency (not on wall street’s payrole) needs to analyze all of these securities products and appropriately label the risk. So maybe in the future there will be less exuberance over $hit filled black boxes.
Amos,
Follow along and you might begin to understand. Keep your eye on what’s under the shell.
A loan is made. The capital for that loan comes from, say a bank. The bank sells the loan to a vehicle, which funds itself by selling commercial paper. The capital for the loan is now coming from the buyers of that paper, e.g. a money market fund. The money market fund is itself financed by owners of money market accounts, so the capital backing the original loan is now coming from these account owners.
Do these account owners regard their money market deposits as risky investments? No, they regard the deposits as cash. They write checks against the deposits. They reduce other cash holdings (e.g. conventional bank accounts) to fund the deposits because the deposits seem just as safe but higher yielding.
This is exactly parallel to fractional reserve banking, where deposits are loaned out and held simultaneously by the borrowers (or by the people who sold something to the borrowers) as independent cash accounts. Real capital is double counted by money. And this framework has set in motion the same credit cycle that Mises identified, enabled by the Fed’s artificial suppression of short term rates, which made these credit vehicles profitable.
imho:
“We start by turning the opaque black boxes into transparent boxes with detailed labels, and we require that the labels be updated frequently. . . . we regulate risk management. Maybe it’s the credit ratings agencies that need to be nationalized??? An independent agency (not on wall street’s payrole) needs to analyze all of these securities products and appropriately label the risk.”
You recognize the function the ratings agencies were supposed to perform. Why do you believe that a nationalized credit rating agency could do a better job than the existing ones?
EricD:
You have the structure of the credit derivatives completely wrong as a factual matter.
In any event, your complaint is not with credit derivatives but, apparently, with the idea of banking itself. I really don’t see a point in responding to it further.
Bee notices that the banking system is “strikingly similar” to the academic system. She puts it this way “If you look at it from the system perspective, the problem is strikingly similar to those of the academic system.” Yes. And why? Because both bankers and physicists are professionals. Banking and physics are the same type of hierarchical bureaucracies. Organisms with the same structure behave the same.
Bee correctly identifies the strict hierarchical bureaucracy of both organisms. “Too many people working for their own immediate advantage, dismissing thinking about the long-term consequences, too few people who pay attention to what science is about and under which circumstance it can flourish.” Bee notices that like bankers physicists too have just one thing in mind: their career. Physicists like bankers want to move up the hierarchy by abusing the system. All they think is their own personal profit. Personal profit for a banker means more money and for a physicist it means more academic authority.
Bee continues that the careerist behavior of the practitioners and that the only way to move up the hieararchy is by abusing the system for self-gain “supports the formation of bubbles . . . that evenutally have to burst.” But the question is why is it that banking bubbles burst periodically but physics bubbles never burst? Does physics have a breaking point? No. The key to understanding this, and I think Bee fails here, is to understand that both the bankers and physicists sell debt. In finance this is how the system works. In order to make money bankers must split the debt into ever finer and riskier debt and move them i.e., sell them. When this pyramid scheme collapses a crash occurs. The financial crash is built into the system. And what looks to outsiders as disaster actually benefits the practitioners and the system. After the crash the debt system is set to zero and it can start all over again. In physics the debt is theories. Physicists must invent ever riskier i.e., ever more absurd, theories that are more and more distant from experiment or verification. Physicists eventually hope that their theories will be verified by the gold standard of experiment. In academic physics this doesn’t happen anymore.
But why doesn’t physics crash periodically when like in banking the debt pushed by careerist physicists reach new heights of absurd? The reason is that physics differs from banking in this respect. Physics studies physical quantities. These, despite the name “physical,” are not physical quantities but arbitrary definitions of units. Anything can be defined as a physical quantity. So physicists define new PQs and continue to float ever riskier theories that never break the system. When the system gives an error that has a possibility of breaking the system physicists define the error as a new legal PQ and start to study its “physical” properties. Here physical means its relation to existing legal PQs. There is no requirement that a new PQ must be experimentally verified.
But when Bee writes that “in both cases … the mismatch between personal incentives and the desirable long-term large-scale trend does not feed back into the system – other than through a major breakdown” she is only partially correct because this is only true for banking. In physics, as I mentioned above, the risk, ie the absurd, is continuously fed back into the system through PQs and this is the reason why physics never crashes.
And Bee’s observation that “people working in the system are aware its setup does not make sense but are unable to change something about it (and unwilling since it won’t be of advantage for them either) ” must be disturbing to physicists. This picture of physicists is not very flattering. I think every physicist needs to stop for a moment and think about this. Because physics should not be like banking. Physics is supposed to be science. The hierarchical system populated by careerist bureaucrats whose sole goal is to sustain the status quo so that they can abuse the system to move up the hierarchy to gain more authority does not look like the scientific environment physics profession projects to the outside world. The content of physics is defined by this rotten hierarchical bureaucracy and the result is theories like the String Theory. I believe this was not an off-topic but a very much on topic post. Thanks.
Amos,
If you see a specific error in what I’ve written, I’d be glad to have it pointed out. Up to this point, you have not done so, as a factual matter.
But if you are only now glimpsing the close micro and macro relationship between securitized debt markets and the conventional banking system, I suspect it is a chastening experience.
Peter,
That was a very nice post and thank you for writing it.
I’m wondering, do you see much difference looking back between the students you had who went to Wall Street and those who stayed in Academia? Were the pre-quants more theoretical? Were they as good as the pre-academics at doing science?
David,
I can’t say that I’ve noticed many differences between people who stayed in academia, and those who shifted over into finance. It’s certainly not true that the best ones stayed in academia, less competent (or more theoretical) ones went into finance.
Dear Mr. Woit,
thanks for even trying to “figure out where all this money was coming from” – that’s more than most people ever did …
(and so the present situation could merrily develop)
Two new articles in the New York Times flesh out the intertwined fortunes of A.I.G. and Goldman Sachs, which might have been a major factor in the government’s bailout of the former.
Wall Street, R.I.P.: The End of an Era, Even at Goldman
Behind Insurer’s Crisis, a Blind Eye to a Web of Risk:
The pervasive role of credit default swaps is central to the story.
Peter,
I know this is a little late, but I completely agree with your analysis and I think there are more parallels between the banking process and the current string model than most realize. Whether it’s $700 billion dollars or 10^500 vacuum states, it’s all the same and pure nonsense – shoving large numbers at a problem does not really solve it. An understanding of the problem and what is happening goes much further than the blatant assumption that “we need to stabilize markets with an infusion of capital”. This is pure nonsense and oversimplification of what happened after the great depression, which after real analysis, may not even be a valid comparision today with our electronically-managed, multiple fund markets. Unfortunately, in an election season, it’s more prudent to be on the side of the public than to analyze the situation and try to correct the disease instead of the symptom. The real tragedy is that this financial fiasco happens right before the election, where critical thinking will get thrown out and knee-jerk reaction will be the substitute.
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Paulson picks a former rocket scientist (and Goldman executive) to oversee the bailout.
By the way, it turns out that the final bill does include a provision for use of a stock-injection plan, despite the opposition of the banking industry.