Monday, September 29, 2008
Yay!!! No bailout package yet!
The House has voted down the corporate welfare... er, I mean economic bailout package. I think that the economy is in rotten shape, but I believe that we're going to have to let things correct themselves. I am glad that the House decided to not reward poor speculation and mismanagement with billions in cash and new powers for the Secretary of the Treasury.
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Now, I know that "hands off" is good small-government (I dare not use the word 'Republican' these days) principle. But we should ask ourselves if throwing up our hands and saying "aw. the market will correct itself" is really good policy. How will the market correct itself? Well, it will correct itself by a lot of companies shouldering their own debt. Satisfying in a Biblical sense, yes, but maybe not practically an intelligent thing to do. This is, after all, what happened in 1929. Is that the route you really want to follow? Free markets aren't as smart as you think. They are greedy and have a habit of exploding on themselves.
The current plan is to bail out some of the big investment banks, thereby transmuting debt into, essentially, inflation. Inflation that, in a perfect world, will be repaid once Wall Street becomes unfucked. Is this a BETTER solution? Really I don't know. I don't think anybody really knows. The potential for mis-management is great, and no one (not even a lot of Democrats) think that a big government move is ideal.
The situation is completely different, so I hesitate to draw the comparison, but Roosevelt's New Deal also made some bold moves to revive the economy, although they were less monolithic and more sustainable (the ND was, after all, an after-the-fact solution to an economic crash) than simply throwing a load of money at private companies.
I imagine the best course of action is somewhere between the extremes of "hands off" and "throw money at 'em", but the fact remains that this is a time-sensitive problem that must be dealt with quickly, before shit really hits the fan.
hmmm...Pete, your description of the cause of the Depression seems a little off. Also, while the New Deal helped a lot of destitute people, I don't think many economist would argue that it got us out of the Depression, especially since WWII happened before the results could be assessed. (It is more likely that since our infrastructure wasn't destroyed in WWII that we had a competitive advantage). Also, while there were many booms and busts during the relatively laissez-faire pre-Depression era, keep in mind that the comparison is not to a perfect world but to a managed economy. Said in different words, the mangers of our economy are people who recently said that subprime was "contained" (Bernake) and that the "economy was was as strong as I have seen it at any time in my 32 year business career" (Paulson). You might also check that bazooka in Paulson's pocket :-) And keep in mind that both Bernake and Paulson are very intelligent people, but they have repeatedly been wrong on the economy. (Though you could argue that they were lying to avoid panicking people.) If they get it wrong, who can you trust to get it right?
On your inflation point, I guess if the situation worked out correctly and after the market cycle turned, then the government could sell the non-illiquid securities and reduce inflation in the same way selling bonds reduces inflation. But that assumes that the government will get $700 billion back. Isn't the premise of the bailout to pay above market prices for bad assets to recapitalize banks and give the banks an excuse to use the government numbers to use in mark-to-market accounting? So why would the government pay anything close to a price that would make the taxpayer whole?
I am fairly uncomfortable with saying the government has no place in bailing out banks, since many years, maybe even decades of bad governmental policy (monetary and regulatory) played a large part in this crash. But, even if the government managed the economy competently, $700 billion is not enough. In 2006, the International Swaps and Derivatives Association estimated that over 250 trillion in derivatives existed. $700 billion pales in comparison.
You make some good points, Matt, and I think we agree more than we disagree. You mention yourself that one could argue that Bernake and Paulson said those things to keep people from panicking. I definitely would argue that. I'm not saying that I want to trust these two men (or any *two* men) with managing the entire market, but I do believe they said those things to prevent people from panicking and not because they are incompetent.
And this strikes at the heart of the problem, really. The market crash is a human problem. Just like in 1929 (and every other minor crash) problems are caused, fundamentally, by human nature and the desire to accumulate wealth. Period. This is the mechanism of market bubbles and crashes.
The question, then, is how to deal with this constant, human-driven bubble/crash effect. This time around the plan was to throw money at large investment banks (insurers) to essentially keep them afloat, quell panic in the market (by keeping the insurers alive), and start lending and borrowing again, maintaining a functioning economy - what Jason calls "corporate welfare". I maintain that viewing an intervention in this way is simplistic.
While a "bail-out" seems the absolute simplest, most bone-headed thing to do, I do believe that what is needed is more than zero government intervention.
However, you may ask the question 'why a bail-out?' It could be that more liquidity - actually dollar bills - are needed. I don't know. (Better check your $250 trillion figure, by the way. The number we want is the number of "bad assets", a number with probably no single person knows. It is very likely that you are counting calls and books and lots of kinds of derivatives, thereby grossly overcounting)
It is not a simple problem to solve. What needs to happen is that a panel of professionals, not politicians, should sit down and figure a measured government response to the situation. Why not insure debt, FDIC style, for example? After all, if we are only battling panic ("fear itself" in FDR's words, btw) then why not spend our time insuring instead of bailing?
I think this kind of measured questioning is a more appropriate response then to throw up one's hands, grumble about corporate welfare, and hope all the problems fix themselves.
Pete, in a way, I believe that you answered your own question. You said that the market is in a cycle of bubbles and crashes and is motivated by greed. Therefore, it works both ways, greed will motivate people to find their way out of a crash.
The bailout plan seemed like a huge mistake to me on several levels. Basically, we were considering handing a lot of money to the folks who made a mess of things in the first place. On paper, it makes sense. As you said, it is the most simple, boneheaded solution. If we are having a financial crisis, we should let loose a bunch of money and see if that will correct it. There are several problems there. It takes away the factor of accountability (that is if even that amount of money would work. At some point it becomes like figuring how many dragons it would take to defeat the Russians). It further socializes our economy by the government taking ownership of these assets. It also raises the question of where this $700 billion is coming from. If we are printing new money for this, then we are just adding to the problem.
The money was the least of the problems with the bailout. The plan called for allowing the Secretary of the Treasury almost total control over how the money was spent and guaranteed limited legal avenues for how his decision-making could be challenged. This would have affected the way our economy is managed for years to come.
While my idea for the way the economy should be handled may be "simplistic", I don't think that it should be any way but simple. We have manipulated the market for years. We have artificially lowered interest rates and encouraged bad investment. How is more government intervention going to settle the problem that it created?
While I agree with you that it is a complex problem and the answers are hard, I don't think that my approach amounts to throwing up my hands and grumbling. It is using the alternative approach and taking government out of the equation.
I am sure we could discuss this all day, but everything (as I check) that we are discussing seems to be laid out in the "Criticism" section of the "Free Market" wiki page.
http://en.wikipedia.org/wiki/Free_market#Criticism
But if you allow me to come to a rather vague philosophical conclusion: everything in our imperfect world seems to function best in compromise, not in absolutes. Neither Fascism nor Communism, neither unthinking Patriotism nor abolition of the state. Stealing is bad, but at times isn't it considered noble?
I think the same principle should apply to the economy. We do not wish to have planned economy, but a totally free market is probably just as intangible a goal as perfect communism. At the present moment our nation is at a cusp - a moment of critical decision making. Where, then, is the middle road?
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