Monday, September 29, 2008

A Time to Ratchet DOWN the catastrophism....

kavips takes the failure of the Bail-out hard:

The American Dream of what could have been… is over.

I could find dozens, hundreds, thousands of impassioned posts on both sides. Throughout the Delaware blogosphere, a strange alliance of opposites from Tyler Nixon to cassandra have taken the opposite tack, remonstrating against this issue.

But I'd like to emphasize a very salient point:

There may well be a legitimate need to do something, but the best and the brightest among our professional economists argue strongly that there too much at stake to do something, even if it's wrong.

Here is the text of a petition to Congress, sent a couple of days ago and signed by over 125 leading economists from all persuasions (including three Nobel laureates):

To the Speaker of the House of Representatives and the President pro tempore of the Senate:

As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:

1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.

3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.

For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.

Very few of us understand economics even well enough to pass classes under these individuals.

So let's use an analogy.

Suppose the US Congress was about to pass a measure regarding global warming (I don't care what, let's just assume it is some emergency measure that will make drastic changes in our economy, driven by the fear that if we don't do it, next Tuesday the entire Greenland ice shelf will explode and NYC will be under water before the next Giants' game), and 125 of the world's most imminent climatologists said, Wait! Don't do that so quickly!

Would we follow their lead, accept their counsel, or take the word of the Secretary of the Interior that the experts be damned, we've got to DO SOMETHING NOW?

Many of these economists, by the way, were the same ones who warned against Phil Gramm's changes in securities' regulation in the 1990s, or the expansion of Freddie and Fannie into the sub-prime market.

This is the opinion of people who study the function of markets for a living, and they agree on one particular sentence that is worth repeating:

The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

I don't know how that could be done, which is exactly why we need to hear from them before we turn on the printing presses in pursuit of more liquid credit.

kavips says [and I am using kavips not for negative reasons, but because the post captures the feeling of desperation so well]:

You lost your job… was it worth it….
You lost all your money… was it worth it…
Your house was foreclosed and you had excellent credit… was it worth it..
Sorry retiree’s…. your accounts are closed… was it worth it..
I need a loan for a water heater, today.. No….was it worth it…
I need a loan to float payroll for a week… No…. was it worth it…

Let's parse that a bit:

If my business needs a loan to float payroll for a week and I don't have any collateral, whose problem is that? Mine? or the government's?

If I've spent sufficient time living beyond my means on credit that I can't afford a $150 [do-it-yourself] or $700 [installed] water heater out of my emergency savings?

If I am a retiree who (a) placed all my money in accounts in excess of the FDIC limits, or (b) failed to seek advice to start transferring my assets into more secure investments several years ago?

If I had excellent credit and bought far more house than I could really afford (a 2.5x annual salary multiplier) and then kept charging goodies on the home equity line?

If I didn't take it as my responsibility to either (a) check from time to time on the stability of my bank, or (b) diversify my accounts to more than a single institution?

If I became so complacent about the security of my job that I didn't bother keeping up on my skills or acquiring new ones, just in case....?

Frankly, folks, there is a global recession in the making right now, that has as much to do with the end of cheap oil, the economic uncertainty of climate change, and the spiraling world population as it does to do with the greed of American investors, bankers, and politicians.

As Americans we like things big: our victories have to be more spectacular than anybody else's, our crimes more heinous, and our crises more important....

Sometimes, however, we forget that our actions are just as often effects as they are causes....


Anonymous said...

Just for fun, I want to tackle some of your parsings...

Most of America's small businesses are dependent on loans to keep afloat... Whether or not your business has collateral (all businesses have collateral) if all banks still says "no" you cannot do business. We are not talking about profits, we are talking about staying in business... When you go out shopping with your family, a part of everything you pay, is going to that business's interest costs....

On to the water heater...what if your minimum living expenses were more than you made? Before you put emergencies on a credit card.. Your bank has stopped that now... You have less than a hundred dollars and a week to go... Your next check was to cover your mortgage, cable, and electricity.. What do you do now?

As a retiree, what if your secure assets, were gone as well? Blue chips, solid as America..selling less than 10% of their value... As a retiree, you are no super financial wizard... You thought you were set for old age....

Assume you had the cheapest house on the market? But where you once were making much more and had extra, now you have to use your tax check to catch up... Your employer just cut your hours 50%.. Your credit was excellent, and now your house goes to a sheriff's sale...

Next, what if your bank was the fourth largest in the nation.. surely if little banks started failing, you would look and see about moving some of your assets...but you had no clue it was in bad shape... Hopefully someday you can work through the red tape to get your insured deposit you have coming to you...

Ok, so you get the point... It seems that those who are rather insulated most likely because of their sufficient salary, seem to feel like "look, these guys got what they deserved..."

There are a lot of people who played by the rules and are now hurt, 1) because others did not play by the rules, and 2) because on September 29, 2008, the House voted to kick in their teeth even harder...

I guess we will have to wait for the economic data to determine how many of those being hurt are assholes, and how many got hit without warning or cause of their own...

For if the former holds true, the plan of not following through with the bailout, hurts only those who overextended themselves...

But if the latter holds true, then your parents, family, friends and neighbors, will suffer horribly...
and this bailout, which had the potential to prevent much of their pain, will not come to pass....I mean dying from hunger... I wonder what that's like...I can't even imagine it...

So do you protect the weak and let the strong slide, or do you punish the strong who will suffer but certainly survive, and kill off all the weak in the process...?

I don't know how morality plays out with Libertarians, (lol) but whatever classification be it that I am..... I think the first option of the two is the better, provided that one is given only these two options among from which to choose....

(Oh, and I didn't realize I sounded desperate at all... funny.)

Anonymous said...

I listened to Spivak, when he first ran for office. Nuts then, nuts now. Smart, clever, still nuts. Chris was his campaign Manager. Close enough?
Tackle some parsings? Lets tackle some exaggerations. Show me a list of Blue Chip stocks, valued at 10% or less.
#2 If your minimum living expenses are more than you make, you do not need a water heater.
#3 And who says the bank should give you credit indefinitely. The only handout that is indefinite, is WIC, section 8, Baby's having Baby's with no daddy''s, and otherwise relying on 100% Government subsistence for Generations.
#4 Your next check has to cover 'CABLE'. WTF? UR Nuts.
#5 Break out the violins, Kavips says that "on September 29, 2008, the House voted to kick in their teeth even harder..." Is that a quote out of the Congressional record? Sounds more like a Quote from the Pulpit of Rev. Jeremiah Wright. Or is that out of Obama's book?
Spivak, none of this is just for fun.

Anonymous said...

All that I will say, is that if anon truly represents the voice of Mike Castle, then one needs no other reason, to prevent his return to office...


Anonymous said...

Why not just respond 1 to 5.
Surely you can support your points.

I am my own voice, sometimes anon, when responses may get confused with personalities. You made remarks, that surely deserve defending, regardless of who challenges you to do so.

When did Cable TV become a necessity?
If someone's living expense is more than they make, someone is using somebody? Shouldn't they reduce their 'living' expenses?

The BASE of this crisis, are those who lied on their mortgage applications. Buyer, Real Estate Agent, Banker and the Mortgage institutions.
Do you believe in NO fault lending? Do you have any money left to lend?