Wednesday, October 1, 2008
A Moment Of Silence For Our Economy
Please read this article and this article both from the New York Times. I cannot say it better and so I refer you to people who do say it better. Tell your wacky friends that just want Wall Street to burn to read them too. Apparently calls are flowing in 200 to 1 against doing anything so its time to mobilize. Its one thing to be for something else. Its another to be for nothing. Its not the public's job to understand the importance of credit, but members of The House of Representatives reflect an ignorance that is just a little too representative of Main Street. Please help me turn these articles into email chain letters. Our stupid, craven, spineless politicians need help.
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14 comments:
I live in another country, but is a common saying here that: "When the U.S gets a cold...we get pneumonia!"
Things don't look that good around here as well, but we need to keep working and place pressure on the stupid, craven, spineless and greedy politicians.
I think much of the fury is not that Wall Street per se is getting the money but that certain investors on Wall Street will be getting the money, especially as bonuses. It was only a few days ago that we learned that Lehman had a $2+B bonus fund. The question a regular person starts to ask is: "Bonus for what?"
The clowns who got us into this mess -- in DC and in NY -- both need some serious constraints. Capitalism is wonderful, unimpeded, unrestricted, do-what-you-please-and-to-hell-with-the-consequences capitalism always leads to this type of horror.
I also believe it's time for the US to seriously examine the ability to deduct mortgage interest from income taxes. It's an inflationary inducement to "invest" in a home beyond one's need or ability to afford. I see the current mess as a combination of this fact plus the "cheap" loans that were made available, which are starting to turn out to not be so cheap after all.
I just read both NYT articles and I agree that the fundamental problem is a lack of trust. But the NYT authors got the location of the problem all wrong.
The problem is that we, the American taxpayers, no longer trust our representatives in Washington. These are the same people who deregulated Wall St and who authorized an invasion of a country that had not attacked America. Now they want 700 billion dollars from the taxpayers? Hell no.
I would rather see this country fall into another Great Depression than see us throw billions of our kids money at a problem that nobody really understands.
I'll leave you with this thought. In 2003 and 2004, the US sent 12 billion dollars in cash ($100 bills) to Iraq to help fund the reconstruction. The money was not from the US taxpayers, it came from "Iraqi oil sales, surplus funds from the UN oil-for-food programme and seized Iraqi assets."
source: http://www.guardian.co.uk/world/2007/feb/08/usa.iraq1
The US government has no record of exactly what happened to this money. It was distributed in a war zone with no paper trail or financial controls.
So, after handing out $12B in Iraqi funds with no way to account for it the US government now wants $700B?
Personally, I don't trust them with it.
P.S. Your comment system is totally broken on Safari/Mac OS X.
The consequences of a run at the banks, even if this would occur, are much smaller today than they used to be, as a result of direct transactions between banks. Today, it is much more likely that people transfer their deposits to other banks, than that they withdraw those deposits. A transfer of deposits does not change the total amount of credit in the system, while withdrawing deposits does.
The financial crisis has occurred because these companies were highly leveraged. They were able to be highly leveraged because the risk they faced was minimized by the guarantees of the GSEs. It was a calculated gamble: if the real estate market and home valuations keep rising, then they make enormous profits. But if things stall or, worse retrench, then the GSEs will save their bacon. The specific forms in which this occurred aren't important, except insofar as they masked the problem from the investors.
I wrote to my Congressmen the other day not because I'm some hayseed who wants them fat cats to get their comeuppance but because the government created the incentive system that fostered this environment and I don't trust it to remedy the problem. The government should never have been in this particular picture in the first place.
Will the world melt down if Congress doesn't open up the Taxpayer Line of Credit (more appropriately the Future Taxpayer Line of Credit since this whole thing will be financed by U.S. debt created out of whole cloth)? Some financial institutions most certainly will. The poorly-run will be fire sold to the well-run, who will write down the bad debts and try to rescue whatever they can from them. The investors of the failing companies are the ones that end up getting burned.
But that is precisely how the free market is supposed to work. The dislocations introduced by the GSEs and the CRA only prolonged the misery, thereby allowing the fiction to continue operating and becoming more profligate.
There are no signs that credit has dried up generally. It will dry up for bad risks, but again that's how it should be. If your company is well run or your credit it good, you can find a lender easily.
Peterdelaat & Bill Brown,
With all due respect, the idea that doing nothing is OK and it will work itself out is, to me, crazy:
http://www.nytimes.com/2008/10/02/business/02sales.html?hp
car sales drop 30%. There is no credit for people to buy cars right now. The concept that it is only effecting people with bad credit is incorrect. Lack of credit will eat every major industry and will have a domino effect. It already is. A 30 % drop in car sales is friggin catastrophic. Monumental. I do believe we have gorged on credit in an incredibly foolish way. But we do not need to induce the second great depression to fix this. Last time around the government didnt do anything and it took 10 years to fix. The conditions are not the same, but to suggest that there could not be an equivalent downside if this thing is not addressed is really an incredible game of chicken.
I never said do nothing. I said that the government should do nothing. Do you seriously think the only entity that can remedy this situation is the federal government? The banks that have failed so far have been absorbed into bigger, better-managed banks.
The only reason that the market has fallen is because they'd really like to be bailed out, thank you. If the government sent a clear signal that they're on their own, you'd better believe things would start happening.
There will be pain in whatever takes place next. An influx of funds from the government will not smooth everything out, far from it as it will introduce MONUMENTAL distortions of its own. Expect every industry that is oh-so-vital to the economy to come a-callin' whenever they're struggling.
I'm an avid reader of your blog, but your posts lately have shown a lack of macro-economic understanding that seems to be shared by the Fed itself.
What you fail to realize is that central banks and fiat money are the cause of booms and busts, not the solution to them! A currency that is backed only by the printing "In god we trust" is doomed to fail. Never in history has an un-backed currency ever been successful.
Pouring more fiat dollars at the problem will only make the issue more prolonged and severe.
Anonymous,
I see. We are supposed to go back to the gold standard. Thats err... interesting. I have heard a lot of economic theory around the solution, but I can't say I have heard that one.
@Anonymous: yet if you look at the 1929 disaster, some of the countries adversely affected were still backed by silver: it wasn't enough.
If you look at why purchasing has collapsed -here in Europe- in the last fortnight it is this: people don't know they will have a job in a few months time. In our house, we've been down to single paid employee since 2007, and while it is something you can adapt to if your outgoings are low, things like mortgages are pretty big consumers of income. I don't blame anyone who doesn't build bigger debts right now. The party is over: you can live on credit for a while, but the time to pay eventually arrives. and so it has.
Returning to the original posting: I think things are a mess, and action is needed to stop things getting worse. But giving the current regime a $700B blank check when they have a track record of incompetence is the wrong solution. Too bad I don't have any better suggestions
Does "Everything" in your domain name also include the average fool calling their congressman? I would agree!
All in BRK.A if you can afford it, or BRK.B if you cant.
There is a cogent argument against Paulson's proposal based on sound economics. First it is important to articulate the logic behind it. Paulson's idea is to establish the US government as buyer of last resort for certain types of asset (particularly Mortgage Backed Securities, MBSs), so that the market will be willing to price them.
As an analogy, the reason why I accept green pieces of paper from you called 'dollar bills' as payment, is because I have confidence that someone else will accept them as payment from me. If everyone else stops believing accepting them, so would I.
Ironically the gold standard (or any real asset based standard) solves the problem for currency the same way that Paulson's plan does for MBSs. As long as everyone knows they can get a certain amount gold from the government for their dollar bills, they are willing to treat them as being 'as good as gold'.
So calling it a 'bailout' (as Paulson himself did amazingly!) is unfortunate. There are valid criticisms of it without resorting to hysteria and accusations.
I'll refer anyone interested to the article that fronts my blog:
http://sharpninth.wordpress.com
I set out the problems and some possible solutions which are predicated by economics (rather than FUD).
This would appear to be the decade of chickens roosting in their abodes (see 9/11, dotcom crash, etc.)
@Hank I can't believe you have not heard about fiat currencies.
@Anonymous Correct. People do not trust their government in America. As a Canadian, I weep for my southern friends, because the right side of this equation is "Things will not change" .
Less trust means more coercion. Notice that there is a army brigade stationed in america now, fresh from Iraq (YAY! Soldiers as police! YAY!)
@Bill Brown Agreed. It's time to pay. The government needs to regulate yes, that's obvious, but YOU HAVE TO PAY. Either raise taxes ( seems verboten in America) or degrade the currency ( USA! USA!) The sooner you pay, the sooner the recovery comes.
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