Some of my hawkier commenters, as well as other people on the web, express the belief that we need to let things come crashing down now without intervention, because if we go on, it will be even worse.
I'm not sure what they're imagining when they say "even worse". Say GDP contracts by a third and unemployment hits 25% or so--a not unreasonable supposition if we'd let the money market be destroyed and pushed all the institutions that regularly borrow there into liquidation. Short of aerial bombing, there is no "even worse"; that's what a country looks like when its financial system collapses.
I suspect there's an awful lot of anthropomorphizing the economy going on here. What happens to an economy when its credit system implodes is not that it cancels the cable subscription and takes a second job waiting tables on weekends. What happens is that everyone stops making so much stuff, because no one else wants to buy their stuff. Everyone's living standard falls, especially those who are shoved into the double-digit unemployment figures caused by the dislocation.
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I think the commenters want to know WHY they should care. Why is it that big corporations I've never heard of being unable to borrow money would affect the customers of my business (whatever that might be)? That's the question you should be answering.
After all, not all GDP is equal. When the tech bubble popped it really wasn't a big deal unless you were in tech, most other people got along just fine. I think there's a bit of a sense that the only folks that will lose their shirts are investment bankers and other rich NYC types.
That's it, I'm buying a gun. Maybe 5 or 6 guns. Big ones. At 25% unemployment huge gangs of Republicans will be roaming the street hunting human meat, and there's no way I'm going to let myself end up as a Republican's dinner.
That's it, I'm buying a gun. Maybe 5 or 6 guns.
At least you're doing your part to stimulate the economy.
Rob Lyman: "At least you're doing your part to stimulate the economy."
Plus I'm paying in cash, which is almost as good as money.
RE: Big guns
You don't want big guns. You want guns that chamber the same cartridges as the guns owned by the state. .223 for your rifle and 9mm for your pistol.
Republicans will go vegan before they eat tainted meat.
I'm not sure what they're imagining when they say "even worse"
Uhhhh...how about the wholesale and permanent destruction of the US economy and our very way of life.
Which do you think would be worse Megan: A depression caused by not bailing out Wall St (and keeping alive our current system which is slowly turning us all into indebted paupers); or a depression caused by a shift away from the dollar causing massive hyper-inflation (a la Argentina) and social unrest the likes unseen in American history?
Oh yeah, I forgot; you're all for the latter if it means keeping your job today! Good for you!
I forgot to add that the latter scenario pretty much means the permanent destruction of the middle class. We recovered from the Depression, but I doubt we'd ever recover from this.
I think Noah is right; my instinct is not to fear a recession and for that reason I'm oppose drastic action to prevent one.
It seems that we keep kicking the can down the road: Greenspan's solution to the tech bubble caused the housing bubble, and the solution to that will cause something else. I'd rather rip the band-aid off than keep picking at it.
As a general rule I'm against government bail outs of business. However, the general rule should have some exceptions. Here are some of the reasons why I favor some form of government intervention:
* Not a pure market failure For this to be a pure market failure, this had to be a "pure market". It wasn't. Few industries are as regulated as are the mortgage and securities industries. Government regulations (and those who used regulations as a lever) "forced" mortgage lenders to make unsafe loans and to assume risks the lenders otherwise would have avoided. Government regulators and advocates for the poor and disadvantaged considered these burdens just part of the cost of doing business and had little concern that the practices forced on the industry entailed any increased risk. They were just forcing business to do the right thing, after all. When government interferes this much in business practice, it's not fair to suddenly blame business for making so many bad decisions -- decisions that often were made unwillingly.
* Too many innocents are involved. Even if we could hold some players as responsible for their own fate, too many institutions are at risk of failure on account of risks they could not have anticipated nor avoided. Suppose your house burns down. As a general rule, I'd say that's your tough luck. Your insurance company will take care of you -- if you bought insurance. But suppose you did buy insurance, but the insurance company has been bankrupted with the assistance of the state insurance commissioner. Worse, your house caught fire because the building two blocks away went up in flames. The flames spread to your house because the buildings surrounding yours were not up to fire code (the building inspector was bribed). Still, the fire department could have put the fire out before it reached your home, but the fire main had inadequate water pressure. In such a case, no one could blame you for not having prevented the fire or for failure to insure yourself. Still, you'd have no claim on our resources to bail you out if it were not for the government's role in so many of the factors that led to your loss.
In the current crisis, many businesses and people will be harmed -- businesses and people who bear no fault and who took reasonable steps to protect themselves -- without some government intervention. Since a good portion of the blame for the crisis belongs with government, it's only fair government act.
Worse could mean avoiding this crisis at the expense of making the next one even larger.
But know that the US financial system and that of other nations weathered terrible storms before and recovered from financial system collapse. It isn't enough to just say that we were facing such a collapse, it needs to be weighed against the costs and benefits of the remedial policy. The immediate benefits of doing something like the bailout are clear but the long term costs are not, where as the immediate costs of doing nothing seem likewise clear the long term benefits are uncertain. But that doesn't at all mean the former nets to better than the later and those wanting to spend $700 billion to do have a much more expensive case to make.
Think about the clean power people and global warming. We've have scientists debate that for years with careful measurement and lots of hard thinking. Yet we aren't running to spend $700 billion on capital to do what they want. The Fed and Treasury want us to trust them without requiring them to make the empirical case that their bailout is needed and their remediation will work.
Mo's Friend says: "Republicans will go vegan before they eat tainted meat."
We must have very different views on Republicans. The ones I've observed are pretty much the very essence of taint.
If you know what I mean and I think you do.
And Republicans will only go vegan when a vegetable is developed that can cry out in pain. And no, Terri Schiavo doesn't count.
* Not a pure market failure For this to be a pure market failure, this had to be a "pure market". It wasn't. Few industries are as regulated as are the mortgage and securities industries. Government regulations (and those who used regulations as a lever) "forced" mortgage lenders to make unsafe loans and to assume risks the lenders otherwise would have avoided. Government regulators and advocates for the poor and disadvantaged considered these burdens just part of the cost of doing business and had little concern that the practices forced on the industry entailed any increased risk. They were just forcing business to do the right thing, after all. When government interferes this much in business practice, it's not fair to suddenly blame business for making so many bad decisions -- decisions that often were made unwillingly.
Oh yes, the new Republican meme (and yes, some parts of the party are actively pushing this) that lending to the poor and to minorities was the principle reason!!!
While lending to those with sub-standard credit certainly was PART of the problem, you're conveniently leaving out the other 99 pieces of the puzzle. Freddie and Fannie got themselves into trouble because they broke with their charters and tried to capitalize on these questionable loans. So did Wall St.
They knew these were risky investments, yet they used them as collateral to make even riskier investments, sometimes capitalizing them 30times over!
All sides deserve a serious foot-up-the-ass for what they've done, but please, don't start with the "this is all the fault of the poor and the brown" argument.
Of course, that won't happen and we'll be hearing a lot of this sh*t in the future.
You want guns that chamber the same cartridges as the guns owned by the state. .223 for your rifle and 9mm for your pistol.
Eh. 7.62x39 is widely available on the world (and domestic) market and packs more punch than .223. Plus, you never have to bother cleaning!
Why do you have to even argue what would happen in a financial system meltdown? We know what would happen. There have been enough severe crises in other countries in recent years that we should just know it'd be bad. The Asian meltdown of the late 90s, the Argentine meltdown of 2000, ...
I have a plan to prevent future meltdowns of government supported institutions.
If a government supported entity (i.e., Fannie and Freddy) requires a massive bailout for any reason we do two things:
1. Set the tax rate for all income earned by the Board of Directors (or equivalent) and the top three layers of management to 99.75%. Don't reward feckless or incompetent leadership.
2. More importantly, take the two ranking members of each political party on all oversight committees, House and Senate, and reset their seniority to 0. Don't reward feckless or incompetent oversight.
And, if I had one more wish from the magic genie, I'd say strip the seniority from the House and Senate majority and minority leaders as well. Don't reward... well, you get the drift.
Add in that if the U.S. financial markets meltdown then there's no bailing out anyone. No bailout like what Mexico got in the 90s, say. Nothing. We'd be alone in that. Except, of course, that much of the rest of the world would be in deep recession too. Not pretty.
I just don't believe any of you anymore. I think I will do the opposite of whatever Megan suggests.
Megan: There are big differences between "financial meltdowns". The S&L crises was an order of magnitude smaller than this one, and the next crises (depending on how we deal with this one) could be even bigger than this one. Eventually, a financial crises will generate a run on the dollar, the US will go through a painful retraction, and US will hold a diminished place in this world just as France, Spain, Portugal, and the UK do now.
We don't need to have a meltdown now, but we do need to transition to a stable system, otherwise this cycle will keep repeating. A bail out is not enough.
No fiat currency has withstood the test of time. We may live through the dollar's demise.
-winterspeak
David Walser: "For this to be a pure market failure, this had to be a "pure market""
there's no such thing as a "pure market." never was, never will be.
in the real world, we might not have been able to avoid the financial meltdown altogether. But it was exacerbated by various government actions, many of them attempting to bring finance more in line with "pure market" ideology. The Fed made credit too easy and Wall Street got out of control. Primary culprits: Alan Greenspan, the far-right, Phil Gramm, etc.
i like how you try to blame poor minorities and those trying to help them for the crisis. Of course the housing bubble/financial bubble happened during the Bush years. funny how republican apologists never mention that.
i guess the point i'd make is that this is a long time coming--a far overdue correction of an unsustainable bubble economy. That doesn't mean we shouldn't try to make things better. But what the financial crisis has shown is a systemic rot in the economy. Things like this don't just happen. There's something wrong with the foundation.
And there are no easy or painless answers.
All sides deserve a serious foot-up-the-ass for what they've done, but please, don't start with the "this is all the fault of the poor and the brown" argument.
Whose blaming the poor and the brown? If I'd been in their position, I'd have taken out a mortgage, too. They were being offered a great deal and shouldn't be blamed for accepting it. No, my beef is with those who forced changes in the loan approval practices and now want to blame poor business decisions for the bad mortgages that resulted from the changed process.
The start of the problem was the bad sub-prime loans. Government (and community advocates) has its fingers all over these loans. In large part they are the result of well meaning attempts to increase home ownership. Regardless of intent, the result was an increase in the riskiness of the loan pool.
Changes in lending practices, alone, do not account for our current problems. No, another factor was the large increase in volume made possible by Freddie and Fannie making a market for these sub prime loans. Again, this was largely the result of intentional government policy to increase home ownership. So, yes, Freddie and Fannie, with the active assistance of Wall Street, repackaged these sub prime loans into financial instruments that were then sold to the public. This would not have been possible without the implicit government guarantee behind Freddie and Fannie.
My point is NOT that non-government actors bear no blame. My point is that government is so involved it is nigh impossible to tell how to apportion blame. Given this situation, it's only fair that government shoulder some of the cost of cleaning up this mess.
It's unfortunate that we, you and I (who are totally blameless), must pay for government's share. Maybe we should be more careful in the future about letting government get involved in business decisions. I doubt that's a lesson we, collectively, will learn.
1. Set the tax rate for all income earned by the Board of Directors (or equivalent) and the top three layers of management to 99.75%. Don't reward feckless or incompetent leadership.
If you have enough evidence of a specific major crime than prison or a fine might make sense.
If you don't, fining them by narrowly applying higher tax rates to them, is unreasonable even unjust.
Also to the extent you greatly increase the extent the tax system is used for such actions you increase the inventive for people to focus on changing the tax system or finding loopholes in it, rather than performing actual productive activity.
I understand the incentive to "get the bastards", but your plan is neither just nor practically beneficial.
7.62x39
If the financial system collapses and there's rioting in the streets, where are you going to get bullets for your SKS? Iraq?
David:
I'm calling you out on this, because what you're saying is nearly the verbatim Republican talking point (which they've overtly tied to minorities) trying to put the blame squarely on Freddie, Fannie and the Democrats. They surely deserve some of the blame, but again I notice how you don't assign ANY culpability to the finance houses which irresponsibly tried to capitalize off these risky loans. Remember, they made risky loans and then tried to collateralize them to the tune of 30:1 to make even more money. Had this not happened, the economy would have still taken a major hit, but the damage would have not been NEARLY as severe.
It's the difference between and economic downturn and a disaster.
Say it along with me: This was a systematic failure and a failure of financial, political (all parties) and personal leadership.
Implicitly assigning blame to the Democrats is useless politics and gets us nowhere.
David Walser
"Few industries are as regulated as are the mortgage and securities industries. Government regulations (and those who used regulations as a lever) "forced" mortgage lenders to make unsafe loans and to assume risks the lenders otherwise would have avoided."
It would be interesting to see what is for the moment a rhetorical gambit turned into an actual argument by walking us through the steps that led from the "poor and disadvantaged" getting loans to the present crisis.
A sub prime loan is a loan made for a certain amount to a borrower who would not qualify for that amount under normal lending practices. So, a 150K loan to a disadvantaged person might fit that description but so would a 500k loan to someone whose income only justifies half that.
So what quantities of which kind of loan are we talking about here? How many second and third mortgages based on house values inflated by the bubble are we talking about? How many developers who built what are now unoccupied condos and sub divisions are unable to repay their loans?
But above all, what government regulations required Lehman and others to buy these mortgages repackaged as securities and invest so heavily in them? Lehman wasn't in the mortgage business. It made no sub prime loans, neither has AIG. So how did government regulations leave them holding all this bad paper?
Oh yeah, there's also the whole "Ownership Society" being pushed by Bush and the Republicans which also encouraged home ownership by those lacking the means to do so responsibly.
That said; this is not an attempt to exclusively blame the Republicans; rather it's an example of the failures of both parties.
[A]gain I notice how you don't assign ANY culpability to the finance houses which irresponsibly tried to capitalize off these risky loans. - Tyler
Tyler,
What part of My point is NOT that non-government actors bear no blame. My point is that government is so involved it is nigh impossible to tell how to apportion blame. are you having trouble understanding? Were non-government actors acting badly? Of course, why else would Countrywide have been trying to curry favor with Chairman Dodd if not for base motives? However, starting in the Clinton administration and continued by the Bush administration, policies were adopted that made the whole sub prime mess possible if not inevitable. (Both parties, Democrat and Republican, are to blame.) Government may have had the purest of motives, but it did not act because business wanted to make sub prime loans. Government acted because it wanted to change business practice in a direction disfavored by business. Absent these changes we'd not have the sub prime mess nor would we have had the housing bubble. Absent greed, the problem wouldn't be as large as it is today. You apportion the blame.
Of course, why else would Countrywide have been trying to curry favor with Chairman Dodd if not for base motives?
Yeah, because this only began in 2006...
This quip is tangential to our disagreement, but it does seem to indicate that you are trying to apportion blame to one side.
Now back to work for me...
I don't think you have to tax management income at 99% to have the desired effect. Simply declare that a bailout is evidence of management failure such that the previous 5 years' worth of bonuses and incentive pay shall be paid back to the bankruptcy court retroactively (on a prorated basis). You could also rule that bonuses paid within the same year of the bailout constitute reasonable proof of criminal intent to defraud creditors. That ought to make a dent.
David Walser writes: "Government regulations (and those who used regulations as a lever) "forced" mortgage lenders to make unsafe loans and to assume risks the lenders otherwise would have avoided."
When in doubt, the right ALWAYS blames the poor. Bonus points if they can blame minorities!
The FACT is that the risky loans and loan types can't be laid at their favorite scapegoat's doorstep this time, as anyone with any real knowledge of mortgage lending over the past couple of decades knows.
But they still won't stop flogging the poor.
David Walser again: "The start of the problem was the bad sub-prime loans. Government (and community advocates) has its fingers all over these loans."
Hoo boy. See, folks? It never stops with these people. The less true a statement is, the more it resonates with them. And the more they repeat it.
It makes me wonder if they practice in front of a funhouse mirror.
Say GDP contracts by a third and unemployment hits 25% or so--a not unreasonable supposition if we'd let the money market be destroyed and pushed all the institutions that regularly borrow there into liquidation.
First, just because the money market was having severe troubles last week does not mean it would be a permanent situation. Second, on what basis are we to analyze that GDP contracting by a third and unemployment hitting 25% is "not an unreasonable supposition"? How are you coming up with those figures? Or, are we to trust the people who got us into this mess to be able to quantify accurately how big the mess will be?
"I think I will do the opposite of whatever Megan suggests."
And if Megan says hydrate?
Re mortgages: When my wife and I bought a condo we looked for a unit in a desirable location that would cost us less in monthly mortgage/tax payments than our separate rents had cost. We found one, a smallish two-bedroom and we're happy with it.
At the time we bought we could have borrowed a lot more than we did and gotten a lot more space or an even better location, a lake view here in Minneapolis for example, provided we had been willing to pay a higher interest rate or take out an ARM (funny term, that.)
We didn't and when my wife's retail company cut back last year and closed a number of stores we didn't flinch. We can get by comfortably on my income for some time. We are by no means disadvantaged, but we could have gotten a sub prime deal for a lot more money than we borrowed and the mortgage broker could have taken a much bigger fee from us than from a local bus driver.
My point is, this mess wasn't caused by bus drivers getting access to credit.
davido writes: "My point is, this mess wasn't caused by bus drivers getting access to credit. "
Of course not. All those treeless McMansion plantations being built out in West Bugtussle weren't being sold to the poor and the brown. They were being sold to in-over-their-heads yupsters and the people who love them.
But every conservative is issued a cat-o'-nine-tails when they join the Cult of Saint Reagan and they're gonna use 'em, damnit!
"...The issue of executive compensation generally deserves a long post. Suffice it to say that if you impose legal limits on executive compensation you will drive the best people into private companies where there are no such limits. Why? Because the limits on the table relate to bonuses and increases in the value of the company's equity and severance payments. All three exist for a reason, the first two because top people do not work brutal hours a week under enormous stress for a mere salary, and the third because top people do not leave a job they have for another one without financial protection against their quick termination."
http://tigerhawk.blogspot.com/2008/09/washington-and-bailout.html
"Never ascribe to malice what can adequately be explained by incompetence."
"The road to hell is paved with good intentions."
I imagine "even worse" is something along the lines of The Road Warrior. Or The Postman.
winterspeak: The S&L crisis was NOT an order of magnitude smaller than this one, not in terms of cost to the taxpayer.
In fact, by that measure the S&L crisis and this one are of very similar magnitude!
The S&L crisis was far *simpler* than this one, that is true, and no runs on banks ensued because people knew the FDIC existed, and there was much less handwringing about bailing out depositors (ha!) than there is today because... well, because depositors and voters are pretty much the same thing, and besides, the FDIC and the implied political commitment to make the taxpayer pay already existed and was an article of faith to all.
Funny how it's all "screw the rich" when people don't realize that their own livelihood is at stake, but threaten their deposits and all hell would break loose.
It would be nice to find some way to link top executives to the downside. Perhaps a bonus delayed ten years after they leave, if the company is still profitable?
At some point, though, all these high powered people accumulate their walking away money. Even if they get fired, they can go play golf for the rest of their lives. After that they become somewhat detached from the downside. I suspect that's true in both Washington and Wall Street.
Public shaming! That's the ticket! Oops. It would only work on Wall Street. Washington is beyond that.
Megan, are you omniscient?
How on earth do you know these things that you are assuming with such confidence? Most important among them being that the bailout will have any positive effect at all in staving off a collapse? You are just taking Paulson's word that this will work. Yeah, because he's been totally right so far! Oh wait, he's been completely wrong!
I don't understand how you can be skeptical of government on so many things, but just assume that in this case Paulson and Bernanke have it all figured out. Truth is NO ONE KNOWS what will happen. This is all new territory. Paulson hope that hooking up his buddies will stop this, but that's all it is: a vain hope.
I for one think that we should at least let these companies fail before we have a fire sale of their assets, instead of trying to prop them up indefinitely with infinite bailouts. That's right, infinite.
http://www.foxnews.com/story/0,2933,425672,00.html
Don't let this shit pass! Call Congress today!
I just finished reading The Grapes of Wrath. Great book, highly recommended!
Even with the bailout, unemployment will probably reach 25% and the economy will probably contract by a third. The money being proposed to save the wealthy should be used to save everyone else.
I'm not sure what they're imagining when they say "even worse". Say GDP contracts by a third and unemployment hits 25% or so--a not unreasonable supposition if we'd let the money market be destroyed and pushed all the institutions that regularly borrow there into liquidation
I sort of alluded to this in a previous thread, but is it possible to get a post for us neophytes to explain why it would be that adverse?
NICO: Can you quantify that? All the data disagrees with your assertion.
The estimated bill for this current credit crises is about $1T -- $700B directly via the Paulson Plan, and an estimate of $300B in subsidies and insurance from all the extraordinary lending facilities the Fed has set up, etc. Of course, the final bill is not yet known.
The estimated total cost for S&L crises was about $150B.
http://209.85.173.104/search?q=cache:TK1_39ArccIJ:www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf+cost+of+S%26L+crises&hl=en&ct=clnk&cd=1&gl=us
This may be more like $200B-$300B in today's money, but it's still far smaller than the current credit crises.
-winterspeak
Megan,
What are your thoughts on Martin Wolf's proposed solution in today's FT? He focuses on recapitalizing the banks via forced debt-to-equity swaps if they can't raise enough capital on their own, or if necessary, having the government inject capital by buying preferred shares in them.
Great work on this topic over the last couple of weeks, btw.
winterspeak writes: "The estimated bill for this current credit crises is about $1T -- $700B directly via the Paulson Plan, and an estimate of $300B in subsidies and insurance from all the extraordinary lending facilities the Fed has set up, etc. Of course, the final bill is not yet known."
Let's remember that this is the same moronic administration that told us the Iraq War would cost less than a $100 billion and would be paying for itself in no time.
Winterspeak, that's retrospective. The prospective estimated cost of the S&L crisis was $500 billion. Since we are similarly not going to lose all $700 billion, it's hard to argue that the S&L crisis was a smaller magnitude. Certainly, the 1929 banking crisis was not smaller in either GDP or real dollars.
Which do you value more: comfort or safety?
The days when you could pick "all of the above" in regards to the US economy are over, probably forever.
Choose wisely.
I'm not sure what they're imagining when they say "even worse".
Think martial law ... food riots ... gas at 20$/gallon, if you can find any ... rampant militias turning into warlord gangs ... & a literally bankrupt government leading to a total collapse of national & local infrastructure.
All well within the realm of the possible when an already-weak US economy hits the wall at high speed, because its leaders were corrupt & myopic enough to REWARD venality instead of punishing it. The markets will read a "Get Out Of Jail Free" card as the cue for an even bigger round of bubble-blowing, with even less real solvent capital to back it up, because they'll know that their government is a gutless patsy who'll write off their losses as long as they cry loud & long enough.
the US financial system and that of other nations weathered terrible storms before and recovered from financial system collapse.
This statement is irrelevant: the current problem is global in scope & its context (& sheer size) is completely historically unique. Other similar crises have been local or regional, & even the largest left many nations untouched. This one is different. Even China & Japan are very nervous about their economic security, right now ... & if America screws them over, they're not going to play nice any more - the US only has one chance to get this right. There will likely be no "outside" to look to for aid next time.
The 1930's were harsh - but at that time, America had a vast industrial system, domestically owned & paid in full, sitting in mothballs & just waiting for the funds to go back into production. That no longer applies - you've sold off way too much industry or have put it into financial limbo as collateral on loans. Nor do you have the vast number of family-farms to take in people unable to survive in the cities that you had then. Any similar situation now would be much more lethal for many more people, & the recovery - if there even was one - would take much longer: you can hardly count on a World War to revive your economy this time, can you?
Every time the Wall Street Hammerheads get off scott-free, their level of sheer sociopathic criminality goes up by yet another level. Go ahead - take them at their word one last time, & hand them the keys to the nation's finances, with zero accountability & total immunity from investigation - what could possibly go wrong?
Next time, there won't be any money for a bailout: in a few years (or less) they'll have looted the Treasury just as thoroughly as they've done to the insurance & real-estate sectors this time around - & your country will be a card-house in a wind-tunnel.
NOW how bad does 25% unemployment & 1/3 off of your sacred GDP sound?
If the financial system collapses and there's rioting in the streets, where are you going to get bullets for your SKS? Iraq?
Clearly black powder weapons are the best choice for a long term "Mad Max" scenario.
Unless you can get hold of high powered air-rifles.
eg. http://www.jcs-group.com/oldwest/guns/lewisairgun.html
Very unlikely, whether or not there is further massive government bailouts.