I used to think the brain was my most important organ. But then I thought: Wait a minute, who's telling me that? ~Emo Philips.
Every time I ponder this bailout, I come back to that quote. Wall Street is telling us that Wall Street needs to be bailed out. A Goldman man has run the Treasury for six of the last thirteen years. I am sure that they think what they are doing is necessary. But anyone who works long in any industry comes to view it as having an outsized importance in the world. If you doubt this, spend a few moments listening to journalists prate about the sacred privileges of the press.
The problem is that they're sort of right. There is no industry in America that does not depend upon Wall Street. If credit seizes up and the banks fail, everyone will suffer deeply as businesses cut back for lack of capital, mortgage capital dries up, credit card rates rise and car loans become hard to get.
But that doesn't mean one has to support the current bailout--you can add me to the list of libertarians standing athwart history shouting "stop!!!" I don't think we can punish risk taking managers and the shareholders who enabled them as thoroughly as we might like without possibly taking the rest of us down with them. But allowing banks to selectively offload their crap on the government without so much as a rap on the knuckles for having bought the crap in the first place is taking things too far.
Of course, I'm not Hank Paulson and Ben Bernanke, and I'm not privy to their information about the markets. What information I do have from various insiders suggests that the financial system was perilously close to simply ceasing to function on Thursday night. So I'm loathe to opine too certainly about the necessity of bailouts. But I'm pretty sure that we don't need to hand the bankers hundreds of billions worth of treasuries as a reward for a job well done.
Hooray! She's back.
I was afraid that the blog had closed on Friday and would re-open today as a subsidiary of JP Morgan Chase.
Proposed rule: every comment on this post has to include a quote from Emo Philips. Obligatory Emo: "Does anyone else have a dog that drinks from the toilet? Believe me, it tickles when you're reading the paper!"
I'm looking at this bailout thinking "No. This is not correct." This is asking the American people to pay corporations (who have a few too many privileges as it is) for incompetence. I really don't want my money wasted, whether it is for military actions that are unnecessary or for bailing out companies that give their executives dozens of times the amount of income that I personally earn.
If the US absolutely HAS to bail someone out, better to bail out the citizens who have little recourse. Bailing out the corporations won't help the mortgage crisis because the consumer will still be crushed by the economy after the corps have their handout and are fat and happy.
Emo Philips played the shop teacher who cut off his thumb in UHF, right?
Megan,
What does "simply ceasing to function" mean in this context? (I'm pretty sure this is one of those clarifications like when you ask the doctor what "myocardial infarction" or "metastasized" means.)
Does this one work for our current situation?
"At my lemonade stand I used to give the first glass away free and charge five dollars for the second glass. The refill contained the antidote."
If the financial system ceases to function, do I still have to pay my Visa bill? Or to put it better, if I have to pay for someone else's mortgage, who is going to pay for my Visa bill? Somehow I think I'm going to end up paying twice.
If you're Bank of America, wouldn't you go right out and find the most aggressive, high risk/high reward investments you can right now? There's no way Bank of America could be allowed to fail; they could operate with an absolute guarantee of government intervention if things don't break their way. I mean I really can't see a way in which this bailout doesn't convince any I-banker or executive who didn't think so before that if your firm is big enough, the odds of the government (read: taxpayers) bailing you out are close to one.
Emo Philips played the shop teacher who cut off his thumb in UHF, right?
Yup.
In all honesty, I don't see as big a problem with letting a lot of the financial institutions fail. yeah, it'll suck, but at the same time, there's no way we'll get improvement by propping up the same old system with taxpayer money.
Of course if the entire economy collapses, we'll have a big ole government bailout anyway, but at least it'll be directed towards companies that survived. not the ones who couldn't hack it.
and if it helps create a system that's less leveraged and less oriented towards short term gain and more oriented towards long term growth, then is it really all that bad to have some sharp short term pain?
Oh, forgot my ObEmo: "How many people here have telekenetic powers? Raise my hand."
"But allowing banks to selectively offload their crap on the government without so much as a rap on the knuckles for having bought the crap in the first place is taking things too far."
If the government buys the assets at a steep enough discount -- say, 30 cents on the dollar -- wouldn't taking a 70% loss on those assets count as a "rap on the knuckles"?
On that note, Megan, I'd be interested to hear what you and some of your informed readers think about this op-ed by a former FDIC Chairman.
http://online.wsj.com/article/SB122178603685354943.html
Shall we all cut off our noses to spite our face?
Ron Paul warned about this looming mess on the floor of Congress on 9/10/03. No one listened.
But the reality is that a government bailout will happen whether libertarians like it or not - there aren't enough citizens out there who would willingly see our 401Ks, savings, and jobs forfeit just to make a point about the heavy hand of "mark to market" regulations and "moral hazard." Rather than rein in compensation, the feds need to offer large bonuses and commissions to those who can make the bailouts as painless as possible to the Treasury.
Apparently we just averted a $30 trillion Great Depression:
http://www.usnews.com/blogs/capital-commerce/2008/9/22/bailout-prevents-great-depression-20.html
Stay tuned.
It seems to me that anyone who has any sort of skepticism of the effectiveness of bloated financial institutions that are tied to the federal government, effectively distorting the line between the free market and corporatist utopia, should have some respect for the purging nature of their potential collapse. In the theoretical bandying about the way the market corrects itself, the very nature of a malfunctioning necrotic set of beasts like we see would be to whither away, leaving space for smaller more efficient businesses and individuals to take advantage of the left over market share, or whatever other void remains. For that matter, one central lament is that credit will diminish and loan capacity will whither along with these institutions. This is based upon the premise that every single human being relies on credit and the possibility of a loan, and that equity is a naïve pipe dream realized only by the very rich after they’ve run the gauntlet of car leases and mortgage payments
I just thought she was covering her shorts. Wm. Isaac, former FDIC chairman, had a piece on the Op-ed page of the WSJ Friday. He recalled back in was it the S&L day that every bank in the U.S. would have gone under if we had the current mark to market accounting on mortgage assets. Back then the accounting rule was 'true economic value' (discounted cash value analysis to Megan). I bet the Senate sets the standard for bank accounting along the lines of specifying or delegating to the judgment of some board. It seems to me it might be about $700 billion cheaper and more congruent with moral hazard to just rewrite that section of law to state 'except for the value of mortgage assets which may be valued at discounted cash value.'
Are Americans being suckered again? Food for thought in the article:
"Let's bail out the greedy, the crooks, the suckers"
AmericanChronicle.com
September 22, 2008
http://www.americanchronicle.com/articles/75078
"Perilously close to not functioning?"
When market insiders say things like that, you know that the market has bottomed out; because at that point whoever in the market was not taking the price offered which would get things moving swallows the bitter pill. Like Morgan Stanley being ready on Thursday evening to sell 49% to the Chinese. Now instead of a week of the market gingerly starting to pick itself up, we will have a market all over the place until people have got their new bearings. I fear that Paulson, Bernabake and Co. will get so nervous about these market jitters that they will not take the time needed to make a reasonable leather purse out of the sow's ear of a plan they displayed on Friday.
"I was walking down fifth avenue today and I found a wallet, and I was gonna keep it, rather than return it, but I thought: well, if I lost a hundred and fifty dollars, how would I feel? And I realized I would want to be taught a lesson."
I love Emo Philips quotations. The one above is somewhat appropriate.
One thing is certain, and you are already seeing it in the negotiations- with $1 trillion in play, the pigs will knock each other over to get to the trough.
As a very prudent taxpayer, I am resentful of the hand in my pocket from the bankers, the politicians and a lot of my deadbeat fellow Americans. I am coming to the conclusion that the only really prudent thing for me to do now is run up as much debt as possible and walk away from it like everyone else.
There is always a sucker, and I realize that the sucker is me.
Great thought. Maybe rather than staging a run on my savings, I'll instead make a run on the consumer products I haven't bought. Let's see, there's another vehicle I'd prefer and some more electronics, construction tools and materials, etc. And my credit card cos have been raising my credit lines over the past several months. Maybe it's time to max everything out while that's still possible...
"If the government buys the assets at a steep enough discount -- say, 30 cents on the dollar -- wouldn't taking a 70% loss on those assets count as a "rap on the knuckles"?
Posted by DaveinHackensack | September 22, 2008 2:45 PM "
But if the "real" value of those assets turns out to be only 10 cents on the dollar aren't we paying them a "premium" they don't deserve?
Just asking.
Here is one way to think about it - we need regulation to protect executives from having to do things against their better judgment.
For example, if you and your competitors are leveraged at 10-1 everything is fine, you can compete on service, talent, innovation, efficiency etc. However, as soon as one of your rivals decides to kick it up to 12-1 you have three choices - move up to 12-1, quit, or get fired. If you stick to 10-1 your earnings will be dwarfed by your rival and your board, your employees, and your shareholders will be clamoring for you removal. We need regulation so companies prosper by delivering a better product, not by inflating earnings with too much debt.
This seems so surreal. The proposed bill gives a guy $700b and no oversight, and Congress is apparently going to vote for it. It's like we're in some other country.
Personally, I'd let failed Wall Street firms fail and use the 700b to directly help the non-financial, non-housing industries keep going, as opposed to indirectly though the Wall St. fat cats.
I was talking to a California relative, out there many years, about the bail out this weekend. She has watched the market go up beyond the means of a middle class income and hearing that those who had gotten free money might be bailed out or be able to adjust for a depreciation on a million dollar house that they bought as essentially a naked long, CA being a nonrecourse state, in other words the bank has no recourse to your other asets if you just walk away from a mortgage, we kind of got to feeling the same way. My feeling is, forget the polls, McCain can say 'Adios a la Casa Blanca' if he doesn't stop this thing. People are going to think lets get the real socialist, friend of the outer dog, if we're going to lack moral hazard anyway.
"you can add me to the list of libertarians standing athwart history shouting "stop!!!"--MM
Welcome aboard. The market is going to correct. We can take the medicine now. Or spread greater cumulative suffering over a longer period.
Can you say stagflation?
Megan, I'm disappointed. You're making the same old fallacy in new clothing.
"Janitors should be paid more because we NEED them." Wrong. We need janitors. We do not need *these* janitors.
"Port workes should be paid more because we NEED to bring in goods that are shipped." Wrong. We need port functionality. We do not need *these* port workers.
Likewise, yes, we do need financial services and investment banking. But we do not need THESE clowns who get paid ridiculously huge sums of money for "intelligently" directing the investment of resources to their highest, best use, which turns out to be a horrible use.
We do not need THESE clowns who *boldly* take the financial risks necessary for a growing economy ... who turn out not be taking a risk in the first place, because any foolish bet will be erased by the government!
The financial sector needs SERIOUS reorganization right now. It needs competent people with realistic models, not "high IQ" people who don't know what they're doing. The sooner it happens, the better. Delaying it only makes it worse.
So people will lose their jobs? So what! Those jobs shouldn't exist, and if these hotshots had a clue they'd have saved a cushion of money for just these circumstances. Yes, even the tellers (if they're even impacted).
If you're so smart, why can't you find a job somewhere else?
It's too late to do that. The music has stopped and the chairs are full (in actuality, there never were any chairs, the players just expected the music to keep on playing). This new bailout is an attempt to create some chairs by taking them from the spectators in the stands, who weren't even playing. What nobody seems to realize is, they don't really have any chairs either and everyone is just sitting on the ground. Which happens to be quicksand.
I love speaking in metaphors. It's fun.
It's always a sucker bet to play by the rules when nobody else is.
Nelson, what people don't seem to be able to wrap their heads around is that there is no $700 billion. It's all debt. Who will buy it, I wonder? Who has $700 billion to buy our debt?
Have we finally started to find the limits of how high we can push our national debt? And what happens when THAT bubble pops?
I confess to ignorance and confusion here.
Money isn't real. It stands for something real so as to facilitate exchange. But the destruction of paper wealth isn't the same as the destruction of real wealth.
The houses that people couldn't afford are still there. The people who need roofs over their heads are still there (where are they living, BTW, if the exurbs are empty?). The widgets are still rolling out of the factories, the crops are being harvested from the fields, and yes, speaking of paper, the patent applications continue to flow from my desk.
So what exactly is the problem here? All the real stuff is just fine. The problem exists on paper. Why is the solution to print up a bunch of new paper to paper over the holes in the old paper?
liberalrob,
You do know that in GDP terms Japan's debt is 5x as high as our and France and Germany's debt is 2x as high. For a major industrialized country our debt levels are quite low.
liberalrob,
For deadbeats it is probably too late to double down (or triple, quadruple, etc.), but people like me, with AAA credit ratings, can still borrow money- a lot of money. I won't actually do it because my disgust hasn't yet breached my ethics (and I do have other options to protect myself against any but the most catastrophic outcomes), but I would certainly understand it from others in my position- and I expect to see quite a bit of it going forward.
Well, here we have come almost to the end of the road and, as a liberal I hate to admit, but it's "Mission Accomplished" for George W. Bush. He has gone his entire presidency without having sex with anybody not his wife.
So what exactly is the problem here? All the real stuff is just fine. The problem exists on paper. Why is the solution to print up a bunch of new paper to paper over the holes in the old paper?
Because "holes in the old paper" of this magnitude would potentially allow us to find out what The Grapes of Wrath would look like with 300 million people and a heavily interlinked global economy.
If the worst-case Thursday fears had come true, those patents on your desk would have been worth more as heating fuel within, at most, a week. You could then have joined the other 5-10 million Americans who would be functionally unemployed within a month's time. What was your backup option? I hope not the truck driving, because demand for that would be way down, too.
Because "holes in the old paper" of this magnitude would potentially allow us to find out what The Grapes of Wrath would look like with 300 million people and a heavily interlinked global economy.
Well, fine, but that's circular. I understand that the problems were dangerous, but I don't understand why. What I'm asking is, how is it possible for an economy filled with functioning parts to be destroyed by problems with what amounts to a description of those parts? It would be as if I could stop a machine from working by chewing up the instruction manual. Or, given the prevalence of derivatives in this mess, chewing up advertising materials printed in a foreign language.
What was your backup option?
Well, I'm not as young as I was, but I'm in good shape; manual labor and/or subsistence farming are both options, as is, for instance, auto repair and general mechanical work. Ultimate fall back would be military service or armed brigandry, depending on how bad it really gets.
If you're Bank of America, wouldn't you go right out and find the most aggressive, high risk/high reward investments you can right now? There's no way Bank of America could be allowed to fail...
Freddie: BOA can't "go right out" and do anything, because inanimate objects like books, trees, sea shells and corporations can't carry out actions. The people who run BOA might be able to do what you suggest, but they'd have to be pretty dumb, unless they want to run the risk of ending up like the (fired) executives of Bear, AIG and Fannie/Freddie. And anyway, BOA -- like all commercial banks -- is much more strictly regulated than those things called "investment banks" that used to exist.
What I'm asking is, how is it possible for an economy filled with functioning parts to be destroyed by problems with what amounts to a description of those parts?
Okay -- I'll take a stab: Because barter is pretty inefficient. And even if there were a way to switch to a financial system that eschewed the use of "symbols" (i.e. money) it's pretty difficult to manage the transition when millions of people would be impoverished because they were stupid enough to put most of their wealth into symbols, rather than canned goods and bullets.
What I'm asking is, how is it possible for an economy filled with functioning parts to be destroyed by problems with what amounts to a description of those parts?
Because economies aren't static.
Zoom in on a simple example: buying gas.
Assume a well, a pipeline, a refinery, a ship, a truck, a gas station, you and your car.
The well can't pay the workers because their corporate assets got frozen when their bank went TU; insurance may kick in in six months or so, but for now they're stuck. The pipeline has a hole, but the company running it doesn't have cash on hand to pay for repairs, and no one can get credit. The refinery got hit by a hurricane, but their insurance company went broke trying to cover CDS insurance. The ship is stuck in port, because they can't sail without insurance, and they can't afford the premiums. The truck driver quit to go farm, because he'll be paid in kind and he can't afford to buy gas anyway. The gas station is out of business because no one can afford to buy the junk food that their profit margin depends on. And you don't have a job anyway, because no one is buying whatever your company makes.
Because barter is pretty inefficient.
True, but the distance between avoiding barter and having people buy a CDS for debt instruments they don't even own is pretty huge.
I'm not opposed to money, in principle, but I wonder about the general wisdom of a system that can fail so thoroughly in the absence of an actual, you know, problem.
I may just become a gold bug after all this. Where demented and ill-informed tax protesters failed, the geniuses of Wall Street and the Fed may succeed.
liberalrob,
You're right. It would be best to not use any taxpayer money or debt. If financial institutions can only get 50 cents on the dollar for their debt, that's still better than nothing. Besides, plenty of wealthy investors (both foreign and domestic) would be willing to pay a discount for low risk debt, and even more of a discount for high risk debt (a house is usually worth something, even if it isn't worth what it was last sold for).
What I'm asking is, how is it possible for an economy filled with functioning parts to be destroyed by problems with what amounts to a description of those parts? It would be as if I could stop a machine from working by chewing up the instruction manual.
Suppose you have a 401(k). The entirety of your contribution goes to financial institution. Some fraction of it is invested in a mutual fund, and some fraction of that is invested in the stocks or bonds of an umbrella property management company, a subsidiary of which maintains an apartment complex over in Padookaville, Middle O'Nowhere, USA, and that subsidiary generates an operating profit by collecting rent. That's at least five levels of financial interactions removed from where you are, and where the source of revenue is. Assuming that investment stops performing for any reason, the cause and the value of the underlying asset are all uninteresting to you, and impossible to effectively assert anyway. You want your money either returned, or put into a better investment. And perhaps more important, you get money without having to personally be an apartment manager, and your returns are insulated from the success or failure of any one economic sector by virtue of diversification.
Unfortunately, if you can get a perfect storm going where an entire economy's worth of investors start opting out at once and hoarding the cash, whether justified or not, the obligations cannot all be met simultaneously and credit markets can cease functioning. That leaves businesses broadly unable to borrow money for new business opportunities or even maintain existing operations, and at that point everyone is hosed.
Whether or not this system is desirable, it's the one we've got, and as the hostess just noted in a more recent post, the Great Depression occurred in an economy with far less reliance on credit markets than the current one. You could dial the economy all the way back to the stone ages and about all you would guarantee is that herd panic would occur over fluctuations in the economic health of shiny trinket jewelry and badger pelts. Humans are what they are.
What I'm asking is, how is it possible for an economy filled with functioning parts to be destroyed by problems with what amounts to a description of those parts? It would be as if I could stop a machine from working by chewing up the instruction manual.
Suppose you have a 401(k). The entirety of your contribution goes to financial institution. Some fraction of it is invested in a mutual fund, and some fraction of that is invested in the stocks or bonds of an umbrella property management company, a subsidiary of which maintains an apartment complex over in Padookaville, Middle O'Nowhere, USA, and that subsidiary generates an operating profit by collecting rent. That's at least five levels of financial interactions removed from where you are, and where the source of revenue is. Assuming that investment stops performing for any reason, the cause and the value of the underlying asset are all uninteresting to you, and impossible to effectively assert anyway. You want your money either returned, or put into a better investment. And perhaps more important, you get money without having to personally be an apartment manager, and your returns are insulated from the success or failure of any one economic sector by virtue of diversification.
Unfortunately, if you can get a perfect storm going where an entire economy's worth of investors start opting out at once and hoarding the cash, whether justified or not, the obligations cannot all be met simultaneously and credit markets can cease functioning. That leaves businesses broadly unable to borrow money for new business opportunities or even maintain existing operations, and at that point everyone is hosed.
Whether or not this system is desirable, it's the one we've got, and as the hostess just noted in a more recent post, the Great Depression occurred in an economy with far less reliance on credit markets than the current one. You could dial the economy all the way back to the stone ages and about all you would guarantee is that herd panic would occur over fluctuations in the economic health of shiny trinket jewelry and badger pelts. Humans are what they are.
As I reflect on this, the my confusion is becoming clearer.
The Fed does not have $700bn in goods and services to offer anyone. What it has to offer is, in essence, devoid of meaningful value. It's not worth the paper it won't be printed on. This contrasts sharply with, for instance, the heavily deflated value of an exurban home (which got the ball rolling on the crisis) which, whatever its faults, is certainly a safe and dry place to store your Precious Moments collection.
But if the Fed can "bail out" banks with what amounts to nothing, then are not the losses being bailed out essentially fake, as well? If the Fed doesn't need to cover its bailout with actual goods and services, then the losses are not being taken on actual goods and services, either. They're being taken on derivatives with only the most tenuous connection to anything real. If a mortgage-based CDS isn't honored tomorrow, my house will not burn down.
On the other hand, if there are real (rather than paper) losses being taken in the markets, then they will require a real (instead of paper) bailout, which this doesn't seem to be. And of course such real losses would be easily visible on the nightly news, as massive numbers of homes burn down, factories are destroyed, etc.
As I said, I don't really understand this, so I've probably made a serious mistake somewhere.
Assuming that investment stops performing for any reason, the cause and the value of the underlying asset are all uninteresting to you, and impossible to effectively assert anyway.
Now we're getting somewhere. Unless the apartment complex burned down, people still need a place to live. It should still be possible to rent the apartments to someone at some price. So the investment may underperform expectations, but that's pretty normal, isn't it? So you sell, the price drops a bit (bringing the return more in line with the price), and you look for something better.
Which actually brings me to another source of my confusion: why does stock price seem to so matter much in the credit markets? If shares in my business drop precipitously, the fundamentals of the business don't change. I still have the same cashflow and the same obligations. My ability to raise cash by selling equity is impaired, but as I understand it, that's not the preferred means of raising cash anyway. Yet somehow stock price drops are considered really bad news for a company, even if clearly overreactions to minor bad news.
It should still be possible to rent the apartments to someone at some price.
Who's going to do the renting if the company that borrowed to build it defaults on their debt and declares bankruptcy because "some price" won't cover the debt payments? Banks are notorious for not wanting to be landlords, assets are frozen all over the place so no one has cash in hand to buy it, and the credit market is frozen so no one can borrow enough to buy it that way either.
This is what's happening with a lot of foreclosed homes. The bank doesn't rent or maintain them, people can't or won't buy at the prices the banks are asking - prices that will cover the bank's losses - and the houses are literally rotting.
why does stock price seem to so matter much in the credit markets?
Stock price is the sum of the current value of a company's assets, plus the present value of their predicted earnings stream. If the assets don't change but the price drops, that's a statement by the market that they expect the company's earnings to decrease. As expected earnings go down, risk to a lender goes up. Risk going up means interest rates going up. Most corporate debt is short term, because it's much cheaper and more flexible than issuing long term debt. So when your debt rolls over, you have the same obligations, but higher interest rates, to pay out of the same cash flow. Or, if the market was right, you have the same obligations, higher interest rates, and less earnings to cover with.
The bank doesn't rent or maintain them, people can't or won't buy at the prices the banks are asking - prices that will cover the bank's losses - and the houses are literally rotting.
That's an actual destruction of real value, and it's thoroughly irrational. Nobody is going to pay full price for a home that has been allowed to rot in a neighborhood where the pimps and dealers have started squatting. A bank that chooses to do this would be better off either holding a fire sale (get money today, avoid rotting house) or just not foreclosing to begin with. Better to get no payments and have the owners maintain the home until you feel like kicking them out than to own a wasting asset.
If they're better off owning the rotting home because it does something nice for their credit rating or reserve requirements, it's a great example of paper theory winning out over reality.
Stock price is the sum of the current value of a company's assets, plus the present value of their predicted earnings stream.
Well, in theory. Yet somehow prices move on no news and swing wildly even for minor news (We missed our projection for one quarter, therefore our earnings in perpetuity are going to be down), and the market fails to anticipate major news even when it's clear that there's a problem well in advance (Lehman, AIG).
If the assets don't change but the price drops, that's a statement by the market that they expect the company's earnings to decrease.
Fine. Why should I, as a lender, accept that judgment, knowing full well that the market's movements are not always in accord with theory? Is it just the seemingly mandatory herd mentality? Can't I make money by lending to good risks with good income but irrationally bad stock prices? What's the point of being a financial genius if you're just going to do what the rest of the sheep do?
Rob,
This is far from my area of expertise, but my understanding is that a company uses its stock as collateral against its debts, so when the stock price goes down, they suddenly have less collateral and are objectively a bad credit risk. (sort of like trying to take out a second mortage on a house whose value has fallen).
I may be wrong, and please correct me if so, but that is how I believe it works.
Freddie: BOA can't "go right out" and do anything, because inanimate objects like books, trees, sea shells and corporations can't carry out actions.
... seriously, dude? Like, I know I take a lot of grief here, and I like it. That having been said... seriously? You've never said "The United States should do this", or "General Electric should do that", etc?
I mean... seriously, dude?
Who has $700 billion to buy our debt? - liberalrob
Can't we always do it the old-fashioned way and print money? But as I understood it issuing more debt isn't a problem at the moment -- people are still eager to buy US government debt because it's now safer than all that other stuff. That's why the yield on T-bills went negative last week. Right?
Can't I make money by lending to good risks with good income but irrationally bad stock prices? - Rob
It'll never work. Warren Buffett's been trying it for decades and look where it's gotten him.
The Fed does not have $700bn in goods and services to offer anyone. What it has to offer is, in essence, devoid of meaningful value - Rob
What the Fed has is the US Army and a press that can print dollars. When all the other forms of debt and credit and value in the country go bad, those two things become the ultimate source of value.
It'll never work. Warren Buffett's been trying it for decades and look where it's gotten him.
Buffett seems to be the personification of rational market theory. But for some reason he's an exceptional investor instead of an ordinary one.
What the Fed has is the US Army and a press that can print dollars. When all the other forms of debt and credit and value in the country go bad, those two things become the ultimate source of value.
When the Army develops a missle that targets hyperinflation, let me know. Until then, those things are a source of cash, but value remains out here in the real world, in the form of goods that people actually want.
value remains out here in the real world, in the form of goods that people actually want.
Currency is a good that people want. At least until the point where your economy actually goes back to barter stage. I think even if every bank in the country went belly-up, people would still prefer to use greenbacks rather than chickens and cigarettes, as long as it was clear the government remained in power and was protecting its monopoly on printing greenbacks. Even in Zimbabwe most (not all) transactions are still conducted in cash, and we could probably do better than them in case of a collapse.
Rob,
I share your confusion about the correlation between stock prices and reality, but I think the key answer to your current question is: trust.
Trust is the real thing of real value that has been lost here, and it's something that can be suddenly disintegrated based only on words and paper, rather than actual houses burning down.
Take it back to fundamentals - you're out in the middle of nowhere with a pile of wood and tools, but no skills, and I show up with no resources but an expert knowledge of carpentry. If you trust me, I can offer to build us two houses, and repay the offer of your materials with a house. But if you are unable to trust me, then we both sit around homeless.
There is a tremendous reduction in transaction costs, and a tremendous amount of opportunity in the modern US economy, as a result of the huge networks of trust that have been grown over decades. As Megan would put it - institutions matter. This is why we can shovel aid into developing nations and not see them magically bloom. They haven't yet developed these webs of trust.
We joke about how I can easily get a credit card and go buy TVs I can't afford, but I can also get student or small business loans to learn a trade and produce real world benefits to those around me.
If all that trust vanishes, real transaction costs go up, and less gets done. It's not the "return to barter" mentioned above, but it's still ugly, in real concrete ways.
standing athwart history shouting "stop!!!"
Ah, yes, the mating call of the pseudo-libertarian.
Hi, Look at the pictures of my new emo hairstyle
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