Having (hopefully) scared you appropriately with the previous post, I now point out that the money markets were only one part of the picture. Let's not forget that we still have the mortgage market and the insurance markets freezing up quite apart from the money market disasters. Every crisis gets compared to the Great Depression. This very nearly was.
There are strains on the left and the right that are kind of okay with this idea.
The right wing version says "Let them fail! Fractional reserve banking is inherently unstable, and we've been living on borrowed money. We need to cut back to our natural, credit-free level of output and consumption."
The left wing version says "Let them fail! Capitalism is inherently unstable; greed is no way to run an economy. We need to force banks to stop doing all of these dangerous things and regulate them so heavily they can't make a mistake. Also, as a general rule, rich people should suffer for their mistakes, and ordinary people shouldn't. This is a great opportunity to repeat FDR's awesome victories!"
These are two ways of being dangerously silly. Whatever your ideal looks like, there are two rules of financial system change:
1) Very rapid change is very bad
2) See above.
The Great Depression took place in an economy much less dependent on liquid credit markets than today's system. In three years, from 1929 to 1932, GNP fell by about 30%. Unemployment hit almost 25%, and stayed within spitting distance of 10-15% for most of the rest of the decade. This was not selective, picking out only the bad people who had bought radios on time, invested in Florida real estate, or taken a flyer on an investment trust. People lost their jobs not because they were bad, but because their company could not sell enough stuff to cover expenses.
In an earlier thread, someone said, roughly, "I don't buy on credit and my company invests on retained earnings. I can sit this out for a couple of months." The problem is, the effects of really rapid contractions don't last a couple of months. They last years. Can your company withstand the bankruptcy of some major clients with large outstanding accounts? How many people will it have to fire if its order book drops 40%? Can it cover its fixed expenses even on half staff?
Liberals hoping that this will bring on a second new deal, however, should think again. What FDR did was a one-trick pony. For one thing, he was operating in an environment with vastly more scope for action than the current government has. Since then, the Federal government has hemmed itself in with a combination of laws, regulations, and legal decisions that make federal projects of any scale take decades. There will be no second WPA or TVA.
More importantly, FDR was working with a financial blank slate. In 1928, income tax receipts were about $1 billion on GNP of roughly $100 billion. State and local taxes were also low. Now the effective federal tax rate for Arnold Schwarzenegger is more than a quarter of his income. The Federal government's share of national income peaked at roughly 50% (IIRC) in World War II, and has averaged about 20% since then. We can't add another 20% so easily. When federal, state, and local governments are taking more than half peoples' incomes, they get awful feisty. Plus, if we take more money, what are you going to do when the bills for Social Security and Medicare come due?
There is no benefit from a "tough love" strategy for anyone that even begins to approach the catastrophic consequences, for everyone, of a massive and rapid contraction.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
I have not seen any columnists or bloggers celebrating the current financial meltdown and hoping for the collapse of capitalism. Megan is again attacking a strawman. It's an unworthy form of argument.
A cynic would point out that Megan is a libertarian until the fat cats on Wall Street have to give up their private planes. Then "the market" needs a blank check, and we should just trust the folks who want to drown the government in a bathtub.
I have seen people take this position. And I can only think that these people don't understand the magnitude of what can happen. We haven't had a serious recession in a generation -- and so it's not too surprising that there are some, and maybe many, who just can't imagine what a real depression would be like. It's not real to them in any way.
Sunday's NY Times article on Paulson and Bernanke had a relevant Bernanke quote:
If your financial house of cards requires more and more socialism to keep it temporarily solvent (over ever shorter periods of "stability"), the cure is worse than the disease. Yes, that would mean no more fancy dinner parties with your beltway libertarian friends at Reason. You may even have to settle for box wine (shudder).
Big argument in the office this morning along these lines. The Obama supporters were chortling about the death of capitalism and its greed. "No bail out! Let them all fail." It was all I could do to show that the current crisis was a bi-partisan effort, that Obama has advisors who were also cupable in creating the situation.
Sen. Corzine was on tv this morning opining that each and every American would see his debt rise by $5000. Sounds like a lot, yes. But what are the consequences of letting all the greedy CEOs fail, all the people who bought too big a house on phoney income statements be foreclosed, etc.?
As Megan points out, the fallout is not going to be confined to those who were stupid or greedy.
Lots of those from left and right who today welcome the crisis and refuse the bailout bandaid, are going to be crying their eyes out when they lose their jobs and open their retirement savings report for the third quarter.
Stop the bleeding, sew up the wound, and then attend to the patient's longer term diseases.
Too bad that Dr. Ron Paul eschewed an independent run as his views on treating that long term disease would be helpful right now. As would Steve Forbes'.
I'm not sure the New Deal was all it was cracked up to be. I recall the expansionary fiscal policy didn't really begin until 1940-1941, for reasons unrelated to the shape of the economy.
Thank you, Megan, for that note of calm reason.
For what it's worth, I suspect that most of the overblown rhetoric and schadenfreude springs from the extremely human impulse to cast financial decisions in moral terms. Thus, when someone borrows more than he turns out to be able to repay, he was not merely unwise, he was immoral - and his ruin is justice served. Or when bankers make more than other Americans, their downfall is preordained.
This sort of thinking is as deeply satisfying as it is destructive. It's difficult to grapple with the bitter reality that in many cases, what distinguishes entrepreneurial risk-taking from improvidence is random chance and luck. It seems to us that the world shouldn't operate that way; we'd rather believe that the worthy are rewarded and the immoral, in the end, punished. In fact, researchers have repeatedly shown that people are willing to forego a substantial amount of private gain rather than see others receive rewards they regard as unjustified. In general, that's a useful impulse. But on occasion, it amounts to cutting off one's nose to spite one's face.
This is all true, and an important point. I've been pretty annoyed, really, with all the false dichotomies I'm seeing in the blogosphere about this. Rejecting individual aspects of this bailout, or insisting on certain changed provisions of this bailout, is not the same as denying any bailout or "rooting for collapse".
A rapid drop would be a terrible thing. People would panic. But shouldn't the goal be a slower, more gradual drop? Basically deflating the balloon, not popping it. There was an awful lot of illusory wealth going around - people paying (and banks and creditors taking as assumed wealth created) thousands more dollars for houses than what their actual usefulness was worth. That gap would have to be filled somehow, wouldn't it?
Spot on Megan. Just a few thoughts on the New Deal:
1. The regulatory measures passed were very much necessary to stop a liquidity crisis. Institutions like the FDIC and SIPC are what stop bank panics. Regulatory institutions are different than insurance guarantee programs. I haven't heard any plan for new financial insurance guarantee programs. The left views regulatory agencies and insurance guarantee programs as interchangable.
2. Proponents of the New Deal tend to forget that the various job creation programs gamed the Phillips Curve. In 1933 we had high unemployment and extremely low inflation (deflation). By igniting a fiscal expansion to "create jobs," there was some positive effect in exiting from deflationary conditions. An aggressive federal "job creation" program would be much less effective as deflation is currently not a problem.
3. The thing that got the United States out of the Great Depression was not the job creation programs (which were actually part of the Second New Deal) but the gold purchasing. The treasury secretary, Henry Morganthau, created a policy to buy gold at an above-market rate. The US acquired a lot of gold as a result, which grew the money supply (Hitler's ascension also drove up the US's gold reserve). Growing the money supply stopped deflation, lowered unemployment, and got money re-circulating. The Paulson plan is basically a targeted helicopter drop meant to support vulnerable asset prices.
Megan, I don't know why you assume that a person who runs his business and personal life in a responsible way (ie. being able to whether unlikely events) is unable to understand the tremendous value of credit, or embrace commerce as a pro-social force. There are some interesting ideas sprinkled among your condescension and self-satisfaction, but since the "emergence" of this latest crises the ratio has fallen depressingly low.
Does anyone know enough about the Swedish banking crisis of 1992 to comment on what government action worked and what didn't? I believe the government took warrants in all the banks that received government help, and that it worked pretty well. What is the argument against that approach?
You are right that some people will let Rome burn. Certainly that is a policy with a lot of unknowns, and many of them are bad. But this bailout may not work either. And then what? It isn't good enough so say we tried.
There are other policy choices besides a bailout. The best ones are about equity for debt swaps for the financial institutions. All junior debt is replaced with 50% debt and 50% stock issued at some recent stock price. Leverage ratios go down, firms are better capitalized, and little public money is involved.
An aggressive federal "job creation" program would be much less effective as deflation is currently not a problem.
Deflation is the entire problem, if house prices didn't deflate then we wouldn't have a financial crisis. Secondly, do the proposals stave off the crisis completely, or just push it off for a few months. If the plans end up trashing the credit of the US too, we will have far worse problems than this credit crisis.
If we are going to do something, spending 2-3 days thinking about it is the absolute wrong way, we need a couple of weeks if not a month. If the problem is serious then lets shut down the market for a couple of weeks and spend some time debating and coming up with a good plan. The "let's give an unelected official dictator like powers over the financial system" plan isn't a good one.
If we reject this bailout, we're undoubtedly in for the nastiest economic contraction since the Great Depression. That said; if we bailout/excuse this maleficence, my guess is that it will continue. The country will slide further and further into debt until one day, the world loses confidence in the dollar, loses confidence in T-bills and pushes for a massive sell-off. When/if that happens, the US is toast. We'll see hyper-inflation and unemployment levels close to 50%. Social unrest will leave our cities burning, dangerous domestic political movements will arise and our enemies overseas will pounce.
Extreme pain now in order to change the fiscal habits of this country, or cataclysmic disaster later on. Your choice, Megan...
Another plus side to not opting for a bailout. A severe economic contraction in the US will likely mean a world-wide recession (or worse).
China's got its own nascent banking crisis brewing: years of almost completely unregulated and highly corrupt lending, means that hundreds of billions has been mis-allocated.
A severe slowdown in our economy will almost certainly bring severe strain on theirs, finally unleashing the banking crisis. The Chinese government's legitimacy rests almost entirely on its ability to deliver a constantly rising quality of life for its citizens. Even with this, they still have hundreds of millions of very pissed off peasants and low-wage workers. If their economy crashes, that government is toast.
Just something to think about...
Tyler, I wish I didn't agree with you. But we got our wake-up call on oil 35 years ago, and did nothing. Back in the 90s, when gas was $1/gallon did I feel foolish driving a Honda 3-Door? Yes, but I also knew it was the right move. How you all liking your SUVs now?
It seems to me the right move now is living a life-style that can be supported on 40% of one's salary, and try to find a safe-ish place to put the rest.
I almost pricked my eyes out for all the strawmen in this article. Ouch. It should come with a warning.
Look. Nobody is looking for the WPA. What are you, nuts? Who said anything about the TVA?
Face it. This meltdown is the Right's albatross and it will hang from their necks until it chokes them.
This was a road to Damascus moment whether or not the Right chooses to acknowledge it. Everyone else can see it.
Or, for a more credible narrative of what's going on: http://blag.xkcd.com/2008/09/23/federal-reserve-skateboard-a-short-story/
but megan you're a libertarian??????
It seems to me the right move now is living a life-style that can be supported on 40% of one's salary, and try to find a safe-ish place to put the rest.
Completely agree. The real scourge of this country is rampant consumerism and the belief that he who dies with the most toys wins. It's what lead Americans to take on loads of personal debt and it's what lead Wall St. to engage in criminally negligent lending/trading practices.
My girlfriend and I have lived off roughly 50% of our income for the past few years and we've actually been ridiculed (or simply been called "cheap") for this at times. We saw this coming and I just hope we've stashed enough away and live a modest enough lifestyle to ride it out.
The Obama supporters were chortling about the death of capitalism and its greed.
What are you talking about? Do you work for a kibbutz? Otherwise I seriously doubt that any Obama supporters were "chortling about the death of capitalism". Nobody is discussing anything of sort, and if you heard their schadenfreude at the collapse of certain banks as "chortling about the death of capitalism," then you have ideological filters on your ears that make it difficult for you to hear what people are saying. Several investment banks -- in fact, all the investment banks in the world -- are not "capitalism". Indeed, all the major investment banks in the US have disappeared over the past six months, yet as far as I can tell this is still a capitalist country. Identifying certain companies with "capitalism" itself is precisely the attitude that infuriates liberals, who understand, as many on Wall Street seem not to, that your business is not synonymous with capitalism.
Since then, the Federal government has hemmed itself in with a combination of laws, regulations, and legal decisions that make federal projects of any scale take decades. There will be no second WPA or TVA.
While it is likely true that there will be no second WPA or TVA, it won't be b/c of "laws, regulations, and legal decisions". Congress maintains the power to overrule itself (and most Presidential directives and most court decisions) at any time. Any authorizing legislation for WPA 2 or TVA 2 could (and would) exempt the program/project from anything other than the Constitution (and, given the way things have been handled lately, the legislation might try to exempt it from the Constitution, too).
Taking as a given that the government must do something to restore confidence in the financial system, why does it have to do that through Wall Street? Why not channel the rescue through some other region or system or by hanging out its own shingle, at least temporarily? After all, if government backing is needed to restore confidence, why does it need Wall Street or anyone else as a middleman? You may argue that that would change the fundamental nature of our system but so will this bailout/rescue plan.
Wall Street has forfeited its credibility. Big Money is looking for safer havens. Why not let the Fed give it some other place to go. Why must Wall Street be saved?
Another plus side to not opting for a bailout. A severe economic contraction in the US will likely mean a world-wide recession (or worse).
That's a *plus*? What kind of sociopath wishes for a "world-wide recession (or worse)"?
Perhaps even more relevantly, Megan, aren't you a strong believer in the idea that "failure" is an essential and organic part of risk-taking, necessary for people to learn and improve over the long haul?
Won't the lesson learned here in the event of a bailout be: when we do stupid enough things, government will always step in to regulate and spend and make things OK?
Seems like with a bailout we're just picking long-term/slow-motion pain over short-term but more educational pain -- risk without (properly personally-focused) consequences.
You opened by basically saying there were two main groups of folks who were against the bailout. While it is true that there are small vocal minorities that yelp such tripe the fact still remains you ignored the much larger group who oppose the bailout.
This group is comprised of folks who believe in capitalism and the free markets. I have no doubt that the package put together by Paulson and Bernanke with the added sludge that Congress will add will appear to work. The history of such intervention these last 30 years says as much.
However my reason for being against all these bailouts, starting with Chrysler, is not what they do but what they prevent. They prevent Adam Smith's secret hand from functioning. They prevent the only real permanent solution. It is with great hubris that the powers that be think they can divine the cure for previous excesses.
The market must be allowed to function without interference no matter what fears an individual may ascribe to its solutions. It's the blockage of this process that, among other things, creates the often quoted "moral hazard". Every time we intervene we set up and even larger set of dominoes in the future.
Your embrace of this bailout, no matter how timid, is a reflection of your distrust in a free market. Way, way down deep you need the assurance that a small group of people are capable of figuring out what the free market wants or needs at certain way points. You console yourself with the dark apocalyptic visions that may occur should you not go along with the "new" deal. You will rationalize why, just this once, it had to be done.
You are trotting down Friedrich Hayek's road to serfdom.
Why do you continually conflate aversion to fractional reserve banking with aversion to credit? Supporters of 100% reserve banking, like myself, don't want to abolish the bank system. We want to make it explicit. What makes FRB inherently insolvent is that two (or more) people are given claim to the same money. If you transform the deposit transaction into an explicit loan, with a high but not perfect probability of funds-on-demand, the system becomes solvent and bank runs become impossible. Yes, when everything is working this seems like a minor difference but it stops seeming so minor when bank runs actually look possible, hmm?
If depositors are to have 100% claim on their funds, those funds can't be lent. If borrowers are to have 100% claim on their funds, those funds can't be promised to depositors (who are actually lenders). You can "have it both ways", as the current system does, only through systemic fraud and insolvency. You might consider that a legitimate choice, but it has attendant risk.
That's a *plus*? What kind of sociopath wishes for a "world-wide recession (or worse)"?
Perhaps if you actually read the entire post, you'd see what I was talking about.
Certainly a world-wide recession is a terrible thing, but it could also obliterate the corrupt Chinese government.
So, while a world-wide recession would be terrible, there are potential "bright spots."
What kind of sociopath wishes for a "world-wide recession (or worse)?
Well there's the rub, isn't it? The desire for personal accountability and responsibility and the pro-social aspects of demanding them smack up against the fact that we're all in this together and letting the economy go down the drain will undoubtedly have anti-social consequences that will effect all of us -- maybe even those of us who have a cushion that measured in years, not months.
The "conservative" voice in my head say fuck you all. The handwriting was on the wall five years ago at least and you didn't get ready, so fuck you all twice.
The "liberal" voice in my head says we're all in this together and each of us is going to have to pay to get us out. After all, personal responsibility include recognizing we have a responsibility to our community, right?
Megan: I'm not sure why you're putting up a caricature of the "fractional reserve is inherently unstable" argument. It *is* inherently unstable, or is FDIC some sort of Gnomes of Zurich plot?
Again, pointing out the instability of the fractional reserve system says nothing about whether or not to bail out the US financial industry -- you can agree with both.
And if you do agree with both, then why not have a bail out that moves us off fractional reserve?
While it is true that "Very rapid change is very bad", that does not mean that it cannot or will not happen, very bad things do happen. The Pound Sterling went from being reserve currency of the world to a has been in about a generation, and the UK of today is a pale shadow of what it was in the 1800s and early 1900s. The world will move off the dollar, the US will have no say about this, and it won't take 30 years to do so.
-winterspeak
Let's accept that the credit world came perilously close to freezing up last Thursday as your sources claim. I don't understand how the promise of a bail out unfroze those markets. No bail out has yet happened so why didn't credit world fall into catastrophe as so many are claiming it would have without a bail out.
And, one can be against a giant bail out, be for smaller government and still agree that we shouldn't go back to a "credit-free level of output and consumption." Your oversimplifying the criticisms of a bail out. There are more than two discrete viewpoints against the bail out. You say one can be for a bail out without being for this bail out. Fine. So what kind of bail out do you favor?
Whatever your ideal looks like, there are two rules of financial system change: 1) Very rapid change is very bad - MM
Yeah. But it's a little late to avoid that. It happened last week. The question is who is going to be guiding the very rapid changes that are taken to rebuild a new financial structure to cope with the very rapid changes that are already taking place. The very unfortunate financial turmoil we are now going through has the mitigating political side effect of making it clear to a large plurality of the public that Republicans do a very bad job of running the economy. And that means that Barack Obama will come into office with an all-Democratic Congress and a mandate to pass legislation undergirding a better financial system. I am confident that he will do so, we will have a couple of bad years followed by 6 years of rising prosperity, and then the pendulum will swing back and some Republican idiot will come into office and fritter away everything that has been accomplished. This is what passes for optimism in my court these days.
Any of these companies that are in need of bailing out, I want to see them PUNISHED. If they want my money, they can have it on my terms. If we have to rush this thing through, we should err on the side of brutality. If financial industry lobbyists aren't screaming bloody murder, the bill isn't done.
Megan, you've made excuses for the people behind these opaque securities. Nobody could have seen it coming, you say. Well, what I want to know from you is how do we slap these suckers so hard that they remember how much it hurt and innovate a way to avoid the next slap?
>> Also, as a general rule, rich people should suffer for their mistakes, and ordinary people shouldn't.
No, rich people CAN AFFORD some failure, and poor people shouldn't. The reason is that falling from a mistake at, say, $12M per year in salary is different than falling from, say, $60,000. The only suffering to talk about is trying to have a life in America on the salary of a secretary or janitor.
Here's the thing, though: Ever fewer people are alive today who can appreciate the true depths of economic hard times. The "nation of whiners" takes anything less than the average growth rates for the past quarter century to be undue hardship. Too many call for aggressive government action to fix stuff that isn't even broken, unless one assumes Utopian dreams are the benchmark.
What I see coming out of this massive federal fix -- assuming it passes as proposed -- is greater moral hazard resulting from the impression that government intervention never hurts anyone or anything. That electricity is as free as the wind and sun, and the government should ensure that it's never any dirtier than that. That health insurance and medical care are free, too, in principle -- no one should be so greedy as to want profits when I'm sick! That rescuing a spotted owl at the expense of the northwestern timber industry is of greater benefit to all of mankind than the desire of the trailer trash for cheaper building supplies. That the government should give us an honest retirement wage after we've spent four decades or less in gainful employment.
The world we've been living in for the past quarter century has been one in which manna falls from heaven, and no one needs to break a sweat except in the pursuit of leisure activities. The old American ethic of working, building, and saving have all been fully forgotten.
And the next big adjustment comes when Medicare/-caid and Social Security go bust: once each wage and salary earner has to schlepp one or two retirees along on the pay slip.
A great example of modern financial market crashes: Argentina in 2000.
Sure, Argentina did not have as mature an economy as the U.S. today. But it was far more mature than the American economy back in the Great Depression.
So you could expect something like what happened in Argentina, perhaps worse, perhaps not.
A 25% contraction in GDP in a matter of months, and prices (of everything, including labor) depressed for years. They are just now recovering, and because it's not exactly a first-world country they are dealing with a raft of third-world country problems (inflation, violence, corruption, demagoguery out the wazoo).
If the banks go tits up you can expect that the FIDC would NOT be able to guarantee deposits because the U.S. could neither borrow (in what markets) what it needs nor could it print it (the U.S. doesn't have hyperinflationary money printing capabilities.
That means: massive numbers of bankruptcies, far, far, far in excess of the Courts' bandwidth.
That means: chaos. At best we'll all negotiate new levels of debt (including debt by banks to depositors) on our own. At worst everything shuts down and we have a humanitarian crisis (and all that that implies, including the possibility of military rule). I'd bet on something in between, probably closer to the former, because Americans come through in such situations. But you never know.
And all this for want of $700 billion that Congress doesn't want to pony up.
I'm a taxpayer, and trust me, I'd rather pay the higher taxes than press the financial reset button.
And that means that Barack Obama will come into office with an all-Democratic Congress and a mandate to pass legislation undergirding a better financial system. I am confident that he will do so, we will have a couple of bad years followed by 6 years of rising prosperity
Do you really believe everybody with a (D) after their name is pure and virtuous and everybody with an (R) is corrupt and venal (Explain Charles Rangle)? Is your world view really as painfully shallow as you make it out to be?
Neither party rule is wholly virtuous nor wholly corrupt. And neither party is capable of adequately policing itself. The country is better off when both parties have a seat at the table.
And all this for want of $700 billion that Congress doesn't want to pony up.
For one, it's far more than $700B. The treasury can hold up to $700B outstanding. If they sell for a loss, they can purchase another $700B for two years with no limits on the total cost. For some reason I think that handing the treasury secretary a blank check to bail out his friends in the banking world isn't prudent and has the chance to bankrupt the US as a whole. I feel that this bailout will just prop up the system for a little longer, making the eventual crash even harder.
Tyler,
Not only am I unconvinced that a destroying the Chinese government is worth the cost of a world-wide recession, I'm not convinced that a recession would, in fact, destroy their government.
It seems to me that authoritarian governments not only persist in the face of economic crises, but they sometimes thrive. There's nothing like a state of fear and civil unrest to justify authoritarian brutality.
One only need to look at Burma and North Korea. Both of these states are paupers on the world stage, but neither show any signs of collapse. Likewise, Castro's Cuba survived decades of abject poverty that barely discomfited Fidel.
For that matter, we have the example of China, itself. If anything should have sparked revolution and overthrow, it should have been the cultural revolution where the entire country was so utterly impoverished that there are documented cases of cannibalism arising as the peasants simply ran out of food and resources but, in spite of all that, Mao persisted and died comfortably.
Axlias:
Very good points and, admittedly, you may be correct here. I'm not by any means claiming this IS going to happen, rather; it's a possibility.
I would counter (again, not saying you're wrong, but just floating these ideas) that the DPRK, Burma, Cuba and China during the Cultural Revolution are/were tightly controlled societies, making them much easier to keep a lid on.
While I rail against the Chinese government, the fact remains that their people do currently enjoy more freedom (and access to outside information) than at any time in their history.
Once a government opens that door, it's very hard to put the proverbial genie back in the bottle.
The Chinese people didn't have these luxuries during the Cultural Revolution.
The fact that there are literally thousands of (mostly unreported) violent protests in the Chinese countryside each year, leads me to believe the situation is much more unstable than the authorities are letting on.
Again, I'm not claiming you're wrong (You may very well be 100% correct here. It may also be possible that hard times - especially if it were to be seen (in China) as being a result of external forces - may increase the government's power as people rally around the flag); I'm just floating some "potential" upsides.
JordanT: the S&L crisis cost $600 billion, that's late 80s dollars. $1.4 trillion of today's dollars would definitely be comparable. That's not a terrible price to pay every two decades for the growth in standards of living that we've been getting. (And don't you tell me that it benefits only the rich. Go look at Argentina and tell me that poverty went down when the financial system there melted down, I dare you.)
Quite aside from that, $1.4 trillion isn't all that much in a $15 trillion economy with a national patrimony larger than $40 trillion. Even with the deficit and debt as they stand (the deficit picture isn't pretty, but it is far from fatal).
Yeah, sign me up for spending $1.4 trillion, if that's what it takes. I'll do my part. The alternative is horrific. Not just for me and my loved ones, nor for the rest of the country, but for the world as a whole.
I have long suspected that there's a double standard in the financial game:
o If I win, I win. If I lose, I lose.
o If you (the financial insiders) win, you win big. If you lose, well you just don't win as big.
Unfortunately for us all, current events certainly support my jaded world view.
It's unfortunate because as a matter of simple fairness everyone shouldn't agree to play by one set of rules but then leave some players the ability to change the rules when things don't go so well for them.
It's even more unfortunate because this sort of behavior, where some players are considered too big/important/well connected to fail, only assures that we'll be back in this position again. Sooner rather than later.
So the people who caused the problem get to keep their boats, and their mansions, and their gold plated golf tees while the people who behaved responsibly dig into their wallets to foot the bill.
Failure has to be an option in the free market, or it never really was free in the first place.
Nico:
Fine, sounds great. Hope it works out. But can we finally stop with this "government isn't the solution" nonsense? (Or was that just code for "Elect me and I won't give your tax money to black people!"?) I'll gladly pay my share of the bill if we can finally dispense with race-baiting masquerading as free-market conservatism.
Do you really believe everybody with a (D) after their name is pure and virtuous and everybody with an (R) is corrupt and venal (Explain Charles Rangle)?
I believe any Democratic president is better at managing the economy than any Republican. I believe this because for the past 60 years, it's been true. Especially for job growth. Not a single Republican president since 1945 has had better job growth than the worst Democrat. But the stock market, GDP growth, median income, the budget deficit, and basically everything else are also all better under Democratic presidents. It's one of those truth-has-liberal-bias situations.
I'll gladly pay my share of the bill if we can finally dispense with race-baiting masquerading as free-market conservatism.
How about you lead by example and not bring up race when nobody else has?
Tony Comstock: "The "conservative" voice in my head say fuck you all. The handwriting was on the wall five years ago at least and you didn't get ready, so fuck you all twice.
The "liberal" voice in my head says we're all in this together and each of us is going to have to pay to get us out. After all, personal responsibility include recognizing we have a responsibility to our community, right?"
I was going to suggest you talk to someone about those voices you hear, but realized I hear the same ones. Well, really, I hear my voice and then my husband's. I'm usually the libertarian and he's the interventionist liberal, but on the mortgage crisis and bailouts our positions have been oddly reversed. "Let the invisible hand b!tchslap all these people for their stupidity!" he says. I'm the one pointing out the collateral damage: "So you're OK with the neighborhood turning into a big crack den when 30% of our neighbors are foreclosed on?" "Yeah, we don't have a stupid mortgage, but we might want to get a mortgage sometime in the near future," and "You know that once all those a-hole bankers who priced us out of our last 3 neighborhoods have been fired, NYC will have to get its tax revenues from us".
The conversations are oddly similar to a discussion we had on the wisdom of providing free housing with full time supervision for the hard-core homeless. Studies of how much such people cost when left on their own (mainly in police and ER costs while they dry out) vastly exceed the $70-80K/year it would cost to simply give them a free home and full-time supervision. But that's never going to happen, because too many people's gag reflexes are triggered by the idea of the gov't (meaning, you) essentially paying some guy $70K per year to be a useless unemployed drunk. So we pay hundreds of thousands per year instead, just to teach him. We flipped sides about 3 times discussing that one. We'll probably do the same here. Anyhow, that's a long way of saying that whoever mentioned people's willingness to forego significant personal benefit to avoid giving someone else an "undeserved" windfall hit the nail on the head - in my head at least.
But that's never going to happen, because too many people's gag reflexes are triggered by the idea of the gov't (meaning, you) essentially paying some guy $70K per year to be a useless unemployed drunk.
Also because you'd need to lock many of them in, causing libertarian freak-out.
But the broader point is real; lots of people want to see punishment even at their own expense. You have to admit it makes some sense, given that the non-punishment is also coming at our expense.
Megan -
I have to disagree with you here. The great depression wasn't just a credit issue. You had a contraction of private credit, very tight money, large increases in income taxes, large increases in tariffs, price controls, pressure or even controls on wages, a massive and relatively sudden increase in regulation, and all sorts of negative interventions by the government in to the operation of the economy.
While many of those things are possible, most of them aren't particularly likely IMO (other than the contraction of private credit, which admittedly would be a bigger deal now since we rely on it more), but even if you disagree and think they are likely, they would be a separate new action. We where not near those things, and without them you wouldn't have had the great depression. Which doesn't mean there would not have been bad times for the economy, just that it wouldn't have been so bad or lasted so long as to deserve the "great depression" label.
We might have been near a severe recession. And severe recessions are bad things. Avoiding them is a very good thing. But the great depression rhetoric is seriously overblown.
"How about you lead by example and not bring up race when nobody else has?"
Nobody else has? Then how did I get this "It's all because community activist forced us to make risky loanes to the darkies!" meme end up floating around in my head? Must be them damned voices again! How about you, Kathryn? You hear them too?
Not really; the voices in my head are currently pondering strategies for limiting my personal income tax exposure if that $700B actually comes due.
Maybe it's your fillings?
"It's all because community activist forced us to make risky loanes to the darkies!" meme end up floating around in my head? Must be them damned voices again!
It is in your head. Find the word "darkies" anywhere in this thread where you haven't put it.
You're accusing people of racism based on their (seemingly erroneous, to me) account of the problem. They aren't bringing up race, you are.
Rob,
You've mistaken the intention of my post. I'm not accusing Niko or anyone else on this thread of racism.
Some sort of bail-out is inevitable, and in fact are an inevitable part of our economy and system of governance; a system that, as Niko points out, provide a remarkable standard of living.
But let's not kid ourselves that what we have isn't some form of socialism that includes massive involvement of the state in the market place. It may be a form of socialism that is preferable to the form practiced in Sweden, but it is socialism none the less.
If the tone of that post sounds disgusted, it's not with any perceived racism on Niko's part, or even taking issue with his prescription. Frankly I don't have the foggiest idea what the way out of this mess is. I'm a filmmaker and a small businessman. The only thing in my life that is leveraged is my house, and that currently as a 20% LTV ratio (we'll see how long that lasts!)
What I am disgusted by is that over and over again. this myth of America as a bastion of freemarket capitilism has been used as a wedge issue to divide our country. As a nation we've pursue socialist policies and then justified not paying the bill by telling ourselves racist lies. Cadilac driving welfare queens did not cause the economic hardships of the 70s anymore than subprime mortgages in the ghetto cause this crisis.
Like it or not, the US is a socialist state, and in a socialist state the government has an important role to play, whether that's in responding to a natural crisis or a man-made crisis. That means sometimes your and my money is go to people that don't deserve it, be they bankers or corner boys.
Time for us to grow up and learn to live with it.
Thank you very much for your reasonable posts, Megan. It seems many, like Newt Gingrich, really do not understand the catastrophic systemic consequences of a meltdown. It's funny how memories that are only on history books (and which most people have not experienced) are quickly dismissed.
This article fails to connect the dots. I do not see that we need a bailout just because the federal government's share of national income has increased since the time of FDR. It's odd that the current issue of Fortune Magazine claims that there is an excess of liquidity, only perhaps that credit is not being allocated efficiently.
In the end we have this odd new conventional wisdom that free markets really shouldn't be free, at least when it comes to government rescues when financial market stupidity rises to high levels.
I am not interesting in punishing rich people, especially since common sense suggests that a severe downturn in the economy will affect everyone.
But no one has yet made a compelling case as to what the bailout will accomplish, or how we will know that it is a success. Instead, people cite FDR and the Depression, but then take an odd turn in rationalizing throwing money without regulation or oversight at supposed Wall St wizards who made spectacular blunders and who have not given any indication of having learned from their mistakes.
I have to agree with MM on this, there has to be some kind of Bailout Plan. It must be done in a bipartisan manner, that brings the financial markets in for as "soft" a landing as possible and keeps taxpayers from losing all of their savings, pensions and investments. The Republicans need to own this failure, but both parties need to look to our collective future. We know what 1929 looked like, and we should do whatever we can to avoid it.
Will some bankers walk away relatively unscathed? Probably. Should we allow our representatives to let this crisis blow over and walk away once the markets stabilize? Absolutely not. The Fed has known about these issues for at least a year and are only reacting to the latest cries of The Sky is Falling because, well, it really has. Reasonable regulation and actual oversight should be our legislative watchwords moving forward.
Anyone who thinks that we should allow massive failures in the financial system, with the possibility of ushering in the next national or international depression is either deranged or just plain stupid. My parents lived thru the Great Depression, and the few stories they tell are of privation and want: summers without shoes and hand-me-down clothes, widespread homelessness and constant hunger. It is amazing how folks can rationalize the "It won't be me" idea of 25% unemployment. It won't be just your Wii you are living without people.
"Let's not forget that we still have the mortgage market and the insurance markets freezing up quite apart from the money market disasters. Every crisis gets compared to the Great Depression. This very nearly was...
The Great Depression took place in an economy much less dependent on liquid credit markets than today's system. In three years, from 1929 to 1932, GNP fell by about 30%."
What I don't get, and maybe the hostess or someone else can explain, is why this line of reasoning doesn't cut both ways.
To wit - from the stock market crash to the election of Roosevelt was a three year slide where nothing that was tried worked, some stuff that was tried was counterproductive and in any case everything got a lot worse for everyone.
But now, we have liquid worldwide markets with near neglible transaction costs (and not only in debt but also in equity, commodities, and currency - and these are mostly fungible with each other at a large enough scale.) And we have social safety nets, and FDIC, and higher levels of homeownership (outright) and nobody still relying on subsistence agriculture.
So how could anything today possibly be worse than '29-'32 or go on for that long. Wouldn't the global nature of today's economy rapidly readjust to even a large financial discolations? And don't the middle class have a lot more of a cushion (and size) to ammeliorate the effects of the storm?
Off-topic, but I find the expression
There are no atheists in foxholes
about as offensive as someone saying "black men can't keep a job." There are, in fact, atheists in foxholes; American hero Pat Tilman was one such atheist.
Does anybody 9-11 how Cathy Young, another supposed "libertarian-leaning" rightist, freaked out over at Reason and told us how our freedoms--sadly--were going to have to reigned in? Many of us lost all respect for her and her loss of nerve at freedom's hour of greatest need.
And now we Megan, giving us deja vu, ditching the market for the wisdom of unaccountable "wise men", funded with taxpayer dollars (actually, funded with borrowed funds the taxpayers can just pay the interest on). She, too, is proven a fraud in the crunch. She is willing to lie supine for another bit of "panic" legislation "for our own good" just like the Cathy Youngs of the world embraced the Patriot Act.
Thanks, Megan, you have been more illuminating than you know the past couple of days.
Off-topic, but I find the expression ["]There are no atheists in foxholes["] about as offensive as someone saying "black men can't keep a job."
Then you should probably recalibrate your offense-o-meter. One the one hand, we have a racist slur with no basis in reality. On the other, we have a largely true observation that people in times of crisis often turn away from pure reason in search of some other source of emotional strength.
"I believe any Democratic president is better at managing the economy than any Republican. I believe this because for the past 60 years, it's been true. Especially for job growth. Not a single Republican president since 1945 has had better job growth than the worst Democrat."
Jimmy Carter - You might, on occasion, want to check your beliefs against reality.
jdkchem:
Actually, from quick googling I did, Jimmy Carter actually didn't too bad on the job creation front - which is why that particular stat was called out. Other economic measures - eh, not so much.
In general I don't think Presidents (of either party) have much effect on the economy (in either direction), but if someone wants to assert that Democratic presidents are good for the economy then I'd like to see a stronger argument than mere correlation. I could believe, for example, that Dems greatly increased the number of government employees. That would surely show up as job growth, but not as increased economic output.
All things being equal, I'd prefer a Democratic president and a Republican Congress. I don't trust either party without a counterbalance.
On the other, we have a largely true observation
Not any truer than "black men can't keep a job." The truth is that there's just as many atheists among the foxhole population as there are in the population at large.
people in times of crisis often turn away from pure reason in search of some other source of emotional strength.
That may be true, but there's a way to express that thought that doesn't slander a minority group as dishonest poseurs. Just as it's possible to talk about the rate of unemployment among black men without resorting to racist stereotypes.
Religious nonsense is not so comforting that atheists automatically turn to it when the chips are down. To the contrary, more often than not.
If I were in a foxhole getting shot at by a bunch of insane religious fanatics, I don't think it would make me likely to suddenly embrace religion.
if someone wants to assert that Democratic presidents are good for the economy then I'd like to see a stronger argument than mere correlation. I could believe, for example, that Dems greatly increased the number of government employees. That would surely show up as job growth, but not as increased economic output. - SG
Yeah, but no GOP president since 1948 has been as good as any Democratic president on GDP growth either, except for Nixon's first term when he was saying "We're all Keynesians now." (Roosevelt/Truman 1945-9 had the worst GDP growth but I think we can all agree that was because WWII ended and the rest of the planet was still in ruins.)
The data you're looking for are here:
http://feeds.feedburner.com/~r/BradDelongsSemi-dailyJournal/~3/401219874/notes-to-self-f.html
Certainly a world-wide recession is a terrible thing, but it could also obliterate the corrupt Chinese government.
Tyler, do you really want to have a place with one and a third billion people, one of the biggest armies in the world, and nuclear weapons, reduced to warlordism as they start going looking for their next meal?
Translation of this and previous article: "Let someone else deal with this, preferably after I'm dead."
That may be true, but there's a way to express that thought that doesn't slander a minority group as dishonest poseurs
Who says they're being dishonest poseurs? There are plenty of free-marketeers who are looking seriously at this bailout as a good idea, not because they have suddenly embraced a mercantilist theory of the economy, but because they've come to the limits of their ideology and found it wanting. Atheists in foxholes may well do the same; I doubt you've got hard data on Pat Tillman's last thought.
If I were in a foxhole getting shot at by a bunch of insane religious fanatics, I don't think it would make me likely to suddenly embrace religion.
I wouldn't expect you to suddenly decide to buy that second set of dishes, but you might find yourself asking God to protect you, if only from his followers.
Brooksfoe - Headline GDP growth (esp. nominal growth, but even real) is hardly the only way to measure the economy, let alone to measure a presidents economic policy.
Look at the inflation rate under Carter, or the "misery index". Also the inflation was bought under control through tight money in the early eighties. That tight money, and other adjustments where the main factors behind a worse than average recession (at least worse than any since in the US) at that time.
You can get easily get temporary higher nominal growth or even real growth, by inflating the economy, and then some later president has to pay the price. Factor that in and LBJ was horrible in this regard. You have Nixon as being the best post WWII Republican but he was probably the worst. The economy was inflated more under him (which would later hit Ford, Carter, and the early part of Regan's presidency), and his "great solution", was sheer economic idiocy, wage and price controls.
GDP growth during a presidential term is a rather poor measuring stick of that presidents impact on the economy. If you insist on using it you should measure from one year after the president takes office to one year after he leaves, to allow for the fact that a new presidents policies take time to get enacted and then take time to take effect. When you measure things that way Republicans do better than by your measurement. Or when you measure growth by who has a majority in congress, the GOP beats the Dems. But both of those measures aren't really good either, mainly because there are other factors besides presidential and congressional policy at play in the economy, and often their effects are far larger than the policies.
Beyond that there is no consistent Democratic, or Republican economic policy. The different GOP and Dem presidents and congresses have different ideas and policies.
Also the sample is too small for meaningful conclusions even if it wasn't for all the other problems I've already pointed out.
One of the main problems with our country's financial system is the poor schooling system that trains our economists to believe that America is above the natural order of things and natural ebb and flow of life. To believe that the economy is going to grow and prosper all the time is just plain stupid and downright ignorant. I would rather have a flat but slowly upward moving economy than huge spikes up and down. It is alright to be an optimist but tending towards a manic depressive economy has it's issues and we are seeing the downside if that right now. Why is it now, all the of the sudden, people are interested in these companies. They have been laughing about Fannie and Freddie's lending polices for years. All these pundits are now jumping at the chance to say what everyone did wrong. And yes 1) Very rapid change is very bad
2) See above. But lax regulations and non-transparency are going to lead us straight to government owned companies and what do you call that.hmmmmm.Not Good!
Seems to me this Bailout is like a Deer Whistle.
Some of us that live in rural areas of the USA believe in having a Deer Whistle on the front of our vehicles. The purpose of which is to scare the deer away from the roadway so you do not hit one!
Have you ever hit a deer? I have. It is not a pretty site and can total your vehicle.
If a deer whistle works, you will not know. Just because you haven’t hit a deer, maybe you were not close enough to a deer. Most of the time you do not even see them.
If you hit a deer obviously the whistle did not work!
If we spend the money for the Bailout (purchase the deer whistle), we may not really know if it worked!
These bailout costs may have somewhat the same relative cost of a whistle and a vehicle.
The only guarantee is that we’re gong to spend money on something that seemed to be necessary at the time!
Dave O
Dave O - But deer whistles aren't all that expensive, and are very unlikely to actually be harmful even if they don't work. The same can't be said about the various plans for a big bailout.