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Another way to think about Paulson
25 Nov 2008 12:15 pm
A friend IM's: "For all those salivating at the thought of a second New Deal, this is what 'bold, persistent experimentation' looks like -- kinda messy." Indeed. My question: will consumer confidence be bolstered more by confident persistence (possibly in the wrong direction), or by a hypermanic government that seems willing to try anything? Or will neither work, and we're simply hosed?
Confidence has nothing to do with it. What's needed is money and there is none. It will have to be printed if you want higher prices, for anything.
What we had was a confidence game. The financial arena became a Ponzi scheme. Trillions of dollars were lent with no possible way for it to be paid back since so little of it went into productive investment. It went into consumption. You can't just start a new con a few months after a two decade one just ended.
House construction is hosed for a few years.
Newspapers are hosed thanks to internet.
The prior Financial System is hosed.
Overpaid American jobs for which there is an import substitution are hosed.
Overpaid service jobs that depend on above overpaid buyers are hosed.
Some $60 tr of fictitious, paper value has disappeared, so there is no need of overpaid Big Bank financial folk to optimize the yields from it. All top 50 banks or so should be allowed to go belly up. Especially Citi, Goldman, & Morgan -- any bank with more than $1 tr in unknown value derivatives; and AIG, too.
Smaller banks should be given 1% loans from the Fed equal to the amount of loans they've made to non-financial, non real-estate companies. The Depression credit crunch was because all the banks stopped lending. If only small banks now lend, and all big banks die, there is not much real credit crunch.
Print the money to send all US tax filers $5 000, or $10 000, for Christmas. They'll spend it (good), or save it (good), or pay down debt (including mortgages; good). No higher tax, no higher interest rate.
With CPI dropping, no fear of inflation.
Those previously overpaid folk need new, mostly lower paying jobs. Nobody knows where they will come from. They will come faster, and more from the market, when consumers have cash to vote with their dollars on what they want more of.
Now would be a good time for the Feds to offer special 'new company' tax relief for companies hiring new employees, or expanding their employees.
I look at it as a choice between the government doing one wrong thing, but at least being consistent about it so you can work around them, or the government doing all sorts of wrong things, constantly changing, so you freeze in fear, hoping that they don't decide to pick on you this time.
Of course, I don't think the government doing the right thing is possible - even if they knew the right thing, which they don't and can't (see Hayek), the public choice problems would prevent them from implementing it.
It's sorta like watching a team of incompetent doctors deal with a flatlining patient: they press the paddles together, shout "CLEAR," and give him a jolt to restart his heart - only to find they have electrocuted him.
I know you said this in an earlier post...
"I'm well aware that I am about to be slammed for supporting the bailout by a large number of people with shaky command of the concept of "uncertainty". Hopefully, at least a few of them will pause to consider that confusing getting good results with having a good decision making process is exactly the cognitive error that brought us to this disaster in the first place."
But come on Megan. Are you honestly telling us that you couldn't see this as the most realistic end result of this bailout? I find your sudden turn around, while nice and all... to be somewhat of a let down.
Why now? Where is the good analysis? You seemed to have a lot of good reasons for supporting the bailout before, and now... nothing but complaints.
I have a bad feeling the reason you were so willing to buy into the bailout originally was due to a certain amount of "economists hubris". That's why you thought bailing out the financial industry was necessary, while at the same time being against the auto bailout.
Just like you thought some companies in your industry were too big to fail, you also thought that good economists, using the right kind of tools and planning, could fiat themselves out of this mess. You became too certain of your indespesibility.
Normally I wouldn't care when people believe that about themselves... except this one is costing me a ton of money.
Confidence will not likely return until the underlying cause of the problem is dealt with and resolved. I appears highly unlikely that this will occur with Senator Dodd and Representative Frank in charge of the effort.
I vote for the scattershot approach. Confident persistence, which is the alternative, seems to me exactly how we got into this mess. In so many ways, those words could be used to describe George W. Bush's eight years or Stanley Baldwin's England in the 1930's. It doesn't help to be on time, if in fact you are lost. Willingness to try anything actually has a method to it. It is an algorithm for arriving at a solution through process of elimination. I would be more inspired with confidence by that approach than by the hubris of consistency for its own sake in these times.
The American economy is not hosed. People and institutions that own bad MBSs are hosed. People and institutions that created the bad MBSs are hosed, unless they can find another line of business, since people aren't buying the toilet paper anymore and aren't inclined to trust those who sold it to them.
However, it's so much easier, after you've done something incredibly stupid and rather evil, to yell "Help! Something terrible is happening! We are all in terrible danger!" than to admit what really happened. Unfortunately the crooks and dupes have the ear of the powerful and have managed to convince the right people of this.
The people who need to go bankrupt must go bankrupt quickly, not get lots of subsidies while we pretend they aren't bankrupt. The sooner the toilet is flushed the sooner the smell will go away.
Bailing out Citi does *not* send the message the government is fixing things. It sends the message that all the banks are in bad shape. Letting Citi go under, while protecting depositors under the FDIC, sends the message that Citi was incompetently managed, can be allowed to disappear, and that by contrast the banks that *aren't* disappearing are actually solvent and competently managed.
First off, I just realized there's another Nick posting here, so I changed my posting name to avoid confusion.
Secondly, I read this on another site and believe it to be a viable solution to the alleged "liquidity crisis":
If more money is all we need, why not just make it legal for everyone to print their own? Put images of each denomination on the internet, then we can download them and print as much "economic stimulus" as we want. Then make it illegal to refuse to accept the printed money.
Rather than the gov't buying bad mortgages, let individuals print out billions of dollars and bid on the mortgages instead! The problem of liquidity would go away overnight. The economy would "grow" a million-fold in one fell swoop.
Same with companies that need to be bailed out because they couldn't hang. Individuals would be able to buy companies with the printed cash, thus rescuing them from their irresponsible behavior. Although, I don't think I'd waste the ink or paper printing money to save GM.
I'd only add that the highest denomination you should be able to print locally is $10. That way the cost of ink and paper would be a small barrier to entry...
ROFL
@Nick
Just like you thought some companies in your industry were too big to fail, you also thought that good economists, using the right kind of tools and planning, could fiat themselves out of this mess. You became too certain of your indespesibility.
You are aware that Megan isn't a merchant banker right? This isn't "her" industry.
Tom Grey has it right: let the dinosaurs die. Unfortunately, a liberal culture which wouldn't let the snail darter or spotted owl die (and which also brought grey wolves back from the dead), will also not let high profile banks and brokerages which are politically well positioned die either.
we are hosed. The USA government is heading for bankrupcy as everone thinks money grows on trees.
See my thoughts on Henry Paulson here:
http://oldpossum.wordpress.com/2008/11/26/the-2-blows-that-felled-the-economy/
@doctorpat I am well aware that she isn't a merchant banker... but given her educational background, and previous employment (or attempts at employment), the argument still stands. When you spend that much time learning about the industry, and then WRITING about that industry, and studying the workings of the industry, it's natural to begin to gain an over-inflated view of the importance of what you do. It's a natural hubris.
I work in the computer industry. Spent 4 years getting a degree in Computer Engineering. I've been consulting in the industry for 10+ years. I think that if we didn't have computers, software, etc. then we'd be pretty screwed. That didn't seem to make a bit of difference during the .com bust now did it? Didn't help me one bit when I was unemployed for 6 months.
The industry shifted, learned, adapted, shrank for a while, and then grew in other areas. Part of the reason for that is because people who weren't in the middle of it were able to look at it with a different perspective.
People who embroil themselves in econcomics all day long lack some of that perspective.
Abstract products are hosed. And there are too many houses right now.
Roads, however, need to built and rebuilt. Same for bridges, schools, power grids, power plants. . .small flexible manufacturing facilities. . .mass transit systems. . .
I fail to see why the economists here don't understand the value of physical infrastructure; appreciate the value of jobs that get folks' hands dirty.
Right now, we need the jobs you that require a shower at the end of the work day, not the beginning. They pay less. They require different skills. And the build things you can touch, not abstract ideas you have to chase.
Just wait. Michael Lewis is currently writing a book about "what happened." Yes. You can preview his thoughts up at Portfolio.Com
But if you don't understand what's going on, at least you can understand that Hank Paulson was/is the head of Goldman Sachs. And, only Goldman, not the other Wall Streeters. AND, only AT THE TOP! Gave the order to SHORT the bond traders IN HIS OWN HOUSE!
The crap? Well, Moody's and S&P, both rated these "impenitrable" bond "derivatives" as super-duper Triple A's. Unfortunately, what happened is that the mortgages were gonna FAIL. And, all the promises, once the default rates reached 14% WIPED OUT VALUE.
Bush & the current congress became fearful that, YES, America's outstanding debt; guaranteed by the TRIPLE A status; had left more than a trillion dollar exposure out there.
And, yes. Lehmann's was the sacrificial goat. (Just as, preceding the S&L's who also lost money cheating people), the "sacrifice was Michael Milken. And, Drexel.
While most people don't even remember RUBIN. Rubin was a "pal" of Milken's. And, the only difference you could see? Ivan Boesky, in a deal with Rudolph Guiliani "bagged" Milken. And, Milken went to jail. For a few years.
According to Michael Lewis, when he wrote about SALAMON BROS., back in 1987, he wrote about the insanities of the "BOND DESKS" in all the whore houses. Oops. Sorry. Wall Street firms.
That's how long ago, Lewis was sure there would be a collapse.
But, yes you can FOOL A LOT OF PEOPLE ALL OF THE TIME, if all they have is GREED. And, they don't expect to pay back anybody. (Hence, the housing market got the "tube inserted" so that prices went through the roof. And, people who couldn't pay back these debts, were "suckered in" with, at first, LOW ARM's. What's an arm? Well, what's a leg. PUll one. And, you pull the other. The suckers thought they could at least afford the "monthlies" ... when the rates were low. But when you increased interest rates ... they lost their bets. And, their homes. While some of them became speculators. Taking increasing amounts of money out of their houses. So that now you've got lots of people with crushing debt loads.
To which you can say the Saud's, in their greed, upped the ante. And, gas prices shot through the perverbial roof. Leaving lots of Americans stranded at home. Where they couldn't pay their monthly mortgages. Oh, well.
You want a comparison to THE GREAT DEPRESSION? For this, you'd have to back up a bit. And, look at how the ROARING TWENTIES, introduced folks to gambling away their earnings, on the "ever profitable" stock market.
Bubbles burst.
The "top" of the HOUSING MARKET, back in 1929, preceded the collapse on "Black Monday,10/29/1929.
Well, if you know how to read financial data; you can even check this out: The highs of the September 1929 housing prices ... sure did come down during the crash! And, didn't go back up again ... until 1954.
To help you out. Let me explain. There are two numbers. One from September 1929. And, the other from September 1954. And, yes. You had to "hold your property," if you could ... that long ... to see the prices rise again. Houses and equity? Doesn't really come back with gusto until our nation began giving VETS home loans.
One of the engines of our society is home building. When this goes down the toilet, the economy does, also.
And, Hank Paulson is the guy who "advised" others within his circle of GOLDMAN SACHS executives, to go and SHORT his own bond traders. Without telling the bond traders they were charletons, selling crap, stamped as good as gold, by Moody's and S&P. But the bubble has burst.
Why the trillion, at least, in bailout?
Because America needs other nations to "invest" in our companies. In our stock market. And, by doing so. By following the promises of big payouts ... as long as housing prices kept going up ... FORGOT what happens when there's a collapse.
No one will do business, again, if Wall Streeters can't be trusted with investment money.
Oh, and while we're at it? Dubya can't buy back his legacy, either.
Go ahead. Don't believe me. I took the information you see here from a long article (9 pages), up at Portfolio. com written by Michael Lewis. How did I get there? I GOOGLED Lewis' name. And, BINGO. Hit pay dirt.