Our Government’s Bailout Plan: The Assumption of Armageddon

“What if we just left well enough alone and let the economy do its thing?”
Saturday, September 20, 2008

Our government, which does not have a particularly good record for handling the economy, and whose policies almost certainly facilitated, in not outright contributed to the current housing and financial sector crises, is suddenly operating at warp speed on the assumption that we are teetering on the verge of the second Great Depression. I’m not exaggerating or jumping to conclusions. That’s what they’re telling us, but where are the signs of this pending financial Armageddon?

Keep in mind, our government’s bailout plan is coming from the same officials who didn’t see this crisis coming, but who are now in a panic to stop it. This isn’t studied management. It’s a knee-jerk, “Yikes!” reaction. If they were oblivious enough to have missed it or even contributed to it, why should we have any confidence in their ability to fix it? My overwhelming sense is that our government, at least in so far as the economy is concerned, is being run by people who have no idea what they’re doing.

Has it been too easy for too many people to buy homes? Sure. Have certain Wall Street firms gone nuts doing overly leveraged, high risk business that never should have been funded? Absolutely. Are there large numbers of innocent people who will suffer as a result of these Wall Street indiscretions who we need to help? Definitely. So, other than helping the innocents, what if we did nothing? On what basis are we getting ready to spend, by all accounts, between $500 billion and $1 trillion to save investment banking firms which clearly haven’t behaved in a way that justifies their continued existence? What if we just left well enough alone and let the economy do its thing?

At the risk of sounding like John McCain – not that there would be anything wrong with that – except for subprime mortgages, their implications for the housing sector and, most importantly, their relationship to our nation’s largest investment banking firms, the fundamentals of our economy are holding. The banking system, far from hanging on by a thread, continues to do business and is adjusting its behavior with remarkable speed. Two of our largest banks are swallowing up two of our largest investment banking firms – and doing it without government assistance. Bank of America has purchased Merrill Lynch. Wachovia is negotiating to acquire Morgan Stanley. Lehman Brothers has just been sold to Barclay’s Bank – again, without government assistance. If we can just get the government to procrastinate a few more months, the economy may resolve the current financial crisis on its own.

In the meantime, the availability of subprime mortgages is evaporating from the housing market. Families who shouldn’t have been able to buy houses will have to rent. Others will have to buy more modest homes. People’s expectations will have to be downsized, but then they were obviously out of line with reality, so they need to adjust. So there will be less personal and business credit available, at rates which more accurately reflect the risks which lenders are taking. Who knows, American’s might actually start reducing the extent of their personal debt in favor of saving. You remember savings? Maybe you don’t, but it’s a good idea, sort of like having an extra bottle of water or frozen Lean Cuisine dinner in your freezer, just in case. The point is, making adjustments is what a fundamentally strong, mostly free market economy does periodically to fix itself.

I just don’t see it. The stock market isn’t real. It’s a speculative market. Real is the way our domestic car manufacturers have failed to innovate. Real is our over-dependence upon foreign oil. Real is a struggling education system that is having trouble producing the work force we need for this generation, let alone the next one. Real is a lack of competitiveness in international markets. Real is our government’s inability to live within a reasonable budget – and these are the people we’re trusting to cure excess on Wall Street?

Let’s help the innocent who will be hurt by the failure of the Wall Street giants, but we need to demand that Washington calm down and prove that we really are on the verge of the next Great Depression before their actions put us into one – only to have them look back, retrospectively, and argue, “See, I told you so.”

If we’re hell bent on spending $500 billion to $1 trillion, there’s got to be something better we can do with it.


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13 responses to “Our Government’s Bailout Plan: The Assumption of Armageddon

  1. nice post. I’ve added you to my blogroll. Best wishes.

  2. Hi. Thanks for stopping by. -wf

  3. Do you understand what a total meltdown of the financial system means?

    It means this:

    Firstly and most obviously, financial institutions collapse.

    Ordinary businesses collapse.

    Hyper-inflation.

    Pension plans disappear.

    Savings will disappear.

    Public services will collapse.

    Public utilities will collapse.

    Food distribution collapses.

    A breakdown of law and order – think ‘Post Katrina Superbowl’.

    Crime explosion.

    Looting.

    Mob rule.

    Martial law.

    A total meltdown of the financial system is an absolute certainty if no radical action is taken. Credit is the blood of the financial system. When the government says a collapse will occur within a few days, they are not speculating. Credit has ALREADY stopped flowing. Financial collapse is imminent.

    If you want to wait a few weeks just to see if the system collapses, then feel free. It will be the end of your world as you know it.

  4. > I just don’t see it. The stock market isn’t real.

    This isn’t about the stock market. This is about the flow of credit. When credit stops flowing, the entire economy collapses. Everything goes with it. It is very real, in spite of what you feel.

    > That’s what they’re telling us, but where are
    > the signs of this pending financial Armageddon?

    An almost perfect analogy is the Titanic. When the Titanic hit the iceberg, most passengers felt a bump. The credit crisis has felt like a bump to most people. For hours after hitting the iceberg, passengers of the Titanic famously carried on eating and drinking. The band played on. Everything appeared to be normal and after all, the Titanic was unsinkable.

    Meanwhile, the lower decks were quietly taking in water and members of the crew fought a losing battle to control the flow. The end came relatively suddenly. The Titanic began to lilt. It split in two and sank taking most of the passengers with it. That will be how an economic meltdown occurs.

    If everything appears to be normal and you “just don’t see it”, then be aware that teams of people are fighting a desperate battle right now. If those people do not take immediate and successful action, the unsinkable United States is going down. Most of the world will go down with it. Recovery will be nigh on impossible since all the means for recovery will have disappeared.

    NYT: Congressional Leaders Stunned by Warnings
    http://www.nytimes.com/2008/09/20/washington/19cnd-cong.html?hp=&pagewanted=print

    “When you listened to him describe it you gulped,” said Senator Charles E. Schumer, Democrat of New York.

    As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

  5. Hi. Thanks for your comment.

    While it’s true the “flow of credit,” as you put it, is tight, that’s not necessarily a permenant problem nor is it bad for the economy. Lenders are understandably concerned, even fightened by recent events and by rhetoric from our government and the Democratic candidate in particular, but those concerns could pass without a massive bailout, the effectiveness of which is questionable.

    More to the point, one of the root causes of our current crisis is that credit has been much too readily available. Reduced availability of credit and/or higher costs for money to more accurately reflect risk has got to be the objective of any government solution, and the result of naturally occuring adjustments in our our financial markets with or without government assistance.

    As for whether or not we should believe our government officials’ warnings, aren’t these the same geniuses who completely missed the point up until now? I’m not questioning their work ethic, these teams that are working around the clock. I don’t think they know what they’re doing.

    Please stop back again when you have time.

    -wf

  6. Hi. Sorry, Mr. Longford. I’m responding to your comments out of sequence.

    Yes, I do understand what a “total meltdown of the financial system” means. I just don’t see any evidence of one happening — other than in the form of some panic-stricken rhetoric from a few highly placed government officials who were part of the problem, and one Presidential candidate.

    In fact, what I see is some major banks — Bank of America, Wachovia and Barclays — taking care of business without government assistance. I see commercial and investment banks making long overdue adjustments to their lending practices — and doing it without increased regulation. I see Warren Buffet spending $4.7 billion to save Constellation Energy without the benefit of any government subsidy or other support.

    Let me put this discussion back on you… What specific evidence do you see of any ongoing or pending meltdown? Wild swings in the stock market, and official rhetoric don’t count. What evidence do you see that our financial markets are collapsing, and not just making reasoned corrections — without the need for a $500 billion to $1 trillion subsidy?

    -wf

  7. Pingback: Even a blind squirrel finds an acorn once in a while « Musings of a Thoughtful Conservative

  8. I have been in the credit industry for 10 years and have seen the credit reports of these people that are losing their homes. These debtors don’t pay their bills. Never have and they never will. If someone dangles a house in their face, you think they’re going take it? Once they are in the house, do you think they’ll start paying their bills on time? They don’t care about their credit. A foreclosure or another charge-off is just another mark on their sleeve. They know they can just walk away. This is basically legal theft.

    Now the tax payers get to pay for it.

  9. Hi. Thank you for your comment.

    You’re right. The goal of having everyone own his or her own home should not be accomplished by extending credit to those who are not creditworthy, but rather through education, training, health insurance (the lack of which is a major reason for these poor credit histories), and economic growth which stabilizes and increases family incomes to the point where they can afford housing.

    Please stop back again when you have time.

    -wf

  10. @wf
    > Reduced availability of credit and/or higher
    > costs for money to more accurately reflect risk
    > has got to be the objective of any government
    > solution, and the result of naturally occurring
    > adjustments in our our financial markets with
    > or without government assistance.

    wf, in the context of this crisis, you are out of your mind. Currently, there is no flow of credit. Credit is the bloodstream of the economy. When credit stops flowing, the consequences for the economy will be the same as if blood stops flowing through your brain. Right now, right now, the economy is experiencing brain damage.

    With all due respect, you are catastrophically out of touch and living in a fantasy. For you to say: “Reduced availability of credit … has got to be the objective of any government solution” is bizarre. There is currently no flow of credit, nor was there when you wrote the post.

  11. @wf:
    > What specific evidence do you see of any
    > ongoing or pending meltdown?
    > Wild swings in the stock market, and official
    > rhetoric don’t count.

    I see the entire global community, with one voice, across all political divides, government and non-government, across nations, screaming that the global economy is in the most extreme danger. That fact was extremely evident even at the time you originally wrote this post.

    Nevertheless, it makes no difference what you believe. When you have finlly finished playing with your belly-button, you might want to take note of the fact that your hair is on fire. As your head burns, the only action you see as appropriate to you, is to complain about the cost of your hair-gel.

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3141428/Germany-takes-hot-seat-as-Europe-falls-into-the-abyss.html

    “We face extreme danger. Unless there is immediate intervention on every front by all the major powers acting in concert, we risk a disintegration of global finance within days. Nobody will be spared, unless they own gold bars.”

    “During the past week, we have tipped over the edge, into the middle of the abyss. Systemic collapse is in full train.”

    “We are fast approaching the point of no return. The only way out of this calamitous descent is “shock and awe” on a global scale, and even that may not be enough.”

  12. Hi. First of all, how did you know I was playing with my belly-button when I wrote this? Have you planted a camera in my office??

    More to the point, I’ve never pretended to know anything about foreign financial markets. What I can assert with reasonable confidence is that the United States financial sector has a long history of over-extending credit to individuals and companies, large and small, with the inevitable consequences.

    The markets will self-adjust — a process which is well underway, at least in this country. Recovery will take time, and will be accomplished with some help from the federal government, but generally in spite of the Administration’s interference and unbelievable lack of concern for the effecf of its generally unsubstantiated rhetoric on consumer and business confidence.

    The process, largely because the problems which have precipitated the current crisis have been allowed to fester for so long, will not be pretty, particularly in its impact on families and small business which is where our government should be focusing its attention.

    The objective should not be keeping people in homes they can’t afford, or protecting businsses which don’t deserve to borrow the way thay had been allowed previously. Among other things, we need to be protecting levels of personal consumption focusing directly and agressively on maintaining levels of employment and income.

    As for the dramatic language you’ve quoted, it’s hard to believe you don’t consider it just a tad overstated.

    Our disagreement notwithstanding, let me encourage you to stop back again when you have time.

    -wf

  13. Hi. Me again, this time to respond to your second comment above.

    The current crisis in the financial sector… Our economy is having other, unrelated problems which are contributing to the potential for a serious recession. …is happening precisely because of reckless underwriting in favor of unbridled profiteering by some commercial banks, by the investment banks (Wall Street and elsewhere) who purchased this paper retail lenders originated, and by the unregulated programs that pretended to insure all this paper against default.

    Yes, lenders have been stunned and are frightened, and have over-reacted by restricting the extension of credit beyond what would be appropriate for a cure, but that over-reaction will correct itself quickly enough — and quite probably without the need for massive and unaffordably expensive government participation.

    When all is said and done, there’s got to be less credit available as a result of tighter underwriting, rates which more accurately reflect risk, and the absence of unregulated markets for the bulk purchase of subprime morgages and other paper. If not, we clearly haven’t accomplished anything.

    -wf

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