As the markets burn, the CEOs deposit their bonus checks and the government keeps throwing billions of dollars at problems it won’t solve, one question remains unanswered: What about the 94% of American mortgage holders who pay every month as they promised to do? Screwed.
When the $700 billion bailout, the one we so desperately needed to stop the “meltdown”, was approved under the haze of fear of fiscal catastrophe, some of us said no. Don’t do it. It won’t help. It won’t solve anything. It’s $700 billion of our money in the toilet. So now Hank Paulson, fear-monger in chief, admits he didn’t have a clue. That Congress was clueless shocks no one. What’s a taxpayer to do?
On Good Morning America, a panel of “experts” (which in TV parlance, means good-looking people of dubious qualifications) discussed what happens to the 94% of Americans who have mortgages in good standing. That means that this entire mess is the by-product of 6% of Americans who bought homes and took mortgages that are behind or in default.
It’s hard to imagine that the entirety of our economy is such a house of cards that it teeters on the brink of disaster because of a 6% failure rate. In fact, it’s unlikely to be true, but rather that the rest of the economy was so heavily leveraged, dependent upon ever-increasing home values fueling ever-increasing consumer spending, that had their been no housing foreclosure crisis, but merely a substantial drop in consumer confidence sufficient to cut consumer spending by 50%, we would be in the same place anyway.
So all the discussion about how we need to stop foreclosures is a wrong. All the discussion about how we need to increase liquidity was a scam. We, the 94%, have been the victims of the most massive fraud in modern history, allowing the government and business to suck untold billions out of the economy, the government and our pockets, to prop up a wildly bad bet by business.
Yes, the micro-economic impact of foreclosures hurts our neighbors. No, the massive infusion of cash isn’t going to fix their hurt. Is stretching a 30 year mortgage out to 40 years going to help the unemployed mortgagee in default? But the next $25 billion won’t stop bonuses from being paid.
When I challenged the propriety of the $700 billion bailout, I received a private email from a law professor who exclaimed that I didn’t “get it,” and insisted that “the facts” proved it was necessary, and the only way I could believe as I did was to reject “the facts.” I’m still waiting for the email conceding that he was wrong and I was right. I’m not holding my breath.
Most people bristle at the idea of redistribution of wealth, the very words smacking of some commie conspiracy. But when put in the context of a big lie, one easily sold because most of us lack any adequate comprehension of economics sufficient to make sense of any of this, we will readily accept it if the word “bailout” is used in its place.
The entirety of our government’s plan to stop the economic bleeding is predicated upon a massive redistribution of wealth. The wealth comes from the 94%, and our children, and our grandchildren, and will be given to financial institutions, automakers and any other corporate giant of sufficient weight. A portion will be siphoned off the top to cover bonuses, junkets, shower curtains and cannibalism, particularly since our government “forgot” to impose conditions when handing over the check. Hank Paulson feels just awful about that.
The balance will perhaps be used to pay down their bad bets and keep them afloat. Eventually, the argument goes, they will hire back employees, loan out money, and the economy will be hunky-dory again. In other words, the best we can hope for is to float these business failures back to the point where they can underpay low level employees, overpay top executives and grab as much from the consumer as we are willing to allow. Return business to life as it should be. Leave the 94 with the tab.
It will all even out in the end, we’re told. Actually, they aren’t even giving us that much, with the only promise being that without these infusions, it will be “much, much worse.” Since it’s impossible to gauge something that doesn’t happen, you can’t lose with this argument. No matter how bad it gets, it could always be worse, proving that they did the right thing to stop the worst from happening. Whew, so confusing.
Back in September, 2008, the sum of $700 billion shocked and engaged a nation. It was the central focus of our news and our concerns. Today, tossing around $25 billion seems like pocket change, with the public paying little attention. We are defeated in one sense, and have placed our faith in the mantra of “change” to cure the disease and put us back on the road to easy street. We are Americans! We always expect someone else to fix our problems. It’s the American way.
While I try my best not to be unduly harsh toward others, I similarly try to remain rational. There is nothing rational about allowing a bunch of experts who have proven themselves wrong at every turn from continuing to push a scheme that shows no chance of success. It hasn’t stemmed unemployment. It won’t stem foreclosures for those who don’t deserve foreclosure. It will make the 94% pay, both for the 6% and for the losing bet that business could act foolishly forever. And we will happily do so out of fear and ignorance, the two forces that allows us to be played like fools.
American is all about business. We’re nothing without it. It doesn’t matter who owns the White House or Congress. This is about a fundamental abdication of the concept of responsibility for mistakes and failure. The verdict is that we, the 94, will pay the price and get nothing in return.
In my humble opinion, this is a lousy deal. and I urge you to reject it. I’m prepared to bet that the invisible hand will do a better job allocating resources. I’m prepared to be that it won’t do worse.
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Ahoy there matey! Now you’re in my arena — economics.
First of all, invisible hands, like invisible buddies that bums down at the waterfront talk to as they shuffle around in their bath slippers pushing their carts full of their life’s possessions, are just that: Invisible. Imaginary. They don’t exist. So let’s start talking about real things, rather than about imaginary friends that will save us all. Praying to your invisible hand will solve our problems about as soon as praying to Casper or to Allah or Jesus will.
Okay, now that we’ve dismissed invisible friends as our salvation, what now? The first thing to do is to prevent a deflationary spiral. The evaporation of so much wealth in the economy is inherently deflationary. The problem is, capitalism works only when there is a slight level of inflation to “prime the pump” so to speak. We found that out the hard way in 1930-1932, the Federal Reserve refused to expand the money supply because the prevailing ideology of the time said that’d cause runaway inflation a.k.a. Weimar Republic Meltdown, and the whole economy went into a deflationary meltdown as a result. Paulson dumping all that money into banks is the most effective way of preventing a deflationary spiral and I’m glad Bernanke finally talked him into doing it. Unfortunately, the amount dumped into the banks so far, about $120B, is child’s play compared to the $4 *TRILLION* in housing wealth that has disappeared out of our economy. At current reserve requirements, he needs to dump another $280B into the banks to offset the disappearance of that $4 trillion.
Okay, on to the next issue. We’re trying to prevent 1930-1932, remember? So what’s the next thing that happened in 1930-1932 that we’re trying to prevent? Well, that is a collapse in industrial production with resulting massive unemployment. And remember, in the U.S. system healthcare is tied to employment, so moving all those people off the employment rosters also results in a disastrous number of uninsured. GM alone provides health insurance to 1.1 *MILLION* people. If the Big Three automakers collapse, we’re talking about the loss of roughly 2 million jobs and roughly 5 million more added to the rolls of those without health insurance.
Now: Just throwing money at the Big 3 isn’t going to fix things. When Nissan was in this same situation in 1999, new management was a precondition of accepting the Japanese government bailout. But we can’t just let them collapse. Two million unemployed people would send the unemployment rate soaring above 10%, and the current Medicaid system would collapse with 5 million more uninsured thrown into it.
In the long term, you are correct that the market will find jobs for those people and that the economy will recover. But in the long term, we’re all dead. In the short term, we’re trying to stay alive until we can make it to the long term. Call it pragmatism. But it makes a lot more sense than relying on an imaginary friend to bail us out.
But the invisible hand isn’t a “thing”, but the absence of a thing. When intervention proves costly and clueless, more of the same seems like a bad idea.
Doing nothing is making a choice too. It is a choice that would put millions of Americans out of work and deprive million more of their health care benefits. If there were other jobs out there this would not be a big disaster. But there aren’t. Over 1.5 million Americans have lost their jobs this past year, and they’re still looking for work. Doubling their number is hardly going to help.
In short, view this as a WPA for heavy industrial workers and you’ll not be far wrong. There has to be a long term solution, but for the moment, we are staring at the risk of a deflationary spiral a’la’ 1930-1932 if we don’t keep people working. We only barely avoided a Fascist revolution in America in 1932.
If the economy were doing well and there were no deflationary pressures I’d say “let GM and Chrysler die.” It would hurt, but a booming economy would soon absorb those workers. But we don’t have that luxury in the short term. Once the economy recovers we start having more options, but simply doing nothing when the economy is already showing distressing signs of the approach into a deflationary spiral… dude. Go read the history books. 1930-1932. Not good.
There’s no certainty like failed assumptions. 1.5 Million Americans are out of work this year, and you’ve got the answer how to stop more? Doing nothing isn’t doing nothing, but forcing business to save itself. GM and Chrysler have to change. Workers have to change. We do not evolve because we keep trying to keep relying on failed assumptions. We learn much from history. But don’t be a slave to it.
I don’t know if this is the way it’ll work out, but if bankruptcy for GM turns out to mean, as some are saying, a change in management and renegotiation of unsustainable labor contracts, that’s definitely not doing nothing.
But closing the doors at all the GM plants would, in this economy, be very bad. There are already people seriously using the d-word, and not all of them are getting paid to raise fears.
I the government doesn’t bailout, then what? Is it likely that GM will just shut its doors, or reorganize. What would a business like GM do without government involvement?
Considering that the automakers have been losing billions of dollars, at what point should they have figured out that they had a problem? Long before it became needed for them to ask for a government bailout. The same is true for the banks.
The first job of corporate officers should be the fiscal responsibility of the company.
Continuing down a losing path without taking what ever steps are needed to change that direction is bad management, plain and simple.
However, we seem to forget that companies are run by people and people will, if enabled, continue with the same bad behavior because they are not put in a position where change is unavoidable.
And quite frankly, the top brass at companies where they are making millions in spite of losses, are not the people who have a stake in the outcome beyond counting up their compensation packages. The people who have a real stake are those who depend on the health of the corporation for their paychecks and put some amount of trust in the management that they will do what they can to continue to employ as many people as possible.
While the bailout might prevent the automakers from going out of business, (although I doubt they would anyway.) It may prevent catastrophic layoffs for the short term. However, for these companies to get healthy again, surgery is going to be required, whether that means cutting out bad product lines, or forcing a negotiation with labor. But the first surgery that should be done is to cut out the bad management that got them where they are.
Very few people join a company because they want to make tacos or build cars, they just want a steady paycheck with some opportunity to advance. And some health insurance would be a huge bonus.
The underlying principle of capitalism is to get maximum production for minimum cost. A concept that politicians have trouble grasping since most of them never participated in the process.
And something that the major automakers seem to have forgotten how to do as well.
Now, Scott’s blog isn’t really economics-centric, but I just had to contradict this: The problem with the Fed in 1930-32 was NOT that the Fed refused to expand the money supply. The problem was that the Fed had happily done that during the “Roaring 20’s.” Unfortunately, that causes interest rates to be far below what they would normally be, and people save less. Ultimately, the banks realize that they are extremely overextended, and the projects they are financing will take up more funds than they have available. So the worst projects have to be liquidated. Yes, this whole process causes deflation. No, this is NOT a bad thing. Remember, businesses failing is not a market failure, it is the result of the free market working to weed out the poor businesses from the good ones. Why should we have to pay to support ANY business’s poor decisions?
Wow. just… wow. So much wrong “information”, so few characters to respond in. First, I suggest you Google “deflationary spiral” which will explain to you why deflation is bad for anybody who owes money and very, very good for the ultra rich, who get to pick up the assets of everybody else for pennies on the dollar. Secondly, I suggest that you read Ben Bernanke’s books. Yes, multiple books. That he has written on the Great Depression. He is probably the world’s foremost expert on the Great Depression and specifically the period 1930-1932 and the deflationary spiral that then ensued. Then look up J. Bradford De Long’s paper “Liquidation cycles and the Great Depression” which closely examines the actions of the Federal Reserve. To quote its synopsis:
“The Federal Reserve took almost no steps to halt the slide into the Great Depression over 1929–33. Instead, the Federal Reserve acted as if appropriate policy was not to try to avoid the oncoming Great Depression, but to allow it to run its course and “liquidate” the unprofitable portions of the private economy.”
The theory you advance is in fact the theory that was extant within President Hoover’s White House. To quote from Herbert Hoover’s autobiography:
“The ‘leave-it-alone liquidationists’ headed by Secretary of theTreasury Mellon…felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula:‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate’.…He held that even panic was not altogether a bad thing. He said: ‘It will purge the rottenness out of the system. Highcosts of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.'”
So a) you’re incorrect about Herbert Hoover’s policy (see his very own autobiography for cryin’ out loud) and b) you’re incorrect about “liquidation” being necessary. We’ve spent 70 years since then with no such “liquidation” and the economy did fine.
Anyhow, try reading some mainstream economics rather than the Hayekian tomes you apparently have been reading, the same tomes that Herbert Hoover and Andrew Mellon were reading in 1929. Hayek’s theories did not work in 1930-1932, and they still don’t work today, as the Japanese found in in 1993-1999 when they had their own deflationary crisis that finally was resolved only by direct and massive government intervention in their economy. Hayek’s theories still are discussed amongst radical libertarian types, but reality is that they don’t work, so pragmatically speaking, studying Hayek’s theories are akin to studying astrology. They’re pretty and all, just like astrology is, but they simply *do not work*. ‘Nuff said.
The problems with the automakers is more than just management. Remember, Chrysler was under German management from 1998 to 2006, and they’re faring worse than the automakers that were under U.S. management.
Part of the problem is the U.S. business environment, which fosters short-term thinking thanks to shareholder lawsuits and such and which has outrageous health care costs compared to competing nations (the U.S. spends 15% of its GDP on health care… even France’s gold-plated health care system, the best in the world and one which covers *everybody*, is cheaper than the U.S. system). Part of the problem is directly caused by the financial crisis — GMAC is no longer capable of funding purchases of GM cars because they lost so much money in the housing market, and thus people are having trouble getting loans to buy cars. Part of the problem is that the U.S. auto industry today is *much* smaller than it was in 1978, yet still is carrying the pension and health care obligations of all those workers who were on the payroll in 1978 who have since retired. So the main problem is how to keep the U.S. industrial base intact and avoid throwing gasoline on the economic fire, and in the long term what’s going to have to happen is that those retirees are going to have to be thrown overboard either via a bankruptcy court breaking the contract or via a government bailout assuming the cost of those workers’ pensions and health care.
So anyhow, the system is sick. But throwing gasoline and a match at a sick man is no cure. Yeah, the man isn’t sick anymore once you do that. But being *dead* isn’t a great alternative to being sick. We need to clean up the incentives system here in America which incentivates executives to think short-term rather than long-term (raising taxes dramatically on capital gains and bonuses would remove those incentives, as well as outlawing stockholder lawsuits that discourage long-term R&D spending). We need to address the bad management at the auto makers that we bale out. But in the meantime, we need to keep the patient alive while we’re working on curing him. Yes, a patient on the ventilator in the ICU needs to eventually be weaned off the ventilator so he can breathe on his own. But you don’t just pull the tube off his face before you’ve addressed the pneumonia that he’s suffering from, for cryin’ out loud!
Paulson is the problem. It’s not about creating liquidity, but creating uncertainty.
I have to agree that Paulson is the problem. His ideological anti-regulation blinders keep him from attaching effective strings to the bailout monies that would keep the bankers from just turning around and giving themselves big rewards with government money. I’ve been very disappointed with Paulson’s actions thus far. Perhaps with the urging of Bernanke (who as I’ve noted is one of the foremost experts in the area) he has in principle taken some of the right actions, but his heart isn’t in it and the result is a half-a$$ed bailout that isn’t going to do the job it’s supposed to do.