
After saddling taxpayers with an expensive prescription-drug entitlement, criminalizing speech through campaign finance "reform," and immersing America in a bloody, expensive, and unnecessary war based on falsehoods and abstractions, what do you do for an encore? George W. Bush's curtain call involves siphoning a trillion dollars from taxpayers to reward the practitioners of financial skullduggery and foolishness. Going quietly from the public stage, alas, is not his style. Refraining from hurling tomatoes and rotten eggs at him is not mine.
Has there ever been a socialist hated by more socialists than George W. Bush? Conversely, has there ever been a socialist more revered by self-proclaimed conservatives? We live in an age when style trumps substance, with the president's rich-kid oilman vibe overriding his actions in office marking him as the greatest friend of big government among presidents of the last half century. Perhaps if he came from Cambridge and not Crawford, his ostensible enemies would understand him better. The same goes of his friends.
Bush's bailout embraces a perverse form of socialism that turns Marx's theory of surplus value (the idea that profits are theft) on its head by viewing losses as a collective rather than an individual burden. Other ingredients in Bush's Marxist recipe for solvency include nationalizing the means of production (AIG, Bear Stearns, Fannie Mae, Freddie Mac) and embarking upon a class war, albeit on the side of Marx's dreaded capitalists rather than his beloved workers. It is socialism for the rich, which isn't socialism's antithesis but its flipside. It still socializes, making the debts of financiers the debts of society.
"We did this to protect the taxpayer," Treasury Secretary Henry Paulson boldly claimed. Paulson's "protection" is of the type offered by fictional goons Tony Soprano and Don Corleone. Who will protect us from our protectors? The estimated cost for the bailout amounts to more than $2,000 for every man, woman, and child in America--and some of the proposed beneficiaries aren't even Americans. Take the cost of the adjustible-rate mortgage assistance plan, the takeover of Freddie Mae, Fannie Mae, and AIG, the absorbtion of Bear Stearns' losses, the $300 billion to the Federal Housing Authority, and the subsidy to Countrywide, and add it to the estimated $700 billion for the current bailout, and the total public pricetag for private malfeasance, knavery, and stupidity exceeds $1 trillion. And who's to say it ends there? Put in perspective, the bailout will eclipse the cost of the Iraq war. And remember the initial estimates for the cost of Iraq? This gang does not have a good record when it comes to accurately forecasting the cost of its schemes. The actual pricetag will likely dwarf the guessed pricetag.
One Wall Street Journal writer even claimed that these government takeovers of bad loans is actually "a good deal for the taxpayer." If it were such a great deal, why are all companies looking to rid themselves of their bad loans and no company looking to take them on? The answer is because it is a horrible deal, and anyone saying anything to the contrary is a liar.
If there were justice in this act of governmental charity, then scores of philanthropists would be lining up to rain money upon the moneychangers. But nobody, and I mean nobody, would give a wooden nickel to any of these malefactors. Should the dregs of Wall Street wish to test this hypothesis, then they should prod one of the more pathetic of their number to venture into the street--perhaps wearing Brooks Brothers instead of Armani to emphasize his impoverished state--with cup in hand and sandwich board denoting his indigence, and harrangue passersby with tales of his woe. The only generosity he will experience is a charitable helping of insult and scorn. In other words, such a bailout could only be conducted by the force of the state. At least the socialism that relieves the destitute of the ghetto and the sticks is based on a popular spirit to aid the downtrodden. Where is the spirit for all this?
The administration's pitch has all the tact of a used-car salesman spiel. "We're going to work with Congress to get a bill done quickly," President Bush explained over the weekend. "The cleaner the better." In case anyone didn't get the hint, he continued that his plan would be moved "as quickly" and be "as big as possible." On Monday, he added, "[T]he whole world is watching to see if we can act quickly to shore up our markets and prevent damage to our capital markets, businesses, our housing sector, and retirement accounts." Translation? Don't read the bill. Don't debate. Just rubber stamp it. It took years to mess up the finances of lending institutions, but the president believes that he can cure them by Friday--the day the administration hopes to wrap this up--of this week. The forego-hardwork, get-rich-quick, don't-have-time-to-save-for-a-downpayment mentality that helped us get into this mess isn't a good model for extracting us from it. It took God six days to create the world. Why does George W. Bush think that he can save the financial world in less time than that?
The original plan presented to Congress by the U.S. Treasury ran a whole two-and-a-half pages. Most college papers are longer than that. The devil is in the details, and the president doesn't want to share the details. Like many a beggar, the federal government wants our money but doesn't want to get pinned down on what they will do with it. Any lendee would spend more time reading the fine print of a $200,000 loan than Congress will do with this $700 billion bill. Should we be grateful that the president even consulted Congress this time before spending taxdollars?
And then there is the incentive the government has created for financiers to act recklessly. The term is "moral hazard," and it means that people act irresponsibly when they know that they will not have to take responsibility for their actions. It encourages recklessness in the future by making a precedent for rewarding recklessness in the present. Welcome to the new normal. Reforms, the Treasury secretary says, can wait. What's important is throwing good money after bad. But pouring all the money in the world into troubled financial institutions does nothing to repair the inherent problems within those institutions.
The government has been in the business of telling business that it must provide loans to people not qualified for them. This includes Clinton administration mandates on Fannie Mae and Freddie Mac to serve underserved populations and the affirmative-action lending that results from constant legal hassles. "Ownership society" were George W. Bush's words describing this idealized America of the future. Yet, we are in that future, and living with the harsh reality of Bush's idealistic dictates of giving money to people who are the least likely to pay that money back. The federal interest in homes for people who can't afford them, like its interest in college educations for people who should have never even graduated from high school, results in inflationary pressure on prices, a bubble which bursts once lendees can't pay lenders and lenders discover the homes they recoup aren't worth what they initially valued them at.
When one adds the insane bankruptcy laws government has enacted to the inflationary pressure government exerts on the housing market by its unnatural obsession with homeownership, one sees why government activism is much to blame for America's predicament. Just as seizing the golden parachutes of executives who have driven companies into bankruptcy is barely discussed when outlining ways for those companies to go from red to black, garnishing portions of salaries or the proceeds of auctioned luxury items isn't on the table in compelling debtors to pay what they owe. Debtors great and small don't face real consequence when they default. The latter lose a house they never actually owned; the former stiff creditors and pass the bill on to Uncle Sam. The government used to put debtors in prison, hence the antiquarian phrase "debtors' prison." Now the government pays the debtors' bills. There are too many legal protections for deadbeats. It's too easy to default, which is why so many people on Wall Street and Main Street take this immoral route.
Republican cheerleaders delude themselves into believing they are supporting capitalism by rescuing these capitalists. They are undermining it. A capitalism without risk soon morphs into a capitalism without reward. President Bush and his Democratic detractors present a false dichotomy. The perimeters of debate roughly include those who wish to use government to bailout the reckless haves, and those who wish to use government to bailout the pitiful have-nots. The discussion is one of who should get the money, and perhaps, at best, how much money should be doled out. Whether the money should be doled out at all isn't even part of the discussion. There is a third way, and it's called anti-meddling, mind your own business, non-interventionism, the free market--take your pick--and it's not even represented in this debate. When Senator Jim Bunning says, "The free market for all intents and purposes is dead in America," I understand where he is coming from.
What should we do? In a word, nothing. Just as it is immoral to seize profits under the envious notion that they are really theft, it is immoral to socialize losses as if a banker's losses are really everybody's losses. Let them fail. They deserve it. There will always be lending because there will always be a buck in it. Enterprising capitalists with capital will be glad to take their place, glad to profit from their mistakes. We've already seen Bank of America gain from Merrill Lynch's loss. There would be more of this if the government stopped meddling. It actually makes more sense to give a trillion dollars as a reward to the financiers who did things right than to reward the failures. What makes more sense than either option is to stop handing out the taxpayers' money. The free market needs to be free of state intervention. There are enough incentives and disincentives to guide behavior in a manner that is beneficial to society. Creating artificial carrots and sticks only transforms rational behavior into irrational behavior. Coercion warps the market into doing things like lending money to people who don't seem to have the capacity to pay it back. A free market, free of government coercion and government bailouts, generally does not behave in this way.
George W. Bush worships the state. From centralizing education through No Child Left Behind, to nationalizing airport security, to footing the bill for the drug problems of senior citizens, Bush's impulse is always to look to government, and not the market, for solutions. Like the song says, "Boy, you're gonna carry that weight a long time." Creditors-turned-debtors won't even have to carry the weight of their losses after next week. Conservatives who stood by the worst enemy to their principles will have to carry the weight of George W. Bush for decades to come. By effectively masquerading as a conservative, as a believer in laissez-faire, Bush has discredited conservatism and laissez-faire by associating those ideas with failure--failures largely the result of government activism disguised as conservatism and laissez-faire. Ultimately, the banking crisis pales next to the taxpayer crisis, in which every American will bear the load of others. It's time for principled right-wingers to do what they should have done eight years ago: vocally and vehemently oppose the socialism of the Republican president and the Democrats in congress, clearly articulating the free enterprise position that is under attack from all sides but is the only way to avoid bailouts, moral hazard, and social engineering that seeks an "ownership society" but creates a deadbeat subculture.
Damn... I was going to ask where you have been since the 19th, but I think I figured it out on my own.
Excellent piece Dan.
One thing this situation emphasizes for me is the fact that we do not live in a democratic state, much less the Republic I would prefer and that we should be. Our oligarchical ruling class and media rule for their own interests, end of story.
This is clear b/c there is no public desire for this bailout, none at all. Literally every teamster blue collar worker I work with KNOWS this is a bad idea implicitly, and they even link it correctly to deflating our currency (and thus inflating their cost of living).
Here is an article on the lack of support for what our political class will do precipitously, without debate, and without second-thought. Hence, we clearly have a ruling class w/ zero interest in the common good:
7 percent support
And n.b. the two presidential candidates offer us flat out nothing on this (though Palin has sounded like she intuitively doesn't like the idea of the bailouts). The man who should be the GOP candidate is the only one out there speaking well on this issue:
And especially note that "W. Two" (McCain) is promising to create a massive Rooseveltian bureaucracy to manage the financial and lending industries from henceforth if elected:
And I would add that the worst part of all this is not a figure like costs "2000$" a taxpayer but that it will be far far worse b/c we are doing this with NO actual tax money but instead fiat currency out of thin air, pure pure deficit spending. This tactic of living on thin air beyond ones means didn't work for the people who caused these failures, why the hell does anyone rational think it will work for a "government" (i.e. the society as a whole)?
It’s disgusting and unnerving to see three of the main perpetrators in the Fannie Freddie mess standing up there haughtily explaining how they’re going to use government to fix it.
Dodd, Schumer and Frank were instrumental in causing mortg@ge fiasco and now to hear Frank say that he thinks the government should be in the real estate business by buying up the defaulted properties and sitting on them until the value comes back up is simply outrageous.
I'm no economist, but it seems to me that it is possible that the bailout of AIG might have been quite urgent. Isn't it possible that a company be so big that its collapse would seriously hurt the country?
Moreover, it is true that this has an inflationary pressure, but could that simply ballance out the incredible risk of deflation that could happen when billions of dollars simply disappear? And deflation is worse than inflation, right?
Is anyone being held accountable for the actions that led to the current meldown? I mean, a trillion here, a trillion there can add up to some real money. I haven't heard of anybody in the gov't even ask about culpability for this mess.
Xantippe,
Isn't the money disappearing inflated already? That is, we had state intervention along w/ rampant imprudent speculation basically fixing prices/home values at unreasonable levels. Those prices have to be allowed to fall correct? Only in so doing will the natural incentives to make prudent borrowing and loaning decisions come back into play.
As for the "too big to fail" idea. It sounds good and is being claimed frequently by people who know a lot more than I do about the economy and financial markets. I don't think though that this strictly has to do with size actually. The problem that AIG posed is that so many other financial institutions were interdependent on it and that so many of these companies were leveraged beyond their actual assets (which again is the imprudent side of all this).
Look at what AIG was heavily involved in, underwriting cds. That industry has grown from 900 billion in 2001 to 45.5 trillion now, clearly something unnatural or irrational was going on. Also, investment banks are allowed to borrow 30 dollars for every one dollar that they have and invest that amount "on the margin" as the saying goes. That is totally irrational. That change was put in place by Christopher Cox, head of the SEC in 2004 (an increase from 12-1 to 30-1). (Hat tip, I learned about this from reading Steve Sailer's blog and his smart commenters).
I suppose that possibly bailing out AIG b/c of it having created so much interdependency avoided the onset of the second great depression (many many banks would have failed and been bankrupted when AIG went under) but I suspect that given our ruling class that would have been the only outcome to actually fix the problems. I don't see the necessary reforms coming into play here at all. Also, having the taxpayer underwrite these idiot fat cats stupid risk taking (subprime loans and marginal investing at 30-1 ratios) again only rewards that behavior.
Could AIG be made less a catalyst of unhealthy interdependency w/o meanwhile doing a massive bailout of it? I haven't run across any good suggestions how to do that.
So yeah, AIG may have needed to be bailed out to avoid widespread bank failure and thus a really big Depression. Frankly though, I still think that Depression is coming anyway given our governments interventions and monetary policy, so has this bailout only made it that much worse when we finally do end up in it? How else to discourage interdependency and risky behavior if failure is not allowed as punishment? Like Dan said I don't see anyone going to jail . . .
Here is a summation from the Man:
"The bailout of Fannie and Freddie, the purchase of AIG, and the latest multi-hundred billion dollar Treasury scheme all have one thing in common: They seek to prevent the liquidation of bad debt and worthless assets at market prices, and instead try to prop up those markets and keep those assets trading at prices far in excess of what any buyer would be willing to pay."
This gibes w/ my point above Xantippe that sure, we can see the immediate consequences of AIG's failure as so bad that the govt props it up, but IF we intervene like that are we not just delaying the inevitable crash that has to come from their malinvestment? Maybe if this was combined by some sort of rational policies overall it would be easier for me to accept.
This issue of the govt restoring liquidity is exactly what made the Great Depression so severe and long-lived, it was the Feds manipulation of interest and currency that has been the biggest culprit then and now I believe.
Summing up this thread in one sentence: the Bush Administration is the greatest criminal enterprise in American history.
I guess someone is looking into this after all.
http://www.foxnews.com/story/0,2933,426783,00.html
I really hope that something comes of this AM. But I think that the investigation gets squashed when the indictable Democrats who caused this mess in the first place and then stole and obfuscated their way into keeping their pockets lined will posture (as they are now doing) and move on to the next crime. Unfortunately, this culminates in us innocents paying the freight.
TERM LIMITS NOW!!!!
The living economist I respect most, Thomas Sowell, makes points in his column this morning that are similar to the points xantippe made yesterday. Even Sowell's most famous teacher, Milton Friedman, agreed that it is government's responsibility to keep the value of money stable. This situation, though primarily of the government's own making, threatens that stability and, so, should be dealt with aggressively. Unfortunately it is not likely to be dealt with well with socialists and progressives in charge of Congress and the bureaucracy.
Here is an excerpt from Sowell:
" Financial institutions are not being bailed out as a favor to them or their stockholders. In fact, stockholders have come out worse off after some bailouts.
"The real point is to avoid a major contraction of credit that could cause major downturns in output and employment, ruining millions of people, far beyond the financial institutions involved. If it was just a question of the financial institutions themselves, they could be left to sink or swim. But it is not.
"We do not need a replay of the Great Depression of the 1930s, when the failure of thousands of banks meant a drastic reduction of credit-- and therefore a drastic reduction of the demand needed to keep production going and millions of people employed."
I agree with most of that and understand the painful reality behind the need for the current bailouts. But this is not the first time this has happened and what will be the incentive in the future of any entity to do the right thing financially or pursue making solid business decisions based on inherent risks?
If there is no potential risk and businesses know they can keep coming back to the taxpayer for protection will things change? Do we ever allow these institutions to fail to wake the market up so that it won’t happen again? I think we need to.
Many in government don’t care. They like socialism. And if we the people, through actions perpetrated by some of our greedy and lazy representatives keep buying up businesses, capitalism in this country will be dead and our house of cards economy could finally collapse.
Doc McG,
I think Friedman and Sowell are wrong about what caused the Great Depression and thus still wrong on this bust. The key issue is understanding why the "boom" was a false one to begin with and did not represent natural economic growth. This boom had to bust b/c it was due to inflation of the money supply and inflation of credit well beyond actual assets value. From my understanding of it I think Hayek wins the day on understanding the cause of teh Great Depression and how our governments very interventions in supposedly stabilizing the money supply is causing these booms and busts.
It doesn't seem to me that Friedman and Keynes are all that far apart as it concerns what the govt can do to stimulate and finesse the economy. It is really a grand conceit from the both of them that relies on a belief that there can BE stability in things generated off of easy credit and that debt doesn't *really* matter.
What if we think of it this way.
If there is no fundamental change to what got these financial institutions into a position of holding worthless debts, then these bailouts will have to be basically infinite to avoid another Depression according to Sowell's view, right? Now, I am not even conceeding that all us humble folk were going to get slaughtered by these banks failures if they weren't propped up. But, even if that's the case how is this bailout not a delaying action at best for a deflation that still must of necessity come?
Lastly, our means of propping it up (govt deficit spending) only work in a sense by foreign nations buying it up, and they only buy it up b/c they see assets in the U.S. that they want to own by means of our *inflated* currency, and b/c doing so makes the siphoning off of our industries and manufacturing jobs to their countries proceed apace. Thus, the humble folk lose their jobs and their lifestyles plummet b/c of the very actions taken to supposedly save them from the loss of liquidity and credit expansion for the big boys.
I really like that “Lastly”. Sums it up very nicely since the real concern for the AIG bailout was that there was so much foreign money invested the powers that be didn’t want to topple foreign financial markets.
I suppose we will continue down this inflated currency route by keeping afloat an economy based on money that we don’t have but borrow from the very people who are invested in our markets.
Confiscatory tax collection will fill in the financial blanks.
I agree that the vast expansion of the regulation of the economy in the first 29 years of the twentieth century made the economy so brittle that it was not able to deal well with monetary disruption. So the monetary disruption alone was not the cause of that Depression. Today, our economy is also brittle with regulation. My favorite economics teacher wrote often that regulation was like arteriosclerosis in the economy. But this is all the more reason why the shock of deflation is to be avoided at almost any cost.
Bruce Wayne is right that this will happen again unless the system is reformed. That reform has to be one in which the federal government vastly reduces it role in the financial markets. The larger that role, the more likely one mistake will cause havoc. Continued viability and health requires diversity and innovation in the financial system, and in any economic system. Regulation tends to stifle diversity and innovation and reward consolidation and conformity to a “groupthink” that comes to dominate any highly regulated system. The media and most politicians are blaming deregulation and greed. They are wrong, and the situation may become worse because of this misdiagnosis, but this is not a matter where taking our economic medicine now rather than later is a good idea. With the right regulatory reform we need not take the medicine at all and without that reform the “medicine” of deflationary disruption won’t help anyway and might kill many of us.
Debt doesn't "really matter" as long as you're healthy and working and earning much more than the payments on the debt. It only "really matters" when you're too sick to work. We have to avoid getting too sick to work and get back on a healthy regimen. But that we are too stubborn to get on a healthy regimen just now doesn't mean we shouldn't avoid getting sick for as long as we can.
That's a good an@logy Doc, but even a very healthy individual can run up such crushing debt that no amount of income production will ever be able to pay it down. I think some fiscal disipline is in order. A dirty thought to many who run our country.
Bruce, Doc, asdf, Dan, et al.: This is the ONLY reason I think something like a bailout might me justified. Look at really poor countries: they have lots of unemployment and lots of need, high supply and high demand in labor, but the two can't seem to get together. This also decribes the depression. This situation is not caused by capitalism, but by a lack of capital. It is basically the worst economic situation one can get, and we should avoid it at all costs. That is what is threatened, at least in the short term, if there is a serious credit crunch -- it would start this way: businesses will not be able to pay their employees because of lack of *cash* on hand.
My objection and anger and fear is deeper than this bailout -- they are going to make the problem worse instead of better. They will not get government out of the subprime mort-gage and securities business. They will think they have done their job simply by adding more "regulation."
It tells you something that you can't type "mort-gage" on this site.
Who would adverise for mort-gages the same way people advertise for p0rn and male-enlargement pills?
Answer: People who know they can sell trash loans to Fannie Mae.
Doc,
After my freewheeling economic spiels let me start with a proper caveat. I don't understand our financial system. I am decently read in what is going on but pretend no expertise and submit it humbly even if my emphatic style belies that.
Here are the two basic points that direct my reading and interpretation of the situation:
1) no one "understands" our financial system. Not Paulson, not Dr. Paul (my hero) or certainly not our media and political elites. Therefore (basically a priori) government should be absolutely in a knee-jerk-default-mode anti-economic intervention. The cult of "expertise" that progressivism/socialism/19th century rationalism has saddled western societies with is maybe the worst development in the history of human pride and Gnosticism in the last 2 centuries.
2) I gravitate towards explanations of what is going on and what should be done which make the most intuitive sense on the micro level since all economic transactions and decisions are the result of individual human volition. Hence, saying "greed" is a factor doesn't bother me at all, what else is living so completely beyond your means other than some form of concupisence at the least?
So I ask to both you and Xan whether it is reasonable to be optimisitic as regards our political class making the necessary changes in governing philosophy that will, as Doc says, give our economy a chance to NOT go in the tank after this bailout by buying time for reform?
If it is not (which is my view) then that means this bailout can ONLY be a delaying action, and just as in medicine delaying the remedy does two things only: make it less likely that survival of teh disease will occur and make the sickness much worse.
The crash will be harder the more we "buy time" for changes that will not come. The corrections have to be allowed to take place in our financial system or the recession will only be prolonged. And here is where the history of the Great D. comes back into play . . . the government did not allow for recovery as quick as the market wanted and would have recovered b/c of its misguided policies. Recovery came much faster in even other countries that were hit harder than the U.S. (Germany for one).
If I am right and the corrections will not be allowed to occur even after this bailout, then how will the next crisis not just be that much worse?
And the worst part is that b/c of the policies of our ruling class for the last generation and a half we are not at all the same people as suffered through the Great Depression. If there is another one that bad our cities will be up in flames and we will lose our government.
"Socialism for the rich" - that's how Bill Ayers (Weather Underground/Annenberg Fund/Barack Obama/*THAT* Bill Ayers) sees it, too:
http://billayers.wordpress.com/2008/09/19/financial-shock-and-awe/
I see this bail out as prolonging the inevitable and as a temporary political band aid to cover the agenda driven incompetencies of our flawed representatives.
As has been noted, historically, intervention by government slows and does not help market corrections. Capitalism works and markets under that system do a pretty good job of stabilizing themselves. Painful as it might be sometimes.
If the free market is allowed to work, a company like AIG will find a way to get leaner and meaner on its own.
But if we continue to put corporations in this country on welfare, they will become fat and lazy like most welfare recipients.
This is my favorite piece you've ever written. It's perfect.
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