The Essence of the Rescue Plan
As explained by Mike "Mish" Shedlock one of the smartest and most iconoclastic financial analysts writing on the economy:
"To stimulate lending, the bailout plan will attempt to recapitalize banks. The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.For some of the finest discussion you can read anywhere about the economy -- if you really want to know what's going on, forget about MSNBC and Jim Cramer and all those idiots -- look no further than Mish's Global Economic Trend Analysis.Unfortunately, no matter what seat of the pants strategies they come up with, I can guarantee in advance that the unforeseen consequences of whatever decisions they make, simply will not be any good. Besides, it is axiomatic that plans to rob Peter to pay Paul, can never really work in the first place, regardless of how much time is spent crafting them."
I read him daily. If I had to make a choice between "Mish" and The Wall Street Journal, quite honestly, I'd take "Mish"!
(Richard Metzger is guest blogger.)
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Well - that's not entirely correct. I don't think there's any plan to raise taxes to cover the bailout. So really we're robbing some future Peter to pay Paul.
This could help in the short term, but seems hazardous in the long term, especially since future Peter has already been shaken down pretty hard.
Yikes that's about the worst description of the financial crisis possible. The common assumption that there are these 'Wall Street Pauls' making a bundle here ignores the fact that most "Taxpayer Petes" are just as invested in the stock market. Anyway, the government isn't 'giving' money to anyone- they're buying assets. Some percentage of those investments are worthless, others are going to make money.
Inflation is the "stealth tax"; that's how the Neo-Cons hoodwink people into a fantasy of officially lower taxes and simultaneous increases in government spending (on war / "national security", subsidies, special-interests, etc.)
That said, having a chance to start reading this guy, I like the cut of his jib:
Agreed.
Thanks for posting this!
The treasury is simply printing money to transfer it to the banks. Wealth does not work this way. The Germans tried to do that before WW2. This resulted in hyperinflation where the value of the currency lost as much value as they printed it. It's as simple as when a corporation issues additional shares of stock - it dilutes the value of the existing stock. If 1 million shares = 100% of the company, then printing another million shares means that 2 million shares = 100% of the existing stock. You can't create additional wealth or assets by simply duplicating the *symbols* of the underlying value. Unless we create true wealth as a nation by increasing our output efficiency, creating technologies that have inherent value, creating and selling goods and services, increasing trade, acquiring new territory...
Creating money however does not count and does not add to the set of "wealth".
It does act to shift wealth around however as it is being distributed selectively. So the $100 in your pocket keeps losing purchasing power as the economy is flooded with a sudden trillion dollars worth of cash. So in effect, it is a tax because it is the government magically removing value out of your own pocket and into the pockets of those benefitting from the trillion dollar bailout cash injection.
If you're not getting any of that bailout money, you're just another sucker who got took.
...That photo is just *so* wrong.
"IZ GOT NO KREDIT KARDS, D00D!"
If Peter is richer than Paul and they are both suffering from the disparity, then progressive taxation, such as Sweden's two-bracket system, is entirely appropriate. Perhaps even a more progressive system is superior (certainly so when you consider the flat "value added tax" (VAT).
Any society with a shrinking middle class is more vulnerable to disease and liquidity. Until the rich people build robots to do all their work, they still need a vibrant and thriving economy. Everybody wins when the poor can afford the necessities.
#7 - yes. Wealth can trickle up. On the other hand, the middle class was pressured to spend everything it had and then go into deeper debt than it could handle by people who equated economic indicators showing spending to mean healthy growth. This was the fatal value system which set us down this path.
We lent too much to undeserving borrowers who defaulted. We created too many investment vehicles based on these loans. So when a loan went into default, it wasn't just that loan that lost value but the investment vehicles derived from them. The beauty of leverage is that it can multiply gains but the opposite is true as well - losses can be made worse.
Now, we're going to remove accountability and the consequences of this bad direction and protect the rich and use inflation and a cash-hose filling the banks as a way to diminish the wealth of the middle class.
"Anyway, the government isn't 'giving' money to anyone- they're buying assets."
@2 - Bruno, when you buy something, who do you give your money to? Where do you think that 'money' is going to? The 'tooth faerie' to fund tooth decay? No. It's going into the pockets of the same Wall St. scumbags who leveraged their way into the greatest financial crisis that modern society has ever faced -for which we, our children, our grandchildren, and our great-grandchildren will be paying.
Mish is a good alternative view, and I appreciate the link, but he is a bit too sensationalist for my personal taste.
I consider the blog of Greg Mankiw, Econ. prof. at Harvard, to be a more balanced economic review and one more focused on analysis and description, instead of references to novels by George Orwell.
http://gregmankiw.blogspot.com/
Of course, many other wonderful sources exist as well.
Lucifer@8: I like your explanation! It seems to me you boiled it down to its essence in a couple of sentences. (UPDATE: This is Mark's comment, not Richard, our guest blogger. Mark was logged into Richard's account when he posted this comment.)
I would have been more impressed if "Mish" had offered ANY EVIDENCE AT ALL for any of his assertions. This may not be rocket science but it is still science.
At least two flaws: the capital being invested today is not being lent out to poor people. It is being lent to businesses for operating capital. And the money is, at least partly, not coming out of the taxpayer's pocket, at least not permanently. By taking an equity stake in the banks, the government will be able to recoup much of its investment, even potentially make a profit, by selling off the stock when the crisis is over.
"Mish" is pretty ignorant.
Wait, what? How does a free market prevent fractional reserve lending? Didn't fractional reserve banking start out in the market, with goldsmiths' notes?
Demanding that banks maintain cash reserves strikes me as an intervention in the market, at least if it's accomplished through regulation.
#12 PJCAMP wrote:
""Mish" is pretty ignorant."
And you're basing this opinion on the TWO whole paragraphs I clipped from his site?
I'm sure he'll just be crushed when he reads this...
(shakes head, sighs)
"can guarantee in advance that the unforeseen consequences of whatever decisions they make, simply will not be any good"
Wait, what? That statement makes absolutely no sense. Unforeseen consequences are by their nature unforeseen. By definition, nobody knows what the consequences will be.
The picture cracked me up. The Austin Chronicle did something similar for a Voter Registration issue.
They got a bunch of angry letters to the editor from animal rights activists! Luckily, it seems boingers are cat lovers AND can take a bit of comedy. (sometimes)
http://www.austinchronicle.com/binary/29a1/cover_big.jpg
@15:
http://www.youtube.com/watch?v=MF6Apumi6D0
Avram, if I recall correctly, there's basically two schools of thought on the matter.
One is that fractional-reserve by definition constitutes fraud, and would be proscribed by State action accordingly.
The other is that in a free banking / competitive currency marketplace, without the State-based monopoly power of central banks (colluding to mask inherent insolvency), inflation from fractional reserve is felt more obviously and immediately, and people will adjust their holdings accordingly. In other words, the customers of money will themselves naturally discriminate against fractional-reserve -- once they're provided with the means to have references for comparative analysis as parallel currencies would.
I read a really good article comprehensively summarizing this argument several years ago, but I can't seem to locate it just now.
But the nit being picked is basically that grey area between when legitimate insolvency becomes fraud -- e.g. Enron, or as I've mentioned elsewhere, with a Ponzi scheme.
@ #4 excerpts. There is a reason Krugman and Roubini are highly respected (Roubini, rather belatedly)and that is because neither buys into this libertarian claptrap "free market" mythology. Yes, things are going to be rough for awhile and alot of people need to be held accountable who might not be. But the mixture of faux populism mashed up with free market worship that characterizes this comment thread is depressing.
Hey, the liquidity crises was/is very real and very dangerous. Properly done, taking an equity stake can help.
Obligatory political claim here: we're going to elect a R or a D no matter what. The R will be infinitely worse, short, mid and long term.
OMG A KITTEH
Carl Sagan once said,
This is why we must rely on positive economic analysis rather than the seduction of normative economics.
People like Krugman subscribe to Keynesianism because it provides a pleasant lie instead of a harsh truth -- like believing in an afterlife or miracles. It feeds on our desire to "do something" when there's nothing we can do, like watching a loved one die, or facing imminent death ourselves.
In a nutshell: "truth matters, God doesn't, and life sucks."
The only fair, rational, humane, and as of yet unspoken solution to this snafu is as follows:
Forgive the mortgages. (All else will follow from that.)
It seems that this whole mess is a matter of too many levels of abstraction covering bad decisions. Every loan officer and manager that said okay to every one of those loans should be fired, fined, and publicly humiliated.
Zuzu, it occurred to me later that there's a third possibility: That government interventions (like the FDIC) allow banks to get away with larger ratios of checkbook money to real assets. If true, a real free market would still have fractional-reserve banking, but with smaller ratios and tighter credit markets. (And occasional bank runs.)
I hope no kittens were harmed in the making of that photo...
Wait, what? That statement makes absolutely no sense. Unforeseen consequences are by their nature unforeseen. By definition, nobody knows what the consequences will be.
The statement makes perfect sense.
Intrusions into the free market cause distortions.
We may not know in advance (the unseen) what those distortions will be
However, we know with a high degree of reliability the unseen will not be any good.
Mish
Wait, what? How does a free market prevent fractional reserve lending?
In a free market with sound money, people would not choose to bank at places that lent out excessive amounts of their capital.
At least most wouldn't. Elimination of FDIC another moral hazard would make people be more aware of who they were trusting their money to.
Should unsound banks prop up, they would likely go under soon enough and in fact would have a hard time attracting much capital to lend in the first place.
Mish
#22, that's not far off from what's happening. Except instead of "forgive", it's "foreclose". Sounds like a big difference - and it is to the person who bought the house - but that's only half of the story.
The problem is all those investors who bought the other side of the mortgage, expecting to profit when the payments were made. But they're not going to be made because they were always too high for the borrower to actually make. Kick them out of the house or let them stay, no payments is no payments. Either way, investors face massive disappointment.
And we can't allow that.
"In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed. "
So what this say is: "Ron Paul was right!" ?
(sorry, couldn't resist)
/not that he wasn't....
My only issue with the bail-out is that they intend to use taxpayer's to finance it. With all the people loseing their jobs in the last 3-6 Mos. Who are they gonna tax?
cute kitty pic.
So they're going to fix the problem of lending too much money to people who can't pay it back by "encouraging" the banks to lend more money to people who can't pay it back?
They say that economics is cyclical. But this just seems like trying the same crazy idea until it works.
@21: I'm so disappointed to learn that Krugman is a superstitious, demon-haunted truth avoider. I'm sure we'll all enjoy living in your world, which sucks.
"I can't go on. I'll go on."
Beckett
@#26: In a free market with sound money, people would not choose to bank at places that lent out excessive amounts of their capital.
Oh yeah, I see my hypothetical free market grandma out there on the internet trying to figure out what percentage of a bank's capital has been lent out. Or perhaps she reads a publication that rates banks, but which is secretly owned by a cabal of banks in order to obfuscate things.
This idea that the market is capable of self regulation through perfect knowledge is totally delusional. Get real. Bankers and loan sharks are a clever bunch that will _always_ find ways to make it seem like investing with (or borrowing from) is a better deal than it actually is.
@ Patrick Austin
But where private money is concerned, you don't have to do any of those things. "The proof is in the pudding." If you go to the grocery store and everything is priced in 3 different competing currencies, as you go shopping over the weeks, and you're noticing that one of those currencies is getting you less and less value (i.e. that prices in that currency are going up compared to the other two), you're naturally going to stop using that currency, and instead rely on the other two. In order to prevent the collapse of the suspect currency (and the private bank going bankrupt), said bank will have to buy back (in exchange for other currencies) enough of its own currency (in exchange for other currencies, lowering the prices of those) to restore the value of its own currency.
That's the thing about markets -- it's a distributed system. You don't have to look up information at a centralized authority to learn about something that's hidden from you directly; and without a centralized authority that acts as a locus of failure (either by corruption, incompetence, or both).
Ironically, it's precisely because of the lack of perfect knowledge that markets work and socialism can't. Consider how much more they can do so with a monopoly based in government authority.To paraphrase Hayek's Road to Serfdom, if you think corporations fuck you over, governments have the power and authority to that so 1000 fold.
QFT. I don't understand how people think that a corporation (which is essentially an organized collection of people with a special purpose) is somehow inherently more evil than the government (which is essentially an organized collection of people with a special purpose). The key is that they are both made up of people, and that those people can choose to be good or evil, regardless of which group they are in.
"sinfest" has lately made the exact same argument, but simpler, and with pictures!
http://www.sinfest.net/archive_page.php?comicID=2959
The "Free market" does not care about sustainability of its mechanisms. The only truism about free market forces is that self interest will motivate agents to maximize profits in the short term even to the detriment of long term survivability of an enterprise.
Free markets will get companies caught up in competitive cycles where they take greater risks to get an edge on each other. Inevitably, much like in a car race, there will be a pileup.
The actions of financial corporations does not take into consideration the consequences of loss. Or rather, of greater value is the inacceptable consequences of passing up potential profit.
Zuzu @33, funny you should bring up Hayek in that context. I've been reading The Road to Serfdom (as bathroom reading, a few pages at a time, over the past few months), and Hayek doesn't make the strong distinction between corporate and government behavior that a lot of libertarians make. He points out that capitalists often try to use government to subvert the market and centralize economic decision-making for their own short-term benefit.
This is one reason I generally refer to central planning rather than socialism in these kinds of discussions. For one thing, there's more to socialism than just central economic planning -- there's also the elimination of privilege. Central planning for the benefit of an existing ruling class (or the establishment of a new one) isn't really socialism. (Arguably, true socialism is impossible for just this reason -- any attempt to centralize planning results in a new ruling class. That The Road to Serfdom in one sentence, essentially.)
For another, many people who call themselves "capitalists" are actually central planners who deceive themselves (or others) into failing to recognize that they're engaging in central planning. "Oh, this can't be central planning, because I'm a capitalist!" The current situation provides a good example.
And another issue is that corporations wouldn't exist in the first place without governments to issue their charters.
push the taxpayer kitten too far
http://www.thejump.net/humor/sniper.htm
That's a common mistake that people make about the idea of self-interest. True self interest takes a longer view than just "take the more profitable choice of the two available". Otherwise, selfish people would never make long-term investments. They'd never sign up for the 401k plan their company offers. Why go to college and earn a degree if you can get a job making money today? What point is there in buying a home when renting will cost less out of my pocket today?
Even charity is often a mostly-selfish act. I know that I might need some help in the future, so if I help out others today, I encourage others to do the same for me later. Also by giving to charity of my own will, I hope to stave off forced charitable giving in the form of taxes to increase welfare spending.
People who take a short view of economic profitability simply don't understand free market economics and true self interest.