To Those Who Still Oppose The Bailout…

By Justin Gardner | Related entries in Economy

…listen to Megan McArdle:

It is worth noting, in answer to the libertarians who are wary of government intervention in the economy, that if there is a serious crash, we will get even more government intervention in the economy–and intervention that is much less to our liking. That cost has to be weighed in your assessment.

On the other side, to those who are averse to bailing out Wall Street rather than Main Street, it’s worth noting that Main Street will suffer worse than Wall Street. Because of the way that their compensation is structured, Wall Street bankers tend to do things like buy their houses for cash.

Remember, it was Paul Ryan (R-WI) who said the following just yesterday

“This bill offends my principles but I’m going to vote for this bill in order to preserve my principles… to preserve [the free enterprise system]. This is a Herbert Hoover moment.. he made mistakes during the Great Depression… Let’s not make those mistakes… If we fail to do the right thing, heaven help us—if we fail to pass this I fear the worst is yet to come.”

Trust me, if we don’t pass this economic rescue package and the fallout hits ordinary citizens hard, you will see a swing against the free enterprise system by voters the likes of which you never could have imagined.

Imagine this…

…no bailout passes…
…credit freezes up…
…small businesses can’t meet payroll….
…more banks fail…
…more small businesses can’t make payroll so they fail…
…everybody stops spending except the wealthy…
…stocks tumble further below 10,000…
…the economy hits recession and stays there…
…unemployment rises…A LOT.

Meanwhile…

…Wall Street incurs some losses, but people are still rich and business goes on…
…however, Main Street loses hundreds of thousands of jobs and nobody can buy a home.

Ask yourself: do you think that scenario is plausible?

If so, then ask yourself this: does that scenario make people more likely or less likely to believe in the free enterprise system?

Listen folks, I believe in the power of free enterprise system, but it obviously can’t regulate itself and that needs to change. But I’d rather have a massive bailout than a massive backlash. Wouldn’t you?


This entry was posted on Tuesday, September 30th, 2008 and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

22 Responses to “To Those Who Still Oppose The Bailout…”

  1. bubbles Says:

    I think if you look at history, we need to occasionally modify capitalism in order to save it. Look at Franklin Roosevelt – - a wealthy New York capitalist… but when the capitalist system went sour he realized that something had to change in order to allow capitalism to survive. The brand of capitalism common in the 1920s proved to be an abysmal failure, so Roosevelt introduced the New Deal Era of capitalism. And now we’re dealing with another failed method of capitalism, and it’s going to take reform – - not neglect – - to solve the problem.

    But this is what is so great about capitalism… you CAN reform it to ensure its survival. When one brand of capitalism isn’t doing to well, we can just tweak it a bit and not fear that the system will collapse altogether.

    Mikhail Gorbachev tried to do that to the USSR’s failing Communism, but you can’t modify a system which relies on totalitarian control… but with our economy we can (and have, and shall).

  2. Agnostick Says:

    So, what has really happened on Wall Street, then?

    The more I hear about this, the more it sounds to me like a big game of “Chicken.”

    Fat-cat CEOs in shiny gold dragsters, with golden parachutes at one end…

    Joe and Jane American at the other end of the street, in their late-model sedan…

    Both cars facing each other.

    3…

    2…

    1…

    GO!

    Both cars racing towards each other… head-on collision imminent…

    Meanwhile, up in the grandstand, our legislators have front-row seats, as they shovel popcorn into their mouths, and swill cheap beer and soft drinks.

    Who’s going to blink first?

    Agnostick
    [email protected]

  3. Rich Horton Says:

    I still dont see why we have to swallow this PARTICULAR bill.

    Look, if we pass this bill and the economy tanks anyway, what will THAT say about the economic system? Will we really say, “Oh thats ok.”

    I really dont think the world is gonna end this week or next. Why cant they take their time and present something they can really sell to the American people? Is it really becuase there is an election in November? If so we are in sorrier shape than I thought…politically, not economically.

  4. Becky Says:

    You miss the point that the present economic problems were largely caused by government intervention–Fannie Mae, Freddie Mac and the intentional inflationary policies of the Fed and promotion of mortgage backed securities. And this rot has to be removed from the economy–the federal government does not have, nor can they borrow enough, to do this.

    The sad reality is that for the last ten-fifteen years the economy has been built upon illusory wealth e.g selling houses to each other, buying imported Chinese crap at Walmart, and the trading of gee whiz financial instruments.

    We are not going to return to the crazy days of the first years of the century–those days are over. The Housing market is not going to save us again.

    If the economy is ever going to recover and transform itself back to a truly productive economy, it can not continue to be propped up by government bailouts (which up until this point have not worked anyway). The market needs to rid itself of the debt that we are buried under and was created because we are a consumer, non-productive economy.

    Credit is drying up because because the economy is buried in debt–the ability to provide further credit is simply drying up.

    It is not going to be fun–but we need to let the market sort it out. Government money would be better spent providing humanitarian relief–amend the bankruptcy code to allow the rewrite of home mortgages, assistance to homeowners, families, charitable organizations,–and whatever can be done to cushion the landing that we have to take.

  5. Benjamin L. Reisterer Says:

    What I don’t think many people understand is that it is NOT a free market…the government has been mandating and propping it up artificially which simply just delays (and makes much much worse) the inevitable. The simple fact of the matter is if your business is not solvent or you have bad debt the free market will naturally eradicate it…when you prop it up artificially it encourages people to make bad investments which just compounds the problem. If government would have gotten out of the way in the first place…we would be much better off right now. Also, if a “bailout” does pass it will just continue to prop this up which again will delay the inevitable, and give us a much worse crash then we would have now…we should learn from the great depression. Either let it go and rebound naturally…which will take 1-2 years…or prop it up until we can’t hold it together anymore which will cause increasingly worse problems over the next 10-20 years.

  6. Togakangaroo Says:

    Can we please from on put a moratorium on the following terms: “Main Street”, “Fat-Cat”, “Golden Parachute”.

    They’ve become loaded term that dilute your point by allowing people to classify you as partisan and disregard you.

    Plus they just flat out sound stupid.

  7. Justin Gardner Says:

    I really dont think the world is gonna end this week or next. Why cant they take their time and present something they can really sell to the American people?

    Listen, the credit markets are already seizing up. Nobody is able to get a loan. That’s why we’re seeing these massive banks failures and that’s why the market needs a big infusion of cash…because the market is failing to do its job and buy up perfectly good, but devalued assets.

    What’s funny is that some HUGE banks like J.P. Morgan are actually buying up some of these assets, but it’s simply not enough. So the market can’t adjust and provide, and the government needs to step in.

    As far as the world ending, no, it will not end, but will it stop? Yes. Because what I’ve outlined above are very real possibilities. We are LITERALLY at a point where credit will not become available. So in that sense, I think you’re asking the wrong question about ending vs. stopping.

    I mean the bank-to-bank lending rate right now is 7%. Do you know how crazy that is? And that’s what the market is doing, not the government. Actually, the recommended rate by the Fed is 2%! That’s how bad this is. That’s why you’re seeing this freeze. Because the market simply will not allow this thing to get fixed. Because the market is emotional. It’s NOT working.

    In any event, that’s the view from the cheap seats.

  8. ExiledIndependent Says:

    Non-financial industries in the U.S. have over a trillion dollars in cash. This is almost getting to the point of crying wolf. I expected the DOW to be up today, but by nearly 500 points? I’m waiting to see a non-political, non-Washington answer to this problem. I will not trust the same machine that caused the problem to fix it.

    And speaking of credit, as a culture we need to grow the hell up and drastically reduce our reliance on credit. If we’ve got $4,000 in the bank, don’t go out and finance a $30,000 car. If you can’t afford a down payment on a house, work a second job and stay in your apartment for another year. Throw away your credit cards. Start saving 15% of your income. This culture of easy credit entitlement needs to end here and now–maybe by getting spanked hard by the economy we can finally learn our lesson.

  9. Rich Horton Says:

    Justin, who is it that cannot get a loan exactly? Places who didnt get into the sub-prime nonsense still have money to lend. Institutions like Wells Fargo, who traditionally hold onto the mortgages they make are still loaning money. There was a false rumor out earlier that McDonalds franchises couldn’t get loans and people freaked….but it wasn’t true. That what panics do. You dont make a panic stop by pretending its real.

    We’ve already had the tax payer pick up the bill for things that could have been sold were it not for government intervention. How do we know this isn’t the same case?

    I still haven’t seen anyone make the case that something like the insurance scheme the Reps floated wouldnt work. It would certainly be less like a blank check.

    Is everything peaches and cream? Of course not, but there are plenty of economists who are arguing that we shouldnt lose our head here.

    As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:

    1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

    2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.

    3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, Americas dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.

    You know, lots of people left of center have pointed out the difficulties that can ensue from rushed through legislation (ala the Patriot Act). Why doesn’t that apply here?

  10. Michael Says:

    You’re missing the point. All of those things will happen WITH OR WITHOUT a bailout. Period. This is a matter of tossing good money after bad for the sake making politicians LOOK like they are doing something.

    Am I the only one who’s simply ASTOUNDED at the sheer arrogance of Megan McArdle — who 6 months ago found Ron Paul’s “sound money, sound money” drumbeat utterly wacky and “insane” — now telling Libertarians to shut up and get in line, now that lack of sound money has doomed the world economy to unprecedented catastrophe? Is L – O – L, with tears in my eyes.

  11. Togakangaroo Says:

    @ExiledIndependent

    Yeah, ok, I don’t have to buy a house, and I can bike to work. But what if this had happened six years ago, you know, right around that time I needed to borrow $60,000 to go to college?

    Or lets simplify for the non-college bound folks. You know how most of the country’s transportation is shit? People need to buy cars to get to work to save that 15% (which they all to often can’t afford).

    We live in a society where credit is the only thing closing the have and have-not gap. Yeah, its been abused to smithereens but you cannot hang it out to dry without absolutely ruining us as a country. Sure the market needs to be readjusted, but if you let it readjust unchecked you might just end up in a position where no one is willing to lend you money to cover things that ARE necessary.

  12. kss Says:

    Even if one presumes the bailout will have the intended effect, and that not passing it will lead to catastrophic market failure, that does not necessarily make passing it a simple decision, to wit:

    Risk is generally under-priced in our economy — the current credit crisis reflects the sudden realization of this issue — i.e. a more ‘correct’ risk valuation suddenly results in trillions dollars of AAA-rated obligations being slashed to Junk status, hilarity ensues.

    Why has risk previously been so misunderestimated?

    Could it be a tacit acknowledgment that the downside risk of catastrophic market failure is tempered by the certainty of government intervention?

    Is there any precedent for such an audacious claim?

    Would a bailout merely exacerbate the problem?

    If that were the case, wouldn’t any bailout merely defer the problem until the next crisis, which, if patterns hold, will be larger and more complex?

    If dealing with a massive market failure is an inevitability due to fundamental flaws in our implementation of capitalism, wouldn’t it be best to deal with it now, rather than in the next generation?

    Won’t someone please think of the children!

  13. Justin Gardner Says:

    @ExiledIndependent – 1) To your trillion dollars comments…yes…but that’ll dry up a lot quicker than you think. Especially when they can’t borrow money to make money. 2) You want a solution from somewhere else besides the government? Where exactly. 3) Yes, we all need to behave better. Again, not a fix for this situation.

    But hey folks…you’re right. The credit market is fine. No need to do anything. All of these people who have intimate knowledge of the financial markets are completely wrong.

    And yes, I suppose this really is one of those situations where it’s fair for institutions holding assets that have a significant amount of value to perish because nobody will buy them and thus set off a chain reaction throughout our financial system that will bring it, and our economy to its knees.

    Please.

    Rich, it’s funny that you mention the Patriot Act, because we actually have actionable intelligence to respond to this situation and thus avoid a deep economic catastrophe, and yet you want to do nothing. On the other hand, the Patriot Act was a reaction to 9/11, and thus it was never necessary to rush it through.

    Also, perhaps I have your position wrong on the post 9/11 world, but my guess is that you’re more than happy to spend a trillion on “pre-emptive” defense which has no discernible return on investment. Interesting juxtaposition if that’s the case. And do know I supported our fight in Afghanistan, as well as the funding it would take to finish the job there.

    @Togakangaroo, please, keep the language clean. thx.

  14. Rich Horton Says:

    I dont know…its seems the days of pre-emption were lost when not enough folks in Congress wanted to do anything about the potential problem in 2003, 2004 or 2005. I object to the idea that all negotiation must be ended because we must act.

    And I never said I wanted to do nothing. I’d rather stop, think first, THEN act.

    Besides, if it is such a disaster why did congress take a little vacation?

  15. Rich Horton Says:

    In case you haven’t seen it, I felt this (http://www.qando.net/details.aspx?entry=9414) handled the case made for this deal by people like David Brooks well:

    Brooks said:

    The Congressional plan was nobody’s darling, but it was an effort to assert some authority. It was an effort to alter the psychology of the markets. People don’t trust the banks; the bankers don’t trust each other. It was an effort to address the crisis of authority in Washington. At least it might have stabilized the situation so fundamental reforms of the world’s financial architecture could be undertaken later.

    But the 228 House members who voted no have exacerbated the global psychological free fall, and now we have a crisis of political authority on top of the crisis of financial authority.

    QandO noted:

    Ah, interesting. The plan, although it sucked, has – or had – an important “psychological” component to it. Although a dog of a bill, it was an effort to alter “psychology of the markets”.

    But when Republicans such as Phil Gramm said we were talking ourselves into a recession and John McCain mentioned that the fundamentals of our economy were sound (something Obama recently claimed as well), those were portrayed as outrageous lies – not attempts to “alter the psychology of the markets.” Those who spoke such stupid things were “out of touch”.

    But when David Brooks (and others) claim that voting for an abysmal bill which just about everyone agrees is equivalent to throwing 700 billion taxpayer dollars down a rat hole, that’s an important “psychological aid” to propping up the markets, correct?

    And, of course, only nihilists would be against it.

    Of course one man’s nihilist is another man’s freedom fighter I guess.

    All-in-all, a sloppy and dishonest “analysis” by Brooks.

    I’m sorry, but a lot of this rings true to me and a lot of other people. And there is certainly a lack of will amongst the Democrats for this version of the plan…so why are we still trying to resurrect it? Wouldn’t a different approach seem to be the way to go?

    And if it the psychological effect you want you make it a real bipartisan effort and not the CYA approach we have been treated to of late.

  16. J. Harden Says:

    All of these people who have intimate knowledge of the financial markets are completely wrong.

    Like this guy…

    http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html?iref=mpstoryview

    …or these 2 guys…

    http://www.becker-posner-blog.com/

  17. Justin Gardner Says:

    And I never said I wanted to do nothing. I’d rather stop, think first, THEN act.

    Besides, if it is such a disaster why did congress take a little vacation?

    Okay, then what do you propose?

    And to the “vacation,” folks took a day off because of the Jewish holiday of Rosh Hashanah. A new vote is set for tomorrow.

    Also…

    I dont know…its seems the days of pre-emption were lost when not enough folks in Congress wanted to do anything about the potential problem in 2003, 2004 or 2005. I object to the idea that all negotiation must be ended because we must act.

    So pre-emption is off the table because we didn’t do something early to address the problem? I’m sorry, but that rationale makes absolutely no sense. Imagine saying that about the defense of our citizens? Do yourself a BIG favor in all of this and frame this in defense terminology, only the thing we’re saving are people’s jobs and livelihoods.

    The fact remains that the credit markets ARE frozen right now. That’s not a myth. You can claim the opposite, but that doesn’t make it true.

    This from IHT:

    The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent Tuesday, the British Bankers’ Association said. The euro interbank offered rate, or Euribor, for one-month loans climbed to record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, advanced to a record. Rates in Asia also rose.

    “The money markets have completely broken down, with no trading taking place at all,” said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. “There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.”

    Credit markets have seized up, tipping banks toward insolvency and forcing U.S. and European governments to rescue five banks in the past two days, including Dexia, the world’s biggest lender to local governments, and Wachovia. Money-market rates climbed even after the Federal Reserve Monday more than doubled the size of its dollar-swap line with foreign central banks to $620 billion. Banks borrowed dollars from the ECB at almost six times the Fed’s benchmark interest rate Tuesday.

    As far as Brooks and QandO go, quote them if you like. I’ll continue to look at the real data and judge from that.

    I’m telling you Rich…this is a BIG deal and we can always revisit legislation down the road. But this market needs cash and it needs it immediately. We are literally talking about days now. Because with each passing day, a few more banks will fail. This is not fiction.

  18. Joshua Says:

    …employment rises…A LOT.

    I do believe you’re missing a prefix there, Justin.

  19. Justin Gardner Says:

    Yikes! Thanks for that Joshua. Fixed.

  20. kss Says:

    http://edition.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html

    (hah! captcha: for Advices)

    “…a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This “moral hazard” generates enormous distortions in an economy’s allocation of its financial resources.

    Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

    Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

    Further, the current credit freeze is likely due to Wall Street’s hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.”

  21. BenG Says:

    Thanks, Guys;

    I know I’m getting into this debate too late to matter, but I wanted to say the thread has been helpful to highlight many of the important points each side in Congress has been making, and it’s good to see them in one place at one time.

    Justin: once again you’ve gotten to the heart of the matter by showing some significant data that Wall St. uses to decide how to invest billions of their client’s dollars day in and day out, without politics or idealism to cloud their decisions, they create wealth. The Libor doesn’t lie, nor does the VIX, which is the Volitility Index on the CBOE Exchange. Called the FEAR Index, it gauges the amount of volitility in the markets by using options trading as its guide. I’m not sure exactly how they work, but the pros do, so we give them our money. And that brings me to my point.

    We’re all just guessing here. Nobody, even the experts, really know what’s gonna happen if they get to implement their plan. To me, it make the most sense to trust the experts in charge because it looked like we have checks and balances finally working. I know it sounds crazy naive, but listen.

    There’s a Republican administration going against it’s fiscal ideology with what it feels it must do to avert economic collapse. There’s Democratic leadership in Congress that’s working with all it has been fighting against for the past 8 years to find a bipartisan way to reach an acceptable plan. There’s two people in charge of fixing the problem for the Fed: Paulson is said to be a ‘genius’ and Bernanke is one of the leading minds on understanding the Great Depression. Major changes were made to the original proposal that all sides in the negotiation said they were satisfied with, so they took the vote.
    I have no idea what the correct things are to do to fix this enormously complicated and difficult problem, but I decided to trust the people we put in charge, even though they don’t deserve that trust, I feel, for the reasons above that they’re our best shot.

  22. Rich Horton Says:

    “I’m telling you Rich…this is a BIG deal and we can always revisit legislation down the road.”

    But how much of this is an artifact of waiting for promised legislation? (and thus a better “deal”.) And, why should this commit us to the first proposal that comes along?

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