The two basic questions concerning the bailout

[billvon 3,173]

Ideology and campaigning aside, there are really two basic questions you have to ask about the bailout:

1) Will it work? i.e. will such an infusion of capital help the economy and prevent a very significant recession?

That's the most important question. If it's not going to work, then you don't do it, period. Easy. The hard question comes up once you assume that it is going to work to at least some degree:

2) Should the government be bailing out corporations like this? Is it better to suffer a near-1929 depression to "teach Wall Street a lesson" than to save them, Deux ex Machina style, from their own shortsightedness?

The first question, in my mind, is still up in the air. I will not claim to understand everything that's happening in the market, but I don't see a straightforward path from handing over $700 billion (or, more accurately, buying 700 billion in worthless debt) to saving the economy. We will inflate the value of that debt and thus get some liquidity back into the market, but will also reinforce all the problems that led to this disaster.

Nor is the immediacy all that obvious to me. Nowadays Wall Street does not react to actualities so much as perceived intent, and thus just talking about it forever, making bigger and bigger promises, might actually have a beneficial effect overall. This is its own problem; artificial inflation of debt instruments are what caused this problem in the first place, and continuing that inflation based on perceived (illusory) future value will not solve the problem either. (Although in fairness it might "tide us over" so to speak until the real estate market readjusts itself.)

The second question is tougher. If your choice is between saving the economy (for an enormous price) and not doing anything at all, it might make more sense to save it. Republican economists have a general theory that to increase revenue you help the economy do well (in their case by cutting taxes) and thus achieve the paradoxical result of increased government income. That's certainly not always true (i.e. the Laffer curve) but it is also true that under some conditions it works.

Might that apply here? Might saving the economy cost us $700 billion - but allowing it to fail cost us trillions? Certainly if it was a depression of 1929 magnitude that would be true.

The bad side of that is, of course, a more socialized, "dumber" market that has been trained, Darwinian-style, to rely on government handouts. Indeed, one lesson an industry could learn from all this is "get as far as you can into bad investments, and do it so aggressively that the government dare not allow you to fail."

We can use history as a guide. The New Deal, by interfering with the normal cycle of business failure (and takeover of that market by another business) set some of the stage for all this. Indeed, in its scope it bears some resemblance to this bailout. In retrospect, was the New Deal a bad idea? It certainly helped us recover from the worst depression ever. Would it have been worth another decade of misery to keep the economy less regulated? I don't see an obvious answer to that.

Or take the S+L bailout of Keating Five fame. The hundred-billion-plus bailout certainly helped avoid a serious recession - but also set bailout expectations and implemented some additional changes (increase in responsibility for Freddie Mac and Fannie Mae) that may have contributed to this crisis.

But again - would you have been willing to accept that recession to avoid that bailout?

None of them are easy questions. From an ideological perspective I'd prefer to let the economy take its course. Let the overleveraged banks fail and leave the more conservative banks to pick up the pieces. But from a practical perspective the best solution is far from clear.

[kallend 2,230]

Why not consider an option of providing a huge stimulus to the economy to keep it from imploding, but NOT doing it by way of bailing out those primarily responsible for the mess in the first place? Are failed banks the best investment we can make?

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The only sure way to survive a canopy collision is not to have one.

[billvon 3,173]

>Why not consider an option of providing a huge stimulus to the economy to keep it from imploding . . .

OK. How do we do that?

[jcd11235 0]

Quote

I don't see a straightforward path from handing over $700 billion (or, more accurately, buying 700 billion in worthless debt) to saving the economy.

To be fair, the debt isn't worthless. The majority of the mortgages will be paid off by borrowers. However, the foreclosure rate of sub-prime mortgages is higher than the rate expected from traditional mortgages, making the associated mortgage backed securities higher risk and, presumably, less capable of producing the expected cash flow. In the short term, the securities will likely lose money. In the long term, however, they are likely to show a profit.

I don't think a bailout alone will help in the long term. More regulation (more accurately repealing deregulation legislation) is necessary to avoid more of the same in the future.

The companies receiving the loans will need to be run with a priority of long term going concern, rather than shareholder profits. Additionally, current shareholders need to suffer losses before government/taxpayer shareholders.

Additionally, any executives that violated the law during their tenure need to be aggressively prosecuted. That should send a message to other corporate executives that abusing their positions will not be tolerated. The same should apply to any lawmakers (regardless of their party affiliation) who acted on the wrong side of the law w/r/t to corporate interests.

Math tutoring available. Only $6! per hour! First lesson: Factorials!

[riddler 0]

Short-sighted, near-term gain economics. It's dominated right-wing economic policy for the last 40 years.

First it was trickle-down economics. As a short term stimulus, it works. People at the top get richer, and start spending more to feed on the greed. Long term, it's a disaster. The rich get richer at a much faster rate than the middle-class or poor get richer, so in fact, most people become poorer.

Then it was deregulation. Again, short term, it works. New opportunities open up, where before they were restricted, and corporations become profitable. Again, long-term, it's a dismal failure. Eventually, the corporate managers figure out how to abuse the lack of regulation, and even McCain is now standing up and saying there needs to be more regulation (after two decades of fighting for the opposite).

Government bail-outs. Short term, they work. People see the money, and they regain confidence in the system. But $700 billion dollars, divided by 138 million taxpayers equals $5,072 for every taxpayer. We pay more taxes, the government prints more money, the dollar is deflated, and the "global economy" that we are so proud of starts to get very expensive with exchange rates. If each taxpayer could keep five thousand dollars, wouldn't that be a much better "economic stimulus" than a check for $600 every few years?

Economic stimulus? I have yet to see any numbers that prove a check for a few hundred dollars every four years affects the economy. Maybe it does give a tiny short-term boost, but the taxpayers are still paying for it - why give more money to the government so they can give a small part of it back in a few years?

Deficit spending. Man, I could go on all day with all these crap policies. I'm not a financial wizard, and even I can see how stupid they are.

Trapped on the surface of a sphere. XKCD

[skiskyrock 0]

Quote

>Why not consider an option of providing a huge stimulus to the economy to keep it from imploding . . .

OK. How do we do that?

Declare a 1 week bank holiday to figure out exactly where the bad debt is concentrated, then thin the herd. Sounds harsh, but this is the same industry that backed bankruptcy reform... don't want to see any deadbeats weaseling out of their obligations.

For what it's worth, i doubt the effects on the credit markets will be as dire as predicted. The US financial industry may be in sad shape for a while, but there is still a lot of oil money out there looking for a decent return on investment.

To stimulate the economy, how about a combination of public works projects to put money directly into the economy, at the lowest levels:

1) develop alternative sources of energy: wind, solar, some nuclear

2) infrastructure development... geared toward reducing reliance on individual cars : better light rail, bike lanes, higher density housing near work and shopping areas

3) spending on energy efficiency

4) CO2 mitigation: imagine the CFO of Lehman Brothers planting trees on a reforestation project for minimum wage

We will still pay the price for spending that much, but the benefits will be distributed as broadly as possible, and we may just solve some long-term problems.