While my focus is intensely family-oriented these days, I couldn’t help but catch wind of the ruckus over the Treasurey Dept. plan for a banking bailout. I have seen some strongly-worded opinions saying that the bailout is a bad idea. My gut says they are right.
Having opinions about political events is a perilous and hubristic endeavor at the best of times. As I have said before, I have no great background, understanding, or insight into the financial bind we are reportedly in; nor into the solutions that might obtain. On the other hand, having no opinion is reckless in a democratic society. While we can’t expect our detailed plan of action to be implemented on a national scale, our society rests on our ability, colectively, to vote for the guy or girl with the least harebraned schemes. But how do we judge, when we barely have the time and resources to keep track of our own lives, let alone the complexities of economics and policy?
My solution is to fall back on heuristics. For instance: I am reasonobly certain that the 9/11/2001 terrorist attacks were not the work of U.S. government operatives, Israeli spies, or the Bavarian Illuminati. I cannot hope to arrive at such a conclusion based on detailed study – I simply don’t have the time, nor would I be likely to discover the truth even if I did, if the government really were using all their resources to cover it up. Instead, I have to base my conclusion on simple rules of thumb:
- Occams Razor (the simplest explanation is usally the correct one) – Islamic terorrists are real, have stated their intent to attack targets in the west, and have previously demonstrated a capability to do so. Not only that, but they have publicly claimed responsibility for the attacks. The conventional explanation is also the simplest.
- People, as a group, are incompetent. Based on my experience with human organizations, successfully keeping a conspiracy on the scale of the 9/11 attacks secret is well-nigh impossible.
Likewise, when evaluating the proposed $700 bullion bailout, I must again resort to heuristics. To wit:
- The "doing something is better than doing nothing" argument is usually wrong. In any given crisis, there is usually a conversation that goes like this: "we have to do something now!" "moving to Tahiti is something" "we have to move to Tahiti now!". The proposed something almost always makes things worse. Things are hardly ever as urgent as they are made out to be.
- Economists are smarter than me. Congresscritters are also smarter than me – if it were otherwise, I’d be the one voting myself more taxpayer money and then sleeping off lobbyist-bought martinis, not the one writing this up in a dank basement at 12:27AM. However, nobody is smart enough to evaluate a long-term solution to a systemic market weakness in a matter of days. That’s not even enough time to grasp the extent and root causes of the problem, let alone properly weigh the pros and cons of a solution
- Honest men don’t skulk around in the bushes. Or in other words, one times out of a hundred a crook turns out to be Robin Hood, but the other 99 times someone behaving in a sneaky, underhanded manner turns out to be just plain crooked. In the aftermath of the first failed bailout vote, the news reported that the Senate was debating – not why the bailout was or wasn’t a good idea – but which Republicans should trade votes with which Democrats in order to minimize the chance of losing their seats for voting for a massively unpopular measure. In other words, they were all in agreement over the bill itself, they were just debating how best to sneak it through with the minimal risk to their precious jobs. That is not the behavior of men and women who are acting in good faith. Nor is trying to sweeten the deal with a bunch of highly specific tax-breaks like a skeezy guy with a Ron Jeremy ‘stache offering sweets out of the back of a rusty van. Nor is threatening to route around the whole process by tacking it onto an unrelated bill. This kind of behavior casts doubt on the legitimacy of the whole affair.
- $700 billion dollars is, to use the metric scale, a fuck-ton of money. I know it’s burning a hole in congress’ pocket, but I submit that they could stand to sleep on the idea.
These are my meta-reasons for believing the bailout is a bad idea. Yes, there are a lot of much more specific arguments to be made against it, but again, I am not qualified to judge their veracity. Let alone to come up with a better plan. I just know when a plan smells bad, and I have a feeling that we could probably afford to give it a few weeks thought without risking being eaten by a giant mutant star-goat.
some thoughts for you… part 1.
I think 700billion is just a tad ridiculous when Paulson & Bernacke have already admitted (when asked) that they just kinda picked that number out of thin air “cuz it was real big.”
On the other hand, from all that I’ve read–and this includes a number of intelligent economicsy types–something should be done here to prevent a major credit meltdow–not because we are saving wall street–but because there are wider repercussions to a major credit collapse in the economy that could fuck up relatively sober people also..
Logic is something along the following.
1. Crisis comes from a basic bunch of people making bad choices. These groups are:
a) Homeowners who got caught up in this housing bubble–thinking they could make tons of money and who went and bought houses as if they were stocks.. and this game stopped at some point and now they are fucked.
b) Predatory lenders who encouraged the above bubble and were often deceptive in pushing such activities
c) Wall Street types who then treated these mortgages–specifically mortgage backed securities–not as something that might contain real risks–but as something that was A SURE THING–and therefore did not handle them in an appropriate way.. Part of this problem–a big part actually–came from the fact that in this area, oversight has been systematically removed or made impossible, and thus Wall street was allowed to “watch itself”–which was dumb.
So far so good.. source of the problem is a big clusterfuck–not of all of our making… however..
2. Unfortunately, all the money that went into the above situation has spread amongst many other players–banks, insurance companies with investments, etc.. Thus, the impact of anything that happens in 1, may also affect a wider bunch of people.
3. The financial structure that we have, at its core, does not act in the short term in negative-feedback ways, but rather in positive feedback ways. Another way of saying this is that there are very few self-correcting mechanisms here–and instead, you have systems that feed on deviations from the norm and go further and further off kilter until they hit a wall. This is how bubbles are created in the first place–expectations are at the heart of this.
4. In this case, the positive-feedback systems that are kicking in are the following:
a) Banks–some of which are sound and some of which are not sound due to the shenanigans in #1, are worried. This worry means that they–or more accurately–that other groups might go under and leave them exposed to possible default and bankrupcty–thus, they are not willing to extend anyone credit right now at the rates that they have before.
b) This rational decision by banks, however, is causing problems. Small businesses and Municipalities often use short term credit to either make their businesses work or meet payroll. Whereas they could do this before easily, now they are often being told i)NO, NOT RIGHT NOW, COME BACK LATER! OR ii) Sure you can have a loan, just fill out 5 times the paperwork as before and the rate is triple what it used to be. Sources for this were in the NYTimes.. I can go find them if you want.
c) b) means that many small businesses have to shut their work down temporarily, and that cities often have to put projects–such as road construction–on hold and thus effectively lay off workers.
d) c) Means that now that more people will have a harder time paying mortgages–people that previously would not have been a problem at all. This then feeds back into the beginning of the loop–making banks that were barely sound (or unsound and hiding it) outright fail or become closer to failing–which means they extend credit at higher interest rates or even less–which only exacerbates the cycle.
e) Wash, rinse, repeat until the system hits bottom.
part two–cuz it was too damn long..
A concrete way of thinking about it is to think of car dealerships. They often take out loans to buy the new fleet and then paythem back when they get sales. Now, they cannot get these loans–or cannot afford them, thus they cannot buy the cars. Or taking it further on to the consumer–if they cannot get good financing from outside sources or from the dealer–then they don’t buy cars.. (and sales of cars, I heard, have dropped 30% in the last 2 months).. This means that car manufacturers have to slow work down–and lay people off–who then cannot pay their mortgages, and the system renews itself.
With all of this in mind–some gov’t intervention is necessary in my mind–but not $700 billion up front. Robert Reich (Clinton Sec. of Labor) was the most reasonable person I’ve heard on this–he said what basically needs to be done here: http://robertreich.blogspot.com/2008/09/stalled-deal.html
The relevant section: Prediction: A scaled-down bill will be enacted by the end of the week. It will provide the Treasury with a first installment of $150 billion. Treasury can use it to back Wall Street’s bad debts with lend no-interest loans of up to two years, until the housing market rebounds. Or to invest in Wall Street houses directly, in exchange for stocks and stock warrants. There will be strict oversight. Congressional leaders will promise further installments, but with conditions calling for limits on salaries and relief to distressed homeowners.
Such a situation would be far more reasonable–and help begin to stave off the downward spiral.
Anyway.. I may steal this and post it in my own journal–because I’ve promised to speak about this there at some point..
Hope you find it interesting and I’d welcome your feedback.. 🙂