"But war, in a good cause, is not the greatest evil which a nation can suffer. War is an ugly thing, but not the ugliest of things: the decayed and degraded state of moral and patriotic feeling which thinks nothing worth a war, is worse. When a people are used as mere human instruments for firing cannon or thrusting bayonets, in the service and for the selfish purposes of a master, such war degrades a people. A war to protect other human beings against tyrannical injustice – a war to give victory to their own ideas of right and good, and which is their own war, carried on for an honest purpose by their free choice – is often the means of their regeneration. A man who has nothing which he is willing to fight for, nothing which he cares more about than he does about his personal safety, is a miserable creature who has no chance of being free, unless made and kept so by the exertions of better men than himself. As long as justice and injustice have not terminated their ever-renewing fight for ascendancy in the affairs of mankind, human beings must be willing, when need is, to do battle for the one against the other."

Thursday, September 25, 2008

Bailing out a sinking ship

Bottom line up front: I don't know much about economics. Just look at my bank account. I'm far better at spending money on frivolous extras than saving it. That said, I've at least managed to live (more or less) within my means. I have credit card debt, but I pay down more than the minimum every month. I own two cars, but bought used on both to keep the price down and have already paid off one with no late payments. And I'm paying down a mortgage and helping with my wife's student loans while still keeping enough to put gas in the tank, food on the table, and give my son a Happy Meal every Saturday. So I think I've grasped the general concept of not biting off more than you can chew. Wall Street, it seems, needs a little remedial training in this department. Like I said, I don't know much about this stuff, but it appears to boil down to extremely poor decision-making on the part of our biggest financial institutions. They played too fast and loose with their money with too many risky loans for too long, and now the chickens have come home to roost. They ignored all the warnings about icebergs and went full speed ahead because they thought their ship was unsinkable. Well, guess what: the water-tight doors are failing and now a lot of people are going to get hurt. And, while three sentences later I still don't know much about this, my gut instinct is: let them sink. Why should those of us who got on the slower, less glamorous boat of paying bills on time and buying used cars and smaller houses go down with this financial Titanic?

I have very little sympathy for all the rats drowning right now. The banks glutted the market with risky loans, floating along on the real estate bubble while ignoring the simple fact that every bubble bursts. And it's not just the high rollers on Wall Street who deserve the blame. Everyone talks about how lenders saddled poor schmucks with subprime mortgages that they couldn't afford. Well, my apologies to those poor schmucks, but the desire to live beyond your means is your own fault. I'm sure the banks painted a very rosy picture about how great life would be in a 3000-square foot gated mansion, but they didn't put a gun to your head and make you sign the mortgage. You signed it; it was on you to be the adult and figure out whether you could really afford it; it was your responsibility to make the payments on time, not the banks'. I'm sorry if you've lost your home and possibly put your family's economic future in jeopardy; but I'm more sorry that your children had someone fiscally irresponsible as their parents. And, as Congress hems and haws about regulatory oversight, it's worth remembering that it's some of their own politicized regulations that helped push us over the edge as well. Regulations mandating more risky loans for various demographic groups helped force the banks to accept some mortgage applications they would otherwise have rejected. I'm not so sure we need more meddling from the folks whose desire for 'fairness' got us here in the first place.

So, my inclination is to let the companies whose choices got us here die. After all, there's no law that says a bank or corporation is entitled to exist forever. And part of a free-market economy is letting groups that make bad choices pay for those choices. I don't think there's anything 'fair' or just in rewarding unsuccessful lenders by throwing billions of dollars their way and risk them doing it again; nor is it right to saddle taxpayers with the burden for this bailout when many of those taxpayers were more fiscally responsible than the banks. Let them die, and let this be a stern lesson to greedy lenders, irresponsible borrowers, and the congressmen whose politicizing of finances made it all possible.

6 comments:

Anonymous said...

I don't think "letting them die" in reference to either the financial institutions (very few of whom are actual banks in the traditional sense) or the individuals who are at the bottom of the morass of what-had-been massively overvalued derivative packages is good policy. We're talking about trillions of dollars in losses sending shockwaves throughout the rest of the economy. As it becomes clear that more and more financial institutions are unsustainably leveraged further devaluation will occur at a time when the ability of corporations and institutions to acquire credit (useful for most longterm operations/planning and a basic requirement for contemporary economics) will become increasingly impinged, negatively impacting even those institutions who are not directly responsible for the subprime mortgage crisis. Long story short is our macro-economy is threatened enough that these institutions simply cannot be allowed to fail. That being said, there needs to be significant structural changes to our financial institutions and markets; transparency and accountability, something that continues to best be created by government intervention (ie laws). I am not comfortable with the government nationalizing a good portion of the financial industry, but there will need to be an infusion of capital into a number of institutions to maintain liquidity in credit markets and avoid a situation where the panic in the financial sector drives the value of assets below what some are referring to as true long-term value. Paul Krugman has had some pretty interesting thoughts on this and, as someone who's been noting that the economy was not growing in a healthy manner for sometime (Something we haven't heard from conservative economists until relatively recently), he's got a pretty worthwhile track record. Another thing to consider is that the economic policies of this country need to be revamped to better drive consumer spending by increasing wages, not unnaturally expanding purchasing power via credit. That means establishing a higher minimum wage, cracking down on businesses that employ illegal workers, strengthening unions and establishing a much more progressive tax code. All of these are things Democrats have been advocating for sometime; the conservative prescription of more tax cuts for the wealthy and deregulation has proven itself to be a spectacular failure. Democrats are true capitalists in the we recognize the incredible contribution market economics make to driving human society but realize that market conditions do not exist in a vacuum and the parameters within which the economy develops needs to be established by the government.

Winefred said...

Hey Anonymous -- (still hiding?)

Invest ten minutes of your life watching this:
http://www.youtube.com/watch?v=H5tZc8oH--o

Use the slow button if you need to -- it moves pretty fast. But it's all there: the cause (Clinton Democrats), the cures we might have accessed (thanks to Bush and McCain) if they hadn't been blocked (by the Clinton and Dodd/Obama Democrats), and the full ghastly picture of the mess we're in now. It's called Economics 101. Too bad it's always ignored by the Party of Free Ice Cream.

Anonymous said...

Wow, a slideshow with statements and graphs and no actual accompanying argument. Golly now I know better. I'm not going to lie, I only made it four minutes in before realizing that there was no substance there, just cut-and-past cinematography worthy of Michael Moore. Come back with some real economics and maybe we can talk. 'Til then you watch your propaganda and I'll watch mine.

Anonymous said...

Okay, my apologies for the snark that was a bit much. However, a real quick refutation of that video...
1. CRA qualifying loans account for approximately 25% of subprime loans, the remaining 75% of these loans came from financial insitutions that do not fall under the rubric of CRA. The majority of subprime of loans are NOT part of the CRA.
2. The subprime mortgage crisis is not simply that due to the collapse of the housing market. The reasons why this has turned into such a far-reaching debacle is that financial institutions have taken these loans and, in an attempt to disguise their poor value, packaged, split and repackaged them in increasingly complicated permutations to sell them to other credulous financial institutions. The reason that this is bad is risk can no longer be accurately assessed because the wild speculation of these packages/combinations has made it almost impossible to figure out their true relative risk and from that their true relative value. This makes institutions hesitant to extend further lines of credit because they don't know the degree to which they are leveraged. That's why liquidity and the alleviation of bad debt will be important in moving the economy through this.
Feel free to blame CRA if you'd like but there are far more forces at work than a government program that accounts for 25% of a portion of the home loan market. And again, my apologies for the aforementioned snark.

Cincinnatus said...

As I said in my original post, letting the rusty old ship sink is more my gut inclination than a detailed analysis of the free-market system. I'm sure you're correct in noting that the failures of these institutions will send shockwaves through the economy (though I'm less sure it will be on a scale of trillions). However, I'm concerned that the proposed government bailout will send shockwaves of another kind which might not be felt right away. Passing the bailout bill means punting the costs down the road to future generations on the hope that the government will successfully manage the acquired assets and make a profit (a dubious hope given government's generally poor record in managing its own social programs), while giving the government unprecedented control over portions of the economy that it will not cede without a fight. As one House rep put it this morning, we'd be trading the possibilty (not even the certainty) of short-term prosperity in exchange for a long-term loss of economic freedom. There's also the fact that this bill may be downright unconstitutional; as the preamble to the Constitution states, the government's job is to "promote" prosperity, not - as the bailout bill says - "ensure" it. Now, it's entirely possible that we're at a point where the market leaves us little choice but to dump money into it; it's also possible the independent actions of the surviving financial institutions will be sufficient to cushion this fall. We already know that not every bank or group made the same bad decisions; BOA and CitiGroup have taken over some of the failures and their assets without the need for a huge government check. Instead of giving billions to the failures, perhaps we should give some incentive to the winners who played by the rules to take over these bad loans and apply whatever successful business practices they used to stay afloat to turn the bad assets around. Then, at least, we'd have organizations who've proven they know something about good economics trying to unfreeze credit and kickstart the market, rather than Congress, which at best indirectly contributed to this mess and at worst aided and abetted it by ignoring the warnings of people like, oh, Senator McCain about lack of oversight, and by taking large donations from these groups (Chris Dodd, where you at?) in order to block said oversight.

I'd agree that Congress could be more constructive in helping the economy by addressing wages rather than expanding credit, but I'd prefer to do that by increasing the amount of income Americans take home rather than artificially boosting the amount of that income. I'd certainly welcome a crackdown on illegal workers, and am gratified that we're hearing more stories about the government doing just that (though we still have a long road to travel in terms of dealing with illegal immigration in general). I would prefer a tax code, however, that dealt less with fuzzy notions of 'fairness' and more with basic economics. There's doubtless a sense of satisfaction in soaking wealthy individuals and corporations (indeed, Sen. Biden thinks it's "patriotic" to pay higher taxes), but self-righteousness is not good fiscal policy. The wealthiest individuals already pay a huge amount of their income in taxes; constantly increasing that rate will only stifle commercial creativity as dynamic entrepreneurs won't be nearly as enthusiastic in trying to make a good product that will make them a lot of money because they'll never see the rewards of their labors. And if that creativity isn't stifled, it will simply be taken somewhere else with lower tax rates; not an ideal solution for keeping jobs in America. As for corporations, their tax rates are already among the highest on the planet; raising them further will simply force them to either move somewhere else (again, bad for keeping jobs here) or find ways to continue making a profit in the face of high taxes, which inevitably means passing the tax increase to the consumer that the increase was originally suppose to protect. I'm not going to get into an argument on about unions; suffice it to say that their time has passed - labor has much more protection in this country than it needs - and unions increasingly exist simply to maximize benefits for their members and leaders rather than provide protections that help both the worker and the economy. GM is a perfect example of this; union benefits are so strong that it's frequently been described as a health care organization that makes cars as a hobby.

I'm sorry but I had to choke back a chortle at the notion that Democrats, right now, are "true capitalists" because they value the free market but think it's the government's job to decide where and how the market expands. For the record I think there's an extreme shortage of true capitalists in D.C. right now, Republican or Democrat; but anyone who believes the government should control the parameters of development does not add to their ranks. Government should not control market parameters for the simple reason that it will never be able to predict all the different ways the market will expand. Consumers and investors generally do a far better job than Congress in picking what wins and what loses. Congress is there to create and regulate a dynamic market atmosphere in which obscure and unforeseen ideas can grow and thrive, not to pick and choose what idea is allowed to grow and what isn't. God, the last thing we need is the government deciding whether Blu-Ray or HD-DVD will be the next big thing in digital entertainment. That certainly wasn't the intention of the Founders and Framers of this country; that's why they used words like "promote" prosperity, not ensure it; why they believed we had a right to "pursue" happiness, though not necessarily achieve it. They knew that the government is there to do a few particular things individuals and groups can't do on their own; but in other matters, people, groups, corporations and what have you need to sink or swim on their own merits, strengths and weaknesses. The Soviets put parameters on their economy, and ended up with factories full of left-footed shoes with no right-footed (feeted?) ones to match.

UPDATE: looks like not even the true-blue capitalists who control the House thought the bailout was a good idea. The Dow didn't respond well, but I'm curious to see whether the market survives in the days to come without a bailout. I suspect it will.

You and Winefred can fight it out over the CRA as I've already gone on long enough.

I said before to check the rage at the door, or post with a blogger identity, or I'd start moderating comments which I don't want to do. Your first comment showed we can debate here within reason and without rancor. You almost blew it with the second. One more strike and I'm going to halt the tradition of unrestricted commenting which I've had in the two-plus years I've run this blog. Don't make me do it.

Anonymous said...

I'm glad to see we both agree that boosting average wages should be a desired economic outcome. We have clearly different philosophies in approaching that issue. I'd argue that the solutions you propose, and feel free to correct me if I'm in error in any of these, are reducing the top tax rate, reducing corporate tax rates & by further eliminating unions. These policies have been consistently adopted in the past forty years and all we have seen is steady decline in the purchasing power of the average worker's paycheck. If you really are serious about driving economic growth across through increased wages and a broader middle class, none of those proposals will work. They may provide short-term incentives for increased economic activity, but serve only to undermine further what most Americans are able to take home.

The first example is your suggestion to cut taxes on the wealthy. I'm not sure if you're aware, but prior to 1960 the top rate was 91%. The current top rate for income is somewhere around 39% (I'm talking about the actual income tax, I'm not including state, local & FICA taxes, most of which are far more regressive than the actual Federal income tax). The top rate remained at 91% from the Second World War through Kennedy's administration. The 1950s were hardly a bleak era of economic growth. That rate has steadily been cut to its current level, some of which I agree with (a 91% rate is far too high and likely has long-term implications for growth) but a return to Clinton tax levels (putting the top bracket at 45%) would hardly have any negative impact on economic growth, as was so easily demonstrated during the 1990s. There is little to no viable economic research that indicates that cutting the top tax rate increases wages. Beyond the relatively low level of the top income tax bracket, you have the aforementioned FICA taxes, sales taxes, state and local taxes-all of which are heavily regressive. Warren Buffett, that Communist infiltrator, is on the record favoring a higher level of taxation on income because, as it stands, his secretary pays a higher percentage of her income in taxes than he does. Tax breaks for the rich aren't going to create the broad-based wage increase that you're looking for.

Second, you talk about corporate tax rates being some of the highest in the developed world, which would be true were it not for the fantastically loophole-ridden nature of the tax code. In practice, due to loopholes, subsidies and other legislation the real corporate tax rate is below 10% and one of the lowest in the world. I'm all for cutting the corporate rate and eliminating the loopholes in a revenue neutral move that would favor good business' over businesses with good lobbies. Such a maneuver was part of the 1986 tax reform bill that passed and would make sense to be adopted. However, none of that has any real impact on our wages because, as previously noted, the real corporate tax levels are already low.

Lastly, unions, at least in the private sector, are hardly dominant. In most developed nations (and in our not so distant past of the 60s) the unionization rates can run as high as 30% for the private sector. Currently less than 10% of workers are in unions. Needless to say, this decline in union strength has coincided with increased executive pay (something that unions typically check by demanding that profits be distributed across the board to the various workers), depressed wages and increased workforce volatility. Unionized industries have 15% higher wages, better benefits and, in many economic studies, perform comparably or better than non-union counterparts. If you want to discuss public sector unions I think we'd have much more common ground as they continue to make up a much higher percentage of the workforce and oftentimes use that as leverage in ways that run counter to good policy goals. Private sector unions, however, are something that would be enormously beneficial, particularly in service industries where workers deserve to receive the marginal profits derived of their labor and currently are subsisting on meager pay scales with minimal benefits. Supporting unions is also not any sort of government planning, as unions are non-governmental actors in the private sphere who would act to boost wages and improve the lives of their workers.

One more thing, because I think you do my argument a disservice when you move from my statement that "the parameters within which the economy develops needs to be established by the government." to somehow imply that I favor a command economy. Governmental regulation does not mean governmental control; I noted in my first comment that "I am not comfortable with the government nationalizing a good portion of the financial industry" because I recognize that government is not going to generate optimal economic growth for a variety of reasons. However, that does not mean that government should be absent in setting the terms around which the market moves; things like transparency, accounting standards, fairness in trade, elimination of monopolies, safe and non-discriminatory workplaces, security of contracts are all best monitored and limited through regulations created and enforced by government. I don't want the US government picking HD-DVD or Blu-Ray but I don't want cigarette companies claiming their product has medicinal properties. Nor do I want investors to buy stocks that are inaccurately valued because complex financial transactions have misstated the worth of assets. Nor do I want Wal-Mart to close a store because meatpackers unionized or fire an employee and face a $50,000 fine eight years later for a blatantly illegal act. Government has a role in insuring that markets operate properly; recognizing that isn't some indication of Communist leanings but accepting the reality that markets are not divinely inspired but the creation of failable humans interacting. I'm certain we can have honest disagreements as to the level of regulation, but to compare my position to a Communist command-control economy is inaccurate. I would not support, nor would I advocate any economic system completely controlled by the government; that does not mean, however, that I would support laissez-faire economics. There is plenty of room amidst those two extremes for legitimate debate.