Let Me State Again: The Bail-Out Will Not Work, It Cannot Work
I’m on vacation, and I check the news and Angry Bear and I find this crazy bail-out is growing like mad just in the last few days. I had a post at the start of this thing that the bail-out wasn’t going to work as it didn’t address any important issues. Keeping Citi and Goldman, Welfare, Queen & Sachs afloat is not an important issue. From the perspective of society as a whole, the point of a banking system to provide capital to entities that need that money to purchase things that lead to increased (or “better”) output in the real economy. Entities in the banking system
make made money by charging interest on the rent for that money. If entitites in the banking system made poor loans, they went out of business. Hence, they had an incentive to loan to those who had “worthwhile” uses for that money. In essence, bankers functioned as inadvertent social planners.
But over time, things have morphed. Companies like Citi and Goldman, Welfare, Queen & Sachs
make made more money creating complicated, opaque instruments and selling those to suckers. Or, as I put it back in March, making “a lot of money selling squirrel carcasses and calling them fillet mignon.”
But you don’t succeed at making money selling complicated, opaque instruments to suckers if those instruments go belly-up immediately after the sale. Instead, you try to ensure the amount of time between the sale and the inevitable implosion is as long possible – that allows you to sell a lot of dressed up garbage at inflated prices. And it helps to have a lot of product… which in this case made making sure that anyone willing to buy a home at very inflated prices could get a loan, so that loan could then be repackaged into a very complicated, opaque financial instrument.
The scam was a bit more complicated than the traveling elixir salesman scam from way back, and more lucrative. Instead of wandering into town and selling elixir retail, Citi and Goldman, Welfare, Queen & Sachs would find someone to buy their entire wagon-load wholesale, and that entity would then sell it on a retail basis. The problem for Citi and Goldman, Welfare, Queen & Sachs is that they forgot they were running a scam. They started to believe their own pitch, so unlike a traveling elixir salesman from way back, they were still in town when the locals discovered that not only does their wonder cure not cure anything, it makes people very, very sick.
To maintain the traveling elixir salesman analogy for a moment, the purpose of the bail-out, in essence, is this : make sure the elixir salesman doesn’t suffer for selling a harmful product and calling it a wonder-cure and provide him with the means to make more elixir. It has occurred to Paulson, however, that if the elixir is simply repackaged, it may not sell. (You don’t become Chief Elixir Salesman for nothing.) It is important to somehow ensure there are buyers for the elixir. So a few sops are thrown to wholesalers of elixir, and a few smaller ones are thrown to the folks who bought the elixir and are now suffering convulsions. And for some reason, none of these measures are leading to an increase in confidence! Imagine that.
As I’ve stated several times before, its long past time to let the structure go. Saving the elixir salespeople is simply not a worthwhile goal; in fact, its counterproductive. And as we’re seeing, tremendously costly.
Maybe, just maybe, in a world without elixir salesmen, car companies will go back to making cars people want to buy (and not being finance companies), bright young students will choose to study engineering or science rather than learning how to be scam artists, and people putting their 40 years on the assembly line will be able to afford a house whose value doesn’t drop precipitously, and walk away with a solid pension. It sure as heck ain’t gonna happen as long as we keep bailing out Goldman, Welfare, Queen & Sachs. The elixir salesmen will see to that.