How To Bail Out the Economy – A Less Wrong Way…a repost
by cactus
How To Bail Out the Economy – A Less Wrong Way Posted 11/27/2008.
Regular readers know I’ve had post after post explaining why a bail-out would be a bad idea and would not work, dating to long before the bail-out began. I predicted that the end result would be the further enrichment of some of the very folks who brought us this mess and junior versions of the same folks who were too young to get in on the original crime spree, but otherwise, we’d have nothing to show for the trillions that would get spent.
The supposed “rationale” for this bail-out is to make sure that companies that are willing and able to produce goods and services that consumers wish to purchase are able to do so, and that in turn consumers are willing and able to purchase goods and services that companies want to bring to market. The story line is that this can be accomplished by giving money to the financial sector, that sector of the economy that for the past few years has specialized in selling squirrel meat as fillet mignon. Give those talented folks some money to make up the massive losses pulled off in the past years and they will happily loan money to producers and consumers, we are told.
Its becoming obvious even to the likes of Henry Paulson that no matter how much money gets paid to Goldman, Welfare, Queen & Sachs and Citi and Countrywide and the rest of ’em, the “financial system” of old is gone forever. Compensating buyers of squirrel meat is more than enough burden on the taxpayer, but it seems we’re expected to make Goldman, Welfare, Queen & Sachs whole for paying the exorbitant salaries of folks like Henry Paulson in the past, and the current and future generations of Henry Paulson to boot. Clearly this is not only a very, very, indirect way to keep companies producing and consumers buying, its also adding a bunch of layers of unnecessary expenses.
So… if the goal is to stimulate production and/or consumption, why not cut out the unnecessary layers of exorbitant expense? I’m not sure I see the reason for bailing out car companies, but say that was the goal for some reason. In that case, the government could simply buy a $20K car for every single American, every single one, and spend less than the $7 trillion that’s been committed so far. That’s well over 30 times as many cars as GM made last year. Worldwide. You could bet the car companies would tool up for this, and it would employ a lot of people, and it would stimulate the economy. Additionally, we’d all have another car thrown in. Sure, it might be a GM vehicle, but its still something, which is more than the nothing we’re gonna get from pumping it into the Goldman, Welfare, Queen & Sachs black hole. Heck, it doesn’t have to be cars – the gubmint could simply commit to spending $20,000 on something, anything each of us picks. You could take your 20 G and spend it on a menu of American made options.
Preposterous, you say? Inflationary, you say? Jingoistic, you say? Sure, I say. Its a stupid idea and I don’t like it all. But I think its a much better idea than the current bail-out approach, which I think is worse than taking (for now) $7 trillion and setting it on fire. Giving the money to the likes of Henry Paulson’s former employer is simply rewarding bad behavior and sending the wrong message, not to mention preposterous, inflationary, and jingoistic.
___________________________________
Cactus of Jan. 2010 writes: “That was the old cactus of yesteryear. Today’s new, improved, modern cactus realizes that his obsolete self made a mistake – all those trillions being printed weren’t the creation of new money. They were merely replacing imaginary money created by the banks through derivative trading that nobody believed in any more.”
The major way banks are earning profits today is not the bailout but the fact that the FED is keeping interest rates on the floor. This lets the banks aquire funds almost for free and then turn around and buy interest bearing securities. They a money machine is created.
If you really want to stop the subsidy to banks you have to be for letting interest rates rise to level consistent with the real market rate.
In the United States we have a confidence problem and this would only be made worse by your helicopter money idea. A cheaper and more effective alternative would be to commit ourself to not raising taxes and improving the business climate my making it simpler to engage in commerce.
In the United States we have a confidence problem and this would only be made worse by your helicopter money idea. A cheaper and more effective alternative would be to commit ourself to not raising taxes and improving the business climate my making it simpler to engage in commerce.
The major way banks are earning profits today is not the bailout but the fact that the FED is keeping interest rates on the floor. This lets the banks aquire funds almost for free and then turn around and buy interest bearing securities. Thus a money machine is created. If you really want to stop the subsidy to banks you have to be for letting interest rates rise to level consistent with the real market rate.
Helicopter money wouldn’t work because money sublimes fairly quickly. But helicopter CARS, busses, local trains, mortgage payments, school improvements, and jobs — coptering in solid things that don’t immediately rejoin the big money cloud like rain in Arizona, that would benefit Americans. $7 trillion to financial guys who just keep it? Not so much.
Noni,
If the government wants to buy me a vacation house in Newport Rhode Island or Martha’s Vineyard i’m all for it. They can either build it from scratch creating construction jobs or buy an existing property and do a major makeover. I’ll take either. A new house means a lot more to me than promising to cure a disease or injury that I don’t have.
I Gues Cactus’ point was to say I tol’cha so that the stimulus would fail.. Maybe he can clarify.
For the other conservatives who tol’chas that the stimulus was going to fail, let me make this predicition. The pivot to traditional conservative stimulus strategies will sess two thing occure. 1) the market will see an immediate turn around. 2) There will be a GDP increase starting 60 days after enactment.
The issues is this going to be enough. After ignoring the jobs problem for a year, following traditional Democratic economic stimulus strategies, crafting an economic stimulus bill more aimed at his reelection than immendiate stimulus, all of which has extended the pain and agony of too many families, the hole may be tto xdeep and wide to fill quickly.
His biggest mistake? Wasting a year to actually provide wide ranging stimulus to those that matter. Note here: I am not talking about the TARP Bill. You can build your own list of those that matter, but the list should have those already stimulated near the bottom. For voters that list is viewed as an abject failure.
I Guess Cactus’ point was to say I tol’cha so that the stimulus would fail.. Maybe he can clarify his point.
For the other conservatives who tol’chas that the stimulus was going to fail, let me make this predicition. The pivot to traditional conservative stimulus strategies will see two things occurr. 1) the market will see an immediate turn around. 2) There will be a GDP increase or jump starting 60 days after enactment.
The issue though is this going to be enough. After ignoring the jobs problem for a year, following traditional Democratic economic stimulus strategies, crafting an economic stimulus bill more aimed at his reelection than immendiate stimulus, all of which has extended the pain and agony of too many families, the hole may be too deep and wide to fill quickly.
His biggest mistake? Wasting a year to actually provide wide ranging stimulus to those that matter. Note here: I am not talking about the TARP Bill. You can build your own list of those that matter, but the list should have those already stimulated near the bottom. For voters that list is viewed as an abject failure.
“…imaginary money created by the banks through derivative trading that nobody believed in any more.”
Now you’re onto what the cause of the collapse was all about. The world woke up one morning and noticed that the Emperor had no clothes. Actually the mortgage brokers that originated all those inflated mortgages, based upon inflated house values, had simply walked away with the real money and that was replaced by the bankers that bought up the initial mortgages and turned them into CDOs. Of course those bankers added a bit of imaginery value of their own for the sake of making a better profit. And then their imaginations were further inflated by the originators of the CDSs that covered multiple times the value of the inflated CDOS, which had been based on the inflated mortgages. Sounds like an exponential progression of imaginary value. And we keep thinking that bankers have no imagination.
Isn’t it interesting that all the guys, like Geithner, Barofsky, etc., that are doing the testifying were in at the beginning of the value inflation phenomenon. Now one could say that they are the most knowledgeable so their testimony is the most valuable. On the other hand their vested interests in maintaining the imaginary description of how all that imaginary value was created and foisted upon investors and borrowers might cause them to provide an inflated description of their lack of complicity in the entire affair.
And once again we see the “fallacy of composition” at work. Since I dont need a promise to cure a disease and I want a house everyone would be better off if they followed my prescription. Although its not really about what is better for everyone anyway or whats better for more the only thing that matters is GOVERNMENTS CANT DO ANYTHING RIGHT, so leave me alone and shut up. However if a do get sick and the treatment isnt available it s all because the govt didnt reward people for thinking up the treatment. Gee isnt it nice to always have something else to blame for stuff that irritates me.
But but which is it CoRev? Can the govt actually do something about employment or not, I thought it was a “Stay out of the way” strategy that conservatives endorse. Taxes are no higher now, labor is cheaper, many raw materials are cheaper and yet still private guys arent hiring. Oh yeah thats right, they are “concerned” that their future taxes are going to be higher so they need to plan now. They need assurances that no one will ever take an of their money in the future and if they dont promise they arent going to hire any of the unemployed.
I agree that the money has been terribly spent. I fully support a payroll tax holiday to stimulate demand, what I dont support is further cuts in “public” spending so we can balance the budget.
The conservatives have one good idea, payroll tax cuts. Unfortunately their economic acumen renders them unable to NOT immediately demand that spending be cut in some misguided effort to make a budget balance.
Go to the Tea Party in Dallas later this month and listen to Warren Mosler (a presidential candidate) and you might have some different ideas about government financing. He emailed me yesterday with the speech he’s going to give, very interesting. He has apparently been well received at Tea Parties. You need to use your connections to learn about him.
Greg: “Although its not really about what is better for everyone anyway or whats better for more the only thing that matters is GOVERNMENTS CANT DO ANYTHING RIGHT, so leave me alone and shut up.”
I am old enough to remember when governments were effective. Unfortunately, when you have administrations who do not believe in government action, they do not do anything right, and some of the same people obstruct administrations who do try to be effective. The belief about government effectiveness tends to be a self-fulfilling prophecy.
CoRev: “ After ignoring the jobs problem for a year, following traditional Democratic economic stimulus strategies,”
You mean that the New Deal is not a traditional Democratic strategy?
Sorry Min,
I didnt do a good enough job of making it clear I guess that those were not my positions, I was simply mocking Cantab. I can pretty much write his responses for him in every thread. He’s on a fixed loop and is capable only of parroting what he hears Rush and Sean say. He’s about as independent a thinker as Peter Sellers’ character in “Being There”
You are right about self fulfilling prophecy. Since the Reagan Revolution most of the elected officials did nothing effective except give themselves pay raises.
Cactus’s comment can be taken a bit further I believe the banks brought their profits forward to 2004-2007, and now we are reeping the whirlwind of that action. So we had both imaginary (play) money used to build derivative pyramids in the sky but these pyramids yielded phantom profits that through accounting slight of hand to become real profits. It is nice when you can set your own pay, and it is nice when you can make up money, but the day of reckoning does come and it has.
Jack,
“…imaginary money created by the banks through derivative trading that nobody believed in any more.”
Now you’re onto what the cause of the collapse was all about.
I have no idea what you mean by imaginary money and how something that is imaginary caused a real loss.
You mean that the New Deal is not a traditional Democratic strategy?
Obama’s new deal was a bait and switch. They told us there were all these shovel ready infrastructure projects just waiting for funding and if funded would create an immediate bump up in private sector employment. This turned out to by a lie since they sent most of this money to maintain funding for the jobs of their cronies in the public sector and with the labor unions. The administration can argue that they saved jobs which is as good as creating a new one, but on the sales job they lied to us.
Greg, I will look at his info. I don’t remember ever saying “stay out of the way!”, but woudl and am saying not that way. The short term kick is in tax incentives. Get businesses buying new capital improvments by allowing a short write off and other business tax incentives. Few of business incentives will work without consumer incentives. Give consumers the payroll tax free day(s) and other incentives to go spend. Incentivize banks to make loans to consumers and small businesses, some kind of Federal guarantee program perhaps.
Then stand back ans stop the class warfare, demonizaation(s) ansd spending.
If you want to cut discretionary spending cut EPA, Dept of Energy, Dept of Ed., AG., NASA, and yes, even DOD. Use the bully pulpit to educate the electorate for the need to stabilize entitlement programs, both in spending and revenues. Those are just my intital thoughts.
Stop the lip service claims of emergencies, and start acting like it! Othewise the electorate gets it! It’s all just a lie and just politics.
Min said: “the New Deal is not a traditional Democratic strategy? ” Yup, but not an economic stimulus strategy, more a political strategy to lock voters for Dems and expand/lengthen Dem control of Congress for the next generation.
You sure are the Big Gambler Cantab. Are you sure you will never need that $1m for treatment and rehab?
I think the term imaginary is misleading in this instance. The “money” was in fact an asset value, like the numbers on your 401k statement. Is this 401K level “real”? Sure it is at that point in time but the mistake people make is not realizing what it reflects which is simply the number of buyers versus sellers of those particular stocks or mutual funds. It is influenced solely by bidding which is influenced by what the bidder thinks the stock is worth which is influenced by how much value is in the company. Too many companies have fallen into the bad habit of viewing labor as a cost and not an asset, so when they hit walls in their earning levels they simply fire people (downsize) ask more of remaining workers and tell their Wall St guys “Hey our bottom line is better now” So people continue to bid up the stock. Well there is an end point to that behavior and it isnt pretty.
I read an article last summer that talked about the lack of innovative business practices in American companies. They said that American companies were lazy and simply cut jobs when they hit walls and bragged about how productive their workers were, where as many European firms, operating under stricter labor laws learned other ways to keep productivity and profits up. Their model is much more sustainable while US companies were setting up for big crashes down the road unless “technology” could save them.
You may not have said that but that is a standard Rush Limbaugh line.
Look I agree about tax incentives and have come around over the last few months regarding some of the conservative ideas regarding taxation. Where they are wrong and not just sort of wrong but dead wrong is the idea that this needs to be accompanied with cuts in govt spending. We need to stop thinking of our taxes as “funding” anything. This is a HUGE source of the class warfare you decry. If I had a nickel for every time I heard a conservative wail “I’m not sending my tax dollar to some $%#^^&$ ” Id be a rich man (This is certainly not a notion only of conservatives but i find my liberal friends to look at taxes as an unfortunate yet necessary duty) The idea that I give my tax dollar to the govt and it uses that tax dollar to give to someone else is wrong. Those decisions are made independent of each other, or at least should be if you understand how our financial system operates. Youll find out about this if you look into Mosler.
Most those departments you list are simply the laundry list of political foes of the business community and the truth is “cutting” them gives us no more money to spend elsewhere. Its a totally false paradigm we operate under and it is a holdover from gold standard fixed exchange rate currency days. Thats not to say we should not only spend on useful things, nor am I under the illusion that a universal definition of useful is likely, but we must start realizing the financing constraints we THINK we are under simply dont exist. At least not for the reasons we think they do.
Stabilizing entitlement programs is a non sequitir. There is nothing unstable about them. The only decision that ever has to be made is how much are we going to allow our seniors to consume. We can always “fund” it at the level we decide. No generation is EVER denied the opportunity to consume everything it produces nor do they ever PAY for the previous generations consumption. Thats a false paradigm. I dont happen to resent the amount of money my mom and dad are getting. They arent taking anything from me. There are those who do I suppose but we need to make them make THAT argument and stop trying to scare us with “debt market blowups” or “bond financing cash flow problems”…………. its pure unadulterated nonsense. Its not economics its religion……. and BAD religion at that.
***I see the reason for bailing out car companies, but say that was the goal for some reason. In that case, the government could simply buy a $20K car for every single American, every single one, and spend less than the $7 trillion that’s been committed so far.*** cactus
Ah, com’n Catus — this is an absolutely horrible example and it juxtaposes numbers that don’t belong together.
Truth is that unlike the financial sector, the existing shareholders in Chrysler and GM were basically wiped out and the bondholders didn’t do very well either. The stockholders are left with shares in companies that are being liquidated in bankrupcy. The companies are deeply in debt, and have no real assets. The assets were transferred to new companies that are mostly owned by the US government, the Canadian government and the UAW. Bondholders in the old GM have a very modest (equity) stake in the new companies. And somehow, don’t ask me how, this deal is not bogged down in litigation that would have dragged on for about three decades.
Assuming that the new companies are run better than the old ones were — which seems not unlikely — the taxpayers may well get their money back eventually. Don’t laugh. It happened with Chrysler and Lockheed not all that many years ago. And the amount of money involved is, as I recall, around $50B, not $7000B.
If the banks had been handled in the same fashion or even in the way that the Savings and Loans were handled two decades ago, the fury over the bail-outs would be much subdued, I think. At least, I wouldn’t be mad which would make the total of pissed off Americans one lower than it is today.
The bail-out enabled the stock markets around the world to rebound, and that was worth about 10 trillion (guesstimate). The political party squabble in this country causes a great deal of confusion. There was little choice on the bail-out because the US accepted a responsibility when it rammed the dollar down humanities throat at Bretton Woods.
Even if we pretend that we need only to concern ourselves with domestic concerns, the biggest loss will be the result of government support of the GSEs. This will cost 100s of billions and it is lost forever as write-downs. The stimulus money is on the other hand still out there somewhere and where it will go — is still in play.
There were of course some options regarding the stimulus money, but it is disingenuous to assume what is impossible to know. But this ploy of assumption has become the favorite PR tool of both political parties. A good way to avoid being fooled by this petty nonsense is to think first about the global implications of US policy. There are much more important considerations than those concerning a middle-class that already has more than its fair share. But of course it is difficult to get elected in this country if leaders even so much as hint at such a notion, so nearly everything flowing through the MSM mill emanates from doublespeak.~ ray
cactus,
taking (for now) $7 trillion and setting it on fire.
What program/policy is costing us $7T? TARP was $245B, and is now 75% repaid.
Are you talking about Freddie/Fannie? FDIC? What?
What Greg is getting at here is at the center of all things economic. Wealth is limited only by the need for incentives. But saying that wealth is an illusion is misleading. It is a tool that we use to get things done. But if too many, get too much, nothing will get done except that which people want to do. Our most restrictive problem right now, regarding progress, is that our system is too dependent on people needing jobs to maintain the illusion of human capital having a value that can not be sustained as machines do more and more of the work. This systemic need for jobs obstructs the incentive to mechanize and results from our inability to settle how the wealth generated from the mechanized production will be shared, or not shared. Capitalism is currently the most productive system but it is in conflict with a mechanized world.
What is lacking is demand. Very little from the impoverished and scared public in general and little investment as long as there is no more consumption demand. So…the only recourse is Keynesian: have the government start to spend and create demand. But this encounters vast hysteria in the inflation hawks and deficit hawks, etc., etc. They would much rather the government spend billions on its wars abroad. Whether that does much for the economy is up for debate.
warprofiteers=warmongers
MM,
There is another option that gets ignored. It is Keynesian, but in a new way. We have millions of construction workers out of work, and there are people the world over who need homes. We have too great a dependence on investing and debt creation and those who need homes also need loans. etc. etc. etc.
Altruism is the best defence against terrorism, militarism and imperialism cause terrorism. And it is folly to think that terrorism can be protected against in any other way.
cantab,
First, the term “imaginary money” was first stated by cactus. I only expanded upon his comment.
Second, You having no idea is par for the course. Try reading the comment more carefully and at the same time try to conceptualize the points made. I realize that the idea of inflating the value of a propety and mortgaging the full amount is difficult to grasp. It requires that one understands that some degree of skull duggery may be involved and a bit of collusion between brokers and initial mortgage lenders. As soon as you begin to accept the idea that business people and even bankers might cheat when they find a real good and obscured way to do so, you will better understand the concept of imaginary money and how it can turn to real money at each point of exchange.
Here’s a simple description of an otherwise complex derivative causing imaginary money to become real. Agency A gets the bright idea of insuring bond derivatives, so-called CDOs, and sells lots of so-called CDSs. Agency A is sure that the CDOs have a great credit rating as issued by the rating organizations. How could Agency A know that much of the value of the underlying properties were grossly inflated by those involved with issuing the original under lying mortgages? Since Agency A is so sure of the profitability of their CDSs they sell so many that they actually begin to insure the same CDOs repeatedly. Think of it this way. If your worth $100,000 to your friends and family alive and an insurance company is certain that you’re going to go on living a long and heathy life, that insurer may be happy to sell twenty people that same $100,000 policy on your life. The insurance company makes big profits on the premiums. That is until one of your twenty friends gets a better idea how to realize the imaginary value of your life.
divorcedone,
I’m sure enough
Margery,
If we are to do another stimulus then what’s wrong with Cactus’s solution of having some sort of forced consumption program where the government forces us to consume more. Why build another Hoover dam when the government could buy us all a new flat screen T.V. built here in the United States. They could buy us other stuff like a new Car, or remodle your kitchen, or finance an expensive vacation. The only requirement is that the money would be used to purchase items produced in the United States, or for vacations to U.S. destinations, or for other services provided by U.S. citizens.
I personally think short term stimulus programs are a stupid waste of money. However, if we must have one I don’t see any benefit to purchasing a public good other purchasing us all private goods. If we have to do something stupid at least we should have something at the end of the day to show for it.
Margery,
If we are to do another stimulus then what’s wrong with Cactus’s solution of having some sort of forced consumption program where the government forces us to consume more. Why build another Hoover dam when the government could buy us all a new flat screen T.V. built here in the United States. They could buy us other stuff like a new Car, or remodle your kitchen, or finance an expensive vacation. The only requirement is that the money would be used to purchase items produced in the United States, or for vacations to U.S. destinations, or for other services provided by U.S. citizens.
I personally think short term stimulus programs are a stupid waste of money. However, if we must have one I don’t see any benefit to purchasing a public good over purchasing us all private goods. If we have to do something stupid at least we should have something at the end of the day to show for it.
Greg said: “Most those departments you list are simply the laundry list of political foes of the business community and the truth is “cutting” them gives us no more money to spend elsewhere.” I don’t see them as foes to business. Ed., Ag., DOD, EPA (maybe), since most are not regulatory.
But this statement does concern me: “ the truth is “cutting” them gives us no more money to spend elsewhere. ” The point is to not start spending elsewhere. The entirety of the budget has been raised by ~20% over the past two years. Cut them back to their FY07 or even their FY06 budgets amounts. There would be little drop in spending apparent to the electorate, but would result in a slowing in the rate of increase for the deficit.
After having done the above we can then talk about funding the targeted spending to incentivize the consumers, businesses to spend, and the banks to lend. This increased targeted spending does not have to equal the cuts.
What is wrong with doing the rational versus political thing?
rl, I think you just bought into Cantie’s story. More homes at a lower price? OK, works for me, write it up so it can be estimated and scored.
Corev,
I probably knew Cantie’s story before he was born. You are buying in to your presumptions. And your presumptions are based on what those who control the wealth need you to believe. The price of the homes does not matter if the wealth to build them is created from nothing.
Cantab,
Protectionism slows human progress. Consider what happens to thin-air wealth when it is added to the global markets. It simply expands the stock of currency, and so long as supply keeps up with demand there is no limit to the amount of currency added. If demand exceeds supply, inflation then diminishes total wealth but machines and increased productivity make supply factors increasingly less an issue.
Cantab,
my second sentece should have read: “Consider ‘instead’…”
I heard tiny tim geithner tell Congress this morning that the money the government got back from big banks when they repaid TARP is all available to give to small businesses through small banks.
At the time I was pretty sure the enabling legislation provided for the money to be applied to this one purpose, one time, and that repayment ended the program. Maybe that changed when 10 days later the committee to save the world decided to recapitalize banks instead of buying toxic assets.
In any case, helicopter money is probably the next great idea. What does your business need? Put in your dibs now for an excavator or a supercomputer, gratis, courtesy of Uncle Sam.
If the conversation must always be about what Americans should get, we should have at least talked about storage units. Those could of course be subsidized!
We already subsidize illegal drug trade through welfare programs so that is not an option. But we could create demand by subsidizing gold jewelry and that would allow our poor, to once and for all, completely distinguish themselves from the poor of other countries. Of course our poor would also be distinguished by the their having storage units filled with useless crap, but people seem unable to notice that our landscape is already dotted with storage units, and gold jewelry worn by our poor has a more noticeable distinction in the historical sense. I know that some would argue that many of our poor already have gold jewelry, but not all of them do; and certainly not enough are adorned with gold so as make this historical anomaly impossible to ignore.
And gold extraction, now that gold is more difficult to find, serves a secondary purpose of removing obstructive hill-tops.
Anyway, creating demand seems easy, but why stop at autos.
rl love,
I think its possible and probably likely that all the exotic financial instruments had nothing to do with our economic slowdown and in putting the overall banking system in peril. As an alternative I think maybe it was the overall volume of available funds that found themselves being pushed through the system and enabling the bubble in real estate prices and to a lesser degree the amount of sub-prime overly risky mortgages. So it was just the volume and not the packaging.
Contab,
You have it right. The sub-prime etc. was needed to maintain the pace of lending. The US economy relies too much on financial services and foreign markets are increasingly restrictive and stingy with THEIR demographic dividend. We have a choice of lingering at the edge of a liquidity trap, or finding more constructive ways to use capital. But domestic demand is saturated and that leads to altruism, and that also solves other problems.
Nice sentiments, BUT….do we really want to build homes for other people? I doubt it. There is work to be done here at home first. And terrorism is related to territoriality, not to living standards. The reason terrorists act is virtually always to drive some intruder from their lands or country, etc. Read Pape.
Take your idea to Krugman or Stiglitz, and see if they buy it. I realize they are much dumber than you and probably won’t see the vast wisdom in your suggestion, but they have the ear of important people so maybe they could spread your idea.
warprofiteers=warmongers
You need to let Buffett know the truth. I think he’s terribly confused. Dumb fellow that he is. What does he know?
Keynes suggested paying people to dig holes and then fill them up again. I am sure we could sell that to Congress, right?
I agree that there is an apples v. oranges problem here.
The $7 trillion is overwhelmingly money lent, not money spent. A buy everyone a car progam would be money spent (unless everyone had an individual mandate to take out a loan for its purchase price).
What percent of the $7 trillion loaned is going to go bad? That is the money spent figure comparable to outright government spending.
If it is 1% or the losses simply reduce the rate of return interest rate on the money lent, the bailout looks like a pretty damn good deal. A 10% loss looks expensive. A 90% loss is catastrophically expensive.
The big problem is that even the informed general public that is paying attention (and I count myself among them) has no idea what kind of losses we are likely to experience on the bailout funds, even roughly.
ohwilleke,
I think you are right, cactus is using $7T in held or guaranteed mortgage debt by the GSEs, and that amount would only be “set on fire” if the value of all housing went to zero. Some serious hyperbole there.
The big problem is that even the informed general public …. has no idea what kind of losses we are likely to experience on the bailout funds.
We kinda do. There is less than $100B outstanding under the original TARP program, if that went to zero, that would be the loss. Fannie and Freddie estimates are a $400B loss. Maybe the Fannie/Freddie losses will be higher, but since they are Government-Sponsored Enterprises overseen by Congress, whose fault is that?
MM,
“You need to” stop dropping names and think for yourself.
And as for terrorists protecting against invaders, we are the invaders, and the enablers. They see us as wanting to force our culture upon them, and they are correct. If we do not expand our culture we get attacked by adverse feedback loops and liquidity traps and — now, is a precursor to what happens if people refuse to embrace our negitive-externality-trade-package. It is a systemic requirement that humanity become addicted to corn syrup and the like or else, and if they refuse to laugh at our sit-com re-runs we have every right to shoot them! At the very least their elite must borrow from us, but only if they do not actually need the money. Growth requirements are not that difficult to foresee. I may have exaggerated though about the sit-coms.
Cantab,
All of the major econ forecasting groups have looked at this and all of the say that the stimulus did in fact create or save about as many jobs as advertised. My gripe with Obama isn’t that he lied…he didn’t…but that he settled for a wimply stimulus that wasn’t big enough. The Administration will likely meet their target of jobs saved and created, but that still means a significant increase in unemployment because their own numbers showed that the stimulus wasn’t big enough to bring down unemployment. He needed a bigger boat.
Cantab,
don’t see any benefit to purchasing a public good over purchasing us all private goods. If we have to do something stupid at least we should have something at the end of the day to show for it
Well, one obvious benefit of public goods is that most of them tend to be in the nature of capital investment that provides a return. Pure consumption spending stimulates the economy, but has no lasting effect once the economy has returned to full employment. We’re still getting a benefit flow from all that capital investment spending during the New Deal era when FDR built sidewalks.
cantab,
I think maybe it was the overall volume of available funds that found themselves being pushed through the system and enabling the bubble in real estate prices and to a lesser degree the amount of sub-prime overly risky mortgages.
As several economists have pointed out, the problem with that theory is that the additional liquidity that went into the system doesn’t come close to being enough to account for scale of the recession. Monetary policy may have been a little too loose, and that may have contributed to a bubble, but after crunching the math the additional liquidity doesn’t explain very much of it. What explains more of it is the ridiculous leveraging and that was a consequence of lax regulation (and the Fed is partly to blame here). And it wasn’t just the sub-prime market that tanked. The distribution of failed mortgages is well represented by big mortgages taken out by solid, middle class folks.
sammy,
The loans the gov’t made via TARP are relatively small potatoes.
If the gov’t goes and buys an asset that is essentially a leveraged bet via a sweetheart deal to take toxic assets off a banks’ hands for $X, it might find itself with a liability equal to some multiple of $X at some later date. Nobody knows exactly what the potential liabilities are.
What is your reason for wanting to cut any of those departments if not political/ideological? It not like we need to save the money for a rainy day or anything. As I’ve said this whole paradigm that acts like we could “run out of money” is insane. WE CAN NEVER RUN OUT OF MONEY. We could (and will) run out of some resources (like oil) but we can NEVER run out of money.
I dont object to looking at all our expenditures and seeing where we might not be getting anything for our money, but the entire conservative movement since Reagan has simply assumed that the EPA, Dep Of Ed and numerous others are just unnecessary. This is not an UN political stance it is purely political aimed at smearing anything which “interferes” with business. There is nothing rational or objective about it.
I dont understand why you think its ok to cut govt spending but you rightly recognize that private spending needs to be encouraged. Tax cuts will give us all more spending money and help increase aggregate demand but cutting govt jobs would be just as detrimental as raising taxes. A dollar spent by a govt employee has just as much affect on GDP as a dollar spent by the private sector. So any bias towards cutting govt spending in favor of private spending is PURE ideology and NOT rational.
Banks dont need to be “incentivized” to lend, that statement is meaningless. Right now banks will lend to anyone with a good credit risk. They always have and always will. Until banks wish to take risks the govt should just step in and give citizens and businesses access to the Fed rates. Thats not socialism thats socially responsible behavior for an entity that has OUR welfare at heart. When banks repair their balance sheets they can increase their activity but commerce should not be held hostage by banks who are nervous in this environment. THAT is a RATIONAL thing. The only objections to the Fed stepping in to lend to citizens are POLITICAL/IDEOLOGICAL.
You really need to check out your fellow Tea Partier Warren Mosler. He will make you look at deficits in a different light, they are nothing to be scared of.
Slugs,
You and your economists are right about the leverage but you are missing that the leverage is also a pace issue. It was also 2nd mortgages and that is where the demand for borrowers was first met by firms finding individual solutions to maintain individual growth needs. It was also consumer loans and essentially all investments as debt became the driving force of the economy.
The old idea of earning, saving, and investing those savings, so as to keep asset values tied to incomes, was necessarily abandoned because wages in the US could not keep pace due to downward pressure on labor values due to the demographic dividend. Investment gains from global sources replaced upward mobility, but, those gains combined with domestic lending growth requirements were in excess. Think of what would have occurred without the leverage and this becomes a little less like dimensional chess.
Slugs,
Paulson is saying unemployment would be at 25 percent if they had not bailed out AIG and other financial firms. There’s not way to know what would have happend had we done something else.
Margery,
Take your idea to Krugman or Stiglitz, and see if they buy it. I realize they are much dumber than you and probably won’t see the vast wisdom in your suggestion,
I would not waste my time taking ideas to these socialist want-to-be gun slingers.
Slugs,
As several economists have pointed out, the problem with that theory is that the additional liquidity that went into the system doesn’t come close to being enough to account for scale of the recession
To the degree that real estate and its affect in killing banking has hurt the economy I think what i’m saying is correct. The key issue is should we blame derivatives and seek resolution by restricting banking transactions. I think not. I think the case is weak.
Got to run, wonder president is making his way to the podium.
Margery,
Keynes suggested paying people to dig holes and then fill them up again. I am sure we could sell that to Congress, right?
Keynes was a gifted mathematical economist, but this idea is retarded.