What’s Next?
The House voted today to risk another Depression rather than compromise various ideological objections to the idea of government intervention to rescue financial markets from an overload of untradeable bad mortgage debt. What’s next?
According to informal reports from House Democratic leaders, the first step will be to assess how the markets react to Congressional refusal to act. Other global governments have already begun to step in, by the refusal of the world’s largest economy to do its part to respond to the crisis will almost certainly be the overwhelming consideration. Already falling, the U.S. stock market has tumbled more than 500 points in recognition of the continuing freeze on credit availability. It is unlikely that the market will be able to adjust to the continuing collapse of banks.
After that, the Congress may attempt different action, but it is unclear what could even possibly be viable. House Republicans have floated a few proposals, such as an insurance program that would force Wall Street banks to pay a premium to obtain government backing of questionable mortgage-backed securities or a repeal of the “mark to market” accounting rule that has made it impossible to put a value on questionable securities held by banks, but none of these proposals address the scope of the financial crisis at anywhere near the scale of the now-rejected rescue proposal. Furthermore, the sheer number of conflicting proposals from ideologically intransigent groups makes it highly unlikely that any proposal could find a majority. In short, Congress is paralyzed by the purism of its most extreme ideological elements.
It is likely nothing will shift as long as ignorance and emotion remain dominant in the public mind. Today’s rescue bill was rejected in large part because it was politically unpopular. Partisans from the extreme right dubbed it “socialism” and relied on the emotional power of that term to short-circuit any critical thinking about the very real disaster blooming in the financial sector. The first caller to C-SPAN after the rescue bill failed proudly spewed Ron Paul talking points, openly hoping for a financial crash just so that Ron Paul’s bizarre economic theories could be proven correct. Partisans from the extreme left dubbed it a “bailout for Wall Street” and relied upon emotional resentment of “the rich” to conceal the effects that a crash will have on the poor and middle class they claim (falsely) to represent. Partisans on the radical DailyKOS web site cheered the fall of the rescue bill, with attention lavished on beating the Bush administration but with no time at all for considering the practical consequences for real people. Perhaps when the economic pain actually starts affecting “Main Street”, as it now probably will, voters will quickly educate themselves not only in the unpleasant realities of the financial situation, but also in the political unreality of their representatives.
Maybe. But that will take a long time. And the supporters of ideological purists like Ron Paul and Barbara Lee will deserve the economic pain they get in the meantime. Unfortunately, the rest of us will feel that pain too.
It will be bad because the underlying fundamentals are bad. It is a question of whether we take the pain now, and adjust to rebuild, or take more bandaid approaches, adding cost and staying power to the pain we will ultimately feel in any event.
The American people aren’t so stupid to think the drop in markets is because of the failure of the bailout bill. It will be a tough year. With the bailout bill it will be a tough decade.
And yes, Ron Paul says so. But UNLIKE Paulson and Bernanke, Ron Paul warned us this was coming, for a decade, and tried to stop it. I think it is time to start listening to him.
More assertions without any analysis or explanation. Typical, though not in any way helpful except as a demonstration of how ideology trumps all with some people on this issue.
If you think Ron Paul’s prescriptions (getting rid of the Fed, unilaterally canceling all of our trade treaties, deflating the currency to get back on the gold standard ala 1876) will actually solve, how about explaining HOW instead of just asserting it? Or would it just be too hard to depart from the pre-scripted talking points and do actual thinking?
You suggest that we should take the pain now to avoid worse pain later. I respond that it is foolish to allow the patient to die in the hopes of avoiding major surgery a week later. You talk about a “bandaid” as if it were a bad thing, but I would remind you that the purpose of a bandaid is to avoid infection. That’s precisely what I advocate doing now with regards to the financial system — put on a bandaid to avoid infection and give us time to address the underlying problems.
I’ll take your challenge. How about you pick one thing you’d like answered?
As to ‘deflating’ the currency, how about you just fix it to current prices? There is no need to deflate, just FIX. The problem with fixing is that the government cannot then go out and spend more than it can tax and borrow…
You really need to go and read about how the federal reserve (central bank) actually works.
Literally, Congress writes checks it can’t cash, so the Federal Reserve prints the money and Congress spends it. You might think it is not that simple, but it really is… go read some of Milton Friedman’s works…
If you continue making personal assertions about what other people do or don’t know just because they disagree with you, you’re going to get yourself deleted and banned. I’m tired of putting up with that BS.
My point about the T-bills is this — the government doesn’t actually need to borrow the money to issue those in this particular situation because they would be exchanging them DIRECTLY for the mortgage-backed securities currently held by the banks. Thus, they would not have to find a new buyer and they would not be inserting inflationary cash into the economy (inflation happens because money loses value compared to products available — this intervention takes place in a different way). Please try looking away from the Friedman scripture long enough to read what I’m actually saying here — this situation is different than one heretofore seen in economic theory. It is a novel type of intervention that we have only limited information about, but that information (RTC in 1990s, Hong Kong in 1998) is quite positive.
Even if I were to concede that there is a threat of new debt, however, that threat is 30 years away from being a critical problem. Thus, if I can solve an immediate crisis by buying 30 years of time and only really adding to a problem that will exist at that time anyway, then it’s good policy to buy that time.
Contrary to what you may think, Friedman was not some kind of deity who’s works must be studied and implemented exactly, with no attention to new situations or unforeseen eventualities. Time to deal with the real world instead of staying stuck in theory. In the real world, there is a credit crisis NOW. It is not theory. It is not some academic exercise or rumination about an ideal system. It is something that has to be dealt with in the real world.
Now if someone has alternatives to a bailout that are actually responsive in detail to the real-world situation, that is a fair discussion. But more Paulist ruminations about free market purity and Milton Friedman’s divine genius aren’t really helpful here.
This is an old problem, that is coming to a head. Some say the solution is to sell out our ideologies, some say we should adhere to them. Personally, I believe that there’s no sense throwing good money after bad. The economy is going to slow down, as a result of the credit crunch. I believe Keynes was right, if the government wants to alleviate the slowdown they need to increase spending and reduce taxes (sounds bizarre, but really genius). Coupled with a policy that did not allow the government to loot savings by printing money and devaluing our currency and you’re talking a solution. The bandaid remedy proposed by Bush will extend the debt, North America is deep enough in debt. Stop punishing people for saving money. There is no sense saving money, inflation is higher than the lending rate, so you can borrow cheaper than you can save.
Today America is waking up and realizing…have we leveraged everything, have we borrowed all there is to borrow? Doesn’t someone have some savings and the answer is no…America has a negative account balance. Lumping another 700 billion on the taxpayers back is not going to solve it.
Decrease overseas spending (albeit not to the level Ron Paul would suggest), America still needs to police the world to make it safe for trade, just like their predecessor Britain did. That is the true secret of the modern world. God forbid a nation with different ethics inherit that role.
Increase domestic spending.
Reduce taxation.
Eliminate mandatory participation in government programs.
Open as many free trade agreements (not preferential trade agreements) as possible and let people acquire some savings.
Don’t deflate the currency five percent (especially after that 700 billion turns into deposits, and the banks reloan it…and it gets redoposited and reloaned). You’re talking about another 3.5 trillion in circulation!
Give people stability and freedom and they’ll find profit where it is genuinely viable. A gold standard, although attractive from a stability standpoint, is not capable of growing with a modern industrial economy. We can manufacture and use more wealth in cars than there is in gold. Money has to continue to be FIAT (even though I hate the Federal Reserve), or perhaps needs to enjoy a hybrid existence. Where a dollar is redeemable for 10% of it’s value in gold and the rest of the value is proportional to the authority of the state to enforce the use of its currenct. That would eliminate…well reduce the need to increase authoritarian practice to protect currencies and help perserve freedom while allowing the market to gradually migrate to a more stable financial situation.
Perhaps we could end these days of rotting savings and return to the days, when a penny saved was a penny earned.
Who is Ron Paul?
Jason,
Just a comment on your comment about Milton Friedman…which would be extended I imagine to include Bastiat, Hayek etc. The philosophy is sound but then again so is Keynesian philosophy. The enemy is really that those philosophies need to be built on a firm currency. The US dollar was worth 1.50 canadian not to long ago.
Ideally we need a Keynesian government with an Austrian Federal reserve. Keynes theory is 70-80 years old, before our currency left the gold standard. His theory coupled with a Fed reserve caused the currency to collapse in 1970 and it’s coming again (albeit not for a long while) . I think the government should listen to Keynes, increase domestic spending (not bailout packages) and reduce taxes. Maybe 25-50% of the troops home from Germany…
Find the money…don’t print it. When they print it they are displacing the spending as an immidiate inflation tax and a guaranteed increase in taxation. That will compound the problem by weakening the currency, expanding debt and increasing taxation.
Keynes and Friedman would disagree with the bailout.
As I explained before, this type of bailout has a different method of exchange (debt for debt) that evades any immediate inflationary effects simply because it does not increase the amount of money in the economy, it only alters the liquidity of the debt that is held by participating banks. I agree, however, that it probably still has inflationary and increased taxation effects long-term (you can only solve debt by either paying it off — taxation — or by reducing the value of the debt by inflation). But I am arguing that if you are in a situation of imminent economic collapse, it is necessary to accept the long-term consequences as the necessary cost of avoiding a worst short-term fate. (Remember my analogy about chemotherapy, a subject which I have close experience with recently.) You may be right that we need to shore up our currency (though I would strongly prefer doing so by fiscal means rather than by the Paulista gold-standard method that resulted in periodic depressions when it was used in the 1800s and would be even worse in the fast-moving global economy — see Mexico 1994 for the danger of a “pegged” currency), but we need to keep the economic patient alive long enough to be able to address that problem. We are in a trauma situation right now and the treatment for the underlying disease has to wait until we stabilize the patient.
It is also important to keep in mind that asset acquisition by the government holds the potential to evade even the increased debt by allowing the government to sell those assets later at a profit. We know this works because we have seen it work before — in the 1990s in the U.S. and in 1998 in Hong Kong.
So I renew my charge that the theoreticians are blinding themselves to the practical nuances of the situation. Just quoting from a Paul or Friedman songbook is fundamentally non-responsive, not to mention highly annoying.
Guys, you are not interpreting Friedman correctly. The government financing COULD have inflationary consequences inasmuch as the bailout came from printing new money. That has been a concern. However, with a credit crunch there is actually the risk of the opposite issue – that of DEFLATION. Although Friedman strictly disagreed with the idea that more credit equaled more money, there is empirical evidence that availability of credit can lead to inflation and lack of it may lead to the opposite effect.
Now, the 700 billion, or most of it rather, will not be financed from printing new money. There are many others who will finance the debt. If Asian governments or others buy this debt to diversify their asset base, do they create new money? No. Also, like it or not, the Fed has control over the supply of money and can do whatever it wants. In fact, in can inject liquidity into the markets by driving the interest rates to zero. That in essence increases the money supply and may be extremely necessary if liquidity dries up. And just when you’d think the Fed could do nothing else when the rates are zero, the Fed can print new money if it feels that liquidity is coming to a halt. In other words, the Fed has the monopoly over the supply of money and could create inflationary presures even without the government intervention. If you truly knew Friedman you’d know that.
But the government financing the 700 billion bail out is not necessarily inflationary. However what may be inflationary is if the government refuses to do its role and hence push the Federal Reserve to act unilaterally by opening up more liquidity. Fed IS independent and may do that if it feels that the financial system is close to collapsing and the congress is not doing its job.
Also the cost would be a lot less if done and supervised correctly. Punitive measures can go hand in hand with this plan. People who are complaining about executive pay should suggest to their elected representatives to introduce legislation to cap executive compensation. Like to a maximum of 10 million dollars per year – and that could be applied to all US corporations. There are legitimate concerns and should be ironed out. But I don’t see why bitching about overpaid CEOs should get in the way of saving the financial system as a whole.
OMG, these stupid retarded paulsters drive me insane!! these people seriusly need to be drawn and quartered. They go to all these blogs and post a link to a vid of Paul giving his stupid speech about the bailout bill…and then the usual, “Wake up, sheeple!”
All these conspiracy wackos talking about the “evil’ federal reserve and the creature from Dr. Jekyll and Mr. Hyde or something like htat. Sorry, tin-foil hat wearers, the federal reserve act was PASSED. it is constitutional. Get over it. Without the federal erserve, we wouldn’t have had all the economic success we’ve enjoyed since its inception. They need to go and actually read a book or two on economics and stop worshipping ron ‘fuzz nuts’ paul.
-Piper
Piper, you might want to read a little about a man named Edward Mandell House, one of the chief architects of the Federal Reserve. If you still come away with the notion that the Federal Reserve IS constitutional and is in the best interest of the common man, then I have offered my view and you can remain steadfast in your beliefs, no harm done.
“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by
conviction and the vote of the majority, but a government by
the opinion and duress of a small group of dominant men.”
-Woodrow Wilson, reflecting on the passage of the Federal Reserve Act of 1913
Three responses to the looming hijacking of the thread by Paulbots (I’m shocked. Shocked!):
(1) Even if something is bad policy, it is not necessarily unconstitutional. Those who bash the Federal Reserve as unconstitutional err in failing to make a basic conceptual distinction that should have been mastered even by an 8th grade social studies student.
(2) It is possible to legitimately disagree with Woodrow Wilson, Milton Friedman, and Ron Paul. They are just men, not deities nor demigods who’s works must remain forever exempt from criticism or dissent.
(3) There are very serious dangers to submitting highly complex matters which require extensive technical knowledge to day-to-day management by democratic institutions. Sometimes, it is the will of the people that experts be put in charge in order to have a better overall policy outcome.
I see your point Jason. The Federal reserve has done what is possible by lowering interest rates and injecting cash into the economy through money creation. The "bailout" package is different in that it is not just new money creation but actually an asset backed money creation because it exists with the creation of a public debt.
My mind is having difficulty rationalizing that if lowering interest rates to historic lows isn’t creating sufficient liquidity in the market that adding liquidity via more public debt will solve the problem.
We are in a mess, and something needs to be done but a knee jerk reaction of starting up the printing presses and guaranteeing that new money has value by leveraging it against debt the free market has rejected as bad debt will do anything but invest us in an ever higher house of cards.
Shoring up the currency would be nice, I don’t think gold is flexible enough to do that but it serves as an example for what is needed to deliver to people the age old axiom that people expect from their currency, "A penny saved is a penny earned".
Free credit for all is never going to exist in perpetuity, as credit becomes less and less available more competition will drive up interest rates. If the federal reserve continuously upsets this natural occurrence, then people who can’t afford to borrow will continue to borrow. An economy has an ebb and flow, best to let it happen in small spurts rather than huge flow followed by massive ebb.
Thus, interest rates need to rise so credit can become available to only the most viable and worthy individuals/corporations. Poorly managed corporations are going to lose out and the economy will ebb. The problem is that the Fed has left the tap so wide open for so long, that the economy can not stomach an increase in interest rates. The decline in the availability of liquid capital will cause one of two events, increased new capital infusions until any savings are completely eroded and our individual buying power will barely earn our families bread or increase in interest rates where those who were responsible with their money enjoy the fruits of their labor and those who where not must borrow at increased lending rates.
The Ninja loans (no income no job approved) is a ludicrous notion that could be founded only with the opinion that the market will never have period of decline (or even slowed growth). It is a bad business decision that in a FIAT debt based economy created trillions in artificial currency, it will cause numerous companies to fail. I don’t believe the american economy will fail, but the artificial growth created by these trillions of dollars will need to be absorbed somehow by the market.
This needs to be done gradually in a controlled manner, so despite my instinct telling me lowering interest rates is only postponing the inevitable rise so people can better prepare, rather it has done the opposite. Lower interest rates has only encouraged people to operate on slimmer margins with greater risk. The new plan is no different, it will be business as usual…
The government needs to protect our currency and maintain a financial infrastructure remain intact, like they must protect all essential services in our economy. If these artificially low interest rates are not saving the companies that bought these debts, then nothing will. We’ve exposed the entire economy to these problems with artificially low rates, we need to leave interest rates low for 4-6 months and then increase the rates…dropping the dead weight by the wayside.
In Wealth of Nations, Adam Smith says on the first page. The wealth of a nation is measured by three things. Firstly it’s production level, secondly its dexterity to adapt and third and least importantly by the number of people employed in that nation.
The erosion of savings has almost eliminated dexterity from our markets without credit. Yet leveraging everything, even ludicrous investments for easy credit has dwindled the availability of credit. At the same time, easy credit has caused the US move most of our production capabilities to other nations. Now that the leveraging is coming to an end…unemployment is going up.
I think we need to start rebuilding now, before it’s too late, not extend this problem to a later date. We can’t falsely prop up the stock indexes via monetary inflation forever…it’s ludicrous. Seven hundred billion dollars…without any guarantee or promise that the policies that allow this to happen will change. This bailout package will become an annual tradition, another economic stimulus package, another company saved by the government….another bailout… This started out as a snowball and now it’s an avalanche. There’s going to be a catastrophe, the question is which generation is going to take on the role of rebuilding.
Curtis, before I respond, I would like to thank you for NOT embracing the talking-point-spewing Paulbot nonsense that has (predictably, since I (gasp) MENTIONED HIS NAME) hijacked the other thread.
I would say that we learned something from the Japanese economic crisis of the 1990s, where even 0% interest rates were insufficient to stimulate the credit markets to reopen in the aftermath of the collapse of a real estate bubble. This is because there are TWO problems here — a liquidity crisis AND a debt valuation dilemma. The lack of an active market means that banks don’t know the true present or future value of their mortgage-backed securities. Thus, their reaction to ANY available liquidity (even that freed up by lowering interest rates) is to hoard cash, in effect nullifying the regular interest rates tool for stimulating the credit markets.
Thus something has to be done to either remove the bad debt from the banks’ books or to somehow create a market for it or at least assign a non-arbitrary value to it. Thus, the bailout is one means of handling this, by removing it from the system and replacing it with a different kind of debt paper (T-bills) for which there IS an active market where valuation can be determined with reasonable confidence. This also would have the side effect of putting it in government hands which could then have sufficient time to allow a market to develop where its value could be determined.
That’s what none of the critics seem to get about this situation — it is about buying time. The government can handle the debt load with less disruption to the overall financial system than private actors can. And that takeover opens up those private actors to start behaving in their necessary role in the financial system while we look at deeper changes necessary to prevent the problem from recurring.
I just don’t agree that we should fatalistically embrace catastrophe NOW just because some people predict an even bigger catastrophe some time down the road. I don’t feel like sacrificing the present to some doomsayers’ prediction about the future which, even if it were true, would not be averted by accepting today’s catastrophe anyway.
Based on the information that is available to me NOW, the bailout proposal appears the best of a range of very bad options. And until the critics start stepping up with more than just purist theories, I’m sticking with my position.
Ron Paul has predicted all of this for a decade now. I don’t find him to be misguided at all. His economic theories are grounded in sound reason and thought. The Keynesian approach has hit a big road bump. All one has to do is look at the charts of the CPI, M3, dollar value vs. time, etc. to know that Ron Paul is completely correct in his assertions.