September 28, 2008 § 31 Comments
A complete economic theory of everything is not something which exists. Of existence, it has none.
Therefore, when we make economic choices, particularly in large scale crises with enormously complicated implications, we face the same kind of situation we face, well, pretty much all the rest of the time too. Even physics has no theory of everything, and in mathematics it has been proven that there is no such thing.
Our situation is as always that there are certain things we know, certain things we don’t know, and certain things we can’t know. The first we are responsible for; the second, we are responsible for learning to the extent it is important to our choices; the third, we simply have to trust to Providence.
Doing what is right right now, and trusting in Providence for the rest, is built into the nature of reality. We are always trying to banish our need to trust in Providence with our theories of everything. Thus far, our attempts to build the Tower of Babel have all been abject failures.
When we are in a burning train wreck in progress, and we have definite and clear means to get out and to rescue many others in the process, we have a concrete obligation to actually do so. If doing so violates our economic theories about actions and consequences that tells us something about our economic theories; it doesn’t tell us anything about our concrete moral obligations right here and now.
So color me unimpressed when it is suggested that the Chicago School is against the government injecting liquidity into the market to prevent a disastrous collapse with global implications. The last century or so is littered with the bodies of people who have suffered and even died for the sake of vindicating economic theories. “Let Main Street burn, because my economic theory tells me we should” is not a proposition I find it even slightly tempting to adopt.
September 27, 2008 § Leave a comment
From The New York Times, September 30, 1999:
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.
“From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. “If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”
(HT: View from the Right)
September 27, 2008 § Leave a comment
No doubt the original Paulson economic rescue plan left a lot to be desired. “This is the best that can be done, even in theory” is not a proposition that even Paulson himself is likely to sign up to, I expect. Many people seem to assume that a highly charged midnight oil weekend debate among congresscritters will be capable of making rational improvements to it; in short, that in a crisis having a debate among a bunch of politicians while Rome is burning will add value to the process rather than detract from it.
I’m not convinced that that is a good assumption.
September 26, 2008 § 14 Comments
It is the height of foolishness to take the line that debt per se is bad. It all depends on why you take on the debt and what is done with the money. Most of the things government does with money are foolish, so most of what constitutes the national debt is bad. Buying up all this distressed illiquid paper is one of the few things which are very much not foolish, for a whole host of reasons. Main Street populism seems determined to commit financial suicide here in the name of self-righteous dudgeon.
If Bill Gross (and the investment bankers I’ve spoken to) are right, the federal government will probably earn 15% or so by holding the distressed paper it is proposing to buy, at a steep discount to book, under the plan. The underlying property is still there: real houses, real buildings, real land. This is not like a company, where the entire income stream can go away in a heartbeat because of some unexpected move by a competitor. The underlying assets here are real, tangible property.
So the government will borrow at 3.5%, and earn 15%. Discounting dramatically for illiquidity, if the scenario is right, it is still likely to earn quite a substantial amount of money for taxpayers.
Let me repeat that:
The ‘bailout’ will not cost taxpayers a dime. Not a penny. Not a nickel. It will earn them a substantial amount of money.
There are risks, of course, as there are in any investment in what amounts to a large global macro hedge fund. Those risks are relatively small, and the consequences of permitting bank lockout, money market catastrophe, etc to happen are not relatively small.
This is like co-signing on a loan to buy a profitable but hard to sell investment – a profitable investment which, if it is not bought, will result in you losing your job.
The way main street populists are looking at this is just stupid, stupid, stupid, stupid, stupid. And self destructive. And stupid.
And by the way, if you read Belloc’s essay on usury, you’ll see that this isn’t some post-capitalist libertarian or socialist nuttery on my part. Lending and borrowing money for productive purposes is not bad, and failing to do it when circumstances call for it can be really, really, really dumb. Borrowing money for optional consumption, to enable bad behavior, etc, not so good. Debt in itself, paying interest on loans in itself, is neither inherently bad nor inherently good.
Would you borrow money to have your appendix out so you can go back to work? Would you borrow money to have your appendix out if your appendix contained a diamond that you could sell for more than the cost of the operation, though it might take you some time to sell it? Or would you rather die of a ruptured appendix, because debt per se is bad, even when you stand to both preserve your income and make a profit?
Since when did we become the financial equivalent of Christian Scientists?
(Note: this rant was originally a couple of comments in this thread).
September 25, 2008 § 18 Comments
I think it is more than a bit silly to call this a “bailout”. In point of fact, taxpayers will probably be buying quite valuable assets at bargain-basement discounts. Rather than costing the taxpayers money, this is very likely to earn the taxpayers quite a lot of money, as long as it is managed with a minimum of competence and oversight. In short, I agree with Bill Gross.
Also, much ado is being made of the ‘carte blanch’ authority being granted to the Treasury Secretary under the proposed emergency plan. This ignores the straightforward fact that what Congress giveth, Congress can taketh away; and that the middle of triage is not the time to start brainstorming about detailed health insurance rules.
I don’t blame Main Street for looking at all the hubbub and instinctively seeing “ripoff”. But in reality, taxpayers are being offered a bunch of free money because the financial institutions which made the mess don’t have the liquidity to get themselves out of the hole. Like all cash-rich value-investing bottom feeders, the Federal government stands to make a killing on their misfortune. Why aren’t private investors doing it? Because they are small fry next to the US Government: they just aren’t big enough to make this scale of deal happen. When push comes to shove, cash is king, and the US Government is the guy who can raise all the cash. But on a smaller scale this kind of deal happens all the time, where smart money which can afford to hang on to some illiquid assets for a relatively long period of time buys them dirt cheap from cash-strapped firms in distress.
Ignorance is almost always expensive, of course. In this case, naive Main Street dudgeon could be very, very expensive indeed. There are probably people involved who are guilty of criminal fraud, and they ought to be investigated and prosecuted. But at the end of the day, this looks more like a taxpayer windfall to me than a bailout.
Heck, with enough deals like this the federal government could ultimately fund itself and would not have to levy taxes anymore. Likely to happen in corrupt and financially idiotic Washington? Nope. But a guy can dream.
September 24, 2008 § 15 Comments
…and some aren’t.
I think people tend to approach the effect that voting has on the voter himself as a false dichotomy. The notion seems to be that either voting has no effect whatsoever on the voter, or that voting for a candidate means that the voter is endorsing everything the candidate ever says and does or even will say or do. I don’t think either of those views is tenable. As is often the case, some things are dichotomies, and this isn’t one. Voting has a small but non-negligible effect on every voter, in my view. For some voters the ‘loyalty effect’ will be large; for others it will be small. For those who also campaign and argue for their candidate, it will generally be larger. For those who quietly do their thing in the voting booth and pray for the best, it will generally be smaller. It is neither as large as swearing undying fealty to everything a candidate stands for, nor is it entirely without any impact whatsoever on the person who votes.
In its most common formulation, the criticism seems to be that once we accept that voting affects the voter himself we have to embrace whole hog the notion that it represents an embrace of everything about a candidate and his policies. Supposedly this represents a reductio. But clearly that is a straw man: the world of possibilities is not limited to the all-or-nothingism presumed by the criticism.
Also and separately, when I argue that the effect of voting on the outcome of a national election is negligible next to the effect on the voter himself, folks tend to lop off the “negligible to the outcome” component and argue against it as a stand alone proposition. But doing that doesn’t confront my argument; it ignores my argument.
September 24, 2008 § 1 Comment
Following up on my previous post, it is interesting that the narrative has gone from focusing on the fact that certain actions of the candidate Bush were prudential judgments to the fact that the action of the voter himself can be justified if there is a proportionate reason. Ultimately we are discussing the same thing: the principle of double-effect. But the focus this time around has moved from being primarily on justifying the candidate’s actions to almost exclusively on justifying the voter’s actions.
The reason why is fairly straightforward: it is impossible to deny that the particular form of abortion for the purpose of medical cannibalism we call ESCR is enthusiastically supported by the candidates. So the focus has to shift to why we supposedly ought to stay on the reservation anyway.
But before pro-lifers corporately decide to go sign this year’s version of the Treaty of Dancing Rabbit Creek with John McCain, we might just want to consider whether doing so will actually have the good effects we desire; or if, alternatively, perhaps it is not very wise to play along in another bidding round of Uncle Screwtape’s Dollar Auction.