Saturday, October 25, 2008
A few followup thoughts on the bailout, after discussion with friends:
- Why we're in this mess:
One of my friends pointed out that the real problem was banks buying toxic debt and not being willing to sell it for pennies on the dollar; because they sold us a story that they're "too important to fail" we now have a "no banker left behind" bill. He suggested that the money should go instead to augment the short-term commercial paper market. Well, this is now happening. Maybe this guy should be my financial advisor. Another friend had a similar idea and said it reminded him of Hamilton's Bank of the United States, a 20-year experiment that was used to put the new country's fiscal system on the right track by reducing speculation and increasing private commercial investment. So there is precedent for these experiments.
- The Fate of Libertarianism:
The same friend was discussing this situation and said (in his perspective) that it was the death knell of the Libertarian party. His friend said "try living without the FDA" and pointed out the current food crisis in China as an example; he then suggested that the same thing could be said of the financial markets - perhaps the argument might be "try saving without the FDIC", or "try investing without the Fed". Maybe that could work, but you'll find plenty of libertarians who'll tell you we weren't doing pure libertarianism before (see the Community Reinvestment Act) and so it's pointless to blame libertarianism for this problem. Nevertheless, the blame game is going around, and it's been difficult for me to get to the facts because so many people examining this situation are hopelessly partisan. More in a bit.
- The Fate of Capitalism:
Another group of friends were wondering about the fate of unrestrained capitalism in the face of this situation. A fair number of Republicans agreed with them over the past few years, calling for increased regulation which didn't happen while Democrats were arguing for less regulation - an odd flip of their normal positions. George Bush is being accused of being a "big government socialist" for the bailout by conservatives and liberals are calling for more regulation. Another friend was wondering if this would lead to fundamental changes in the capitalist system, and, shortly thereafter, the U.S. government started buying shares in banks. If successful, these shares will jump-start the flow of credit and, if the bailout is successful, will win for the taxpayers. If unsuccessful, we will be in the Second Great Depression, and the loss of that $250B will be the least of our worries.
So where do I stand? Right now everyone's too partisan to think clearly: the Republicans are blaming the Democrats, the Democrats are blaming the capitalists, the libertarians are blaming the government, the bankers are looking at their shoes, and no-one's trying to look at the many Americans we were encouraging to buy homes and who are now defaulting. I don't know if everyone's so scared they're grabbing for their favorite bugaboos or whether, more cynically, they're trying to use the crisis to get their favorite policy change implemented - or perhaps both.
But what I do know is that the amount of the bailout - seven hundred billion dollars - is only around 5 percent of our current GDP. At the "worst" point of the Great Depression, 1933, the GDP fell to about 50% of its pre-Depression levels. So at worst, the bet Bernanke is making is 10% of the GDP we should expect to have if things go really south. So ask yourself: is it worth it to take 5% of your income for a year --- roughly $2300 from each American --- to invest in a business upon which you depend for 50% of your income? Of course, the question isn't that simple: what help is the $2300? what's the chance that the business will fail anyway? what's the chance you will get it back? and, really, what's the likelihood that the $2300 is going to cause your crazy uncle to do something stupid again?
So I think it is worth it as long as we do the following things with the bailout money:
- Make it accountable: We need to know where the money is going and why.
- Don't throw good money after bad: If a business is going to fail anyway, don't prop it up.
- Put the money where it is needed: Whether this is buying short-term commercial paper, propping up mortgages, buying in to central banks to give them liquidity, it should be something that really helps in a material way with our real problems.
- Don't give the money away: The stakes we are buying in banks pay a hefty dividend. It goes up if the banks don't pay us back. All our other investments should have similar incentives for the taxpayer to be paid back.
- Don't get the government in the business of business: The government encouraging banks to do things they ought not to was a key part of this mess; we don't want the government meddling in the running of these businesses because what government officials think that businesses "ought" to do often has little to do with reality of the market.
- Don't let business get away from its fiduciary duty: Business leaders and individuals taking on more risk than they should was another part of this mess. Part of the game of people running businesses as businesses without being exposed personally to the businesses losses is the fiduciary duty of the people running the business: they are responsible for being responsible with the money that they have been given. Smart regulations should be put into place to discourage financial institutions from taking on the huge risks that they did in this crisis, without taking away their flexibility to do what they need to do to keep the market moving.
In short, if we carefully use this money responsibly, we may be able to blunt the impact of this downturn; if we're even more careful in how we invest it, as we appear to have done by investing in the major banks, the taxpayers may even come out ahead. We're not out of the woods yet, but there is reason to be hopeful that the bailout can help if we hang on to our principles.