Sunday, September 21, 2008
By DB on Sept 21st
Humor me for a second. Let me tell you a story about a once great hero named, um, let's go with Hiro. Hiro decides one night to go out drinking with some friends. After a good night of socializing our hero spots a walking godess at the end of the bar. She looks risky, but Hiro believes that despite the risk, if he can score with her, he would himself become a god. He just so happens to be single (meaning no girlfriend) now which means he has no rules of engagement. It is all about him now. With no rules, Hiro makes his move. Our Godess takes the bait and joins him for some after party thrills at his place...alone. A hug becomes a kiss, a kiss becomes a...ok, I'll spare the adult details. Point is, Hiro scores and he scores big.
A couple days later, Hiro notices that due to his risky behavior, he has put his health at risk by contracting a very painful and itchy STD (use your imagination). He now is faced with one of two choices to make. He can (1) ignore said STD and hope it heals on its own or (2) he can self-diagnos and treat said STD making it feel better.
Typically, our hero would follow step one as he uses Eastern medicine which makes this type of STD cleanse itself from his system naturally with a benefit of making his system stronger in the long-run. This time though, our hero decided to scratch his STD which made his body feel good, but spread the STD to his brain which ultimately killed him. Sad, yes, I know.
Ok, I am sure you are all wondering why I am telling such a stupid story. Here is why...this story is simply a metaphor for our economic "crisis" right now. Hiro, my metaphor for the markets is normally an easy going, not very risky hero. He at one time had controls over his urges (his girlfriend, my metaphor for regulations) but that has gone by the wayside and now he wants to score big with a beautiful lady who happens to be risky (my metaphor for corporate greed). One thing leads to another and we find our hero in a bit of a crisis (STD). He thinks the best solution to handle the crisis is to scratch it ($700b bailout) which he doesn't quite understand is temporary. He feels he needs to do something (cough Bush, McCain, Reid, Obama, cough) even though he wouldn't normally do this as these things just typically go away naturally making his body stronger (free market theory). This pointless intervention of itching ends up killing him. Again, sad, I know.
What I am trying to say (with a bit of humor that no doubt sounds better in my head) is that WE SHOULD NOT INTERFERE WITH THE MARKET AND BAIL OUT FAILED COMPANIES!!! They are failing for a reason. If a company fails in our heavily deregulated market as it is now, then they are meant to fail. Capitalism people. That is how it works! The market becomes stronger because of this. That's the point!
Why? Easy. Let me explain. Free market theory is based on the assumption that a company that is meant to survive will survive without the help of government interference and manipulation. This means, no regulations and no bailouts. Of course there are two schools of thought on this, but I am concentrating on the basic school of thought that small governments do not interfere with markets, otherwise it is not a free market. If you are a pro-regulation type of person (typically a liberal position until this week), then this crisis this week validates all your fears of deregulation and affirms to you that corporations and free-market capitalism are indeed evil.
I fully understand that if these banks go under we are all going to somehow be hurting (not really, but that's what they want us to believe). All the people see the stock market tumbling and ignorantly DEMAND action by our leaders. We criticize Bush for not acting (though he could have at least came out from his cave). We criticize Reid for saying he doesn't know what to do. We criticize McCain for being out of touch as usual (shouldn't he remember what to do from the Great Depression?). We criticize Obama for not doing anything...again (or blame everything on him as McCain did). But the public pressure is on...what happens? Everyone does something to simply show the people they are doing something! God forbid a politician look like he is doing the right thing by doing nothing! Do you know how bad it looks to do the right thing which is to do nothing? Horrible. Much better to do the wrong thing by just doing something. Regulate, regulate, regulate!! Doing something (itching the STD) will make the problem much worse! But the people are happy now, what's the big deal?
The big deal is this. Our government is swallowing the mistakes of greedy investors and bankers thinking that it has to do something. They artificially flood the market with tons of money, they bail out companies that are failing, and tighten the regulations. If you truly believe in free market capitalism, you just watched the best example of such a system collapse right before your very eyes this week. This market is becoming dependant on our federal goverment like a five year old with a security blanket.
Should we have let the banks collapse? Yes! Sure, it will sting for a while and really make us buckle down, but it will make the system stronger! We might go into a (omg!) recession without interference, but that is way better than the potential DEPRESSION that will hit when this all backfires. Bankruptcy makes the system stronger. Little banks can gain market share when large banks collapse. The system doesn't have to rely on government money to survive. You don't need to regulate because a major collapse is regulation enough! Other banks will see what happened and learn from it. That is how markets stay disciplined. Now they have simply learned that the govenrment will bail them out whenever they are in trouble. People are so scared of a little bit of pain that they will treat the symptoms rather than the disease that will kill them silently.
Sure, President Bush and Congress have decided to do something, but be very scared. True free market capitalism died this week. In a few short days our great capitalist nation took a huge giant leap towards communism (government ownership) and market socialism all on yours and my dime. Are you better off than you were eight years ago? Who cares, because eight years from now we will be really feeling the effects of the size of our government. We will face a real financial crisis in a few years from now because it will come at a time when our government is unable to bail the markets out. What we saw in the US this week is unique in our lifetimes. We saw our government meet the destiny of every government seeking more power...they take it. If we go down the path I expect Bush and the Congress to take us down this week, it will be a long time, if ever, before we ever see a true free market in the United States. Regulations are here and they are here to stay. Get used to it.
Oh, and playing the blame game doesn't change the fact that both sides are preparing eulogies for capitalism. Then again, maybe capitalism works best when regulated. Perhaps this is only bad for capitalism and it is good for all of us. Tomato, tomahto. Maybe free-market capitalism just doesn't work? The theory never took into account jittery nerves when reality takes hold.
Humor me for a second. Let me tell you a story about a once great hero named, um, let's go with Hiro. Hiro decides one night to go out drinking with some friends. After a good night of socializing our hero spots a walking godess at the end of the bar. She looks risky, but Hiro believes that despite the risk, if he can score with her, he would himself become a god. He just so happens to be single (meaning no girlfriend) now which means he has no rules of engagement. It is all about him now. With no rules, Hiro makes his move. Our Godess takes the bait and joins him for some after party thrills at his place...alone. A hug becomes a kiss, a kiss becomes a...ok, I'll spare the adult details. Point is, Hiro scores and he scores big.
A couple days later, Hiro notices that due to his risky behavior, he has put his health at risk by contracting a very painful and itchy STD (use your imagination). He now is faced with one of two choices to make. He can (1) ignore said STD and hope it heals on its own or (2) he can self-diagnos and treat said STD making it feel better.
Typically, our hero would follow step one as he uses Eastern medicine which makes this type of STD cleanse itself from his system naturally with a benefit of making his system stronger in the long-run. This time though, our hero decided to scratch his STD which made his body feel good, but spread the STD to his brain which ultimately killed him. Sad, yes, I know.
Ok, I am sure you are all wondering why I am telling such a stupid story. Here is why...this story is simply a metaphor for our economic "crisis" right now. Hiro, my metaphor for the markets is normally an easy going, not very risky hero. He at one time had controls over his urges (his girlfriend, my metaphor for regulations) but that has gone by the wayside and now he wants to score big with a beautiful lady who happens to be risky (my metaphor for corporate greed). One thing leads to another and we find our hero in a bit of a crisis (STD). He thinks the best solution to handle the crisis is to scratch it ($700b bailout) which he doesn't quite understand is temporary. He feels he needs to do something (cough Bush, McCain, Reid, Obama, cough) even though he wouldn't normally do this as these things just typically go away naturally making his body stronger (free market theory). This pointless intervention of itching ends up killing him. Again, sad, I know.
What I am trying to say (with a bit of humor that no doubt sounds better in my head) is that WE SHOULD NOT INTERFERE WITH THE MARKET AND BAIL OUT FAILED COMPANIES!!! They are failing for a reason. If a company fails in our heavily deregulated market as it is now, then they are meant to fail. Capitalism people. That is how it works! The market becomes stronger because of this. That's the point!
Why? Easy. Let me explain. Free market theory is based on the assumption that a company that is meant to survive will survive without the help of government interference and manipulation. This means, no regulations and no bailouts. Of course there are two schools of thought on this, but I am concentrating on the basic school of thought that small governments do not interfere with markets, otherwise it is not a free market. If you are a pro-regulation type of person (typically a liberal position until this week), then this crisis this week validates all your fears of deregulation and affirms to you that corporations and free-market capitalism are indeed evil.
I fully understand that if these banks go under we are all going to somehow be hurting (not really, but that's what they want us to believe). All the people see the stock market tumbling and ignorantly DEMAND action by our leaders. We criticize Bush for not acting (though he could have at least came out from his cave). We criticize Reid for saying he doesn't know what to do. We criticize McCain for being out of touch as usual (shouldn't he remember what to do from the Great Depression?). We criticize Obama for not doing anything...again (or blame everything on him as McCain did). But the public pressure is on...what happens? Everyone does something to simply show the people they are doing something! God forbid a politician look like he is doing the right thing by doing nothing! Do you know how bad it looks to do the right thing which is to do nothing? Horrible. Much better to do the wrong thing by just doing something. Regulate, regulate, regulate!! Doing something (itching the STD) will make the problem much worse! But the people are happy now, what's the big deal?
The big deal is this. Our government is swallowing the mistakes of greedy investors and bankers thinking that it has to do something. They artificially flood the market with tons of money, they bail out companies that are failing, and tighten the regulations. If you truly believe in free market capitalism, you just watched the best example of such a system collapse right before your very eyes this week. This market is becoming dependant on our federal goverment like a five year old with a security blanket.
Should we have let the banks collapse? Yes! Sure, it will sting for a while and really make us buckle down, but it will make the system stronger! We might go into a (omg!) recession without interference, but that is way better than the potential DEPRESSION that will hit when this all backfires. Bankruptcy makes the system stronger. Little banks can gain market share when large banks collapse. The system doesn't have to rely on government money to survive. You don't need to regulate because a major collapse is regulation enough! Other banks will see what happened and learn from it. That is how markets stay disciplined. Now they have simply learned that the govenrment will bail them out whenever they are in trouble. People are so scared of a little bit of pain that they will treat the symptoms rather than the disease that will kill them silently.
Sure, President Bush and Congress have decided to do something, but be very scared. True free market capitalism died this week. In a few short days our great capitalist nation took a huge giant leap towards communism (government ownership) and market socialism all on yours and my dime. Are you better off than you were eight years ago? Who cares, because eight years from now we will be really feeling the effects of the size of our government. We will face a real financial crisis in a few years from now because it will come at a time when our government is unable to bail the markets out. What we saw in the US this week is unique in our lifetimes. We saw our government meet the destiny of every government seeking more power...they take it. If we go down the path I expect Bush and the Congress to take us down this week, it will be a long time, if ever, before we ever see a true free market in the United States. Regulations are here and they are here to stay. Get used to it.
Oh, and playing the blame game doesn't change the fact that both sides are preparing eulogies for capitalism. Then again, maybe capitalism works best when regulated. Perhaps this is only bad for capitalism and it is good for all of us. Tomato, tomahto. Maybe free-market capitalism just doesn't work? The theory never took into account jittery nerves when reality takes hold.
6 Comments:
Have you seen the provision in that $700 billion bill that says "this legislation cannot be reviewed by the courts or any law" or whatever and basically gives Secretary Paulson total control over what to do with this money. That is scary, especially since this is coming from the same administration that gave us "mission accomplished," "heckuva job," "I'm a uniter, not a divider," and "last throes," I don't think "trust us" is going to fly this time.
Absolute government control, in this extreme case one person, is exactly what Ayn Rand warned about when it comes to government interference in the free market (yes, I know, radical example, but the point stands). I am most shocked by Republicans and Conservatives actually pushing for regulations (I simply expect it from Democrats). This market is no longer free. Free market conservatives are selling out to protect their political futures. No one can be seen "doing nothing!"
Funny thing is, that provision isn't the scariest part of this bill. The real scary part is that the government is going to buy FAILED companies and somehow hope they can sell them to someone on the cheap. We are BURNING our money. Failed companies failed for a reason. They weren't purchased for a reason. Why does the govt think this is a good idea? Our govt is now MASSIVE. Small govt my ass. Any conservative who supports this bailout should have their fiscal conservative credibility card revoked!
The scariest part of all this is that neither candidate, nor Bush, nor Paulson, nor Congress know wtf they are doing. It is all guess work. They are reacting to the scared electorate rather than using their knowledge of economics to guide their decision (in a timely manner, not immediately as being requested-shouldn't we think things this important through??). If one thing could have gotten me back to supporting McCain, it would have been a common sense approach to this "crisis". But he buckled under the pressure (again, Dems are all about regulation so they will benefit from this).
Long response, but I feel like we are wiping our asses with our money and flushing our economy away. Colorful, huh? (Thanks for caring enough to comment lol)
Your suggestion that we let the big banks fail is misguided. This is not the S&L "crisis", in which lack of a bailout would have hurt (relatively) few people. These giant banks are cornerstones of the world economy. Letting them fail would not only hurt Americans, but have a devastating impact on global markets. This would not "sting for a while". Without the American money flowing through the worldwide systems, banks all over the globe start to fail. Locally, exports would dwindle. Imports would stop. Famine. Pestilence. War. Cue hoof beats...
Worldwide anarchy is not in our best interests. Not even for a little while.
So the feds really have no choice. Even if they let the banks fail, taxpayers would still be on the hook for the FDIC. I have no idea how much that would be, but 700 billion seems low.
The questions I have are:
1. What's being done to punish those who made such poor decisions that precipitated this crisis? How could/should we punish the execs who bought all these bad loans as well as the dishonest, fly-by-nighters who started this whole mess 5 years ago?
2. Would the same poor (at the very least, risky) decisions have been made without the assumption that the Fed would almost certainly rescue them should they fail?
3. Should giant corporations that have such an enormous potential impact on the world economy be allowed to exist without some form of regulation and oversight, both nationally and, if need be, internationally? Even if Americans didn't scream bloody murder at the mere thought of international interference, how the hell could it be done?
I don't think anyone can answer that last one. As far as economic theory goes, they are all just guessing.
BTW, I absolutely do not support this bailout. Just like I didn't support the (failed) bailout of idiots who got loans they couldn't handle. I understand the necessity of both, but I don't like it. There are no punishments for the guilty/stupid and no incentives to do anything differently. I want to see some fat-cats swing for this. I'd also like to see the blood of predatory mortgage brokers and lenders (rhymes with "My-check" and "A share request") running through the streets. Good luck with that, though.
Oh, and Hiro would probably just go to the free clinic to care of that STD.
You are working on the assumption that a bailout will work, and not just in the begining, but in the long run. Either way, free market capitalism is dead. People feared the government running our healthcare, but they should really fear our government running our banking! Big government wins and that will be Bush's legacy.
To answer your great questions:
1. Giving them $2.5B in bonuses is a good punishment.
2. Doesn't matter because the market will learn that the govt bails out failed companies rather than let the market run itself and that will become the norm. Ironically, the problem is due to the hastened pace of deregulation.
3. Free market theory suggests no regulation. What we are now seeing is the dawn of a new age of socialized capitalism. Europe will come out looking like the more stable of a market and the Euro might become the currency of choice in the world. No one is saying it, but recent events will shake things up and a bailout will only make the US weaker on the world stage. Our bailout depends on foreign governments buying our debt, and they will stop if our economy looks like it will fail.
But my illogical assumption is that free-market theory actually is the best system. I am starting to think that a completely free-market might not work best because we have seen how it is easily manipulated when it comes down to greed. Whether I like it or not, regulations are back and they are coming back with a vengeance. It makes you wonder if the conservative "anti-regulation movement's accomplishments in 1999 were wise as they were better off with those regulations than the kind we are about to see.
It is an interesting time, and I highly doubt a bunch of elected citizens with no concept of economics running for re-election are going to make a decision that is in the best interests of the American people and the economy. Either way this is handled, the one thing all liberals and conservatives have in common is that we are about to get #&@%ed
You mentioned in your post, "a huge giant leap towards communism (government ownership)." I disagree with this statement as pure communism would be the absense of greed and ownership by society as a whole. By the government owning something you are more than likely referring to a step towards totalitarianism. To be communist it would be the absense of government control.
Now that we have that cleared up, we can move on to the meat and potatoes.
Bullet said before his, Cue hoof beats quote, something along the lines of a domino effect. That is what makes the world economy so great, it will soften the blow of any economic hardship that the United States will endure. Those buying up the United States debt are in a symbiotic relationship with the US because if we are not thriving their investment won't be.
I do agree that regulation is the worst way to handle this. If there is going to be any regulation is would be an education of the masses in wisely taking out credit to finance their spending choices. Other than that, it is an irresponsible way to handle this, in effect the economy asking them to jump and the politician saying, how high.
One thing FDR ran on when he was first running, he said, now I am paraphrasing here, he really didn't have an idea of how to solve the problem of the Great Depression, but he would enact "bold and persistent experimentation" to see us out of the ordeal. That is just what he did. 90% or more of the programs failed, but he did something. Most of it wasn't in the form of regulation, it was in the form of creating jobs and programs to employ the masses. Perhaps this is the way we should go with the likes of those unemployed Lehman Brothers ex-employees, the government should give them a job.
Overall, regulation is a bad idea and doesn't allow those to fail that should (an idea repeated more than enough by the original post itself and those who have commented here). One thing to point out to illustrate this argument is has any bailout ever helped any airline company? They seem to perpetually persist in moving to declare bankruptcy and the government, in the interest of keeping plane flights cheap, runs to the rescue. Will this happen every time a major financial institution fails?
On the bright side of this argument. Now is the best time to buy REITs and stocks because I am young enough to right out the market's fluctuations(event the Great Depression didn't last for 30 years: knock on wood, picture me knocking on my head). So I say, if you are young, buy, buy, buy (but buy responsibly, "Best of Breed" as Jim Cramer always says).
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