The argument for intervention
posted at 11:45 am on October 1, 2008 by Ed Morrissey
King Banaian, chair of the Economics department at St. Cloud State University and a fellow at the Minnesota Free Market Institute, makes an argument for government intervention to resolve the financial crisis at The American Experiment. King, a free-market economist, argues that the problem facing financial institutions is the utter lack of a market for ill-advised derivatives based on previous, and even more ill-advised, government intervention. As long as the action taken now does not involve coercion, King believes that the US government can create a free market that will allow proper valuation of these derivatives:
The “free market” did not get us into this mess, but we need the free market to get us out. For that to happen, the free market needs government as a partner, whether conservatives like that idea or not. …
[W]e suffer from more than a liquidity crisis at this time, and the most disconcerting for the free marketer is that many assets and derivatives on the banks’ balance sheets have an undetermined price. Mortgages on real properties are relatively easy to liquidate, but some other bank assets are relatively new securities innovations that turned out to be bad ideas. How these will be liquidated is unknown.
Ideally the government can act as a “market maker of last resort” in these securities, just as the Federal Reserve was envisioned as a lender of last resort for the liquidity crises of old. If the government can create a market where none exists, our system might recover without too much violence done to it.
Free markets do not mean always private markets. Free markets mean markets with an absence of coercion. It is possible for government to step forward for a missing market and not be coercive. A bailout that did not consume taxpayer dollars would be one example.
I’ve also argued that the government that created the crisis through fraudulent business practices has a responsibility to provide at least part of the solution. The derivatives got out of hand, and that was the fault of the private sector, but without the massively overvalued securities issued by Fannie Mae and Freddie Mac, and without their insatiable thirst for lending paper allowing lenders to issue loans risk-free, the derivatives wouldn’t present anywhere near the problem they do now.
Creative destruction can provide plenty of new opportunities for private investors — but only as long as credit remains available. The problem in this collapse is that credit will tighten to nearly impossible levels unless a market for the controlled destruction of these toxic assets can arise. King sees this happening already in global markets, with credit costing almost 7% with Libor and 11% at the European Central Bank. The net effect will be that investment capital will have to work harder to create more opportunities, even as we desperately need it to create a boom from the creative destruction of the markets.
The problems will not occur overnight, but will stretch out over a long period of decline in investment. Jobs will evaporate, and without credit, investor capital will escape into non-productive savings. Existing businesses will take less risk, retreat from expansions and projects, and consumer spending will contract. Proper management on the margins can keep this from becoming a depression, but without rational pricing on credit, we’re in for a long and hard recession.
That doesn’t necessarily mean that the legislation in front of Congress is the completely correct approach, either, although it keeps improving (except for the pork) on each successive iteration. But the government that created this mess with its coercion over a period of several years needs to act at least to remove that coercion and to stimulate a market for the products of its failure. Be sure to read King’s entire essay.
Blowback
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Seriously, a lot of us want to be onboard with this. We don’t want the economy to tank and people’s financial future to be in jeopardy.
But it’s hard to know how to filter the information when people in Congress are more concerned with how this bill plays politically than getting it passed. No one crafting the bill seems to really think we’re in dire enough straights to stop playing politics and pass a common sense bill without pork that doesn’t simply increase the size of govt. by a trillion dollars and place the country further in debt.
And it’s hard to be on board with this bill when it’s being crafted by the same guys (Dodd, Frank) who got us into this mess.
BadgerHawk on October 1, 2008 at 11:50 AM
FASB indicated they will allow some restriction on their mark to market rule, and will issue a further clarification later today or tomorrow. Since that is a huge factor in the liquidity problem, I think we have time to make a rational case and rational plan, instead of jumping into a bailout bill – especially one written with earmarks.
Vashta.Nerada on October 1, 2008 at 11:53 AM
Check out Bob Herbert’s current column; “The zealots are still in charge.” It completely ignores the responsibility of Democrats for the financial crisis and blames everything on Bush, McCain and Republicans. Of course, I’m reading this in the St. Louis Post-Dispatch, so there won’t be anything to refute Herbert.
Star20 on October 1, 2008 at 11:53 AM
Ed, have you read the draft Senate version of the bailout bill yet? You might want to before you sign up as a community organizer for the Treasury Department.
Fletch54 on October 1, 2008 at 11:54 AM
Here is my statement on this:
If Republicans vote for this bill, I will not vote for McCain or any other Republican again.
If conservatives cant stand on their principles, then I have no use of them.
I am sick of hearing, “We need the free market to work BUT, we have to do this.”
This is the final line drawn in the sand for me as a conservative. Voter for it, and you will forever lose my vote.
TheHat on October 1, 2008 at 11:54 AM
Obviously, there’s no rush. It’s CRITICAL to the Democrats that they take this out as long as possible.
This way, McCain can be blamed or tarred with the brush Nancy Pelosi tried to use on Monday.
There is NO leadership on the Republican side. Boehner FAILED. Failed to be included, failed to get a good bill and failed to lead enough republicans.
Nancy, is the complete failure. Simply, the WORST speaker of the House in our history. A “done-nothing” Congress and one that does NOT want to get to the bottom of the problem.
We need a new speaker.
originalpechanga on October 1, 2008 at 11:55 AM
The only influence government should ever have is through legislation. If our government wants to help, it needs to remove all the unconstitutional legislation that warps economic reality.
Regardless of gubmint intrusion, the private sector shafted itself with glee. It needs to burn the deadwood.
We don’t live in a zero risk, zero cost world. People need to suck. it. up. This is gonna hurt. Rightly so.
LimeyGeek on October 1, 2008 at 11:56 AM
Amen. The 110th has pretty much failed in every major initiative it’s tried to get passed.
BadgerHawk on October 1, 2008 at 11:57 AM
Does intervention include millions in earmarks?
Abby Adams on October 1, 2008 at 12:00 PM
This is what I’ve been saying all along: we (in the collective sense) allowed our government, through our representatives, to interfere and corrupt normal market risk/pricing mechanisms. As such, we have an obligation to make the market “whole”. However, whatever bailout action we take should be short-term in nature to restore market liquidity.
The long-term solution has been posted many times so far: the first course of action should be to dissolve Fannie/Freddie, repeal CRA, and repeal/amend MTM. Anything short of this just wraps the sh*t sandwich for the next generation to discover at the bottom of the fridge.
kuhio on October 1, 2008 at 12:01 PM
This is the golden paragraph. It both condemns the bailout and the legislation that warped the market.
No bailout. Reap it.
LimeyGeek on October 1, 2008 at 12:02 PM
How about an intervention into a investigation!!!
canopfor on October 1, 2008 at 12:06 PM
Vashta.Nerada on October 1, 2008 at 12:06 PM
Two key points.
First, this bill gives the Government EQUITY in the companies it bails, not just the asset in question. This makes it in the Governments interest for Companies who were bailed to succeed, and in a free market, that means others must fail. If you believe this will not create corruption, and give bailed companies a larger voice in the legislative process than other companies… you are naive.
Second, the FED will decide on who to bail, and who not. Paulson has already said that he is only going to bail certain companies, AT HIS DISCRETION… he is directly picking winners and losers. The companies who are bailed, with clean balance sheets will give and receive credit, while those not bailed will not. Thus, the bailed companies will have the strength to BUY the companies that Paulson will choose to fail… bank consolidation… using Government power.
Remember when they used to talk about the Military Industrial Complex? Now we have the Banking Government Complex.
Romeo13 on October 1, 2008 at 12:06 PM
Should we take Karl Denninger seriously?
In his latest video screed he shows a clip of Congressman Brad Sherman last night on Kudlow’s show saying this: Hundreds of billions of dollars are going to bail out FOREIGN INVESTORS. They know it, they demanded it, and the bill has been carefully written to make sure that can happen.
I’ve known for days that foreign banks were included, but is it true this bill is a result of foreign demands? If that’s true, how should we respond? Should we cover the bad investment decisions of foreign investors just because they were investing in US products? Denninger points out that the underlying troubled assets that could be purchased by Paulson do not have to be located in the United States.
Denninger also wrote this: “Note also that Representative Sherman said on Kudlow last night that when this was raised with Secretary Paulson he was told that if Congress tried to restrict the ability of the Secretary to purchase assets “laundered” in this fashion from foreigners, that the bill would be vetoed.”
I believe we have real problems, but I am having trouble knowing exactly whom the taxpayers can trust. Are any of you confident we have been told the real truth? I certainly don’t trust the rats in congress or Hank Paulson. And to me President Bush seems like a deer in the headlights. It appears to me that all of this is beyond him and he is trusting untrustworthy men.
flyfisher on October 1, 2008 at 12:07 PM
No.
There is a limit to the culpability of even a population as apathetic as America’s. Our government has run amok with power. Vast swathes of legislation are passed without due diligence or even cursory inspection by those we elect to serve us. Incompetence.
The government is responsible. Exploitative marketeers are responsible. Joe Shmoe is not. We do not ‘owe’ a single penny to bail out these cretins. True, we cannot avoid the blowback, but we’ll be establishing a cleaner market for the future.
Tighten your belts and start behaving like Americans, FFS.
LimeyGeek on October 1, 2008 at 12:08 PM
“Wool Research”
Read the crap the senate is debating. Yeah, we have a crisis all right.
CSMBigBird on October 1, 2008 at 12:09 PM
To a large extent, Paulson’s effort is a psychological one. And you may say that’s not any business of the US Treasury Department, but over the years Americans have probably lost more money over psychology–from nervousness–than over balance sheets. If you look at what starts economic avalanches, it usually starts based on little more than fear.
RBMN on October 1, 2008 at 12:09 PM
Spin, spin,
The fix is in.
Spin, spin,
No one wins.
Spin spin,
The air is thin,
around those who created
an economic sin.
Thank you! Thank you! I close the Copa on Friday!
madmonkphotog on October 1, 2008 at 12:14 PM
Those of you who oppose the bailout do not understand it. Period. End of story.
The so-called “bailout,” while it does involve government intervention in the economy, does not involve government ownership of the economy, and thus it is much better than the alternative, socialist plan to buy up the housing stock and nationalize the financial industry (proponents of the latter plan call for it euphemistically with the slogan “equity for taxpayers”). Further, it does not bail out sub-prime lenders (most of them have already gone bankrupt or been bought out) or sub-prime borrowers, so the “moral hazard” argument is inapplicable.
What it will do is stop the collapse of the entire economic system—the failure not just of bad banks and marginal businesses, but of healthy banks and profitable businesses. As with any non-trivial economic argument, the exact details are far too complex to explicate in an internet comment thread, but Charles Wheelan has a pretty good summary on Yahoo Finance today. Suffice it to say, the situation today is more like 1907 or 1932 than 1987 or 1974 or 1929.
hicsuget on October 1, 2008 at 12:20 PM
I want to see CRA revoked.
DerKrieger on October 1, 2008 at 12:21 PM
Yes, yes, and meanwhile, a petition with over a hundred economists’ signatures is calling for Congress to do nothing hastily. Again, nobody’s done the math. Nobody’s the slightest bit interested in doing the math. And until somebody does, pro or anti bailout is whistling in the dark.
rightwingprof on October 1, 2008 at 12:22 PM
It was with this in mind that several of us suggested as a first step the suspension of FASB 157 which inadvertently was creating the equivalent of a nationwide margin call in the banking markets.
With the market being flooded with all the derivative mortgage paper looking for a bid, the mark to market demands of FASB 157 basically deemed the paper to have no value. Many banks were then technically insolvent forcing them to raise enormous new capital in a market that did not want to give them any because they could not get a bid on the paper–a destructive feedback loop. Without a bid the new lenders could not determine the risk on the new loans they were being asked to make.
Sometimes provisions on the books have the opposite effect of their intended purpose when a market goes into panic selling. In 1987 institutions were using the futures markets contract for the S&P as insurance. People had warned that because the futures had a daily price limit there could be a problem in a perfect storm, futures vs the cash market. Well it happened on Oct 19, 1987. The futures market went limit down, lock limit down, so no trades could take place, as such there was no pricing mechanism–the longs could not get out. As a result, massive institutional selling, to offset their exposure, took place on the Stock exchanges dropping the cash S&P price even more, setting up a destructive feedback loop further locking down the futures. The market dropped 22% on a technical problem. The next day the same happened on the opening. It is reported that Soros lost a billion dollars on the opening when he was stopped out. Massive buy programs by the Fed finally stopped the rout. That was the day the famous “Greenspan Put” was born.
Short story–the CFTC has since changed its contract by-laws on limit down moves such that we have halts now, on both the futures and cash, followed by re-openings. These changes were made so that fair value pricing could be arrived at in calmer conditions. The halting of trading for a couple of hours provides that opportunity.
The markets are better for it now.
patrick neid on October 1, 2008 at 12:26 PM
This video has me fired up…BUT can we believe it?? I dont know what to think.
becki51758 on October 1, 2008 at 12:26 PM
I am going with McCotter on this one. NO Wallstreet got themselves into it Wallstreet can get themselves out of it.
http://www.youtube.com/watch?v=7qA3cpYiz5k&feature=related
Dr Evil on October 1, 2008 at 12:26 PM
How can we support a bill that has no provisions to stop this happening again?
lodge on October 1, 2008 at 12:26 PM
hicsuget on October 1, 2008 at 12:20 PM
Wrong, I fully understand. But, enough is enough. If it’s real, why are our elected officials worried about “Wool Research”? Answer that.
As someone who retires in a few months, I really do get it. But, I’m willing to “Suffer”, if it means getting the Government out of the problem. They “ARE”, the problem. Not free market.
If they are not discussing fix’s to the “Root” problem, I say not one red penny to stop anything.
CSMBigBird on October 1, 2008 at 12:27 PM
As the vote approaches, the DOW is off over 100 points.
I thought this bill was supposed to please and reassure the markets.
People who’s money is at stake seem to disagree with the experts.
MarkTheGreat on October 1, 2008 at 12:29 PM
I have no idea if we can believe it. The congressman who made the claim on Kudlow’s show is a Democrat I am unfamiliar with. But why would he make something like that up? Are they pushing this bill as a result of ChiCom blackmail? There is just too much about all of this that we don’t know.
flyfisher on October 1, 2008 at 12:31 PM
OMG! Can we believe any of them? Everyone needs to watch that video and read the information on that website. My blood is boiling right now. I’ve got to go outside for a smoke and calm myself down.
Stayright on October 1, 2008 at 12:34 PM
Can we separate FanFred and the subprime crisis please? Fannie Mae, the world’s largest financial institution by asset size, securitized a piddling 6.79% of the subprime loans made in 2003-2007. The truth is, most of the subprime-backed securities were issued by Wall Street investment banks.
The government did play a role in the subprime crisis but it was mainly not through FanFred but by failing to regulate investment banks, hedge funds and bond rating agencies.
FanFred crumbled not because they securitized subprime loans but because they strayed from their normal MO, which is to buy loans, securitize them, insure the bonds and then sell them to investors, using the proceeds to start over. Instead, they bought the loans with borrowed money, securitized them, but then kept the bonds because they figured they could make more money that way. Most of the underlying loans are healthy (because FanFred actually have serious underwriting standards) but no-one wants to buy the bonds anymore because investors are afraid of everything with the word ‘mortgage’ on it. Meanwhile FanFred had a hard time refinancing their debt because until the US Govt. took them over, they people were reluctant to lend them more money.
It’s an attractive idea to build this historical arch of blame from FDR through Johnson, Clinton and Franklin Raines but in fact reality is a bit more complicated. The current financial crisis has many factors, of which FanFred’s demise and the subprime implosion are to distinct ones.
factoid on October 1, 2008 at 12:38 PM
I saw Sherman on Fox the other day. He is a Rep. from California. He mentioned a group they formed against the bailout. He also made a ton of sense.
I can believe this tho…this whole thing stinks to high heaven. Im sending to to everyone I know.
becki51758 on October 1, 2008 at 12:41 PM
The question is, does this bailout actually remove the coercion (fix the underlying problem) and is its implementation itself free of further coercion?. If not, why can that not be part of the bill?
neuquenguy on October 1, 2008 at 12:42 PM
The intervention needed is to roll back previous interventions.
First, Dodd, Frank and company made access to credit a human right rather than a business decision. Second, when that reaps disaster, the accounting practice that assured highest standards in good times, now artificially dries up capital. It’s been “clarified” (and may be almost enough by itself).
If capital needs to be released to unstick the markets that government intervention gummed up, fine. But let it be done in the form of warrants rather than purchases or equity, both of which involve government meddling and further skewing of the markets.
Chaz on October 1, 2008 at 12:44 PM
It’s up 200 points in the past hour. It is hard to guess how much of yesterday’s recovery was built on anticipating the passage of a bill.
Also, analysts are revising their Q4 and 2009 estimates based on the impact of the credit contraction. To the extent that stocks are trading off of foward P/E’s, the “E” is lower today than a few weeks ago.
dedalus on October 1, 2008 at 12:45 PM
If yesterday’s recovery was based on a conviction that someday there would be a bill, how could anyone claim that the failure to pass the first bailout bill caused any of yesterday’s losses?
MarkTheGreat on October 1, 2008 at 12:51 PM
Those of you that support the bailout do not understand economics and are corrupting America. Period. End of story.
Winning arguments is so easy!
LimeyGeek on October 1, 2008 at 12:52 PM
Lou Dobbs on Imus in the Morning, on the Bail Out Bill. Hint he isn’t interested in a Crap Sandwich, thanks anyway.
http://www.wabcradio.com/Article.asp?id=913480&spid=22807
Yeah the opposition to this 700 Billion Dollar Bail Out is piling up. Who gets to come back later, and claim they didn’t know any better when it is being reported every where? Credibility? Forget Accountability this is the drama driving some politician’s re election chances or not.
Dr Evil on October 1, 2008 at 12:56 PM
Fannie Mae held 30% of the MBS paper – they bought it from the investment banks
Vashta.Nerada on October 1, 2008 at 1:00 PM
I found this among the comments on MM’s blog:
Stayright on October 1, 2008 at 1:00 PM
Paulson needs to ‘fall up the stairs’.
LimeyGeek on October 1, 2008 at 1:03 PM
There was a rally on Friday anticipating that government would get the bill done over the weekend. On Monday the market opened lower. If you look at an intraday chart you can see about a 600 point drop that begins immediately after news of the “no” vote.
dedalus on October 1, 2008 at 1:03 PM
I’m talking about subprime MBS here, not MBS in general.
factoid on October 1, 2008 at 1:05 PM
becki51758 and Stayright,
What I cannot figure out is why no one else is talking about this. It was said on CNBC by a CONGRESSMAN, not by a nutjob with a video camera from the Patriot movement who believes in a worldwide zionist conspiracy. If Americans heard this, wouldn’t they be as outraged as I am? Am I missing something?
flyfisher on October 1, 2008 at 1:08 PM
Thanks a lot! grrrrr This makes me mad!
becki51758 on October 1, 2008 at 1:09 PM
Me too, I’m looking for the link
Vashta.Nerada on October 1, 2008 at 1:10 PM
Maybe a government could do as King suggests, but not this government.
VolMagic on October 1, 2008 at 1:23 PM
No offense but this is another load of crap. First, let’s end this prefacing everyone with free market conservative or whatever other bona fide is supposed to make the masses feel good that this deal is the right one for all of us.
Looking at this as anything even remotely favorable to the republic includes swallowing a major pill that includes future Congressional responsibility. Not to mention, we are supposed to expect Obama’s treasury secretary to be responsible with the petty cash they are giving him to buy whatever he wants. Let’s just say a lot of blue state mortgage deadbeats are going to be off the hook come January.
Someone show me where that scenario is not possible in the langauge of this bill. Democrat President – Democrat House – Democrat Senate. Who will provide the oversight? Republicans who have spent the past decade trying to out spend Democrats?
grdred944 on October 1, 2008 at 1:25 PM
you just made Halloween come early for me
neuquenguy on October 1, 2008 at 1:36 PM
Read through the comments to that video here.
Who knows who those people are, but there are truly frightening comments. One of them, from another site, says this:
That’s probably tinhat territory, but something, somewhere isn’t right about all this.
Stayright on October 1, 2008 at 1:40 PM
A hummina, hummina, hummina type non-admission admission on CNBC that traders are trying to crash the market to convince Senators of the need to pass this bill… Economic blackmail!
TheBigOldDog on October 1, 2008 at 1:42 PM
If that passes your smell test, get a nose transplant.
LimeyGeek on October 1, 2008 at 1:48 PM
Yesterday, a conservative banker friend, who is quite sensible about these things, referred to the bailout as economic terrorism. I am now wondering just who the terrorists are.
flyfisher on October 1, 2008 at 1:49 PM
“I want to see CRA revoked.
DerKrieger on October 1, 2008 at 12:21 PM”
Great point! We should be addressing the root cause of the problem at the same time the rescue is being addressed.
Star20 on October 1, 2008 at 1:51 PM
I think most people, myself included, prefer free markets, but will grudgingly agree to a government bailout, since the government played a key role in the crisis it seems fitting. I don’t however think we need a bailout for a bailouts sake alone. It needs to be a well thought out plan that gets the job done with the minimum damage to the taxpayer, and maximum help to the economy.
The original and the latest version that got voted down in the house didn’t do that.They didn’t address the underlying reasons why we’re here, they just injected money so the party could continue through the night. They would have allowed foreign investors to dump their bad paper in our bailout. Fix these problems and I can support a bailout, but until then I support the house Republicans resistance to the plan.
DFCtomm on October 1, 2008 at 1:53 PM
Indeed. There’s so much FUD being slung around, the public must be quite punch-drunk. Not conducive to making smart decisions.
Some retarded wench from FBC was screeching about “160 million jobs on the line!”. Fire her dumb ass.
LimeyGeek on October 1, 2008 at 1:55 PM
Yes, just like all of us who deny the end of the world is nigh due to anthropological global warming are just getting in the way of saving the world.
Maybe the folks who were so arrogant to believe that their positions and their fear mongering alone would move this legislation failed to convince not only Congress but the people they represent. If we don’t understand, then the proponents failed to make their case and we shouldn’t sign on to something we don’t understand.
End. Of. Story.
shuzilla on October 1, 2008 at 2:00 PM
Many people are trying to scare other people into supporting this bailout, and they talk about the pain mainstreet is going to feel if the bailout isn’t passed. They tell you about the worst case scenario if the bailout isn’t passed, but they don’t tell you about the worst case scenario if the bailout is passed and the taxpayer is stuck with the bill. You should be scared by the state of the economy but you need to realize no matter what our course of action is there is mainstreet is going to feel pain.
DFCtomm on October 1, 2008 at 2:09 PM
If you SUPPORT this taxpayer-funded, forced bailout, you’re are either willfully ignorant or mind-bogglingly stupid.
Skipping the financial reasons – which are obviously beyond your comprehension – here’s a fact that should in itself stop the bailout in its tracks:
Everything our federal government is responsible for, they have fumbled in epic fasion.
From emergency management to public ‘education’ Washington has been soundly proven to be incredibly incompetent.
And you want them involved in our economy on a massive scale???
Dark-Star on October 1, 2008 at 2:11 PM
Many people are trying to scare other people into supporting this bailout, and they talk about the pain mainstreet is going to feel if the bailout isn’t passed. They tell you about the worst case scenario if the bailout isn’t passed, but they don’t tell you about the worst case scenario if the bailout is passed and the taxpayer is stuck with the bill. You should be scared by the state of the economy but you need to realize no matter what our course of action is mainstreet is going to feel pain.
Fixed.
DFCtomm on October 1, 2008 at 2:11 PM
The government did win a few wars and put a man on the moon.
The S&L bailout was probably better than the alternative. More recently, handling WaMu and Wachovia before their failure created a panic was in the best interest of the country.
I wish the government were half its current size, but there are some things that the government can do that private industry can’t efficiently do.
dedalus on October 1, 2008 at 2:20 PM
Fair points. Although I must point out that as soon as the space race was over, the government-run NASA began going downhill.
Like force us to give them money at gunpoint?
Dark-Star on October 1, 2008 at 2:31 PM
No.
Real individuals accomplished these things. The gubmint didn’t use its magical lawmaking powers.
Name one. Other than “fail”, of course ;)
LimeyGeek on October 1, 2008 at 2:31 PM
Private-sector criminals have been robbing us at gunpoint in dark alleys since forever….and they don’t require a gargantuan INS agency to get the job done either.
LimeyGeek on October 1, 2008 at 2:33 PM
Here’s what I posted on the legislation. It’s time to solve the credit crunch. Follow the link to find out why.
LFRGary on October 1, 2008 at 2:39 PM
As pointed out, the SEC has moved to allow these tainted assets to be valued based on their income stream. This makes a fair amount of sense because, unlike a bond, the value of a mortgage backed security goes to zero when it matures. Its value is it income stream.
This move helps banks maintain their ( too low ) capital requirements. It also reduces the size and urgency of the crisis and the need for the bailout.
Gov’t action should now be geared to tightening up loan standards, determining the maximum amount of MBS a firm can carry as a percent of assets and loading up the bailout with pork so that they can maintain their sense of self importance.
Laurence on October 1, 2008 at 3:17 PM
Let me get this straight LFRGary. We must allow foreign investors into this bailout because our investment banks sold them bad paper? You’re not saying that it was government issued bonds that soaked foreign investors, but instead private companies with no connection to the government that sold them bad paper. These foreign powers are now having a temper tantrum and threatening to dump dollars and destroy our economy because they got soaked in their investments by private entities. I’m sorry but I have no sympathy for these foreign investors, and if they have to power to sink our economy then that is the true failing of our government.
DFCtomm on October 1, 2008 at 3:19 PM
In WWII it incurred massive debt and and essentially nationalized some manufacturing. American mass production was key in fighting and defeating two foes. Having multiple private military corporations with shareholders probably wouldn’t be as effective as what we have now.
dedalus on October 1, 2008 at 3:47 PM
Thanks Ed.
Terrye on October 1, 2008 at 5:32 PM
It is not possible for government to intervene in a way that does not involve coercion. It can intervene either by regulation (obviously coercion) or by participating in the market in some way. If it particpates in the market, it has two potential sources of funds – tax revenues (obviously raised via coercion), the proceeds of government bonds (which must ultimately be repaid out of tax revenues) or simply printing money. In the latter case, inflation would result. Inflation devalues cash held in the market and thus transfers wealth (coercively via government monetary action) from those who need cash from those who already hold cash. The notion that government purchases of distressed assets could ultimately be self-financing via the potential for appreciation in the value of those assets is silly – if a meaningful potential for appreciation was present, there would be private buyers (many of whom specialize in buying distressed assets) that would be prepared to purchase them. The fact that there are not suggests that the government is intending to pay too high a current price, thus eliminating any valid expectation of profit.
pussum207 on October 1, 2008 at 6:04 PM
He needs to get off the Keynesian bandwagon and read up on Austrian Economics.
One could have made the case that when Lehman was on the brink it was too big to fail — assets of $639 billion and employing over 26,000 people. Yet in a few days the market, once allowed to do the job, reallocated the good pieces of Lehman to various buyers and the bad parts have vanished. It was poetry.
Tim Burton on October 1, 2008 at 6:47 PM
The government corrupted by “donations and pacs” enabled the free market to do this. Corporate greed caused it. Most of us know examples from our own experience. The problem now is what will be the result of this over reaction to the situation. What will it mean for our free enterprise system? Only time will tell. This is one of the times it is unfortunate the US is a Republic rather than a Democracy.
kanda on October 2, 2008 at 8:31 AM