An interview with Ron Paul on CNN today, in which he discusses the problems with the recent government bailouts of US corporations.
I really just wanted to hear some thoughts on this. I tend to agree with the idea that, while painful, these bankruptcies are responses of the market which (in a completely free-market economy) need to be allowed to occur. Ultimately, if there is no threat of bankruptcy (or oversight) it would seem that these businesses would also not be threatened by the dangers of speculation. I don't know everything about the US economy, but Paul's analogy of the drug addict's "fix" seems appropriate. There is no doubt that these current conditions are painful for many people, but what is the long-term cost of simply putting a bandaid on the situation? Is this just simply prolonging the inevitable?
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5 comments:
Here as elsewhere, Ron Paul's ideas are great in a vacuum. If the world could start over, his view would be one worth considering for a foundational philosophy. But the real world exists and there is an order to things - and it's not his free-market idealism.
I think the drug analogy is a good one. The fact is you don't just tell a junky to get off the stuff and hide any and all substances from him (unless you're in AA, which is more religion than anything else). If you're dealing with a heroin addict, you lock him in a room and give him methodone to control the DTs. If it's a financial services company integral to a functioning economy, you "lock it in a room" - take over its management, sequester its records, regulate how its stocks are traded - and give it a less threatening version of the drug it's been ingesting - by securing its debt or providing alternative sources of capital. Just like with a drug addict, the idea is to soften the fall.
This chastens "creative destruction" advocates like Paul, but it provides some stability to a financial services industry so devoid of capital it could sink other industries (e.g. banking and insurance).
I don't think these practices are always a good idea. For one, I think the idea that AIG deserved to be bailed-out is laughable; they insured transactions they knew to be high-risk (default credit swaps). Their failure was not due to lax regulation but unwise business decisions.
If anything, this crisis will result in much needed additional financial regulation (not less as Paul would wish), provided the election turns out favorably. Obama 08!
(For the record, I didn't know what any of this meant a week ago. Jennie just taught me all this, like, yesterday.)
Ideally, I think it would be best to let these companies fail. They screwed themselves and they should have to pay the price. Bailing them out runs into the problem of moral hazard.
Unfortunately, all of the financial institutions are so interconnected that they would probably all fail. So, I think we're caught between a rock and a hard place. Ultimately, things are going to get much worse because the money to pay for all of these failures has to come from some where.
The best thing Paul said in that interview was in relation to the dollar. The dollar can be crudely thought of as stock in the American economy. If the federal government continues to take on this bad debt, the dollar is going to fall. If the dollar falls, oil (and other commodities traded in dollars) will rise which is what we saw earlier this year. Obviously, more expensive basic inputs like oil are going to raise prices and drive down the economy.
Hindsight is always great, but somewhere along the line somebody should have more closely scrutinized lending practices for home purchases. Back in the day (from what I understand), you had to put 20% down and couldn't take on a mortgage payment that would eat up more than something like 28% of your gross, verified income. Apparently, in the past few years you could put nothing down on a house and take on as big of a mortgage as you wanted to (more or less) and the lenders wouldn't even verify your income. How does that not sound like a bad idea? Well, banks were packaging the risky debt and selling them as collatoralized debt obligations and FannieMae/FreddieMac were guaranteeing them. Thus, FannieMae/FreddieMac ended up responsible for about half of all the mortgages in this country?! Again, didn't somebody say, "Hey, dude, I don't think this is a good idea." Half the mortgages tied up in a single place?! Now, if a regional or local bank takes on too much bad debt, they can't fail in isolation because so many different institutions have pieces of that debt.
The whole deal is reminiscent of what Enron was doing. And apparently AIG was somehow lending money to itself? I haven't really figured out how AIG fits into this whole thing, mainly because I could care less anymore.
I know it's all more complex than that, but I think it comes down to these financial institutions doing some boneheaded things but we have all been roped into it through their "creative" bookkeeping.
By the way, the ban on shorting financial stocks is absolutely ludicrous. It's just delaying the inevitable. The one hope is that the ban will give investors time to actually stop and evaluate these companies' actual value instead of just relentlessly shorting them just because they are a financial institution. Hopefully, a few of them didn't get caught up in all of this shady business and can actually survive.
All I know is, I'm saving my pennies.
Today, Democratic leaders in Congress stressed that protections for taxpayers need to be tied to the recent government bailouts. This is all fine.
Nancy Pelosi, on the other hand, sounded pretty stupid (at least to me) when she told reporters, "We will not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome." If the check is made out for $700 billion, then it isn't blank. Dummy.
By the way, thanks to both of you for good answers. I enjoyed each, but the only thing we may be able to agree upon is that these companies were doing risky shit, and no one was there to make sure they didn't get in over their heads. Bad news: We get to pay for it. Good news: We are now all part owners of the world's largest insurance company. Good buy, guys!
You can't call people "dummy," that's my thing. Why do you have to steal everything?
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