Bailout so far: $3.5T, will there be anything left?

Topics: Regulation
12 Nov 2008

From: Ervan Darnell




As of today, the bailout stands at $3.5T, yes, trillion[1]. Forget
that paltry $700G. Congress seems to be on a drunken spending and
regulatory spree, from nationalizing the banks, to micro-managing how
companies must operate (setting wage levels, legislating dividend
payments). In the interest of saving your mortgage, they have
mortgaged your future. $3.5 trillion, wow.
Has anyone noticed the recovery for all of that money spent? I
think not.
The TARP (the $700G bailout) was supposed to be about saving banks by
insuring some bad debt. Oh, forget that [2], Paulson wants to use
the money to do whatever he pleases. I told you so. The
corruption possibilities here are unlimited. He (or his successor)
will be back for more for the banks later.

With this level and capricious degree of bailout, the government is
making it impossible to make any rational economic calculation. Far
better to look bankrupt and get in line to beg for a handout than
actually do something productive. The government is either going to
give you or your competitor $100G. That trumps everything
else. Winning the lobbyist battle is far more important than
winning the battle to make a better product.
If there is some nuanced explanation of short term effects, breaking
various cycles of expectation, avoiding deflation, etc. I haven't
seen it. The recent behavior of the government says that any such
explanation, even if valid, is going to be ignored in their head long
rush to seize control of everything they can and recklessly spend the
money on their favorite projects anyway.
In particular, what is a GM bailout anyway [3]? It has nothing to
do with "credit markets freezing" or any of the other
excuses. It's all about a bailout for an inefficient company,
consuming more resources than it produces. Why do we want to
preserve that? Why do we want to take capital away from the
productive economy (as it's borrowed to finance the bailout) to finance
the unproductive economy? We have to create new, useful jobs
and move people to them. Preserving the old dysfunctional economy
won't work. The Ron Paul piece was on target: until prices converge
with reality, we'll continue bleeding. Congress's approach is to
deny that reality at every step by subsidizing loans to keep housing
prices too high and to subsidize the production of cars we don't actually
want (net all costs). None of this can work. There is no
apparent limit to who needs a bailout. Everyone is losing money
this quarter.
This feels like a death spiral. Every intervention leaves less of
the productive economy, more of the unproductive economy, more
uncertainty, less capital (that $3.5T was borrowed) to invest in
something actually useful. Then, every downturn is taken as an
argument for more intervention.

If there is any good news, it is that the economy has always recovered
from governmental onslaught before. And $3.5T is "only" a
doubling of the federal budget. Some of the purchased assets are
supposed to have some value. Well, that was yesterday's theory, now
they are talking pure bailout. If all $3.5T winds up as debt (only
15% of the S&L bailout was recovered[4]), the debt will be near 100%
of (last year's) GDP. It was slightly higher than that in WWII, but
nowhere near since. Even conservative economists (e.g. Martin
Feldstein) are calling for spending in this recession. This still
seems wrong to me, but I'm open to a good argument. If it must be
done, these individualized bailouts seems the worst possible way.
At least, let's do something with the money in way that is harder to
corrupt, spreads more evenly, is less economically disruptive, and buys
something useful (like fixing bridges).
[1]

http://finance.yahoo.com/tech-ticker/article/126117/Bailout-Price-Tag-3.5T-So-Far-But-%27Real%27-Cost-May-Be-Much-Higher?tickers=AIG,FNM,FRE,XLF,^DJI,^GSPC,C

[2]

http://finance.yahoo.com/tech-ticker/article/126386/Bailout-Improv-Paulson-Rolls-Out-New-TARP?tickers=AIG,FNM,FRE,XLF,AXP,^DJI,^GSPC

[3]

http://www.news-leader.com/article/20081111/BLOGS09/81111039/-1/rss

[4]

http://en.wikipedia.org/wiki/Savings_and_loan_crisis


====================================================
Ervan Darnell,

http://www.kelvinist.com





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