Monday, October 27, 2008

Three Bailouts - One Big Mess

Over the last two months, government bailouts of the private sector have been on the agenda more than anyone previously could have imagined. It is now obvious, even to Alan Greenspan, the crusader of anarcho-capitalism, that deregulation and Wall Street-mania has brought a catastrophe to the American economy, and to the American people. To make up for decades of mistakes, a series of government bailouts have been proposed, initially designed to restore the system so that it could continue to operate as it had before. When it became evident that this could not be done, the plans had to adapt. The government has certainly been innovative in coming up with new ways of helping the financial industry, but being all over the place with a new plan every day is not always such a good thing for the economy. One economist recently described the efforts as a giant game of whack-a-mole. What is also lacking in the process of trying to save the economy is a clear vision and ideological coherence in how to actually go about the task. Bush, Bernanke and Paulson have, from the start, been working with an idea that they strongly disagree with: government intervention in the private sector. The result of this is a twisted, ineffective, wasteful and criminal situation.

As of now, there are mainly three different bailouts that have either been proposed, or are in different stages of implementation. One of them was suggested by Bernanke and Paulson, the second by John McCain, and the third was advocated by a large number of economists who drew inspiration from crisis management in Sweden and Great Britain.

What I refer to as the first bailout, is the original $700 billion plan presented by Paulson and Bernanke that would buy up bad assets from Wall Street firms, also called the TARP plan. The proposed second bailout is what John McCain has recently suggested, which is the one that would have the government buy individual mortgages. The third bailout is what the government later changed the first one into, so that the $700 billion would instead be used to buy shares of banks. This is what was done in Sweden in the 90s, and what was done in Great Britain a few weeks ago.

It can be hard to wrap ones mind around what these bailouts really mean, what they can accomplish, and what the final consequences are. Consider the following analogy:

During a period of five years, Ford has been producing millions of cars. After a couple of years, signs are starting to show that the quality of the cars is rather poor. Some more time goes by, and eventually it becomes clear that all of Ford’s cars that have been produced during this five-year period will inevitably break down beyond repair after just two years. Ford is now facing bankruptcy because of these problems of quality control in the manufacturing process. There is no way that the company is able to reimburse all the people who bought the faulty cars, and Ford asks the government to bail out the company. The politicians then consider three plans to bail out Ford with taxpayer money:

1. To buy all the faulty cars at full price from the consumers who bought them, so that they can go and buy new cars, and so that Ford does not have to reimburse the customers and just go on as if this never happened, or

2. To set up government-run and owned car repair garages that will repair and update all the millions of faulty cars produced by Ford, or

3. To help Ford overcome its problems with quality control in the manufacturing process by investing money in Ford factories as well as in research and development for the future

It may come as no surprise that plan 1 is an analogy of the first bailout (the TARP plan), and that plan 2 is the McCain plan. Most people now realize that the original bailout plan was not such a good idea. I believe that plan 1 in the Ford analogy is no more absurd than the TARP plan, in its practical implementation. McCain’s plan is also so complex, and has such a large element of a tax money give-away, that it is undoable, unfair and would not really solve any systemic problems. I believe that McCain only proposed it so that he could have something to say to individuals who are suffering at the hands of 35 years worth of laissez-faire capitalism.

Plan number 3 is meant to describe the Swedish/British bank bailout plan. A bank is a lot like a car factory, in that most financial instruments and most financial deals originate there. By fixing the banks, the fundamental workings of the financial economy could probably be restored. As it turns out, however, that plan may not have worked as well as most people had hoped. The fact that the banks are still not lending money to each other, or to individuals, is really at the heart of the financial problems, and it is also an economic indicator that is every bit strong as the stock market when trying to gauge where things are going. The banks are also at the heart of a healthy relationship between the real economy and the financial economy. Never mind the stock market, hedge funds and all the rest of it; the economy cannot recover with job growth and wage growth if the banks don’t function properly. At this point, it appears that the bank bailout plan did not work, but why?

Henry Paulson made an intentional “mistake” that doomed the bank bailout plan, and again, turned the $700 billion package into a huge waste of taxpayer money. He did not require the banks to lend out the money that they were receiving from the taxpayers. Injecting the money into banks was the right thing to do, but it was not right to do this without strings attached. What was needed were clear guidelines and rules for what could be done with the money, but none were provided. Paulson should have required the banks to make the money available for other banks and individuals to borrow, which is what politicians did in Great Britain.

The government should have taken some amount of active control of the banks as a result of the huge capital injection. Instead, the American banks took the money and put it in the safe, or went and bought up other banks. This is happening as we speak, and we are going to see a lot fewer banks in America within a few years. The banks can hence kill two birds with one stone: they can clean up their balance sheets, and eliminate the competition! Paulson probably did this because he categorically opposes government influence in the private sector, and by not doing his job in the interest of the tax payers (by not using the power that the government now rightly has over the banks), while hoping to appear to be doing his job admirably, he is once again trying to deceive the American people and steal $700 billion from them and giving the money to his friends.

Again, we are seeing a twisted version of capitalism with huge give-aways, corporate welfare, corporate favoritism, lies and deceit. What I described in plan 3 in the Ford example is what should have happened in a well-designed plan (and what did happen in Sweden). If I were to incorporate the result of the bank bailout plan, into the Ford example, it would instead look like this:

3. To give Ford $700 billion so that the company can buy Honda, Hyundai and Chrysler, close them down, and keep whatever is left over of the money while the government does nothing.

Moreover, I advise that the current electoral system should be destroyed.

1 comment:

Anonymous said...

This may sound radical, but wouldnt it be better for the country if the government just forgave most if not all of the consumer debt?

De-value the prices of homes and readjust the mortgages so people can afford to stay in them.

Allow people to declare bankrupty and wipe away their credit card and student loan debt.

I guess I still don't understand how bailing out the banks will help the economy when the consumers are still stuck with debt, which will prevent them from both spending and from gaining access to new credit.

Are these banks going to lend their money to aliens? even if they lend the money to businesses, whose going to buy the non-essential products that these businesses might produce?

The only hope I see here is if the businesses use the loans to create products which can be exported to countries like china and india.

The days of runaway american consumer spending are over.