... all for the bail out, stand up and holler!So the bailout (in its current incarnation) was voted down today, several House members claiming they were receiving emails and letters from their constituents at a ratio of "100 to 1" in opposition to the bill. This would mark the only time I know of that civilians actually appear to have turned the tide on a critical vote as it was happening in Congress. That's kinda cool, but why the opposition? What does the public know about economics?
Not a whole lot, myself included. A quick scan of the internet for recent stories concerning the bailout and the comments that follow them reveals that the narrative many people have come to accept is that this is a bailout for rich people. The thinking goes like this:
There are a bunch of rich people (the bad guys). They set up a system that made them rich while inflating home values. They then ripped off a bunch of poor people (the good guys) and kicked them out of their homes. Now the rich guys are feeling some kind of financial pinch as a result of the unpaid mortgages. Regular people are being asked to hand over $700B to save the rich guys. There is no nuance. There are a bunch of victims and a bunch of villains and that's it. The rich people are totally responsible. Let them lose this one.
If you hold this view or something similar to it, then I can see why you might oppose a bailout. In particular, it's difficult for a lot of people to see how -- specifically, mechanically -- they will be impacted if the banks are not rescued. Some of the more common questions out there are, "How exactly do I end up losing my job if some investment bank somewhere is not bailed out? How do I end up on the street?"
I am absolutely not an expert, and I may have this totally wrong, but I think it goes something like this:
People stop paying mortgages they should have never been offered and should never have accepted. Securities made up of those mortgages, incorrectly evaluated as safe, fail. Owners of insured securities that failed (every major bank) go to AIG to collect insurance. AIG doesn't have anything even remotely close to that kind of money. Without "bailout," banks are left holding worthless loans and worthless insurance policies. At this point, bank liabilities (our bank account balances) far outweigh bank assets. Depending on the degree to which this happens, panicky money managers and nervous citizens fearing bank insolvency run on the banks. Seth Rogen writes the Grapes of Wrath 2, the best stoner movie based on the Second Great Depression.
Now, whether or not the panic above would actually occur, sans bailout, is unknown. If everyone remains calm (I'll give you a sign when you should hightail it to the bank; "tippy-toe") and nothing unexpected happens, we will simply enjoy an enormous recession. If a run on all the banks does happen, however, all bets are off. No, you probably won't lose your job. However, your employer's banker having gone under, you also won't be receiving a paycheck anymore, so that'll just work itself out naturally. On the bright side, there may no longer be a bank collecting your mortgage.
As a fiscal conservative, I am at first tempted to say let it all fall apart. Let the free market teach everyone a lesson about unqualified lending/borrowing. Easy credit inflated the values of homes and mortgage-backed securities. Perhaps we should just get the giant correction out of the way in one quick, two-decade-long tearing away of cooled GiGi Brazilian Bikini Wax (Microwave Formula) from our collective private area. Be there no doubt, this could be a very painful correction. In fact, it is likely to seriously affect the entire world's economy for a long time to come. Additionally, any resulting domestic deflation (lower cost of goods, lower wages, unchanged mortgage payments ... more foreclosures!) means plenty of people who did not lend irresponsibly nor take on unaffordable loans will feel some/much of the pain. And it's at this realization that my "libertarian" economic stance sort of falls apart. Many responsible citizens could end up being even more unfairly penalized if a bailout is not given a chance and you have to be a really serious market purist to GiGi someone else's potty spot while they go on paying their mortgage like an adult. Count me out.
Carrying the bank run scenario further, somewhere down the line I think someone's gotta get "bailed out" anyway. We can try it now with the big banks, we can wait until it hits the smaller banks causing employers to fall short on payroll and bail them out, or we can wait even beyond that until it hits the most critical businesses: grocery stores, telecom companies, power plants, gas stations and then save them and/or their banks so we can still refrigerate our food. And, come to think of it, have food to refrigerate. Most politicians, economists and financial analysts have been saying that a bailout now is the best option to at least make an attempt at dodging potential financial chaos. Since I don't know shit and I'm not enough of a free-marketer (nor armed sufficiently) to risk possible life in a Thunderdome economy, I'm just gonna go with ... whatever Paul Krugman says.
3 comments:
wow, drew, for an admittedly amateur observer, this is a very prescient and observant post. which isn't all that surprising coming from you, actually.
i've written elsewhere along similar lines. you would think all of a sudden the average american is an mba with the way they've all suddenly got opinions. i mean, i'm glad people are finally figuring out that we're all pwned by wall street and big banking interests, but i hope some of this anger sticks around long enough to help force the meaningful systemic changes that need to happen -- things like getting govt spending under control and regulating the creation of credit and fiat currency -- but i'm not holding my breath.
a good analogy i've heard for this situation is that the us economy is like the heartattack man, and voting down the bailout is like denying him a lifesaving transplant while he's in cardiac arrest and wagging a finger saying he needs to quit smoking and eating mcdonald's. save his life first, then worry about the lifestyle changes.
but even so, if done correctly, this "bailout" could actually make the government some profit even if it gives wall street firms a slightly better price than where they've currently marked their assets. all the while preventing a prolonged depression (at least some depression is virtually inevitable at this point).
remember the president started his second term with all that "political capital?" well, apparently he has about as much political equity left as a subprime borrower from the same period. his utter lack of credibility is the primary cause for the shocking no-vote. second is the ultimatum style with which the bill was presented to congress, when for months this should have been being planned as a contingency.
then, on top of all that, no one really took the time to explain the situation to the average american and how it absolutely relates to them. forget loans and mortgages, forget even payroll and employment. wall street is like a very high maintenance mistress -- it may cost a lot, but if you keep her happy and she'll keep you happy, discretely. piss her off and you could lose everything. but c'mon, twenty years into the affair is no time to suddenly become moral and blame her of corrupting you! most everyone has enjoyed the benefits of easy money wall street provided, not just subprime borrowers and overextended house flippers.
but as a result of this perfect storm of crap, you get just enough house reps, including mine, who got an electronic earful earlier today, voting ideology and the country be damned, or else taking the easy way out and voting what's popular rather than being leaders and educating their constituents, the very constituents who turned a blind eye to the whole financial structure for decades and now hold everyone responsible but themselves.
the run on the banks scenario you describe is exactly what will happen, not on the tv, but out your window, if there isn't some bailout and soon. even if it does, we're likely in for a long period where it's virtually impossible to get a job (as if it wasn't hard enough already), those credit card offers stop coming everyday in the mail (in fact, it's difficult to expand your credit at all), and young entrepreneurs have a hard time getting business startup loans (so long unnecessarily hip apparel). rather than thunderdome, i'd liken it to when luke loses his focus on dagobah and everything he'd been levitating comes crashing to the ground. not exactly the end of the world, just not so great either.
I think I'll turn on the HP and start printing my own pesos...could come in handy...
I concur with your assessment. I think it is hard for the majority to grasp because we don’t realize how much of the economy operates on short term credit. If the ability to get a short-term loan disappears that’s when business miss payrolls and ATMs go unfilled. Banks are currently holding a lot more in reserve (i.e. not making loans) to cover financial losses and possible run on the bank. Congress needs to pass something for the sake of confidence and trust, and I think we could do it for less than 700 billion (maybe half that…).
Krugman’s response to this has irritated me a little. His position of: “So am I for the bill? Yuk, phooey, I guess so”. Is a sell out. I expect better of reasonable people. Is it really so hard to get this right? If we don’t hold our government to higher standards, then we’ll get what we deserve. America is better than accepting “Yuk, phooey”.
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