Wall Street thread

What we are seeing today is a reason why I said this corporate welfare -- bail out plan, was short sighted and feckless... and would create bigger problems in the long run.

There was no staving off a deep recession and probably a depression. So these legislators went in with their guns blazing, except the guns blazing amount to spitting into the wind when it comes to the world's credit markets. That spitting into the wind is a substantial sum of money to the typical American, though, and will create government deficit spending that only exacerbates a nasty economic downturn we were going to have to deal with either way.

This isn't the brain surgery some people pretend it is. This idea that government controls the economy is plain wrong. The financial system is simply a thin layer wrapped around the real economy. Strip it away and people will still behave in certain ways. They will still develop and market new products. People will still buy clothes and food. That goes on, even if an economic downturn causes people to tighten their belts because demand of things is elastic, depending on what you are talking about.

The bottom line is, though, even though you have to face hurt for a period time (and there was NO avoiding it, even with Senators and Congressmen puffing their chest and acting like they were saving the world), if a bank that was helping fuel the economy fails because of stupidity, ANOTHER one will take its place. The best course of action was to let the bad actors self select themselves out and allow new, smarter people to step in and create credit markets. It WILL happen, because there is an opportunity to make money doing it. Government interference screws that up, and when they interfere with private markets with $700 billion of our money, they take a bad situation and will undoubtedly make it worse -- and prolong the suffering.

Damned idiots. If only people could accept that some things can't be "fixed." Sometimes you have to just take your medicine, and going for an "easy" fix stands to make you more sick in the long run.

 

cranberry, Well, I posted before today saying that we were in for a world of hurt regardless of government action. And our $700 billion package has zero impact on the WORLD'S credit markets, which dwarf that amount -- and all of Western Europe, Asia and South America, which we have no jurisdiction over, but which are related to us and therefore suffer the same problems when our credit markets dry up.

I predicted this wouldn't "soften the blow" for a number of reasons. One, they never intended to soften the blow. They intended to grandstand and gain political points. If they wanted to soften the blow, they wouldn't have been out with a doomsday scenario announcing to the financial markets (and the average person) that we were going to go to hell in a handbasket without the Senate and Congress playing superhero (how they wanted to be perceived). Bush wouldn't have gotten on TV and scared the hell out of the rest of the world. They wouldn't have set expectations of the necessity of a package, when they couldn't even get it passed the first time -- signaling to the world that they really AREN'T in control of anything. It had the exact opposite effect. The only thing they might have been able to do was bolster confidence. Instead, they created more doubt that anyone should be confident.

I'm all of easing "human" suffering. Short of that, I am all for trying to soften a recession, if it is possible. But I am saying that a convoluted government program that uses the money of the people suffering--and uses it in the WRONG ways, is not a formula for fixing anything. It hurts those people worse than they would have been hurt. Done correctly (and as I pointed out above, it was done wrong in most ways), it might have had an effect of bolstering consumer confidence. We didn't even get that. But even done correctly, it would have given us a short-term bounce, NOT prevented the recession we are staring down and created a mountain of debt that is sure to extend the economic downturn. We would have ended up with the same exact recession (and let's face it, this has depression written all over it), except with $700 billion of our money pissed away in a feeble attempt to make it look these morons who have no clue can actually manage an economy they don't understand.

It was a bad idea in every way. I don't care if people who call themselves "free-market capitalists" were for this. A bad idea is a bad idea no matter what you call yourself to justify it.

 

am, Well, not sure I can teach. A little of this is a background in economics, a little bit is personal philosophy. The best I can say about myself is that I believe my ideas are informed.

Credit markets rely on confidence. When you lend someone money, you are not going to do it unless you feel with a degree of certainty that they will meet their repayment obligations. Government can't legislate that. Markets legislate it. Risky borrowers have to pay more to get loans. That way lenders can eat some bad loans and make up for it with he higher interest payments they get from those that meet their obligations. Less risky lenders can pay a market rate, based on current inflation and interest rates.

What happened in this crisis is that the largest borrowers (investment banks, insurance companies), got out of control and did some incredibly stupid things. And lenders got stupid at the same time and afforded them VERY risky loans. The investment banks got crazy betting on the housing market -- they bought these complicated securities that were futures (technically, they were a type of investment called derivatives and swaps) based on packaged loans (mostly tied to the housing market). That in itself was OK. Investment banks make bets on investments all the time and they can absorb bad bets when they get it wrong. In this case, though, many of these investors leveraged themselves to abnormally ridiculous levels. And the lenders were complicit. So a firm like Lehman Brothers could leverage itself to 50 times the worth of its assets. And it took a bath. As a result, their creditors were left holding the bag. Multiply Lehman by hundreds of other firms, and creditors -- which were allowing companies to leverage themselves to that degree and handing out ill-advised loans -- swung to the opposite end of the spectrum and got gun shy. They won't extent credit to anyone with any degree of risk -- let alone affording any power of leverage.

The government can't fix that. Think of it as me and you. If I lend you $10,000 (even knowing you don't earn a lot of money) because I think you have a great investment idea, and then you lose the money, when you come back and ask me for another $10,000, I am going to cut you off. Government can't change that. If they do, they are just trying to change it with OUR money, because the only money government has is tax revenues. In the case of the financial crisis, the average American is going to suffer as a result of the recession being brought on -- with less liquidity out there, there is less economic development and our economy retracts. Government's solution is to tax us on top of it and take a ridiculous sum -- $700 billion -- of money we can't afford and muck things up with it.

If they stay out of it, it is STILL going to be ugly. But these things sort their way out. If a bank dries up, there will be others who spring up ready to make loans. There is a profit incentive to. The NEW lenders will be more careful with their money. They won't let a firm like Lehman borrow well beyond its means. They will charge a lot in interest because everyone is so gun shy now. But eventually someone else will step in and undercut them, because they will know they can afford the risk and still earn a healthy profit. And as more new lenders step in, it will create competition and things will stabilize and normalize.

It may take time. We are staring at a nasty recession. But that is the way markets work. Government can't legislate it.

I'll turn it back around. Find me someone who can explain how government, aided by debt that will have further negative effects on our economy, can fix something that we just have to ride out because a lot of people made bad decisions and now the world's economies are paying for it? What is this magical solution?

 

BT, a depression isn't a well-defined term. There are no parameters that officially make a recession into a depression. A recession is a simply a decline in gross national product of two quarters or more. A depression -- in loose terms -- is a recession that spirals and turns into a prolonged recession. Typically attempts at fiscal policy make the situation worse, too.