Bailout 2008. Is it a Good Thing?
Bailout 2008 passed in its second, even less attractive, form. I have expressed my opinion here and in comments on other blogs that the bailout was bad. Of course, I meant that it is bad policy because the effects will be more bad than good, or that in balance there will be more bad results than good results.
Let me try to formalize my objections somewhat. They fall in two broad categories. One is the etymology of the policy. Where did it come from? Why is it what it is? Two is the likely consequences of the policy. Will it free up liquidity? If people believe that how valid is their belief? How will bailed out institutions behave in the future? What does the bailout reveal about our ability to face harsh realities?
Now I am not an expert on economics or financial policy. I have an undergraduate degree in Philosophy, a law degree, some experience in law related to finance on Wall Street, and some experience with my own business. However, I believe that any reasonably intelligent person can understand financial policy issues such as this. It depends on how you confront the problem.
Over the dinner table my daughter often asks a couple questions about Aristotle or Nietzsche, or a school of philosophy. I can usually dredge up a couple facts about their beliefs. Once she blurted out “How can you remember all that? I can hardly remember what we went over in class yesterday.” I was flattered but I do not have a good memory. I had integrated a philosophical map. I drew longitude and latitude lines through the raw data. It all fit into a somewhat larger scheme. Just as if somehow told you an island you would be visiting was in the Caribbean, you could deduce from your knowledge of geography that the official language was not going to be Swedish. For her, most of what she was learning were arbitrary facts. “X” espoused “Y”. Enough of those and it is hard to remember what was told yesterday. If you know that an idealist would have a very hard time supporting utilitarianism, a vague memory of a philosophy triggers a cascade of related facts. It is the relation that makes it possible to remember many facts. One thing follows from another, so to speak.
Now I know that we have been in a serial bubble economy for several years. The millennium bubble was caused by an influx of dollars to counteract any possible problems of the digital turnover from 1999 to 2000, when many devices stored dates in two decimal places. Then there was the dot com bubble. When that deflated, the government stopped the effects by expanding leverage in financial institutions that flowed into real estate [mal] investment. Now finality the real estate bubble, the largest of them all, is deflating and the good ol government of the good ol US of A is trying to stand athwart the tide and prevent this bubble from deflating.
There are many good arguments in support of their present action, not the least of which is this major credit contraction threatens the destruction of many financial entities because of the growth of derivatives and swaps. Tight money prevents one entity from honoring its commitments which causes a domino effect due to the many swap ands derivative transactions written. Ultimately a bubble has to keep inflating exponentially or deflate. It is hopeless at this point for the US Treasury to try to prop up the housing bubble. No matter where the money is applied it will be insufficient. Our taxpayers dollars going down the drain.
If by any chance the Treasury managed to re-inflate a bubble economy, in minutes some asset class would start appreciating (collectibles, gold, oil, anything) and the next big unwind would be even more painful - because the bubble would be fueled not only by stupidly created debt, but by the trillions of dollars the US Treasury is willing to apply in the spirit of absolute panic.
This bubble must deflate. It is stupid to talk about maintaining homeowners equity when their home is unaffordable for them and for all potential buyers. Every cent Paulson is spending will be lost to asset value deflation and will have it be repaid by your children or yourself out of your retirement savings.