Tuesday, September 23, 2008

A Rant on the Credit Crisis

The main thing that worries me about the credit crisis is how we respond to it. Perhaps the proposed bailout is necessary, perhaps not. I suppose, in the absence of something like it, we may be looking at a major recession, which prospect substantially narrows the range of options that will be seriously considered in an election year. Like everybody else, I would prefer to avoid economic pain, if possible; however, I would rather see a recession, which would result in a sharp correction in the investment and job markets, but which would ultimately instill the discipline required for a healthy, long-term recovery, if the only alternative is a sea-change in our economic system that envisions a more or less permanent nationalization of private debt, and the preservation of the political class that has caused this ruinous state of affairs.

The great danger lies in the possibility that the American people will see the latest credit crisis as a failure of capitalism. It is undoubtedly a failure by certain capitalists, but it is, more importantly, overwhelmingly a failure by our political class to refrain from turning financial institutions into enormous slush funds. I have always been appalled by the fact that Senate and House Committee members have been able to receive political contributions from the very businesses that their committees regulate. But even worse than that is the legislative extortion that is applied by congressional majorities whenever the executive branch (in conjunction with a congressional minority) attempts to impose fiscal responsibility. When it became evident several years ago that Fannie Mae had been using bogus accounting to generate paper profits (in order to inflate the bonuses paid to its executives), which ultimately led to nearly a $10 billion “adjustment” to its books, President Bush (and John McCain) tried to tighten up the accounting principles and the regulation of this institution. Congress pretty much said, Ok, but in return for greater transparency in reporting, we’d like to broaden the definition of acceptable risk; so - voila! - we got the sub-prime mortgage nightmare. The necessary quid always seems to involve the self-defeating quo.

While I think Americans would be willing to accept some kind of emergency measures, they most definitely do not wish to preserve the rot that gave rise to the crisis in the first place. I believe the first presidential candidate to outline a workable emergency plan – even if it involves a bailout – and to link it with a program for dismantling the incestuous relationship between the regulated and the regulators will enjoy a distinct advantage in the coming election.

And in case politicians need reminding: the next revolution isn’t likely to be started by shrieking cyber-pamphleteers and professional grievance mongers whose dreams of class warfare are constantly being thwarted by the reality of their historical ignorance and pathological anti-Americanism; the next revolution will be set in motion by people who have played by the rules and who value their liberty and independence and who deeply resent the wholesale plundering of the nation’s wealth by the pompous ideologues, the clueless incompetents and the glad-handing thieves who constitute the no-longer sustainable core of our present governing class.


kc said...

"...the next revolution will be set in motion by people who have played by the rules and who value their liberty and independence and who deeply resent the wholesale plundering of the nation’s wealth by the pompous ideologues, the clueless incompetents and the glad-handing thieves who constitute a no-longer sustainable core of our present governing class."

Hear, Hear!!!

You're brilliant, Paco...but you knew that, didn't you?

Anonymous said...

The Greatest Heist in History, coming soon to a country near you.

Henry Paulson is demanding that he be given personal control of the distribution of $700 billion, without review or sanction.

All in the name of responding quickly to the crisis that he and his friends have created. The laws must be passed by Friday or we all turn into pumpkins and mice and the glass slipper is forever lost.

I smell rats and fish.

Anonymous said...

It would be a smart move for McCain to oppose this deal, whiile the Ubermessiah supports it.

I finally have decided that it should be opposed; this is people's money going to the coffers of companies that have either a) screwed up or b) pretended to screw up.

As a libertarian, I certainly agree that companies that screw up go to teh wall.

Mr. Bingley said...

Wasn't it PJ O'Rourke in "Parliament of Whores" who said that basically democracies survive until they realize they can vote themselves the treasury?

Anonymous said...

While I agree there is danger that this mess will be seen as a failure of capitalism, that's certainly how Obama and his ilk will spin it, there is reason to think that it will be seen as a failure of government, atleast by reasonably well informed people. One example is victim politics, which played a hand in leading the government to insisting that there be 'affordable housing', a euphemism for lending money to people who can't or won't repay. This is mis-regulation by government, and there's no reason to think they've gotten any smarter.

Lord, don't let them meddle any deep in to health care.


Anonymous said...

Paco, haven't yet read your rant; will do so after mine :-)

I'm taking my cue from Michelle Malkin here; but, hey, I am a hardline libertarian.

This whole panic-until-you-hand-over-money thing about the $700 billion reminds me of the global warming scam.

Frankly, I don't understand who gets the money or why. Did banks and, as they are called in the UK, mortgage companies, make loans that cannot be called in? I thought a mortgage was covered by the lein on the property.

OK So perhaps at current values, the property is valued below price, so don't sell it. Wait 'til things get better.

BTW Now is the time to buy property

So, where is the money going to go? To the mortgagees or mortgagors?

But, if I have heard right, there's is more too it. Companiesw started selling these bd mortgages to each other in an incestuous round of building u[p paper profits; hey, a bubble. It burst.

Why should this one be treated any different from any other bubble: tulips; South Seas; dot coms; etc.

Busgh came out tonight with "dire warnings" that if the $700 billion are not paid out immediately, the end of the world will occour. Hmmm. Why? That's the question that hasn't been answered. All we get is the fear-mongering and not the reason to fear.

I am very suspicious; I smell a heist on a global and historical scale about to take place.

Even if wrong, I reckon it is better for the US and financial markets to go thropught the cleansing experience of paying up for wot you dun.

To put it into perspective, I nask how much Americans pay to hostile governments for oil imports each year? And the congress refuses to allow American oil production. Shame.

Anonymous said...

I can feel an economist's duality coming on! How many hands does an economist have?
On the one hand we have this nice proposition that a couple of thousand for every man, chattel and child will get us past "go" and everything will recover. Not much to pay for an ongoing job, with the alternate spectre of no income looming stage right.
On the other hand, we have the hard-to-swallow proposition that the cheating gamers are taking the prize money.
I am one of those who feels that we can run neither a purely capitalist or purely socialist model. There will always be at least some element of socialism i our working capitalist model, and the Chinese and Russians have found that a large dose of capitalism was required to transplant vital organs into the "centrally planned" zombie-economies they formerly dressed up as revolutionary enlightenment.
At the end of the day I can't see why we pay anyone more than a million a year to do any job, high-powered executive or otherwise. Except that they convinced us it was necessary and a great way to ensure that you had the best executives? Sure!!!
The people who build industrial or communications empires do it because they are compelled to do so. Rupert stopped doing it for the money a long time ago. Execs on the make have a different narrative, but right here's where we end up at bedtime with their storybook - busted!!
Regards to you Paco,

Anonymous said...

Paco for Pres!

kc said...

I would follow John Stossel anywhere but Paco's got my vote anytime he runs for anything.


Sorry, I don't know how to do links here, Paco!

Paco said...

Very kind of you, KC, but my views on elective office are the same as those of my father, Old Paco, who was occasionally asked to run by local Republicans for sheriff or state office: "The only thing I ever ran for was the county line."

pete m said...

WC - the money is needed for the credit market. Without an inflow of cash, liquidity will dry up and banks will not have funds to lend to people over and above their deposits. This will mean a severe contraction of the economy, commonly referred to as a recession or if worse, depression. Most of the bailout is not going to the fin inst who stuffed up, but to the credit market and to buy those mortgages.

Now it could happen that the mortgages the fed buys will end up gaining them $, as Buffett thinks it will. The Fed stands to make about 20% on their loans - and they will control how those houses are sold. So rather than have all those FM loans called in and the market flooded with houses, we'll see a more reasoned approach to their sale.

I certainly agree with paco that none of this money should go to saving the system that failed here, namely bad regs (not under or over - just bad) and cowboy financiers.

A whole bunch of greed needs to be punished.

amortiser said...

The money is needed for the credit market?

The Fed is going to buy a whole bunch of bad mortgages. It's going to buy them off those who bought them speculating that they would be able to pass them on to someone else for the big payday. They have made bad decisions and now people who have not made such decisions (taxpayers) are going to be forced to bail them out.

This is bad policy. The cash is coming out of some peoples' bank accounts and being given to others or the Fed is going to print a big load of cash. Someone has to pay and in this scheme it will not be those who are responsible for this mess.

The people who make bad decisions should bear the responsibility for those decisions. When bad decisions are rewarded or mitigated what does that do to the mindset? Bad decisions will proliferate and people who make good decisions will be penalised for their virtue. The result is perverse and dangerous.

Let the cards fall where they fall. The lessons and consequences will then be there for all to see.

This scheme should be opposed. Those who stuff up should pay the full price.

Anonymous said...

I have read a lot about this crisis, all the points back and forth. The most salient thing in my mind - something that seems to have been missed - is that these people who are so sure they know what the problem is and how to fix it, are the same people who three weeks ago had no idea what was going to happen.

Let me modify that: Three weeks ago, they were of the opinion that things were going okay.

They have been proven wrong.

Suddenly, in the space of a few days, they're the experts and the only ones who really understand what's happening? I don't buy it.

Second, this is no way to do government policy. Government policy is about the long term, not the short term. This is day-trading mentalility

finally, these claims that "we have to act now! Spend all your money! The sky is falling!" remind me of the global warming 'crisis.'

My guess is that it's not as bad as it looks. America needs to hold its nerve.

It will pass.

Anonymous said...

I urge everyone to watch this video - where the politicians stop the regulators from examining the financial fraud in the US mortgage industry in 2004. The problems were brewing then but the Democrats actively stopped govt investigators from checking up.