No Time for Utopian Anti-Interventionism

[metalman]

Re: No Time for Utopian Anti-Interventionism

Third World Countries -- what does that have to do with the present situation and discussion? I am confused.

Is the intimation that we will become a Third World Country if we do not allow the bailout to move forward? Or that a Depression will make us into a Third World Country?

that a depression will turn the usa into a 3rd world country. it will split politically along wealth lines like a log hit with an ax.

i ask abut travel becaues i know a dozen free market purists and they all have one thing in common... none of them has traveled extensively and seen how other countries do and don't work. every last one of them has developed a religious belief about markets and the gov't that cannot withstand a day's experience in a country that conforms to their fantasy world of tiny gov't, or can go a day without the services that gov't provides them that they don't even notice... but will after they're gone... safe food, safe roads, safe cars, etc.

[phirang]

Re: No Time for Utopian Anti-Interventionism

that a depression will turn the usa into a 3rd world country. it will split politically along wealth lines like a log hit with an ax.

i ask abut travel becaues i know a dozen free market purists and they all have one thing in common... none of them has traveled extensively and seen how other countries do and don't work. every last one of them has developed a religious belief about markets and the gov't that cannot withstand a day's experience in a country that conforms to their fantasy world of tiny gov't, or can go a day without the services that gov't provides them that they don't even notice... but will after they're gone... safe food, safe roads, safe cars, etc.

Civility is compromised enough as it is... add in real poverty, i.e. hunger, and easy access to firearms and you have...

Brazil!

[hayekvindicated]

Re: No Time for Utopian Anti-Interventionism

I would agree with EJ's suggestion if American politics was not so corrupt. The problem with bail-outs is that the politicians will resume their merry ways as before and continue to spend money without an end in sight.

We have seen America's unfunded liabilities rise from $20 Trillion in 2000 to $58 Trillion under George Bush. Bankruptcy is inevitable because the politicians will not do anything to deal with this problem. And since they won't deal with it, the debt bomb will eventually explode. America will eventually have to declare bankruptcy.

I find Jim Rogers' comments hard to understand. He knows all about the debt problem but thinks a one year nasty recession can cure the problem. This is badly mistaken. The problem is beyond cure. There comes a point where even chemotherapy doesn't work. Within the decade, I believe, America will have to face up to the $58 Trillion (and rising with compound interest) question. I do not believe that question has an answer.

I also do not believe that because America owns the world's reserve currency at this time, it cannot experience hyperinflation in the future. All human arrangements must end some day. So will the hegemony of the dollar. Once that ends, the Government will then go on a printing spree because without that the social security and medicare commitments will not be capable of being honoured. And then there will be total economic failure.

[flintlock]

Re: No Time for Utopian Anti-Interventionism

Just a few comments about comparing a depression USA to a third world country. There are some major differences in what caused Third world countries to become that way and what we are going through. By the way, I am pro (limited) bailout and do believe no bailout will result in making America a very scary place to live, but 3rd world, no.

1) Massive corruption in 3rd world vs what we have here( though we are catching up in this regard) No economy can succeed in that climate of corruption. All 3rd world countries have this in common. #1 reason for being a 3rd world nation in my opinion.

2) Much worse education systems in 3rd world. In many cases, People arent just poor but ignorant, so much more limited in job choices. You need an educated population to climb out of a depression. They don't have it and the rulers plan to keep it that way on purpose. I don't see that being an issue here.

3) Less stable governments in 3rd world mean very high risk to investors. Hopefully, our government in a depression will remain stable. I think most investors would still find the US in a depression a safer bet than Guatemala.

4) Did the US turn into a 3rd world nation during the Great Depression? Not hardly. It sucked, people suffered, but I don't remember hearing about homes being turned into forts or any of that nonsense.

5) Debt deflation didn't cause their problems. Their mud huts and shanty towns didn't suddenly lose value.

3rd world countries have economic systems so much less developed that ours, its really hard to compare their situation.

In a US depression, I do think things will be a lot more violent than in the 30s, but not necessarily the typical anarchy of a 3rd world country. I find the threat of socialism and decline of capitalism a lot more frightening than any 3rd world scenario. The criminals of course will all come out of the woodwork, and frankly, I wouldn't want to be living in a big city. But then I feel the same today about that.

[EJ]

Re: No Time for Utopian Anti-Interventionism

Always delighted to receive comments not only from a fellow entrepreneur but a paid-up subscriber, as well. A couple of comments.

hmmm very interesting postulations so allow me to throw my little spanner in the works.

IMHO when inflation is tracked back to its ultimate source there are only ever two causes.... Greed or inefficiency.

I guess one could say Wall Street has provided the greed (I have had trouble trying to find any difference between Vegas and Wall Street, other than the Flashier slot machines) and Government has supplied the inefficiency. I am not an economist, I just own my own little business. My business is only as good as its worst employee in my eyes. When someone makes a mistake or has a bad day, I foot the bill and I take responsibility.

The secret to the success of functioning capitalist systems is accountability and reward. The reason government can be so bad at delivering products and services is that the people who work for them are not measured based on performance. The result of success and failure is the same. You are not held accountable for your decisions.

On the other hand, as a business owner you are not only responsible for your own decisions but for the welfare of others should your judgment be flawed. The experience of making payroll for years on end is one that informs my opinion on the King plan.

The one thing that seems to be so often missing in financial discussions is people and thus emotion. In the US over the past ten days I have spoken to several associates whose sales are down 80 - 90% in last years same week sales. Seems people may have put away their wallets. (would this be close to a "Sudden Stop"??)

I too am hearing friends that business is evaporating. As a student of the Great Depression I can tell you that this is precisely what happened then. Try to explain this to market traders and academics and they won't get it.

We can all attribute blame, but what is blame?? I call it - Blatant Lies At My Expense.

In other words I can choose to not accept responsibility and pass it over to someone else so I feel better, else I can look at me and say, what is REALLY happening here. Blame is such a futile excuse.

As I explained to Inc readers in Wall Street vs. Main Street: "The hidden benefit is that if you've been smart about cash management and can quickly reduce the fixed costs, it [the recession] will be beneficial because your weaker competition will be probably going out of business. The pie will be shrinking, but you can increase your slice."

However, if we allow the recession to develop into a full blown recession. as I explained Sat. to a group of UMass, Amherst aspiring entrepreneurs – at a lecture at 8:30AM on a Saturday! – then human capital is wasted. You have a situation like we had in the early 1980s except not intentionally induced by the Fed: PhD physicists driving cabs and fixing the slurpy machine at the local 7/11.

I have read that the game has changed/is changing and the next 20 years will be nothing like the last 20. The whole financial system is changing, so therefore might not the rules need to change as well?? The only thing that is ever constant is change. It is just the degree of change that changes.

I expect it will start off badly but end up well, but I'm an optimist.

We hear about all the banks on the"watch list" that will fail. By my count there are a lot of banks out there who will not fail (all going well). So why not do an about face and support those institutions that have proven to be more diligent rather than throw another bet into the Wall Street Casino. If politicians want to be re elected, then supporting their constituents local bank would surely find much more favour than another Wall Street gamble. Plus it just might make the population feel a lot more at ease, feel like someone actually cares about them. They just might start to relax a little and maybe even start to believe in something positive again. Hell they might even go out and Buy something. Now that might be a good thing, don't you think??

Rewarding the well run banks by allowing them to buy the assets of the failed badly run banks is how it should work. Maybe government needs to step in and help float the deal but no more than that. When we schooled the Japanese on the S&L bailout we bragged to them that we did it that way. The right way. Put the assets on the open market to maximize the price. Throw the criminals in jail where criminal activity was proved. Reward the good banks with the assets of the bad banks. So why not this time?

The problem is that the whole banking system structure is broken because of debt securitization and no-acount transaction-based lending. It is as if we over 15 years allowed the oil companies to change the gasoline supply over to securitized gasoline. Then one day when we were all driving through the desert all the gasoline turned into water because, as it turns out, the new fuel doesn't work in the heat. Now we can either allow the government to replace enough of the securitized gasoline with real gasoline to get some of the engines started again to let us drive out of the desert or we can all get out and start walking. Some of us didn't even bring water. Our fault for letting the banks do it.

I don't doubt that my comments may bring some adverse replies and that is fine, because it will allow me to look at me and see if I have it wrong. Then I can either change me or live on in my delusion.

I greatly appreciate all of the comments here and have learnt a lot through the writings of each and every one of you.

Perspective is all that keeps us apart, but somewhere inside this mess there is a Truth and That Truth shall set you free, if it is ever found amongst this huge pile of exposed greed and deceit that we are ALL faced with now.

It doesn't really hurt that much when you step outside of the box and look at something from a different perspective. In fact doing just that is what has allowed us ALL to evolve and live in a world full of amazing technology and instant hamburgers. Finance is not sacred, there are no fixed rules. PEOPLE are sacred, ALL people. Be they Asian, Anglo saxon, African, purple, pink or green. THEY are the other side of the balance sheet. Too often, that simple fact is forgotten, usually because of Ego or Greed. The greatest wealth of any economy lies in its people.

There is great wealth here at itulip because of all of you.

Cheers

Great to have your here.

[grapejelly]

Re: No Time for Utopian Anti-Interventionism

that a depression will turn the usa into a 3rd world country. it will split politically along wealth lines like a log hit with an ax.

i ask abut travel becaues i know a dozen free market purists and they all have one thing in common... none of them has traveled extensively and seen how other countries do and don't work. every last one of them has developed a religious belief about markets and the gov't that cannot withstand a day's experience in a country that conforms to their fantasy world of tiny gov't, or can go a day without the services that gov't provides them that they don't even notice... but will after they're gone... safe food, safe roads, safe cars, etc.

I have traveled extensively in Mexico. I mean into the countryside and away from the tourist zones. I have also traveled in West Virginia (just KIDDING).

Government doesn't provide these services, Mega. Private actors do. And the sanctity of contracts and private property, and the predictability of the law in terms of enforcement, these are the things that make a country first world or third world.

If the US bails out the banksters, as it will without a doubt, it is rewarding irresponsible behavior that is costly to individuals. It is actually socializing the losses of a few, and placing them on the shoulders of the many who are innocent victims.

Socializing the losses of the few is a rather third world thing to do...

I too am hearing friends that business is evaporating. As a student of the Great Depression I can tell you that this is precisely what happened then. Try to explain this to market traders and academics and they won't get it.

As I explained to Inc readers in Wall Street vs. Main Street: "The hidden benefit is that if you've been smart about cash management and can quickly reduce the fixed costs, it [the recession] will be beneficial because your weaker competition will be probably going out of business. The pie will be shrinking, but you can increase your slice."

I am very appreciative of this point of view. I am an entrepreneur and have a large number of subscribers who are entrepreneurs and greatly affected.

As some wag observed, a recession is when your neighbor loses his job and a depression is when you do.

Many of my subscribers are ALREADY in a depression. They owe $300,000 on their house, they cannot afford the payment, the house is worth $200,000, they have massive credit card debts, maybe $30,000.

This is the reality for thousands of my subscribers. Thousands.

Now, they got drawn in, in many cases, by the promise of cheap and easy credit. And the banks and brokers who sold them on loans in many cases earned gi-normous commissions.

So who is going to bail them out? And why should these folks now face losses of $2700 or $5400 per household, or $10,800 per household (the cost pro rata of the "bailout") and still have their problems to deal with?

However, if we allow the recession to develop into a full blown recession. as I explained Sat. to a group of UMass, Amherst aspiring entrepreneurs – at a lecture at 8:30AM on a Saturday! – then human capital is wasted. You have a situation like we had in the early 1980s except not intentionally induced by the Fed: PhD physicists driving cabs and fixing the slurpy machine at the local 7/11.

Yes this will happen. Remember Argentina in 2001? That is exactly what happened. But even there, a few years later, they dug themselves out of it.

The alternative is simply to spend huge gobs of government money, wildly inflationary, and in the end, crowding out of the private sector. A disaster.

And then they'll throw some sops at Joe Homeowner, who will not be fooled. And that is very, very bad for Big Business and Big Banking because the mob will be very angry.

This bailout smacks of the exact same process when the Patriot Act was passed, and when the Iraq war was started...the government whipping people up into hysteria and saying "we have to Do Something Now or else we are lost."

That type of process only works so many times. It can cause pretty devastating cynicism and eventually the widespread graft and corruption and cheating because the average little guy perceives the system as completely unfair (and he is right.)

I expect it will start off badly but end up well, but I'm an optimist.

Rewarding the well run banks by allowing them to buy the assets of the failed badly run banks is how it should work. Maybe government needs to step in and help float the deal but no more than that. When we schooled the Japanese on the S&L bailout we bragged to them that we did it that way. The right way. Put the assets on the open market to maximize the price. Throw the criminals in jail where criminal activity was proved. Reward the good banks with the assets of the bad banks. So why not this time?

The problem is that the whole banking system structure is broken because of debt securitization and no-acount transaction-based lending. It is as if we over 15 years allowed the oil companies to change the gasoline supply over to securitized gasoline. Then one day when we were all driving through the desert all the gasoline turned into water because, as it turns out, the new fuel doesn't work in the heat. Now we can either allow the government to replace enough of the securitized gasoline with real gasoline to get some of the engines started again to let us drive out of the desert or we can all get out and start walking. Some of us didn't even bring water. Our fault for letting the banks do it.

The bailout is all about preventing free market transactions. It is all about hiding the market value of securitized holdings.

It is ANTI MARKET and ANTI MARK TO MARKET. That's the bottom line. The ONLY reason for the bailout is to PREVENT price discovery.

That's why loaning money to the banks isn't enough. No, the banks need to sell off these assets without anyone knowing their market value.

There is NOTHING free market about it. It's like the government in your example saying "we'll buy gasoline from the oil companies at an unknown price that only we decide, and use taxpayer money to do it." Well, it's great for the oil companies. But ain't great for the consumers.

[metalman]

Re: No Time for Utopian Anti-Interventionism

IRemember Argentina in 2001? That is exactly what happened. But even there, a few years later, they dug themselves out of it.

"EVER since Argentina began its recovery in mid-2002 from a devastating financial collapse, it has seemed to defy economic gravity. The country’s left-wing government, first led by Néstor Kirchner and then this year by his wife, Cristina Fernández de Kirchner, has violated many standard economic prescriptions: it has shunned the IMF and shafted private bondholders; kicked out foreign companies and set up new state-owned ones; imposed price controls; and even doctored the inflation figure. Yet over the past six years, Argentina’s economy has grown at an annual average rate of 8.3%—faster than any other big economy except China."

http://www.economist.com/displayStor...ry_id=11966983

i rest my case!

[grapejelly]

Re: No Time for Utopian Anti-Interventionism

"EVER since Argentina began its recovery in mid-2002 from a devastating financial collapse, it has seemed to defy economic gravity. The country’s left-wing government, first led by Néstor Kirchner and then this year by his wife, Cristina Fernández de Kirchner, has violated many standard economic prescriptions: it has shunned the IMF and shafted private bondholders; kicked out foreign companies and set up new state-owned ones; imposed price controls; and even doctored the inflation figure. Yet over the past six years, Argentina’s economy has grown at an annual average rate of 8.3%—faster than any other big economy except China."

http://www.economist.com/displayStor...ry_id=11966983

i rest my case!

Argentina is an economic basket case in many ways but they recovered quickly. They had a depression there with PhDs unemployed and real incomes dropping off a cliff.

But they didn't have the scare story that the US Treasury department is putting out. They simply stopped paying people their USDs from their accounts. They renegged on promises, people lost everything, and in a few years they recovered.

That's my point. We takes our medicine and we recover better than before. Screw the banks. Screw the Billionaire Bailout. It ain't the end of the world. It is the end of fat and cozy Wall Street salaries and the FIRE economy ripoff which is over either way.

It's a question of the FIRE economy being over in one day (you can't withdraw any of your US dollars, they're gone from today onwards) or over in a period of years (slow dribbling away of your account through loss of purchasing power and struggle.)

[phirang]

Re: No Time for Utopian Anti-Interventionism

Argentina is an economic basket case in many ways but they recovered quickly. They had a depression there with PhDs unemployed and real incomes dropping off a cliff.

But they didn't have the scare story that the US Treasury department is putting out. They simply stopped paying people their USDs from their accounts. They renegged on promises, people lost everything, and in a few years they recovered.

That's my point. We takes our medicine and we recover better than before. Screw the banks. Screw the Billionaire Bailout. It ain't the end of the world. It is the end of fat and cozy Wall Street salaries and the FIRE economy ripoff which is over either way.

It's a question of the FIRE economy being over in one day (you can't withdraw any of your US dollars, they're gone from today onwards) or over in a period of years (slow dribbling away of your account through loss of purchasing power and struggle.)

Door #2: coerce more nations to buy our debt, attack trade deficit through weak dollar etc, and then ever so slowly re-industrialize etc.

Through in a war or two to keep things interesting, if necessary.

[Louie.G]

Re: No Time for Utopian Anti-Interventionism

The secret to the success of functioning capitalist systems is accountability and reward. The reason government can be so bad at delivering products and services is that the people who work for them are not measured based on performance. The result of success and failure is the same.

Hi EJ

Thank you for your words. Maybe my own definition of Politics could be enlightening after all

Poli = Many (OK Excuse the i instead of y)

Tic = A blood sucking leach.

Too many tics will eventually consume and kill the host feeding them, then they too die.... eventually. (Unless they can find another host quickly).

So do we start walking out or wait for the Government to send a school bus to take us home?? Either way, the car probably stays in the desert to rust away cause the engine is knackered. LOL

Again thank you. It is great to be here.

Cheers

[GRG55]

Re: No Time for Utopian Anti-Interventionism

The Senate is preparing to vote on a version of the BBB or the MOAB that includes extensions of many tax incentives, (including renewable energy), and a suspension of the ATM among other vote-getting add-ons. The vote is scheduled for later tonight. It appears we're going to try and pull a rabbit out of our financial hats and hope for the best. The House will vote tomorrow and the White House has said it will sign before the end of the week.

If the media reports coming out of the USA are accurate, it appears that the public remains overwhelmingly opposed to "any bailout". That both McCain and Obama have spoken in favour of passing a bill [the bill?] and the Senate is rumoured to be likely to pass the bill shortly, is quite remarkable imo.

Is this an indication of real leadership? Or is it simply another example of how remote Washington is from the rest of the nation? In his remarks supporting passage Obama made some mention of everyone now realizing how connected "Main Street" is with Wall Street. Not much change happening there...:p

[metalman]

Re: No Time for Utopian Anti-Interventionism

Argentina is an economic basket case in many ways but they recovered quickly. They had a depression there with PhDs unemployed and real incomes dropping off a cliff.

But they didn't have the scare story that the US Treasury department is putting out. They simply stopped paying people their USDs from their accounts. They renegged on promises, people lost everything, and in a few years they recovered.

That's my point. We takes our medicine and we recover better than before. Screw the banks. Screw the Billionaire Bailout. It ain't the end of the world. It is the end of fat and cozy Wall Street salaries and the FIRE economy ripoff which is over either way.

It's a question of the FIRE economy being over in one day (you can't withdraw any of your US dollars, they're gone from today onwards) or over in a period of years (slow dribbling away of your account through loss of purchasing power and struggle.)

you are evading the fact that you have made ej's point after arguing with him... the free market didn't fix argentina, the heavy handed, anti-market lefty gov't did that the depression emboldened and justified. just like in the usa in the 1930s with fdr. just like will happen in 2009 in the usa if we don't get on the stick with the king plan.

that is ej's whole point! thanks for making it so eloquently

[ocelotl]

Re: No Time for Utopian Anti-Interventionism

No Time for Utopian Anti-Interventionism

Anti-interventionist utopianism has no place in a financial crisis that is rapidly developing into a self-reinforcing debt deflation. The credit markets and this economy will not self-correct any more than a damaged ship that is taking on water will right itself. Righting a ship that is listing is expensive, but trying to raise one that has been allowed to capsize is vastly more so. After declaring victory yesterday over the defeat of the poorly conceived Paulson Wall Street bailout, it's time to get practical proposals in front of Congress now.

My friends and readers know me as a Libertarian. My experience is as an entrepreneur first and investor second. Rest assured I am not I am not a socialist third: you will not find among entrepreneurs and capitalists anyone who promotes the idea that government is the driving force behind a dynamic and growing economy.

That said, my libertarianism is practical not ideological. Markets determine prices and allocate economic resources better than governments can most of the time. But markets can fail, and when they do sometimes only government can provide a floor to stop their self-destructive, self-reinforcing collapse and get them moving again. A constructive, rational debate is over how to stop the collapse – and fast – not whether we should try to do so at all.

Today Jeffrey A. Miron, senior lecturer in economics at Harvard University, represents the Libertarian fundamentalist perspective on the financial and economic crisis in an article Bankruptcy, not bailout, is the right answer for CNN.

The essence of Jeffrey A. Miron's argument is this: "Talk of Armageddon... is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen."

He believes that eventually the credit markets and banking system will self-correct. The problem with this assertion - and it's a big one - is that there is not a single piece of historical evidence to support it and many to contradict it.

No self-correcting debt deflations

US economic policy-makers awaited a self-correction in the 1930s as did Argentina in the 2000s. The policy failed. The problem is the antecedents; our financial system is experiencing a debt deflation following a period of credit expansion that resulted in over-indebtedness. Credit and banking contractions following periods of over-indebtedness result in a self-reinforcing process of debt deflation.

A summary of Professor Irving Fisher's theory of debt deflation, which was later more completely developed by Minsky, extracted from a lecture by Steve Keen Modelling Debt Deflation (PowerPoint file):

1. Debt liquidation leads to distress selling and to
2. Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes
3. A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
4. A still greater fall in the net worths of business, precipitating bankruptcies and
5. A like fall in profits, which in a "capitalistic," that is, a private-profit society, leads the concerns which are running at a loss to make
6. A reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to
7. Pessimism and loss of confidence, which in turn lead to
8. Hoarding and slowing down still more the velocity of circulation. The above eight changes cause
9. Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.” (1933: 342)
10. With deflation on top of excessive debt, “the more debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing” (Fisher 1933: 344).

The Libertarian fundamentalist "let the market take its course" prescription is not a real world option under the circumstances of a debt deflation. It is a misapplied Utopian vision that is guaranteed to turn into a Depression nightmare for the US much as in the 1930s.

The key difference is that today the US is a net debtor versus a net creditor, making the circumstances of its debt deflation and financial crisis more similar to Mexico's in the mid 1990s and Argentina's in 2001.

A recent Forbes article lays out the real world choices the US faces, Lessons from a Mexican bailout:

"It's a long, complex road," said Carlos Nunez, head of equity consulting at Grupo Financiero Monex, a Mexico City brokerage. But while painful and expensive, the bailout was necessary to avoid inevitably worse consequences - like those seen when Argentina declined to shore up teetering banks in 2001, prompting a run and then a freeze on deposits, and ultimately, the world's largest-ever government default, he said.

Which do we want? The Argentina 2001 financial crisis outcome or the mid 1990s Mexico financial crisis outcome? It's a two item menu – there is no real "sinking ships right themselves" choice. It's a myth, albeit an appealing one.

Like it or not, those are our options. It is unfortunate that there is among our leadership no one left with any credibility to explain this truth of our circumstances, and that many of my fellow Libertarians are taking an ideological versus a pragmatic approach.

Alternatives

As an alternative to doing nothing or the Paulson plan I support the plan proposed by Bill King, author of The King Report.

King Report Bailout Plan

Premises:
• The US credit system is broken.
• The Paulsen-Bernanke Bailout Plan does not insure that those banks and brokers that receive bailout aid will increase lending. The reality is the market is hoarding liquidity and these banks are likely to do the same. More importantly consumer lending has been a small, often insignificant part of their business. They made money by trading and through securitization of debt.
• It is necessary to create a new system parallel with the existing dysfunctional system in order to mitigate the inevitable economic and financial damage and to facilitate, as seamless as possible, the transition to a functioning financial system or new model of credit and banking.
• The Wall Street model, securitization and extreme leverage, is obsolete.
• US financial institutions need to recapitalize.
• Hank and Ben assert that it is paramount to keep credit flowing to consumers; the bail out is a necessary adjunct.
• Paulsen and Hank’s bailout plan is tantamount to bailing out Univac, Digital Equipment, etc, in the eighties, which would’ve retarded the development of Dell, Microsoft, Intel and other nascent technology companies.
• It’s wasteful & foolish to put more money in an obsolete non-functioning system
• Big banks and brokers made most of their earnings over the past several years in trading, not consumer lending. And now their derivatives are THE problem
• If you want to get money to the consumer: the less middlemen, the better.
• Decentralization of liquidity, lending and risk is necessary to refurbish the financial system. The illiquidity of a few large banks is collapsing the system.

Basics of the King Report Bailout Plan
• Directly recapitalize banks by the US government allocating $500B into a plan for community-type banks to increase their capital in partnership with the government.
• The government would match existing or some percentage of existing bank capital. If it would be better, a separate bank could be created. Place a limit of say $1B per bank.
• This would create $5 trillion of credit at conservative 10 to 1 leverage. This is more than the entire private mortgage market. It is a much better use of capital instead of absorbing $700B of losses with no means to discern resultant credit creation.
• Give the banks a tax rate of 15% on consumer and commercial lending for 5 years and the right to buy out the government share of the operation at some premium.
• Only banks that meet some metric, like a Texas Ratio of 50, are eligible.
• To help the big banks, allow them to create a consumer & commercial lending facility with the 15% tax rate benefit. This should entice private equity and sovereign funds as well as Wall Street remuneration that was garnered over the past decade or so.
• Prohibit trading, especially derivatives, in consumer & commercial lending operations. However, pure hedging would be allowed.
• Immediately increase FDIC-insured bank deposits and money funds to $1 million per eligible account.

Further considerations:
• Foreign banks in the US could be included if they have respective funding from their government.
• The real estate problem is due to the fact that American incomes do NOT support current prices. Easy credit allowed them to purchase homes they couldn’t afford.
• Any solution to clear the real estate market must entail hiking income, which is very difficult, or allowing prices to drop to levels that the average American can support. This helps average Americans, not the big banks and investors stuck with overpriced mortgages.
• No bailout for the imprudent and reckless but a means to directly help Americans and procure capital from private and sovereign sources because a new financial system must be implemented.
• This is not likely to be the final model but it is a stop-gap measure that will resonate with average Americans. It’s a way to connect with Middle America because it benefits them directly and is not an exclusive Wall Street bailout.
• The cause of our current financial morass is Big Government + Big Business = Crony Capitalism + Funny Money = concentration of wealth and risk + declining US living standards.
• The solution is decentralization of the financial system, like the tech industry, which will lower systemic risk, foster competition and yield better ideas, services and companies.

Non-intervention is not the answer. Congress needs to move quickly to draft legislation that conforms to the principles put forth in the King plan.

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EJ, you stepped ahead of us again, by explaining all this.

As mentioned in your post and also here, , there are previous experiences on a bailout of the financing industry.

As for what I remember on Mexican bailout of 1995, there are several polemic points that are still the source of discussion to this day:

- As of the debt trespassing, it was never clear which was the criterion used on the bailout of individuals or enterprises, so it all was seen as a "siding" bailout, on which most of the favored individuals and enterprises were due to their influence in the government.
- It was never clear the mechanism upon which the favored individuals and enterprises had their debt refinanced, or how the liquidation of such debts was considered into the Fobaproa/IPAB accounts or if it could be made public or not.
- At one point in time, an external audit was hired and paid by the government (our taxes) to check the procedure upon which all the bailout proceeded. Such audit, even when it was of the use of tax fund, was not made public instantly, and upon request of opening due to ruling transparency legislation, always the answers have been vague.
- The obscurity and murkiness of the mexican bailout has been one of the base arguments from mexican left parties on their reject to several high funds projects since.

In my opinion, and I've sustained it for at least 6 years, even when all the accounts included in the Fobaproa are opened to public knowledge, all that money has already moved. At this point we need not only an opening of the Fobaproa procedure, but also a follow up of all the individuals/enterprises included, in order to have a real grasp of the debts bailed out and the repay balances. Also it would be good to know how current legislation on debts to federal government can be applied now to have an idea of how much can this internal debt be reduced and how it will be paid.

And Argentina, and Mexico...they did similar things, no? I mean, the whole reason for this crisis was moral hazard and money printing in the first place.

Not exactly.

During the Salinas Period, the main monetary compromise was to reduce inflation, and in 1993, we got to 1 digit yearly inflation. I remember most of us were happy we were at last leaving behind the monster that had been eating us alive for the preceding two decades. Getting back to price levels that were in most cases below the earliest of my memory and having circulating silver coinage was a source of pride I haven't felt before.

In Argentina, they limited to 250 USD a week per individual the amount of money that could be taken out of banks. As far as I remember, there was no such limitation here. And I remember it since I was working on the terminal project that I proposed for my University graduation, and I had not many problems getting the money I had already saved. The problem was that my budget had to double in a matter of days, since the high level parts needed were priced in USD...

In Mexico, the main problem was the amount of treasury bonds linked to USD that were sold by federal government without a clear mechanism of reserve accumulation as was developed later. Instead of getting out of the peg that MXN was set on in february or march of that year (as of what I've read, a 25% devaluation would be enough and would release the pressure that was left accumulating) It all was left until the Bank of Mexico had to declare the default on the USD denominated bonds.

Along with the points already posted, your government has to left clear the mechanisms upon which the proposed bailout is going to work, how the liabilities included in it are going to be treated from now on and how the debt will be considered in the public financing. Of course, people that regulate this package has to be accountable of the proceedings of the money used for the bailout, to assure it all will be restructured in a way that harms the least the US populace and serves as a base for a wealth creation system, instead of just a money pit. (O.K. I just left my idealism roll on this)

[orion]

Re: No Time for Utopian Anti-Interventionism

"EVER since Argentina began its recovery in mid-2002 from a devastating financial collapse, it has seemed to defy economic gravity. The country’s left-wing government, first led by Néstor Kirchner and then this year by his wife, Cristina Fernández de Kirchner, has violated many standard economic prescriptions: it has shunned the IMF and shafted private bondholders; kicked out foreign companies and set up new state-owned ones; imposed price controls; and even doctored the inflation figure. Yet over the past six years, Argentina’s economy has grown at an annual average rate of 8.3%—faster than any other big economy except China."

http://www.economist.com/displayStor...ry_id=11966983

i rest my case!

Don't close that case too quickly. I have family in Argentina and they don't seem too happy or well off (a mix of middle and lower class folks). So I shot over to the Economist (a first rate group) and read the rest of the article that ends with;

"This time the government has plenty of policy tools with which to stabilise the economy. Start with energy, for which Argentines still pay a third less than their neighbours. Further hikes in energy tariffs would improve the public finances, and attract investment. Settling with the Paris Club and the bondholders would enable Argentina to secure financing from the markets on relatively favourable terms. Many economists reckon that these measures would be enough to keep the country growing at a still-healthy annual rate of 4% or so for several years. “These problems should not be difficult to solve,” says Javier González Fraga, a former Central Bank governor. “But no one seems to want to do so yet.” By delaying the necessary adjustments, the government has already made them more painful. And the Kirchners, who govern as a couple, have made their defiance of the IMF, the Paris Club and the bondholders a point of pride. Unless they now swallow that pride, it will be followed by a fall."


http://www.economist.com/displayStor...ry_id=11966983


There are more less than glowing comments on the economist Argentina page;


http://www.economist.com/Countries/Argentina/

[grapejelly]

Re: No Time for Utopian Anti-Interventionism

If the media reports coming out of the USA are accurate, it appears that the public remains overwhelmingly opposed to "any bailout". That both McCain and Obama have spoken in favour of passing a bill [the bill?] and the Senate is rumoured to be likely to pass the bill shortly, is quite remarkable imo.

Is this an indication of real leadership? Or is it simply another example of how remote Washington is from the rest of the nation? In his remarks supporting passage Obama made some mention of everyone now realizing how connected "Main Street" is with Wall Street. Not much change happening there...:p

I tried to fax and call my senators but their lines were busy. And they have heavy duty phone lines. My belief is that people *are* overwhelmingly against the bailout.

But those in power want it.

you are evading the fact that you have made ej's point after arguing with him... the free market didn't fix argentina, the heavy handed, anti-market lefty gov't did that the depression emboldened and justified. just like in the usa in the 1930s with fdr. just like will happen in 2009 in the usa if we don't get on the stick with the king plan.

that is ej's whole point! thanks for making it so eloquently

Argentina administered its medicine on one day when nobody could ever after withdraw US dollars from their bank account.

The rest of it is lefty nonsense. But the fact is, that one day, that was it, door shut and the end of your savings if you had US Dollar denominated accounts.

If the US were to just say "no" to bailouts, it would be the equivalent. And after a year or two, things would be well on their way to a nice recovery. What FDR did was prolong a sharp and short recession into a long protracted Great Depression. Argentina lacked the surplus savings to do it. FDR still had great borrowing authority especially after seizing the gold.

Unfortunately, the Fed is going to keep printing money one way or another. So there is going to be a bailout no matter what we argue here.

The bailout in Washington is all about hiding price discovery, and is so vital to the banks so they don't have to mark to market and so they can have a ready market for assets they never should have acquired in the first place.

The result of no Washington bailout will be a Fed engineered bailout but there will be more daylight in the process unless they suspend FASB rules altogether (which they might).