No Time for Utopian Anti-Interventionism

[metalman]

Re: No Time for Utopian Anti-Interventionism

Sorry EJ but you posts seems to me like an endorsement of another compromise with the devil. The King Plan has nothing to do with all great quotes you used in your message.

IMHO an utopian anarchist/libertarian, like Jim Rogers, who knows nothing about markets, makes more sense than your support for the King Plan:

easy for him to say since he got out of dodge and is now living in china.

they sure as hell don't let markets collapse on their own there.

jim says one thing but does another. does not much enhance his credibility.

what is your fantasy anyhow? that the debt goes away and everyone just continues on their merry way? you seen itulip's 'before' pictures?



what do you think the 'after' pic is gonna look like?

what do you think the millions of crushed debtors are going to vote for?

'oh, i didn't want my kids going to college anyway. oh, i didn't need that car anyway. oh, i don't need to see the doctor for my diabetes, it'll get better. oh,...'

riiiiiight.

what do you think is gonna happen in the usa if we get the economic crash you dream of? think the poor will get richer? don't think the rich will dodge the bullet? think: argentina type wealth and poverty distribution when it's over.

or maybe you're hoping for wealth redistribution?

why don't you fundamentalist libertarians all go move to some 3rd world country with the gated communities ringed with guns and barbed wire... your idea of the dream life apparently... instead of trying to turn my country into one.

[Supercilious]

Re: No Time for Utopian Anti-Interventionism

The risk of our government devolving into a dictatorship, considerable as it may be, is not my primary reason for wanting to see the King plan implemented versus non-intervention. We lack the experienced leadership needed to steward the economy through the kind of crisis an unmanaged debt deflation will create. For that reason I believe that road leads to disaster.

Sorry EJ but you posts seems to me like an endorsement of another compromise with the devil. The King Plan has nothing to do with all great quotes you used in your message.

IMHO an utopian anarchist/libertarian, like Jim Rogers, who knows nothing about markets, makes more sense than your support for the King Plan:

[EJ]

Re: No Time for Utopian Anti-Interventionism

I misconstrued your humor for a bout of deflectionism, Agree no name calling. My tit-for-tat response was an attempt on my part to call that out, but sadly, I chose the low road.

I do not disagree with your points, just the premise you used for their justification.


My one point is this, and it is an important one.

The Goldbug thing is not about burning down the entire world while we all watch, all huddled in a cave with our loved ones, guns, gold, and food.

It is about personal choice and personal accountability and most importantly EMPOWERMENT.

I disagree with Jim that there are "no safehavens". There are, and what really REALLY bothers me is when the governement PREVENTS or discourages people (via tax penalty and accesability) from talking the only safe refuge from the storm. The people out there that bought PM's did it because they KNEW they had no control over short selling rule changes, currency interventions, liquidity injections, etc.

It pisses me off that the Government does not allow people to protect themselves, AND, in fact, pro-actively establishes policies that work against individual people from acting in their own best financial intrests.

THAT IS NOT WHAT A GOOD GOVERNEMENT DOES TO ENSURE A STRONG DEMOCRACY AND STABLE COUNTRY.

It is pure madness!

That is the only point "goldbugs" are trying to make. We do not want the world to burn down into some post-apocolyptic nightmare. Does ANYONE (that is not mentally ill) want that?

In a perfect world, of course.

Adam Smith said, "The natural effort of every individual to better his own condition ... is so powerful, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations. Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things." - The Wealth of Nations Book IV Chapter V Section IV

But following a crash of the US economy, are peace and a reasonable administration of justice the likely outcomes after a few hundred million people are suddenly denied the standard of living to which they have become accustomed?

A prerequisite for the constructive outcome of the US re-developing in the way Adam Smith describes: competent leadership.

What is that?

"All of the great leaders have had one characteristic in common: it was the willingness to confront unequivocally the major anxiety of their people in their time. This, and not much else, is the essence of leadership." - John Kenneth Galbraith

Do you see anyone who is currently running for president who is confronting unequivocally the major anxiety of the American people in our time? I do not. I see politicians who have lost the trust of their people and their credibility. They are conveying false hopes about the outcome of US domestic and foreign debt.

No one who is running is telling the people the truth: "My fellow Americans, we can never pay it back. Not the home mortgages. Nor the credit cards. Nor the hospital bills. Nor the college tuitions. Nor the foreign debts to China, Japan, Russia. We have to write most of it down, and when we do we will not be able to borrow from overseas again for many years. We shall then be materially more poor for a decade than we were 20 years ago while we dig ourselves out of the hole we'd dug ourselves into since the early 1980s. But if we work hard and save and invest we will reemerge better and stronger than ever. Here is how we are going to do it."

That is what my book does. It levels with the American people. It offers no "let's get rich on the coming collapse" nonsense. It is about the restoration of all that we have lost that made us great.

"If there is a country in the world where concord, according to common calculation, would be least expected, it is America. Made up as it is of people from different nations, accustomed to different forms and habits of government, speaking different languages, and more different in their modes of worship, it would appear that the union of such a people was impracticable; but by the simple operation of constructing government on the principles of society and the rights of man, every difficulty retires, and all the parts are brought into cordial unison. There the poor are not oppressed, the rich are not privileged. Industry is not mortified by the splendid extravagance of a court rioting at its expense. Their taxes are few, because their government is just: and as there is nothing to render them wretched, there is nothing to engender riots and tumults." - Thomas Paine

What would Paine say about America today? He'd note that the poor are oppressed by debt and taxes, that a system of debt serfdom not unlike the one the first settlers came to America to escape. He'd note that the rich have constructed a system of privilege that concentrates wealth and power and diminishes the productivity of the people. He'd see a government mortifying industry by subsidizing finance at its expense. He'd see an economy staggering under a hopeless load of debt. In sum, he'd be horrified.

But, as I said, to return the US to its roots takes leadership. Unfortunately, the FIRE Economy has captured our political system so we are not likely to get any while the economy is imploding. Change will instead occur from the bottom up.

"All successful revolutions are the kicking in of a rotten door. The violence of revolutions is the violence of men who charge into a vacuum." - John Kenneth Galbraith

And this is where optimists and pessimists can argue. The US got off easy with FDR during the last depression. Other nations that suffered through the last depression were not so fortunate.

In one corner:

"The world economic crisis is merely the last and worst of the periodic crises inevitable under the capitalist system, whose production invariably outruns the demand every ten years or so because the capitalist producers withhold the profits from the working population and the gradual accumulation of this mass of profit becomes, so to speak, 'frozen' at the end of each period—or is exported—whereas under the Socialist system every cent of 'profit' is returned to the workers, not only in the form of wages but in material and cultural construction. Thus in the Socialist state—in Soviet Russia—there is no frozen money, so that supply and demand are adjusted automatically." - Stalin On Everything, Time Magazine, Jul 14, 1930

In the other:

"Up to today not even President Hoover has been able to work [economic] miracles," [he] said last week, "and he is the most powerful man in the world at the head of the richest country in the world." Facing [him] in a respectful crescent sat Italian Capital & Labor, not metaphorically but in solemn fact. This was the inaugural session of the new National Council of Corporations. It was to hear the Prime Minister's personal examination of Depression, his prophecy of when Prosperity will return.

"Not All Can Be Saved!"

"In our usual blunt, precise Fascist style, without euphemism and without reticence, we admit," said [he], "that our general economic situation has grown worse since last October, when the American crisis burst with the violence of dynamite. . . .

"The Fascist Government is not passive in the face of the present difficult situation, as vile anti-Fascist scandalmongers say. The government has its hand on the pulse of the nation and hears distress signals from whatever source they come. But not all can be saved and some indeed deserve to go to the bottom. The majority of the latter belong to the category—enormously increased during and after the War—of business improvisers, men more reckless than enterprising, acrobats of industry and finance, men supremely encyclopedic in their initiatives."

"Pyramid Trusts Flayed"

"The mountebanks of the economic world," [he] continued, looking several such on the Council benches directly in the eye, "complicate everything with innumerable companies on a chain system, with boards of directors composed of nonentities who exercise no true leadership, often with faked balance sheets and non-existent dividends. They are the true, authentic, most dangerous kind of anti-Fascists because they speculate on the good faith of the public. Prison is small retribution for their misdeeds. They sow such infinite ruin and misery and they do such harm that they truly deserve Death!

"Some examples have already been made, but henceforward such men will be shown even more clearly that the public can not be defrauded and hard-earned savings cannot be misused with impunity." - Report on a speech by Prime Minister Benito Mussolini, "No Miracles Today," Time Magazine, Oct. 13, 1930

Beating up on the crashed FIRE Economy 1.0 was a rallying cry for dictators on both the left and right.

For any hope to see a positive outcome – history is clear on this – do not vote for the candidate who aspires to be a dictator. Going into this period of economic crisis, no one can be more dangerous.

The risk of our government devolving into a dictatorship, considerable as it may be, is not my primary reason for wanting to see the King plan implemented versus non-intervention. We lack the experienced leadership needed to steward the economy through the kind of crisis an unmanaged debt deflation will create. For that reason I believe that road leads to disaster.

[c1ue]

Re: No Time for Utopian Anti-Interventionism

You know what's really interesting in this whole debate?

The bail out means major inflation. The dollar will go up for a short time as everyone heaves a sigh of relief that system collapse was averted.

Then the monstrous amounts of created dollar credit thrown around will start moving again.

No bail out means a major economic recession, maybe depression. Certainly it can be argued that companies are overly dependent on credit and this is perhaps not healthy.

But it is what it is.

In the depression, there will be monstrous amounts of created dollar credit also: as the US reenacts the WPA, etc etc.

So there might not be that much difference in the end.

As I've said before: get out of the dollar. The only way to go.

[orion]

Re: No Time for Utopian Anti-Interventionism

I am still torn by my crash and burn tendencies and making the right decision. But how's this; if it is the right thing to do by bailing out the system why isn't the right thing to do (for society as a whole) for all of us to keep our money invested as if nothing was wrong? Is it right for us to be discussing getting money out of dollars, buying gold? I guess we'll get points for buying treasuries.

[orion]

Re: No Time for Utopian Anti-Interventionism

The next step is for taxpayers to bear all banks losses in an unlimited fashion. That is the last step, I suppose, to total bankruptcy due to fiat currency. The first step was the Fed, second step ending gold standard, and this is probably the end game.

This is right on with today and the idea the FDIC will have unlimited funds to backup deposits.

[D-Mack]

Re: No Time for Utopian Anti-Interventionism

Are the two we already have not good enough for you?
In my day we were happy to have one war.
I've read in history books that there have been times with no wars. They call the gaps between wars "peace". Peace must be hell (but I wouldn't know).

Those are wars with borrowed money....

I think he is talking about a real war against somebody who can defend itself, like China or Russia, not some Shock & Awe on CNN.


It looks like Bush doesn't want to adress the issues, maybe he is just a broken record or maybe there is more.

He talked about terrorism and terrorist regimes, and about governments that allegedly support terror. He failed to notice that the delegates sitting in front of and below him were shaking their heads, smiling and whispering, or if he did notice, he was no longer capable of reacting. The US president gave a speech similar to the ones he gave in 2004 and 2007, mentioning the word "terror" 32 times in 22 minutes. At the 63rd General Assembly of the United Nations, George W. Bush was the only one still talking about terror and not about the topic that currently has the rest of the world's attention.

"Absurd, absurd, absurd," said one German diplomat. A French woman called him "yesterday's man" over coffee on the East River. There is another way to put it, too: Bush was a laughing stock in the gray corridors of the UN.

http://www.spiegel.de/international/...581502,00.html

[phirang]

Re: No Time for Utopian Anti-Interventionism

This is a little off topic, but it is truly shocking..:eek:

Following is a partial transcript

Rep. Brad Sherman, D California:

Larry I am glad you have a few seconds to talk to someone who voted against this bill. I am not changing my mind. I want to thank my colleagues who stood up to the purveyors of panic and voted against a very bad bill and voted with 400 eminent economists including three Nobel laureates who wrote to us and said don't panic, don't act hastily, hold hearings, work carefully. The fact is Larry if you read this bill, even you would have voted against it.

It provides hundreds of billions of dollars of bailouts to foreign investors. It provides no real control of Paulson's power. There is a critique board but not really a board that can step in and change what he does. It's a $700 billion program run by a part-time temporary employee and there is no limit on million dollar a month salaries.

Larry Kudlow:
Let me just ask you one question. I think you are referring to foreign banks headquartered in the United States. I do not see how foreign investors get bailed out.

Rep. Brad Sherman:
Larry you have to read the bill. It's very clear. The Bank of Shanghai can transfer all of its toxic assets to the Bank of Shanghai of Los Angeles which can then sell them the next day to the Treasury. I had a provision to say if it wasn't owned by an American entity even a subsidiary, but at least an entity in the US, the Treasury can't buy it. It was rejected.

The bill is very clear. Assets now held in China and London can be sold to US entities on Monday and then sold to the Treasury on Tuesday. Paulson has made it clear he will recommend a veto of any bill that contained a clear provision that said if Americans did not own the asset on September 20th that it can't be sold to the Treasury.

Hundreds of billions of dollars are going to bail out foreign investors. They know it, they demanded it and the bill has been carefully written to make sure that can happen.

Resolution Draft

Inquiring minds are verifying the above in the Bailout Bill Resolution Draft.

Here is the language under discussion.
3 SEC. 112. COORDINATION WITH FOREIGN AUTHORITIES
4 AND CENTRAL BANKS.
5 The Secretary shall coordinate, as appropriate, with
6 foreign financial authorities and central banks to work to
7 ward the establishment of similar programs by such au
8 thorities and central banks. To the extent that such for
9 eign financial authorities or banks hold troubled assets as
10 a result of extending financing to financial institutions
11 that have failed or defaulted on such financing, such trou
12 bled assets qualify for purchase under section 101.

7 SEC. 101. PURCHASES OF TROUBLED ASSETS.
8 (a) OFFICES; AUTHORITY.—
9 (1) AUTHORITY.—The Secretary is authorized
10 to establish a troubled asset relief program (or
11 ‘‘TARP’’) to purchase, and to make and fund com
12 mitments to purchase, troubled assets from any fi
13 nancial institution, on such terms and conditions as
14 are determined by the Secretary, and in accordance
15 with this Act and the policies and procedures devel
16 oped and published by the Secretary.

SEC. 112. COORDINATION WITH FOREIGN AUTHORITIES
4 AND CENTRAL BANKS.
5 The Secretary shall coordinate, as appropriate, with
6 foreign financial authorities and central banks to work to
7ward the establishment of similar programs by such au
8thorities and central banks. To the extent that such for
9eign financial authorities or banks hold troubled assets as
10 a result of extending financing to financial institutions
11 that have failed or defaulted on such financing, such trou
12bled assets qualify for purchase under section 101.

So we have to save the entire world's exposure...:mad:

pleaes read the thread above to understand what's going...

[Brooks Gracie]

Re: No Time for Utopian Anti-Interventionism

This is a little off topic, but it is truly shocking..:eek:

Following is a partial transcript

Rep. Brad Sherman, D California:

Larry I am glad you have a few seconds to talk to someone who voted against this bill. I am not changing my mind. I want to thank my colleagues who stood up to the purveyors of panic and voted against a very bad bill and voted with 400 eminent economists including three Nobel laureates who wrote to us and said don't panic, don't act hastily, hold hearings, work carefully. The fact is Larry if you read this bill, even you would have voted against it.

It provides hundreds of billions of dollars of bailouts to foreign investors. It provides no real control of Paulson's power. There is a critique board but not really a board that can step in and change what he does. It's a $700 billion program run by a part-time temporary employee and there is no limit on million dollar a month salaries.

Larry Kudlow:
Let me just ask you one question. I think you are referring to foreign banks headquartered in the United States. I do not see how foreign investors get bailed out.

Rep. Brad Sherman:
Larry you have to read the bill. It's very clear. The Bank of Shanghai can transfer all of its toxic assets to the Bank of Shanghai of Los Angeles which can then sell them the next day to the Treasury. I had a provision to say if it wasn't owned by an American entity even a subsidiary, but at least an entity in the US, the Treasury can't buy it. It was rejected.

The bill is very clear. Assets now held in China and London can be sold to US entities on Monday and then sold to the Treasury on Tuesday. Paulson has made it clear he will recommend a veto of any bill that contained a clear provision that said if Americans did not own the asset on September 20th that it can't be sold to the Treasury.

Hundreds of billions of dollars are going to bail out foreign investors. They know it, they demanded it and the bill has been carefully written to make sure that can happen.

Resolution Draft

Inquiring minds are verifying the above in the Bailout Bill Resolution Draft.

Here is the language under discussion.
3 SEC. 112. COORDINATION WITH FOREIGN AUTHORITIES
4 AND CENTRAL BANKS.
5 The Secretary shall coordinate, as appropriate, with
6 foreign financial authorities and central banks to work to
7 ward the establishment of similar programs by such au
8 thorities and central banks. To the extent that such for
9 eign financial authorities or banks hold troubled assets as
10 a result of extending financing to financial institutions
11 that have failed or defaulted on such financing, such trou
12 bled assets qualify for purchase under section 101.

7 SEC. 101. PURCHASES OF TROUBLED ASSETS.
8 (a) OFFICES; AUTHORITY.—
9 (1) AUTHORITY.—The Secretary is authorized
10 to establish a troubled asset relief program (or
11 ‘‘TARP’’) to purchase, and to make and fund com
12 mitments to purchase, troubled assets from any fi
13 nancial institution, on such terms and conditions as
14 are determined by the Secretary, and in accordance
15 with this Act and the policies and procedures devel
16 oped and published by the Secretary.

SEC. 112. COORDINATION WITH FOREIGN AUTHORITIES
4 AND CENTRAL BANKS.
5 The Secretary shall coordinate, as appropriate, with
6 foreign financial authorities and central banks to work to
7ward the establishment of similar programs by such au
8thorities and central banks. To the extent that such for
9eign financial authorities or banks hold troubled assets as
10 a result of extending financing to financial institutions
11 that have failed or defaulted on such financing, such trou
12bled assets qualify for purchase under section 101.

So we have to save the entire world's exposure...:mad:

[santafe2]

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.

[we_are_toast]

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?

Yes. A country experiencing an economic depression could very well resemble a 3rd world country.

[grapejelly]

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?

[we_are_toast]

Re: No Time for Utopian Anti-Interventionism

Based on the discussion here, it seems that everyone needs to ask themselves 2 questions.

1) Do you believe that we are on the edge of plummeting into a great depression if the government does nothing?

2) Is a great depression a price worth paying to support the philosophy that markets without government intervention are the best for society as a whole?

For me to answer number 1 I have to go through several steps since I do not have the economic and historical background to make the call on my own.

1) Who are the respected experts in the field?
2) Is there a consensus that leads to a particular conclusion?
3) Are their arguments reasonable?
4) Can I check some facts to determine if they are factually correct about particular points.

When I went through this process I concluded that their was a consensus of opinion among respected people who have studied the situation that the result of inaction would lead to a reasonable risk of plunging the country into a great depression.

How bad can a great depression be? Since I wasn't around during the last one, how can I answer this question for myself?

1) Talk to people who were around.
2) Visit places that have economies that might resemble what a depression type economy in America might look like.

Having talked to people who lived through the last depression, my reaction is :eek::eek::eek:.

Having visited 3rd world countries, my reaction is :eek::eek::eek:.

And speculating about some of the things that might happen in a country with a very depressed economy, such as the formation of right and left wing militia groups, an uninformed public voting in people like Pinochet or Chavez, my reaction is :eek::eek::eek:.

I think everyone needs to take some time and reasonably analyze the consequences of government action VS government inaction and reach your own conclusion. At least then you can try to influence the politicians into taking the course of action you've concluded will best serve America.

Re: No Time for Utopian Anti-Interventionism

Here is a snapshot for the iTulip "family album" of all the squabbling, stubborn, fractious iTulip members. Describes the three primary groupings of thinking on the need, advisability, or urgency for some sort of mitigating bailout to be passed quickly (or not). I must clarify despite defending a rapid intervention here, that quite clearly Paulson's original bill really was a pandering obscenity. I doubt there is a single one of us who would defend it. I notice that Friedman is squarely on the same page as EJ on one point - that there is no such thing as "economics" - but only "political economy". That insight is emerging in sharp definition in the current crisis - the bailout, a decision by which a large part of our immediate future's aspect will be affected.

______________

The Political Nature of the Economic Crisis


September 30, 2008 - By George Friedman [ STRATFOR ]

Classical economists like Adam Smith and David Ricardo referred to their discipline as “political economy.” Smith’s great work, “The Wealth of Nations,” was written by the man who held the chair in moral philosophy at the University of Glasgow. This did not seem odd at the time and is not odd now. Economics is not a freestanding discipline, regardless of how it is regarded today. It is a discipline that can only be understood when linked to politics, since the wealth of a nation rests on both these foundations, and it can best be understood by someone who approaches it from a moral standpoint, since economics makes significant assumptions about both human nature and proper behavior.

The modern penchant to regard economics as a discrete science parallels the belief that economics is a distinct sphere of existence — at its best when it is divorced from political and even moral considerations. Our view has always been that the economy can only be understood and forecast in the context of politics, and that the desire to separate the two derives from a moral teaching that Smith would not embrace. Smith understood that the word “economy” without the adjective “political” did not describe reality. We need to bear Smith in mind when we try to understand the current crisis.

Societies have two sorts of financial crises. The first sort is so large it overwhelms a society’s ability to overcome it, and the society sinks deeper into dysfunction and poverty. In the second sort, the society has the resources to manage the situation — albeit at a collective price. Societies that can manage the crisis have two broad strategies. The first strategy is to allow the market to solve the problem over time. The second strategy is to have the state organize the resources of society to speed up the resolution. The market solution is more efficient over time, producing better outcomes and disciplining financial decision-making in the long run. But the market solution can create massive collateral damage, such as high unemployment, on the way to the superior resolution. The state-organized resolution creates inequities by not sufficiently punishing poor economic decisions, and creates long-term inefficiencies that are costly. But it has the virtue of being quicker and mitigating collateral damage.
Three Views of the Financial Crisis

There is a first group that argues the current financial crisis already has outstripped available social resources, so that there is no market or state solution. This group asserts that the imbalances created in the financial markets are so vast that the market solution must consist of an extended period of depression. Any attempt by the state to appropriate social resources to solve the financial imbalance not only will be ineffective, it will prolong the crisis even further, although perhaps buying some minor alleviation up front. The thinking goes that the financial crisis has been building for years and the economy can no longer be protected from it, and that therefore an extended period of discipline and austerity — beginning with severe economic dislocations — is inevitable. This is not a majority view, but it is widespread; it opposes governmen t action on the grounds that the government will make a terrible situation worse.

A second group argues that the financial crisis has not outstripped the ability of society — organized by the state — to manage, but that it has outstripped the market’s ability to manage it. The financial markets have been the problem, according to this view, and have created a massive liquidity crisis. The economy — as distinct from the financial markets — is relatively sound, but if the liquidity crisis is left unsolved, it will begin to affect the economy as a whole. Since the financial markets are unable to solve the problem in a time frame that will not dramatically affect the economy, the state must mobilize resources to impose a solution on the financial markets, introducing liquidity as the preface to any further solutions. This group believes, like the first group, that the financial crisis could have profound economic ramifications. But the second group also believes it is possible to contain the consequences. This is the view of th e Bush administration, the congressional leadership, the Federal Reserve Board and most economic leaders.

There is a third group that argues that the state mobilization of resources to save the financial system is in fact an attempt to save financial institutions, including many of those whose imprudence and avarice caused the current crisis. This group divides in two.

The first subgroup agrees the current financial crisis could have profound economic consequences, but believes a solution exists that would bring liquidity to the financial markets without rescuing the culpable.

The second subgroup argues that the threat to the economic system is overblown, and that the financial crisis will correct itself without major state intervention but with some limited implementation of new regulations.

The first group thus views the situation as beyond salvation, and certainly rejects any political solution as incapable of addressing the issues from the standpoint of magnitude or competence. This group is out of the political game by its own rules, since for it the situation is beyond the ability of politics to make a difference — except perhaps to make the situation worse.

The second group represents the establishment consensus, which is that the markets cannot solve the problem but the federal government can — provided it acts quickly and decisively enough.

The third group spoke Sept. 29, when a coalition of Democrats and Republicans defeated the establishment proposal. For a myriad of reasons, some contradictory, this group opposed the bailout. The reasons ranged from moral outrage at protecting the interests of the perpetrators of this crisis to distrust of a plan implemented by this presidential administration, from distrust of the amount of power ceded the Treasury Department of any administration to a feeling the problem could be managed. It was a diverse group that focused on one premise — namely, that delay would not lead to economic catastrophe.

From Economic to Political Problem

The problem ceased to be an economic problem months ago. More precisely, the economic problem has transformed into a political problem. Ever since the collapse of Bear Stearns, the primary actor in the drama has been the federal government and the Federal Reserve, with its powers increasing as the nature of potential market outcomes became more and more unsettling. At a certain point, the size of the problem outstripped the legislated resources of the Treasury and the Fed, so they went to Congress for more power and money. This time, they were blocked.

It is useful to reflect on the nature of the crisis. It is a tale that can be as complicated as you wish to make it, but it is in essence simple and elegant. As interest rates declined in recent years, investors — particularly conservative ones — sought to increase their return without giving up safety and liquidity. They wanted something for nothing, and the market obliged. They were given instruments ultimately based on mortgages on private homes. They therefore had a very real asset base — a house — and therefore had collateral. The value of homes historically had risen, and therefore the value of the assets appeared secured. Financial instruments of increasing complexity eventually were devised, which were bought by conservative investors. In due course, these instruments were bought by less conservative investors, who used them as collateral for borrowing money. They used this money to buy other instruments in a pyramiding scheme that rested on one premise: the existence of houses whose value remained stable or grew.

Unfortunately, housing prices declined. A period of uncertainty about the value of the paper based on home mortgages followed. People claimed to be confused as to what the real value of the paper was. In fact, they were not so much confused as deceptive. They didn’t want to reveal that the value of the paper had declined dramatically. At a certain point, the facts could no longer be hidden, and vast amounts of value evaporated — taking with them not only the vast pyramids of those who first created the instruments and then borrowed heavily against them, but also the more conservative investors trying to put their money in a secure space while squeezing out a few extra points of interest. The decline in housing prices triggered massive losses of money in the financial markets, as well as reluctance to lend based on uncertainty of values. The resu lt was a liquidity crisis, which simply meant that a lot of people had gone broke and that those who still had money weren’t lending it — certainly not to financial institutions.

The S&L Precedent

Such financial meltdowns based on shifts in real estate prices are not new. In the 1970s, regulations on savings and loans (S&Ls) had changed. Previously, S&Ls had been limited to lending in the consumer market, primarily in mortgages for homes. But the regulations shifted, and they became allowed to invest more broadly. The assets of these small banks, of which there were thousands, were attractive in that they were a pool of cash available for investment. The S&Ls subsequently went into commercial real estate, sometimes with their old management, sometimes with new management who had bought them, as their depositors no longer held them.

The infusion of money from the S&Ls drove up the price of commercial real estate, which the institutions regarded as stable and conservative investments, not unlike private homes. They did not take into account that their presence in the market was driving up the price of commercial real estate irrationally, however, or that commercial real estate prices fluctuate dramatically. As commercial real estate values started to fall, the assets of the S&Ls contracted until most failed. An entire sector of the financial system simply imploded, crushing shareholders and threatening a massive liquidity crisis. By the late 1980s, the entire sector had melted down, and in 1989 the federal government intervened.

The federal government intervened in that crisis as it had in several crises large and small since 1929. Using the resources at its disposal, the federal government took over failed S&Ls and their real estate investments, creating the Resolution Trust Corp. (RTC). The amount of assets acquired was about $394 billion dollars in 1989 — or 6.7 percent of gross domestic product (GDP) — making it larger than the $700 billion dollars — or 5 percent of GDP — being discussed now. Rather than flooding the markets with foreclosed commercial property, creating havoc in the market and further destroying assets, the RTC held the commercial properties off the market, maintaining their price artificially. They then sold off the foreclosed properties in a multiyear sequence that recovered much of what had been spent acquiring the properties. More important, it prevented the decline in commercial real estate from accelerating and creating liquidity crises throug hout the entire economy.

Many of those involved in S&Ls were ruined. Others managed to use the RTC system to recover real estate and to profit. Still others came in from the outside and used the RTC system to build fortunes. The RTC is not something to use as moral lesson for your children. But the RTC managed to prevent the transformation of a financial crisis into an economic meltdown. It disrupted market operations by introducing large amounts of federal money to bring liquidity to the system, then used the ability of the federal government — not shared by individuals — to hold on to properties. The disruption of the market’s normal operations was designed to avoid a market outcome. By holding on to the assets, the federal government was able to create an artificial market in real estate, one in which supply was constrained by the government to manage the value of commercial real estate. It did not work perfectly — far from it. But it managed to avoid the most feared outcome, which was a depression.

There have been many other federal interventions in the markets, such as the bailout of Chrysler in the 1970s or the intervention into failed Third World bonds in the 1980s. Political interventions in the American (or global) marketplace are hardly novel. They are used to control the consequences of bad decisions in the marketplace. Though they introduce inefficiencies and frequently reward foolish decisions, they achieve a single end: limiting the economic consequences of these decisions on the economy as a whole. Good idea or not, these interventions are institutionalized in American economic life and culture. The ability of Americans to be shocked at the thought of bailouts is interesting, since they are not all that rare, as judged historically.

The RTC showed the ability of federal resources — using taxpayer dollars — to control financial processes. In the end, the S&L story was simply one of bad decisions resulting in a shortage of dollars. On top of a vast economy, the U.S. government can mobilize large amounts of dollars as needed. It therefore can redefine the market for money. It did so in 1989 during the S&L crisis, and there was a general acceptance it would do so again Sept. 29.

The RTC Model and the Road Ahead

As discussed above, the first group argues the current crisis is so large that it is beyond the federal government’s ability to redefine. More precisely, it would argue that the attempt at intervention would unleash other consequences — such as weakening dollars and inflation — meaning the cure would be worse than the disease. That may be the case this time, but it is difficult to see why the consequences of this bailout would be profoundly different from the RTC bailout — namely, a normal recession that would probably happen anyway.

The debate between the political leadership and those opposing its plan is more interesting. The fundamental difference between the RTC and the current bailout was institutional. Congress created a semi-independent agency operating under guidelines to administer the S&L bailout. The proposal that was defeated Sept. 29 would have given the secretary of the Treasury extraordinary personal powers to dispense the money. Some also argued that the return on the federal investment was unclear, whereas in the RTC case it was fairly clear. In the end, all of this turned on the question of urgency. The establishment group argued that time was running out and the financial crisis was about to morph into an economic crisis. Those voting against the proposal argued there was enough time to have a more defined solution.

There was obviously a more direct political dimension to all this. Elections are just more than a month a way, and the seat of every U.S. representative is in contest. The public is deeply distrustful of the establishment, and particularly of the idea that the people who caused the crisis might benefit from the bailout. The congressional opponents of the plan needed to demonstrate sensitivity to public opinion. Having done so, if they force a redefinition of the bailout plan, an additional 13 votes can likely be found to pass the measure.

But the key issue is this: Are the resources of the United States sufficient to redefine financial markets in such a way as to manage the outcome of this crisis, or has the crisis become so large that even the resources of a $14 trillion economy mobilized by the state can’t do the job? If the latter is true, then all other discussions are irrelevant. Events will take their course, and nothing can be done. But if that is not true, that means that politics defines the crisis, as it has other crisis. In that case, the federal government can marshal the resources needed to redefine the markets and the key decision-makers are not on Wall Street, but in Washington. Thus, when the chips are down, the state trumps the markets.

All of this may not be desirable, efficient or wise, but as an empirical fact, it is the way American society works and has worked for a long time. We are seeing a case study in it — including the possibility the state will refuse to act, creating an interesting and profound situation. This would allow the market alone to define the outcome of the crisis. This has not been allowed in extreme crises in 75 years, and we suspect this tradition of intervention will not be broken now. The federal government will act in due course, and an institutional resolution taking power from the Treasury and placing it in the equivalent of the RTC will emerge. The question is how much time remains before massive damage is done to the economy.

This report may be forwarded or republished on your website with attribution to STRATFOR

[bart]

Re: No Time for Utopian Anti-Interventionism

I believe the Austrian School has this right (much more correct than Irving Fisher). They say that a credit bubble leads eventually to the bubble popping.

I believe that you're missing the overall issue. Manias and bubbles have existed since dirt, and they *always* pop. That concept and truth far predated any Austrians.

I believe that you are also ignoring what EJ noted that Fisher actually said in Jan. 1930 after he blew it in Sept 1929 - ("The U. S. is headed toward a period of business depression... beginning within the next two years"), which is virtually and practically identical to what Mises, Rothbard etc. said beforehand.

And debt deflation does exist as a valid and proven economic concept, regardless of whether it was conceived in 1933, 1842 or 1978.

So the answer is not more credit expansion. The answer is to stop the poison that created this in the first place.

The result may be a depression. I can see how that may happen. But with bailouts, that is, pursuing the interventionist policies of the 1930s et seq, we almost guarantee a long period of economic stagnation as governments take over a huge percentage of the FIRE economy.

Middle grounds can (and I believe do) exist.

Gold money is incompatible with unlimited monetary expansion.

That's the whole point of gold money. It is honest money.

When the Fed was began in 1913, that put the nail into the coffin of the gold standard.

The banks had expanded credit in an irresponsible way and couldn't honor redemptions. Again and again, this happened before the Fed was began, and when it did, banks were allowed to reneg on their commitments but that was only temporary. It was wrong, but it happened at least temporarily.

It was the wanton expansion of credit, to enrich Wall Street, that resulted in the Crash, not the gold standard. The gold standard was, as usual, suspended in times when banking ran too amok. This time permanently.

I don't think you see the major logic issue there.

I could also just as easily state that gold money is incompatible with consistent growth too, but that does not address the basic issue.

It's neither the gold standard nor the "fiat standard" (or whatever you want to call it) that is the real problem. As you note, the credit expansion and all the other ills pre 1929 did actually happen during a gold standard. Many recessions and depressions also happened under a gold standard.

Of course gold is honest money too, but again - it in no way prevented the problems.
Just like no fiat standard has ever lasted throughout history, no gold standard has lasted either.

If neither has been the answer, then the question(s) or assumption(s) are incorrect.




Just in case too, I am *not* in favor of a "bailout" and saving Wall St. scum whose greed and blatant egregious injustices are the primary (but far from only) cause of our current mess.