I expect the recently-legislated bailout of the lending system to amount to a hill of beans in the long run.
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It's an insanely expensive gamble premised on a number of unduly optimistic assumptions. Unlike many commentators I do not subscribe to the "at least they're doing something" theory; spending money like drunken sailors in a logical vacuum potentially makes things worse. I can agree, though, that doing nothing is a poor option.
On the Friedman/Hayek-worshipping right, letting the entire financial system go belly-up is the preferred, if not only, course of action (e.
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g. Jeff Miron's "Bankruptcy, Not Bailout, Is the Right Answer"). The stated reasons have a lot to do with pious talk and free-market idolatry. Oh, so wonderfully principled those economic libertarians are. As usual the real motive is hidden carefully behind the curtain.
Who benefits from what Miron calls the "bankruptcy" option? Lending institutions fail, stockholders get creamed, private individuals will need a black ski mask and a gun to get a loan, and the entire economy will contract.
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There is no obvious winner excepting a bunch of Ron Paul supporters who will get raging erections. But Miron is careless and lets slip the winners in this scenario:
Bankruptcy means that shareholders typically get wiped out and the creditors own the company. Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines).
The "Do Absolutely Nothing" plan is about one thing – redistributing wealth by consolodating even more of it in the hands of the top 1%.
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Bankruptcy and financial chaos simply allow the sliver of the nation with the resources to ride out the storm to go bargain shopping. Miron's plan is a disingenuous way of driving asset prices through the floor, at which point it will just so happen that what few entities are financially healthy (JPMorgan, for example, is on a buying spree) will purchase their former rivals for pennies.
It's not just for behemoth financial conglomerates, though – the average Joe Millionaire Six-Pack can handsomely profit from buying foreclosed homes! The message is the same either way: this recession won't last forever and assets bought on the cheap now will be worth millions later. Libertarians are simply hoping that as many assets as possible end up in the bargain bin, waiting for our heroic betters to swoop in like vultures and gorge themselves on the remains of our prosperity.
David says:
I think that's oversimplifying. We need to look at *all* the consequences of both approaches:
1) Try to inflate our way out of this. This is what we're doing when we bailout. This is what we're doing when we increase money supply by 8% in one week. This is what we're doing when Bernanke hints he wants to lower interest rates. This is, simply, what we're going to do.
The consequences:
* crashing of the dollar. (To be honest, this is a scenario the Ron Paul fans and gold bugs like. They're in gold, which appreciates like crazy in $USD.)
* Lack of social correction ("You can buy things you can't afford.")
* Depending on the commitment level, this can lead to hyperinflation (which, as I noted in a past comment, is historically always accompanied by dictatorships and scapegoating)
* Possibly making the US less solvent. (Other countries won't buy our debt, since we have signaled our intent to devalue it, anyway.)
* Resulting unemployment as we inherently become more insular, which exacerbates the problem.
2) Deflate. Thanks to past failures to correct our debt situation, I am not sure we can simply have a recession, anymore. I think the choice, at this point, is hyperinflation vs. depression. What would the consequences be of allowing this to occur (by raising rates, not bailing out, etc.):
* Inability of anyone to get credit (to run their business, to buy things, etc.)
* Rampant unemployment
* Dragging down countries around the world that depend on our consumerism
* Quite possibly, with municipal failures, regional warlords/gangs/organized crime running sections of the country.
* Likely the destruction of the U.S. as we now know it (although the mechanics of this destruction are hard to forecast.)
* Everyone gets punished.
So, it's really a Shakespearean tragedy. With option 1, everyone gets screwed. With option 2, pretty much everyone (or those who aren't victorious in the laws of tooth and nail) get screwed.
And again, the gold-ies see appreciation of their asset, *either* way.
Mind you, I think option 2 is inevitable. If we don't get there this time around, we'll do it in another 7-10 years. The debt won't magically disappear, unless there's some innovation (again, Mr. Fusion or at least a flux capacitor) that changes the landscape significantly.
Kulkuri says:
For decades the free marketeers have said let the market solve all our problems. The thought of letting the marker correct itself is nice, but those that so richly deserve to take it up the ass will just walk away with their millions. Either way we are all screwed, it's just a matter of to what degree. I don't know what the best solution to this mess is, I just hope that the government doesn't wind up bankrupt because next year I can sign up for Social Security.
Albert Z. Winkler says:
It's a choice between an eventual hyperinflationary depression or a deflationary depression. The Fed has already told us that deflationary depression is not an option, so we go the route of hyperinflation. We are presently in an inflationary depression, which will make itself obvious as a depression as the recession drags on longer and longer. Houses have many years to go until they bottom, and declining house prices will continue to be a major drag on the economy. If we keep printing money like we are, and eventually step up the printing rate to paper over more and more debt, then the inflationary depression of today will ultimately turn into a hyperinflationary depression. That would be the ultimate worst outcome. It has all the same effects of a deflationary depression, except one must add complete worthlessness of the currency and a society that feels completely fleeced by its government, thus leaving it very susceptible to the wrong kind of suggestion. Democracy and liberty would be seriously challenged if not expelled.
Mike says:
Re: comments. Inflation does not seem like a major concern to me, in the short, medium or long-run term. It also seems as an aside to what is going on. "Hyperinflation", 1920s Weimar-style, should be about the 100th thing to worry about. As Krugman points out, we aren't even net borrowing or printing money to take on this crisis – the citizens are just taking on risk exposure and moving net cash flows:
http://krugman.blogs.nytimes.com/2008/09/30/where-will-the-money-come-from/
http://krugman.blogs.nytimes.com/2008/09/20/follow-the-money/
The problem, and solutions, has nothing to do with money supply right now – it's credit among lending institutions. The government can either force banks to fail or socialize them. It should get on that, soon.
beau says:
thanks mike. while watching everyone else run around imitating the scream by munch is entertaining, a dash of reality is always nice. especially when discussing economics (where reality so rarely gets a look in).
David says:
Well, Mike, I can't say I agree with Krugman. The money comes from *somewhere*.
"Treasury would issue several hundred billion dollars’ worth of bonds." A-ha! So that's where it comes in! The banks couldn't sell their worthless stock. But they *can* sell bonds! So while Krugman says that means the taxpayers are just absorbing the risk, I say the Treasury just created money where there was none. Those bonds? They have to be financed somehow. It's not about moving net cash flows, because the we need either an increase in money supply or an increase in debt to provide these bonds. Someone needs to pay at some point.
It's not about borrowing from abroad. More likely, it's about diluting what folks already have.
However, Mike, I agree that hyperinflation should be low on the list of things to worry about. I have no control over it.