All you posted is common sense, but it seemed to me to be common sense 20 years ago, too. Somehow, whether it’s thanks to the Chinese and other foreign investors, or to the awesome brilliance of Alan Greenspan (I kid, I kid) that was an awful lot of bleeding over a very long period. I mean, if you have a wound with prognosis for death more than 20 years in the future, maybe it’s not really a situation for the paramedics to comment on in the first place.
In fact it wasn’t normal corporate or government debt that caused the current crisis (though I concede the crisis couldn’t have arisen in a much tighter economy with less debt), but a particular kind of especially bad debt associated with a bubble, and even then it had to be accompanied by some immensely bad corporate decisions that don’t seem – offhand – to be directly associated with the debt-based economy we’re ruing. So much as I agree with the sentiment, I’m just not sure it’s really true.
This (whether posted elsewhere or not) is a great example of a fundamental irrationality in the markets. So many people were invested in the belief that the market must go up that they had to shout down anyone who said otherwise. It really irks me that we’re now bailing these guys (even though I don’t really buy the arguments about “moral hazard” and such, I think these guys will continue their irrationality no matter what).
That sounds suspiciously similar to the people who said that because the real estate bubble hadn’t burst in 2003, 2004, 2005, that was proof that there was no bubble. The longer the problem goes un-dealt-with, it doesn’t go away it gets worse. Just because the Wall Street banks were able to stay in business for a decade with an unsustainable business model doesn’t make the business model sustainable. At the end of the day it’s still a parasitic industry.
I think the fundamental problem is that US economy has gone away from producing and selling things to buying things with borrowed money, and repackaging financial paper to sell to each other at more and more inflated prices. I think it’s foolish to believe everything will work out on its own or that the bust is the aberration rather than the boom. And I think giving money to companies that have proven themselves bad with money is a losing proposition.
Keeping Morgan Stanley and others in business may prevent a short-term crash in the stock market but long term I don’t think it can have any positive effect. No matter how much the government gives them, they aren’t going to start handing out NINJA mortgages again or loan money to GM to keep making SUVs or to consumers to keep buying them. So where’s the benefit to the broader economy? The bailout didn’t prevent Citi from laying off 50,000 people.
There is a need for a functioning credit market, but there is no need for the previous members of that market to remain in business. And right now it looks like we’re going to keep the current players without actually getting a functioning credit market.
I agree with the free marketers like Peter Schiff up to a point, but when he starts talking about how the New Deal was bad and the FDIC is part of the problem he loses me. What I do think is that you can only rely on greed to get people to look out for their own self interests in the short term, and that the self-interests of the people working for or running a company does not translate into the best interests of the company or the nation. If you rely on the self-interest of greedy people, you get the robber barons and the S&L scandal and Enron. To ensure the best interests of the nation requires regulation and oversight.
However, since we’re beyond that point I think the FDIC model is good. Banks that fail and have to use the FDIC guarantee go out of business. The problem I have with the Paulson plans is that he’s handing out money, guaranteeing debt and buying up worthless paper ostensibly to keep the system functioning, but in reality he’s removed the penalty for failure. Companies that go bankrupt and require government intervention for the good of the global financial system should still go out of business.
Some elements of the plan are reportedly already in place, including convincing the girls from their sister sorority to remove their tops to distract security guards at the mansion of NYSE Euronext CEO Duncan Niederauer, and the construction of the Recoverybot—a profanity-spewing, stock-trading automaton designed by horny Japanese exchange student Shibusawa “The Brain” Shigenobu.
The US still produces and sells quite a bit of stuff. More than it did before, in fact. It’s just that US consumer appetites have grown faster than US production. Manufacturing employment is way down from 20, 30 years ago, but manufacturing production is very much up. One of the consequences of efficiency.
Don’t get me wrong. I think there has been a quite a few empires built on fake wealth the last little while. But let’s not get carried away with the deindustrialization idea.
Trade deficit, government deficit and negative savings rate during the boom strikes me as a bad omen for the bust. An economy based on consumer spending will suffer even harder as unemployment climbs. I’m not making Weimer comparisons but I do think there are structural problems in the US economy that have been growing for years but have been masked by the bubble. The trade balance and reliance on foreign oil are just the most obvious.