Financial Reversals

Everything bad is good again

Remember when Treasury Secretary Henry Paulson warned us that the economy was about to collapse unless Congress immediately authorized him to spend $700 billion on "troubled assets" held by banks? Remember when he said banks would never lend again as long as they remained saddled with these bad investments?

You do remember? So it's not just me. I was beginning to think I had dreamed the whole thing, because a month and a half later the Treasury Department has yet to buy any troubled assets, and last week Paulson said it had no plans to do so. Instead the department is using its $700 billion to buy the banks themselves, which I could almost swear Paulson said was a bad idea a couple of months ago. Evidently the Bush administration is still calling the effort the Troubled Asset Relief Program for the sake of the acronym, which suggests a cover for something unsightly or embarrassing.

The TARP turnaround is not the only bewildering reversal of economic wisdom we've seen in recent months. Here are some of the more memorable:

Loose credit is bad, and so is tight credit. Loose credit encouraged people to buy houses they couldn't afford, which raised defaults and foreclosures, which undermined the value of mortgage-related assets, which made financial institutions that held such assets cut back on lending. The solution, according to the Bush administration: looser credit.

Moral hazard is bad, except when it's necessary. Government guarantees, such as the implicit commitment to bail out the congressionally created mortgage companies Fannie Mae and Freddie Mac, encouraged lenders and investors to take bigger risks than they otherwise would have, contributing to the collapse of confidence in financial institutions and the credit crunch. In response, the Bush administration has offered more bailouts—of banks, insurers, and homeowners, among others—and raised the limit on deposit insurance by 150 percent.

Rising prices are bad, and so are falling prices. As recently as mid-August, we were worried about runaway inflation. In an article headlined "Higher Costs Are Taking a Toll on Business," The New York Times reported that "rising prices have seeped into much of the economy, led by higher costs for food and energy." At the end of last month, under the headline "Fear of Deflation Lurks As Global Demand Drops," the Times warned that reduced consumer demand could lead to "persistently falling prices," "suffocating fresh investment and worsening joblessness for months or even years."

Rising home prices are bad, and so are falling home prices. As home prices rose through 2006, newspapers across the country ran stories bemoaning the lack of "affordable housing." Now that prices are falling, newspapers across the country are running stories about the disaster of negative equity, the loss of what used to be a reliable investment, and the financial havoc caused by the assumption that home values would keep climbing forever.

Rising oil prices are bad, and so are falling oil prices. Last summer, with crude oil going for more than $140 a barrel and gasoline over $4 a gallon, politicians were falling all over each other to do something about rising oil prices, which made food and a wide range of other products more expensive. Now oil is around $60 a barrel, but instead of celebrating we're supposed to worry, because the price reflects fears of a prolonged worldwide recession.

Consumer spending is bad, except when it's good. Until recently, economists bemoaned the nation's low saving rate, warning that Americans were living beyond their means, enjoying a spending spree subsidized by foreign capital. Now the problem is that Americans are spending too little, saving or paying down debt instead of buying stuff they don't need and thereby stimulating the economy.

Feeling confused, anxious, uncertain? Well, cut it out. That sort of thing is bad for the economy. If you want to shorten the recession, you'd better be confident and optimistic. Just don't overdo it.

© Copyright 2008 by Creators Syndicate Inc.

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  • Cabeza De Vaca||

    Nice Article Jacob.

  • ||

    We're on the same page here Jacob.

    I think it's just the function of modern government to jump on whatever the most negative consequences of an economic adjustment are and act as though we can or should take steps to prevent winners and losers.

  • Kyle Jordan||

    Thank you! I have a few friends I'm going to show this article to.

  • ||

    Very nice article, I'm going to give this to a business English class to discuss in about 15 minutes, I think it'll go down well and prompt much discussion.

  • ||

    The economy, with it's unpredictably rising/falling prices, is like a bad, restless child, to most concerned people. It needs to be restrained!
    Good piece, Mr. Sullum.

  • ||

    Paulson is about as dumb as the day is long. Somehow I gotta a feeling he made plenty of profit of his own on the issues that led up to the current economic crisis!

    jess
    http://www.privacy.de.tc

  • ||

    If only we could control the weather, the economy, and the space-time continuum! Well, since we can't actually solve any of these problems, there's money to be made in prolonging them.

  • ||

    BINGO!
    You nailed it Jacob. Every bullet spot on.

  • ||

    drill! drill! drill! Spend! spend! spend!

  • BruceM||

    Bush and the Republicans, who are still in power for 60 or so more days, are going to do EVERYTHING they possible can to destroy the American economy before Obama and the Democrats take over the reigns. Slash and burn! Why wouldn't they? Because they love America? Please. They see it as a means to an end, making Obama's job as difficult as possible so their chances of regaining power are improved, no matter how marginally. Does anyone seriously think Bush is above a complete fuck-you slash and burn of our economy? Conservative nutjobs like Rush Limbaugh are already blaming the bad economy on Obama! Bush will do all he can over the next 2 months to destablize the economy to the greatest extent possible, and the second Obama takes over on January 20th, they can yell and scream about how it's all Obama's fault and more people will listen (right now it's hard to do with a straight face, but after Obama's inauguration that won't be a problem).


    Slash and burn, baby, slash and burn!

  • egosumabbas||

    @BruceM:

    You give too much credit to Bush in executing such a master plan. In fact, it's similar to 9/11 troofer logic that despite all evidence to the contrary, the government is smart enough to pull off a cover up.

    I would say the EXACT OPPOSITE of what you are saying is happening (well up until Nov 5th): Bush was desperately trying everything he could to keep the economy floating along so that McCain could be president. Of course, since Bush has no business acumen or grasp of history, all his Keynesian planning failed miserably.

    The fact that Paulson isn't buying up troubled assets may be due to incompetence. It might also be due to laziness. Why try very hard to engineer a bailout or stick to promises? There is no longer any reason to since Obama will be president.

    Ironically, Paulson completely flailing about and doing as little as possible is the best thing we can hope for.

  • ||

    Ironically, Paulson completely flailing about and doing as little as possible is the best thing we can hope for.

    If only that's what he was doing. Instead, he is buying up stock in financial services companies, probably the worst long-term solution to whatever problem we have. It sets a terrible precedent, creates insoluble conflicts of interest, and guarantees the kind of intertwining of politics and commerce that got us into this mess in the first place.

    The reason they didn't buy the assets is because it was too hard. They realized, in a rare moment of clarity, that they couldn't put anything like a decent price on the assets, or manage them worth a fuck once they got them. Stock, on the other hand, is nice and easy. So do the easy thing, and fuck the long-term consequences.

  • ||

    The appearance of action is more important than action itself.

  • egosumabbas||

    @Royal Cola Dean

    Hey, I didn't say him doing nothing was what would happen, just the audacity of hope, that's all.

  • ||

    I'll assert that, apart from the mistakes in implementation, each of the apparent reversals which the article finds confusing is still not confusing at all to many economists, policymakers, and businessmen.

    From listening to everyone who has authority these days, from long-dead Keynes to Chairman Bernanke, I find that the governing consensus sees economic management as a maddeningly complex balancing act. So sometimes loose credit is bad, and sometimes it is the solution to our ills. Generally moral hazard is bad, yet no-strings-attached bailouts and guarantees may be necessary to avert catastrohpe. And so forth.

    The consensus in business and economics is able to go through with this exercise in doublethink because there are decades of mainstreamed research and practice to support it. Its supporters can read that list of contradictions without blinking.

    Sure, I agree with the article, and there's the word "economist" in my job title. It may very well be convincing too for a lot of ordinary people who don't engage these issues in depth. However, as far the dialogue between we free-marketers and those entrusted by the public (those same ordinary people cited above) to manage the economy, we're still talking past one another.

  • Xeones||

    Is it just me, or does that picture look kind of like George Bluth?

  • ||

    Part of the damage caused by the New Deal was the uncertainty caused by FDR constantly changing the deal, thus deepening and prolonging the Great Depression.

    Bush's cronies, in an attempt to prevent a repeat of the Great Depression, appear to be doing their level best to enact policies that would lead to a repeat.

    Well, that and frantically trying to throw gobs of money to their rich allies before they get tossed out of office and new looters with different allies to appease take the helm.

  • BruceM||

    egosumabbas it's easy to destroy something, and Bush has shown he has natural abilities in that department. Prior to election day, it was a given that Obama was going to win. Moreover, McCain did all he could to distance himself from Bush, and Bush never campaigned for McCain. Of course Bush wanted republicans to maintain power, even though it looked pretty clear that the only question was not whether the Dems would have a majority in Congress, but only how big it would be. So the initial slashing and burning was already taking place before election day. But after November 5, with the democrats about to take control of the White Houe and both houses of Congress, Bush's only remaining acts as president will be to (a) destroy the country's economy to the greatest extent possible while maintaining plausible excuses for his actions (which are easy since 99% of americans don't have the slightest understanding of economics, a field in which things are often counter-intuitive) and (b) pardon Scooter Libby on January 19th.

    It doesn't take smarts or a brilliant stragegy beyond the capacity of Bush to destroy our economy. He has advisors like Cheney telling him what to do and how to do it, anyway. He sees it as the right thing to do, because he believes God/Jesus wants republicans to control the country and sabotaging Obama's presidency is the only thing within his power that he can do in order to improve the chances of that occurring in the future.

  • ||

    You left out my favorite:
    Low corn prices are bad, because they put farmers out of business, especially in the third world.

    High corn prices are bad, because poor people in the third world can't afford to eat when all that grain is being used for ethanol.

  • ||

    "From listening to everyone who has authority these days, from long-dead Keynes to Chairman Bernanke, I find that the governing consensus sees economic management as a maddeningly complex balancing act."

    Isn't that the reason why they should not attempt to do it?

  • Mike M.||

    DJIA and NASDAQ now at the lowest levels in five and a half years. Can you say Epic Fail?

  • Colonel_Angus||

    No matter what economists, policy makers, and businessmen think or do, all of the things that Jacob listed happen on their own natural balancing cycle anyway, and trying to avert a "crisis" or "problem" or "catastrphe" now by tweaking shit will probably just fuck something else up later, and probably won't solve the current problem anyway.

  • ||

    Disregarding paranoid nonsense from Bruce here, I think we should pick a side and stick with it.

    In my opinion, anybody who voted for this genocidal terrorist-loving traitor 0bama from hatred of Bush as some of you traitors evidently did deserves to suffer as badly as possible, so from now on, I'm going to rejoice at every tumble of the stock market, every bankruptcy, every mass layoff (especially at terrorist-loving media outlets such as yours), and every cry of distress when you see what evil schemes your false Messiah plans to impose on the lot of you.

    Of course, I expect many of you are already battening down your hatches, trying to brace yourselves for the financial hurricane headed your way, as am I. By all means, please do! It'll help hasten the onset of this catastrophe you've brought down on us with your idiocy. Better hurry, though: I hear gold's getting hard to find at any price and gun shops are reporting record sales.

    In fact, I suspect it's already too late for most of you, believing as you do that people are basically decent and that 0 & co. would hesitate to commit any atrocities whatsoever against you. (I guess the atrocities so many willing civilians committed against their own neighbors in the 20th century have taught you nothing.) Still, I shall take some consolation from watching you fools scramble for safety like the drowning rats you are.

  • ||

    Disregarding paranoid nonsense from Bruce here, I think we should pick a side and stick with it.

    Another one off his meds ...

  • ||

    I am not certain why the current state of the global economy is such a mystery. It's a simple cause and effect relationship that has been manifesting for at least three decades. A paper (or fiat) economic system cannot survive. This is an impossible condition and no such system has succeeded throughout the entire history of humanity. Added to this unimpeachable reality is the chaos that is created by egoistic influences affecting the global market. It doesn't even matter at what level these egoistic influences are impacting our future. There's the day-to-day pleasure seeking/desire-fulfilling routine we all act out almost every moment we breathe. We satisfy one desire, experience the very brief pleasure, and we immediately begin the pursuit of the next target we believe will satiate our need to reach a permanent state of pleasure-filled bliss.....whatever that means. Then, there's the business person who takes down a billion dollars one year. But there's no real time to enjoy it because they're already trying to determine why they didn't make two billion. The same rule applies to world government/political leaders. The pursuit of power and influence is at the expense of the societal stability. In the midst of this individual pursuit of self-pleasure we have lost our connection with each other. The degree to which we pursue material/physical/psychological satisfactions is no less impacting than anything that may or may not have been done by Wall Street or some government entity. No matter how we cut it, an individual is a component of society and every act and/or thought by every individual impacts the society. No economic model will succeed unless it is based on the precept that humanity is the irreducible primary, not the individual. We seemingly cannot grasp, although it is becoming apparent to some, that all of our failures throughout the generations are because we do not have a correct understanding of the purpose of humanity. Even with all of the advances in medicine, technology, and science, we still have not improved how human beings relate to each other. Not only have we not figured out how to stop killing ourselves, we've gone in an obviously opposite direction by devising ways we can kill ourselves in greater numbers with more reliable efficiency. We are out of balance with Nature. There are no fixes for the current global economic crises in any context that are generally understood. The fix exists only in how we connect with each other. When we can make that correction, the environment that allowed the current economic chaos cannot exist. We need to enter a new mode of thinking and take pause to consider the ice under our feet. It's starting to get very thin.. I came across a very interesting perspective that gives us something to consider when trying to understand how we have arrived to our present difficulties: www.laitman.com/2008/10/the-financial-crisis-an-analysis/

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