$8.5 Trillion and Counting

Matt Welch | December 1, 2008

The L.A. Times on Sunday updated the numbers on 2008's historic (and historically awful) round of bailouts, and came out with a shiny new figure: $8.5 trillion. It's a useful piece of journalism, so I almost hate to complain, but the lead-paragraph framing is really annoying:

With its decision last week to pump an additional $1 trillion into the financial crisis, the government eliminated any doubt that the nation is on a wartime footing in the battle to shore up the economy. The strategy now -- and in the coming Obama administration -- is essentially the win-at-any-cost approach previously adopted only to wage a major war.

What a godawful mix of imprecise, played-out metaphors ("wartime footing," "battle," "major war") and couldn't-possibly-be-accurate absolutism ("eliminated any doubt," "win-at-any-cost approach," "only"). As in the inaccurate, propogandistic usage of "rescue" over "bailout," this paragraph conveys the impression that the financial crisis can be likened to a finite, singular goal, one that can be accomplished if only you marshal enough resources. Neither are true. Globalized economies are organisms that evolve constantly, not stationary mountains that can be climbed with enough sherpas. And by definition, not all government interventions into a national economy get you closer to the goal of allaying a capital-C Crisis, particularly when key elements of said Crisis (politicized lending practices, moral hazard caused by federal guarantees, cheap monetary supply, mark-to-market accounting rules) were caused by...government intervention!

Anyway, the rest of the article is actually about that latter conundrum, which is another reason to read it. Here is a section devoted to sanity:

Once the financial crisis eases, higher interest rates and soaring inflation will be risks. If they materialize, they could dramatically increase the government's borrowing costs to meet its annual debt payments. For consumers, borrowing could become more expensive even as the price of everyday items rise, holding back economic growth.

"We could have a super sub-prime crisis associated with the meltdown of the federal government," warned David Walker, president of the Peter G. Peterson Foundation and former head of the Government Accountability Office.

My only quibble there being with the word "if," since we will have bailout-triggered inflation, mes amis.

And here's a quote that scares me:

"You just throw everything you have at the problem to try to fix it as quickly as you can," said David Stowell, a finance professor at Northwestern University's Kellogg School of Management. "We're mortgaging our future to a certain extent, but we're trying to do things that give us a future."

As the economics journalist Amity Shlaes told Nick Gillespie in a January 2008 interview, such kitchen-sink problem solving, and the uncertainty it creates, certainly prolonged the Great Depression. A selection from that interview:

Both the Hoover and Roo­sevelt administrations (but especially the Roosevelt administration) were so unpredictable. That hurt the economy very much, and when I went back and saw the extent I was astounded. Uncertainty is a factor that I thought needed to be explored. There were lots of people who said, "I will not invest 'til I know what's going to happen."

During the Depression, you heard the phrase "bold, persistent experimentation" all the time. We've been taught that was good. Somebody had to do something, was what we learned. But what I saw was this enormous cost, especially during the second half of the 1930s.

Comments

timtum|12.1.08 @ 11:08AM|#

Wait, you mean this Amity Shlaes?

Russell Crowe Fightin\' Round |12.1.08 @ 11:12AM|#

Right, where is that pussy recession!? We couldn't find unemployment, but we did find an unemployed man. Take that, ye testicle!

Hugh Akston|12.1.08 @ 11:16AM|#

During the Depression, you heard the phrase "bold, persistent experimentation" all the time.

I've seen the phrase "bold action" bandied about lately in reference to everything from the bailout to socialized medicine universal healthcare.

It's a very helpful signpost that tells me a) the government has no idea what its doing, b) its going to proceed anyway, and c) the writer of the article (or his/her editor) approves of the whole mess whole heartedly.

|12.1.08 @ 11:17AM|#

"You just throw everything you have at the problem to try to fix it as quickly as you can,"

Sounds like a well thought out plan.

1. Throw everything at problem
2. ???
3. PROFIT

economist\'s political diction|12.1.08 @ 11:18AM|#

"Bold Experimentation"="Open Your Mouth and Close Your Eyes"

Butters|12.1.08 @ 11:19AM|#

You ain't gonna stick anything icky in my mouth, are ya?

Fidus Achates|12.1.08 @ 11:23AM|#

Why would you quote Amity Shlaes? She's a writer who has professed ignorance about the subject she writes (Keynesian economics) and completely and utterly wrong about FDR's response to the Depression. That's like quoting Kathy Young for accuracy on the Russian/Georgia conflict. Did I stumble upon the Weakly Standard?

|12.1.08 @ 11:24AM|#

"You just throw everything you have at the problem to try to fix it as quickly as you can,"

Would you like your mechanic or plumber to proceeed with that methodology?

I have extensive experience in "fixing" complex systems and can honestly say if you are at the "throw everything you have" point, it is time to step back, regain your composure, think long and hard about the problem and proceed deliberately.

But I haven't been to college so I'm probably talking out my ass.

economist|12.1.08 @ 11:27AM|#

"completely and utterly wrong about FDR's response to the Depression"
Wrong how, exactly? Did she ascribe policies to him that he didn't implement?

economist|12.1.08 @ 11:27AM|#

"You just throw everything you have at the problem to try to fix it as quickly as you can,"
I like to think of it as a "surge".

|12.1.08 @ 11:32AM|#

"I couldn't figure out where that noise was coming from, so I decded to change the motor, just in case that was it. What's really weird is, it's still making that noise. You owe me eight thousand bucks. Bring it back next week, and I'll throw a gearbox at it."

economist|12.1.08 @ 11:34AM|#

You'd be amazed how my boss reacts if I say I'm not sure what the problem is, but we should take drastic measures that cost lots of money to fix it.

SIV|12.1.08 @ 11:35AM|#

Globalized economies are organisms that evolve constantly, not stationary mountains that can be climbed with enough sherpas.

Pretty fancy writin' there Matt.My lack of metaphor skillz condemns me to a life of backbreaking labor. "Sherpas" should be uppercase no?

economist|12.1.08 @ 11:36AM|#

Matt, I would avoid analogies when describing the global economy. Analogies suck.

|12.1.08 @ 11:36AM|#

From the 2007 articles about the housing collapse being a myth, through this very post, Reason's coverage of the mortgage meltdown has been uniformly awful, consisting almost entirely of highly-questionable by ideologically-convenient explanation of its causes, to kneejerk denialism of manifest problems, to shallow kool-kids sniping about the proposed solutions that doesn't go any deeper than repeatedly asserting that they are so obviously and unquestionably wrong that consideration of why is unnecessary, beyond noting that they violate your theory of government.

Really, a disappointing performance from a source I've come to respect for its thoughtful criticism.

|12.1.08 @ 11:37AM|#

re: Shlaes vs Krugman slugfest

Is it just my imagination, or has Krugman become a totally (as opposed to mostly) insufferable ass since he got the Knobble Prize?

"Look, everybody! They pinned a medal on me, because I'M SPECIAAAAAAAAALLLLLL!"

Bingo|12.1.08 @ 11:38AM|#

Laws in the same vein as the PATRIOT act affecting the economy?? Where do I sign up!

squarooticus|12.1.08 @ 11:42AM|#

You'd be amazed how my boss reacts if I say I'm not sure what the problem is, but we should take drastic measures that cost lots of money to fix it.

It costs the current government caretakers nothing to throw money at the problem. They'll have skipped town long before hyperinflation and/or massive tax increases occur. Such is the predictable outcome of democracy.

|12.1.08 @ 11:47AM|#

How... did this happen? I feel completely helpless. Utterly powerless. I honestly haven't felt this way since I was mugged.

|12.1.08 @ 11:47AM|#

I think the danger of inflation at least right now is pretty low. You have to remember that trillions of dollars in wealth were wiped out in the last year. The government printing money is just taking the place of that lost money. The danger right now is deflation not inflation.

That does not mean, however, that the bailouts are anything to be happy about. Recessions do actually serve a purpose in markets. They wipe out speculators and under performing businesses and allow for better businesses to replace them when the economy comes back. If you bail everything out, you get none of the good effects of a recession and all of the bad effects with a good dose of moral hazard thrown in to boot.

toshiro_mifune|12.1.08 @ 11:50AM|#

Joe - a disappointing performance from a source I've come to respect

Completely agree.
Considering it was on this very board in late `05 that I found thehousingbubbleblog.com (I think Tim Cavanaugh posted about it). I was hoping for leading edge reporting from people who had some insight. Not to be so.
So far calculatedrisk.blogspot.com has done some really great stuff as has nakedcapitalism.com.
I've been very disappointed in Reason though.

toshiro_mifune|12.1.08 @ 11:56AM|#

I think the danger of inflation at least right now is pretty low.

The current danger is deflation, hence the Fed's actions in the various rate cuts, lending facilities, etc.
None are really working though, this of course won't stop them from trying. Now we get a chance to learn what the Japanese already know; trying to back-stop a falling asset price doesn't really work that well.

|12.1.08 @ 11:57AM|#

"During the Depression, you heard the phrase "bold, persistent experimentation" all the time. We've been taught that was good. Somebody had to do something, was what we learned. But what I saw was this enormous cost, especially during the second half of the 1930s."

Of course Roosevelt was doing a lot more than just bailing people out. He was doing all sorts of crazy shit like controling prices and taxing the hell out of anyone with a buck. It was the regulatory control more than the spending that caused the problems Shales is talking about.

Thus far we don't seem to be doing much beyond throwing money at the problem. Joe is right in that Reason has done a pretty poor job explaining why throwing money at the problem isn't the least of a set of bad options. To play devils advocate, if the Fed weren't rolling out the presses right now and borrowing like drunken sailors, it is very possible we could be in a deflationary spiral and really would be looking at 1932 all over again.

Honestly, I don't know. Part of me looks at the economic numbers and sees a garden variety recession and suspect that this whole thing is a bunch of bullshit dreamed up by connected big wigs and politicians looking to loot the country. But part of me also thinks maybe it is only a garden variety recession and not a depression because of the bailout. Reason has not been very helpful in deciding which option is true.

Don the libertarian Democrat|12.1.08 @ 11:58AM|#

Who's counting?

|12.1.08 @ 11:59AM|#

a disappointing performance from a source I've come to respect

I think reason's reporting on financial issues sucks in general, in both print and H&R. I find the discussion on H&R much more enlightning. And its not like the print issues are so stuffed full of other groundbreaking reporting, that they don't have room, why this past issue was chock-full of masterbatory musings on the history of reason, who would want critical insightful reporting.

toshiro_mifune|12.1.08 @ 12:03PM|#

John - if the Fed weren't rolling out the presses right now and borrowing like drunken sailors, it is very possible we could be in a deflationary spiral and really would be looking at 1932 all over again

Equities prices are falling, commodities prices are falling, asset prices are falling... Isn't this deflationary? All in the same environment that has seen the Fed cut by, what? 400 some odd bps in a little over a year? That should have been a massively inflationary move.

Egosumabbas|12.1.08 @ 12:03PM|#

"Completely agree.
Considering it was on this very board in late `05 that I found thehousingbubbleblog.com (I think Tim Cavanaugh posted about it). I was hoping for leading edge reporting from people who had some insight. Not to be so.
So far calculatedrisk.blogspot.com has done some really great stuff as has nakedcapitalism.com.
I've been very disappointed in Reason though."

Agree. Agree. Agree.

I'd like to add themessthatgreenspanmade and globaleconomicanalysis to that list.

The economic coverage on Reason was pollyannish until the very instant TSHTF.

I think the reason for this is that most of the economic studies fed to them are from CATO, which suffers from horrible bias and inept methodology. Which I love pointing out over and over again.

robc|12.1.08 @ 12:03PM|#

joe,

housing collapse being a myth

That's because reason doesnt like Ron Paul.

|12.1.08 @ 12:10PM|#

"Equities prices are falling, commodities prices are falling, asset prices are falling... Isn't this deflationary? All in the same environment that has seen the Fed cut by, what? 400 some odd bps in a little over a year? That should have been a massively inflationary move."

It is very deflationary. But the commodities are coming down from a bubble. Since they were artificially high to begin with, their falling shouldn't be that damaging. Of course housing prices were artificially high as well. You tell me, if coming down from a bubble the same thing as deflation? I am not sure.

|12.1.08 @ 12:11PM|#

"Would you like your mechanic or plumber to proceeed with that methodology?"

Right. I'm not sure what kind of plumbing situation would truly be analogous to the current financial situation.

Maybe a constant spew of bloody sewage spewing from every toilet and faucet in a building, uncontrollably? "Why, this kind of thing hasn't been seen since the assplosion of '26!"

Under truly comparable dire circumstances, you probably *would* be yelling for your plumber to do anything and everything.

Egosumabbas|12.1.08 @ 12:14PM|#

"Under truly comparable dire circumstances, you probably *would* be yelling for your plumber to do anything and everything."

True, but the people yelling for a bailout the most are the idiot speculators (housing, finance) who caused this mess in the first place. They made a huge risk and are whining now that their "investments" declined in value.

Ordinary Americans who decided to sit out the debt-consuming madness benefit greatly from deflation: falling prices everywhere!

|12.1.08 @ 12:15PM|#

"Of course housing prices were artificially high as well. You tell me, if coming down from a bubble the same thing as deflation? "

The problem is that consumers have stopped buying, hence deflation.

|12.1.08 @ 12:16PM|#

Ordinary Americans have 401ks, and sometimes try to sell their homes.

|12.1.08 @ 12:20PM|#

"Ordinary Americans have 401ks, and sometimes try to sell their homes."


But they don't use 401Ks today for disposable income so the loss is a paper loss and will given time be made up when the recovery comes. The home price issue is a bigger deal. But, if they bought their house to live in and not in hopes of flipping it, they can sit tight, pay their mortgage and wait until the market comes back or just sell their house and buy a new one and let the bank take the loss. Yeah, they are out equity, but they are now in a much cheaper house and mortgage. In the mean time, the rest of the world gets affordable housing, what a concept. If they bought their house to speculate, fuck em.

toshiro_mifune|12.1.08 @ 12:20PM|#

John - You tell me, if coming down from a bubble the same thing as deflation? I am not sure.
A fair question.
For any corp. or individual that has acquired a large amount of debt over the past few years the diffference may be academic. They own and owe on assets that are now not worth what was paid for them. Moreover, in many cases, the values may not return for a long time to come and in some cases (some of the RMBS tranches) ever.

|12.1.08 @ 12:21PM|#

"The problem is that consumers have stopped buying, hence deflation."


Really? Black Friday looked pretty good. What are the hard numbers? I haven't seen them. I don't think they are that bad and a lot of the deflation is things like oil and housing returning to their natural prices from a bubble. To me deflation means things going below what should be their natural price.

toshiro_mifune|12.1.08 @ 12:23PM|#

Yeah, they are out equity, but they are now in a much cheaper house and mortgage

Unless they have been re-fi'ing that house every few years and using that extracted equity as a substitute for wage increases they weren't seeing. In which case they're screwed. They owe big on an asset that is losing value.

Egosumabbas|12.1.08 @ 12:25PM|#

"Ordinary Americans have 401ks, and sometimes try to sell their homes."

Ordinary Americans didn't borrow from their 401k's and use their house as an ATM machine.

Like John said, fukem.

short, fat bastard|12.1.08 @ 12:25PM|#

Ordinary Americans have 401ks, and sometimes try to sell their homes.

So what?

I've "lost" every penny my company and I have put into my 401k this year. This will take care of itself over the 15 years I get to wait for retirement, unless the Federal Government decides to do something really stupid in the near term.

As for the people that bought houses at inflated prices, fuck'em.

|12.1.08 @ 12:25PM|#

But they don't use 401Ks today for disposable income so the loss is a paper loss and will given time be made up when the recovery comes.?

Good enough for me. My Mom's in her sixties.

But, if they bought their house to live in and not in hopes of flipping it, they can sit tight, pay their mortgage and wait until the market comes back or just sell their house and buy a new one and let the bank take the loss. Yeah, they are out equity, but they are now in a much cheaper house and mortgage. Unless they're upside down.

the rest of the world gets affordable housing Assuming they're still employed, at a good-enough salary to get a down payment together. Incomes, particularly for the segment of society poor enough to be priced out of the homeownership market, tend to do poorly during recession.

|12.1.08 @ 12:26PM|#

While I don't think Shlaes is the hack that people are making her out to be, people constantly mistakenly talk about the New Deal as a single blanket program. Likely, parts of the New Deal worked, and parts didn't. However, both sides of the issue are almost always wrong, claiming either that the New Deal entirely didn't work, or entirely did. What is certain, however, is that the New Deal was one of the most freedom-crushing eras to ever happen in this country, which has set the stage for even more losses of liberty over the course of time.

We need to look at each policy on its own merits and impact. The Fed loaning money to banks to keep credit flowing has a lot of bad attached to it, but also might be unfortunately necessary, I'm not quite sure. Price controls, mandatory minimum wages, and public job creation, all things Shlaes mentions, are terrible policies, hindering trade and employment. We need to look at what we need to keep the market working for us, and not overshoot to where we are hindering the market more than helping it.

short, fat bastard|12.1.08 @ 12:26PM|#

Unless they have been re-fi'ing that house every few years and using that extracted equity as a substitute for wage increases they weren't seeing. In which case they're screwed. They owe big on an asset that is losing value.

These people deserve to take it in the ass.

|12.1.08 @ 12:27PM|#

These threads always come down to young, healthy, upwardly-mobile people saying "fuck 'em" about people who aren't so lucky.

|12.1.08 @ 12:28PM|#

If you didn't refinance you house, it hasn't lost value?

You sure about that?

short, fat bastard|12.1.08 @ 12:29PM|#

My Mom's in her sixties.

If your mom is in her sixties and the majority of her 401k was in stocks instead of bonds or other stable investments, she (or you) screwed up.

Sorry, but that's not my problem.

Egosumabbas|12.1.08 @ 12:29PM|#

Also I have no sympathy for those who are upside-down in their homes, because they irrationally bought a home because that's the thing to do. Anybody with basic arithmetic skills could see it was half the cost of ownership to simply rent a home until prices became more reasonable.

Also, is foreclosure really such a bad thing? You get to live somewhere rent-free for a year in exchange for a temporary hit to your credit rating.

short, fat bastard|12.1.08 @ 12:31PM|#

These threads always come down to young, healthy, upwardly-mobile people saying "fuck 'em" about people who aren't so lucky.

No, it always about saying that people too stupid to read the newspaper for the last decade and see the coming collapse deserve what ever they get.

|12.1.08 @ 12:32PM|#

"These threads always come down to young, healthy, upwardly-mobile people saying "fuck 'em" about people who aren't so lucky."


Bullshit Joe. Lots of young uppwardly mobile people bought houses they couldn't afford in the 90s and 00s and now expect the rest of us to make good on their losses. Many older people are doing just fine. In fact, if you are older and stayed in the same house, the market flucuations shouldn't effect you one bit. Your reasonable mortgage from 1985 stays the same.

I had the opportunity to buy into the boom lots of times but chose not to and instead paid off my student loans. My reward for that is not being able to afford a house despite having a big income and people like you telling me I need to pay higher taxes to prop up those poor people who are losing all the money they made from the housing boom. Yeah, lets tax the poor and the rentors and put our grand children into debt to make sure that the rich and upper middle class get to keep their housing equity. Yeah that is fair.

Egosumabbas|12.1.08 @ 12:33PM|#

"These threads always come down to young, healthy, upwardly-mobile people saying "fuck 'em" about people who aren't so lucky."

Nobody put a gun to the Boomer's heads (who have had everything handed to them on a silver platter) and told them to refinance their house and mortgage their 401k to go on an extra cruise and upgrade their SUV. Obviously, they valued short term gain over long term stability. "Luck" has nothing to do with it. My frugality should not subsidize their debt addiction. Not my problem.

|12.1.08 @ 12:33PM|#

If you didn't refinance you house, it hasn't lost value?

You sure about that?

Yes it has. But so what? A house is not meant to be a liquid asset or an atm, if you bought your house with in your means to live in, not to flip, the drop in value hasn't really impacted you until you need to sell. Yes there are definetely cases, where people need to sell, like relocation etc.., but by same token they should be able to re-buy cheaper as well.

|12.1.08 @ 12:34PM|#

"Also, is foreclosure really such a bad thing? You get to live somewhere rent-free for a year in exchange for a temporary hit to your credit rating."

Exactly. It is just bad for the bank because of no recourse mortgages. All of this "keep people in their homes" bullshit is just that bullshit to hide the fact that we are taxing people to save the banks by trying to claim we are saving people's homes.

classwarrior|12.1.08 @ 12:37PM|#

Matt, most of the blame here clearly rests with private actors such as:

1) companies that overleveraged themselves to bet on finanacial instruments they didn't understand, and which were built on models that did not allow for declining house prices

2) rating agencies that negligently or fraudulently rated subprime crap as triple-A

3) originators who hid the risk by bundling mortgages together

4) outright fraud in the mortgage application process

5)lulling financially unsophisticated people into payments they couldn't afford with assurances they could always refinance.

If libertarianism is truly about accountability, then it should take off the ideological blinkers and acknowledge that most of the blame goes to the private sector (plus Randian Greenspan) on this one.

|12.1.08 @ 12:38PM|#

"If libertarianism is truly about accountability, then it should take off the ideological blinkers and acknowledge that most of the blame goes to the private sector (plus Randian Greenspan) on this one."

Not all of the blame but some of the blame for sure, which is all the more reason not to bail them out.

SIV|12.1.08 @ 12:38PM|#

Recession since Q4 2007

Wooooooooooooooo!!!!

fuck all of y'all bitches

Looks like I win

short, fat bastard|12.1.08 @ 12:40PM|#

If libertarianism is truly about accountability, then it should take off the ideological blinkers and acknowledge that most of the blame goes to the private sector (plus Randian Greenspan) on this one.

Da classwarrior actually comes close to the truth.

The businesses that made the loans should go bankrupt.

The people that bought the houses should lose them.

Accoutability should cover all the actors that made mistakes.

toshiro_mifune|12.1.08 @ 12:41PM|#

egosumabbas - I have no sympathy for those who are upside-down in their homes
There is a large percentage of these people who deserve exactly what is coming to them. There is a very small percentage who were in the wrong place at the wrong time. I have sympathy to the later's plight even though I don't think there is much we can do about it.

bullshit to hide the fact that we are taxing people to save the banks

Are they even trying to hide it?

|12.1.08 @ 12:44PM|#

4) outright fraud in the mortgage application process

5)lulling financially unsophisticated people into payments they couldn't afford with assurances they could always refinance.

Like john said, companies fuck up and go under all the time only to be replaced by the more prudent companies. For example because of bail out of the too-big-to-fail banks who made bonehead moves, the smaller community banks, who more prudent and were posed to move into the space left by the failures and grow were basically stopped from doing so by government fiat. And as far as your point 4+5, the expectation is to spend tax dollars helping crooks and dumbasses?

toshiro_mifune|12.1.08 @ 12:46PM|#

short, fat bastard -
The businesses that made the loans should go bankrupt.
The people that bought the houses should lose them.
Accoutability should cover all the actors that made mistakes.

Agreed. We also need to discuss the culpability of the Federal Reserve in this whole thing.
This is as much a central banking failure (maybe moreso) as a corp. banking/investment banking failure.

|12.1.08 @ 12:47PM|#

I feel that this is an argument about monetary policy rather than simply letting businesses fail. The banks fucked up by making bad loans to people who couldn't afford them. Normally, in the market, this is fine; if you make bad investments, you lose your money. However, the banks are also our instruments of money in a fractional reserve system. When the banks overvalue their assets they are holding as reserves, and this finally comes to light, people get scared about the security of their deposits, and banks begin to pull back lending. This then fucks the rest of the economy.

Basically, banks may be "too big to fail" becomes they are so intertwined with, and integral to, our monetary policy that just sitting back and letting them get fucked would collapse our entire system which the banks allow for.

|12.1.08 @ 12:51PM|#

val, the question is are there really other banks with enough capital to take the place of the big banks if there is no cash to go around?

|12.1.08 @ 12:55PM|#

I've been calling for a recession for over a year and now we've got one. It's not yet official, but who doubts it? These things happen and people's investments lose value. If anyone thinks the geniuses at the Treasury Department or on Capitol Hill know how to make recessions a thing of the past they're credulous beyond the bounds of reason. The smart thing to have done would have been to take our lumps, let failing businesses fail and wait for a recovery. They always come and near as I can tell all the government does is exacerbate the problems.

I wanted Fannie and Freddie to go belly up. I wanted the institutions who held bad paper to take their losses and go bankrupt if the losses were too much fotr them to handle. Yeah it's too bad if you bought a house five years ago and now want to sell. If you bought one 20 years ago to y'know, raise a family in, you're not getting killed by this crap. Yeah the bonanza when you sell ain't gonna happen now, but that's not why you buy a home.

Upthread, maybe instead of a home's plumbing, I should have referenced a problem with this place's pipes. Throw "everything" at it and see if it gets better on the eight floors with problems. Or maybe things get worse on the other ninety four.

Take your bets.

|12.1.08 @ 12:58PM|#

val, the question is are there really other banks with enough capital to take the place of the big banks if there is no cash to go around?

There are foreign banks in addition to the smaller banks. Also so far most banks have not needed a crutch, so there are other 'big' players that could have picked up some of the slack and picked up some assets at good price. But you're right I don't have a magic crystal ball that tells me exactly what would have happened, and you're totally right that the private-public tangle in the current banking system makes things more complicated.

Nigel Watt|12.1.08 @ 12:59PM|#

These threads always come down to young, healthy, upwardly-mobile people saying "fuck 'em" about people who aren't so lucky.

Given that the other option is us having to pay for "'em", I'm definitely on board with that.

toshiro_mifune|12.1.08 @ 1:01PM|#

Robbie - Basically, banks may be "too big to fail" becomes they are so intertwined with, and integral to, our monetary policy that just sitting back and letting them get fucked would collapse our entire system which the banks allow for.

Wouldn't this logically call for us to break the banks up then so that we can allow them to fail? Something like a revived and modified Glass-Steagall?
As it is all that we have seen in the past year is consolidation of one failing instiutuion into another, transferring the debt and delaying the inevitable. Eventually we'll get an instituion that is both too big to fail and too big to bail.
The bailout of Citi would seem to indicate the bigger is better model doesn't work. B of A is certainly looking awfully zombish as well.
I realize that aruing for regulation on a libertarian web site may be like pissing into the wind, but something has to be done so the tax-payers are not is this position again.
Should Citi or BofA or GS fail it would be calamatous, but the bailouts are just as bad. Where do we go from here.
These are the sorts of questions Reason should be asking.

|12.1.08 @ 1:02PM|#

short, fat bastard,

If your mom is in her sixties and the majority of her 401k was in stocks instead of bonds or other stable investments, she (or you) screwed up. Many now-worthless MBSs are were AAA-rated real-estate bonds. But you knew that, right?

Egosumabbas,

How do you know why people bought their homes?

Also, is foreclosure really such a bad thing? Are you kidding me? People will write anything to keep their worldview intact.

But I guess it's ok, if they're Baby Boomers.

John,

Lots of young uppwardly mobile people bought houses they couldn't afford in the 90s and 00s and now expect the rest of us to make good on their losses. Name one. C'mon, one. I want you to name a single person who wants "the rest of us" to cover the amount of money their home's value has lost.

Your comment has absolutely no logical connection to anything I wrote, except that you feld a kneejerk complusion to insist that I'm wrong, and that the losses people have endured aren't really a bad thing.

What the hell does your personal history, or anybody else's personal history, have to do with the observation that it's predictable for a comment about people going through hard economic times to generate a lot of "fuck 'em" replies?

|12.1.08 @ 1:04PM|#

val,

Yes there are definetely cases, where people need to sell, like relocation etc.., Yes, there definitely are.

but by same token they should be able to re-buy cheaper as well Unless you're upside down and can't get a down-payment together.

In an alternate universe, some government activity was costing people the same amount of equity, making it equally hard to sell your home. Alternate-universe Reason commenters are outraged.

|12.1.08 @ 1:10PM|#

Given that the other option is us having to pay for "'em", I'm definitely on board with that.

But when "the other option" is framed as some libertarian-friendly policy changes intended to prevent this from happening again, the pain caused by the nosediving economy is the worst thing in the world.

Typical.

|12.1.08 @ 1:15PM|#

housing collapse being a myth

I guess it depends on whether you think a bubble bursting is the same as a collapse, myself.

I haven't checked recently, but I recall seeing somewhere that overall, housing prices have retreated all the way to 2004 levels, or something like that.

These threads always come down to young, healthy, upwardly-mobile people saying "fuck 'em" about people who aren't so lucky.

Not really. Young, upwardly mobile types are the ones most likely to be changing houses on a more rapid cycle, and thus more likely to get caught out in the current housing market "correction".

Not sure what being healthy has to do with it.

SIV|12.1.08 @ 1:15PM|#

Search function is hard!

I was trying to see who called a recession when on H&R comments.I was willing to bet we were in one (here in the comments) back in May and July if not earlier.I called Q4 2007 here at the end of October.I called a recession " since Jan '08 " back on July 11.

Egosumabbas|12.1.08 @ 1:20PM|#

"Egosumabbas,

How do you know why people bought their homes?"

Easy. It's the government official policy to cram as many people into homes as possible, no matter what the cost. Bush coined this the "ownership society". This distorts the public's perceptions of what a home is. In a free market, a home is simply what you decide it is, be it a rental, mortgage, or a handmade cabin under a freeway. Having the government arbitrarily decide how many people should "own" (in quotes because banks own them) their homes is folly.

|12.1.08 @ 1:22PM|#

Don'y you get it guys? Housing prices rising, 401Ks increasing in value, investments of all sorts guaranteed a net gain is what some think we can achieve with the right people and the right regulations. If their speculative investments (ALL investments are speculative to a greater or lesser extent) lose money, Uncle Sam should jump in to rescue them.

Oh yeah, almost forgot. Lower housing costs are bad. Remember that when somebody talks of affordable housing and propping up real estate values.

Egosumabbas|12.1.08 @ 1:23PM|#

"I called Q4 2007 here at the end of October.I called a recession " since Jan '08 " back on July 11."

Many people called a Q4 2007 way back in 2006. Many meaning libertarian writers at economic blogs who don't write for Reason or post comments here.

Egosumabbas|12.1.08 @ 1:25PM|#

"Oh yeah, almost forgot. Lower housing costs are bad. Remember that when somebody talks of affordable housing and propping up real estate values."

Greenspan figured out how to get both when he lowered interest rates to 1% earlier this decade. Encouraging ARM loans was just icing on the cake.

|12.1.08 @ 1:25PM|#

Props, SIV. As someone who frequently get to do that, I always enjoy a good "Toldja so." You know what makes it even sweeter? When the threat you link to is full of people calling you an idiot.

Although I'll note that, in most of the country, noticing that the economy's in the crapper in late 2007 or throughout 2008 wasn't terribly rare.

short, fat bastard|12.1.08 @ 1:27PM|#

joe, anyone that bought into MBS's deserves what they got.

|12.1.08 @ 1:27PM|#

Ego,

How do you know why people bought their homes?"

Easy. It's the government official policy...

I don't even have to read the rest of that. Egosumabbas knows what people were thinking, because of government policy. Mmm-kay.

|12.1.08 @ 1:27PM|#

One last rant. If all of this was brouth on by irresponsible lending and borrowing, wouldn't credit tightening up be a good thing? A logical market response to the problem. People might actually have to put 10-20% down on a house. Less buyers means lower prices and ... Oops, lower housing prices are bad.

SIV|12.1.08 @ 1:28PM|#

Ego,

That is why I'm gloating here where so many held to the "2 neg Q of economic growth" bullshit.I'm not sure how you call a future recession before it starts w/o being Chicken Little.I'd be interested to see who called it in "advance" in 2006.

|12.1.08 @ 1:30PM|#

Toshiro, I see your point. I guess my comments weren't necessarily directed at the specific companies being too big to fail but rather that the banking system has to remain healthy, whatever healthy means, so that the rest of the economy can remain healthy. When all the banks begin to restrict credit, the money system begins to unwind, causing massive pain through the entire system and de facto deflation. So the question is, as you rightly put it, where do we go from here? The problem may be a systemic one, where we base our monetary policy, which should be to have a stable currency neither greatly inflating or deflating, on the workings of banks. Maybe it is a case for more regulation regarding how big banks can get. Libertarians aren't against all regulation, nor against the government being involved when it is necessary. Otherwise we would be anarchists. We just set the standard very high for what should be regulation and what shouldn't, and look at every new regulation with intense scrutiny, as it should be. That doesn't mean regulation in this situation isn't warranted. I can see the problem, but I have no idea about the solution...

|12.1.08 @ 1:30PM|#

joe, anyone that bought into MBS's deserves what they got.?

Sadly, it isn't just the fund managers who actually bought into them - made the decision to buy into them - who are getting what they deserve, but the people who did the right thing, and put aside some of their income to invest in a smart, diversified retirement account.

And while you might not know this, the DJIA - the one that dropped from 13,000 to 7000 - doesn't include MBSs in its measure of value, so the people who get to take a great, big bite of this shit sandwich don't need to have bought any crappy mortgage derivatives at all.

|12.1.08 @ 1:31PM|#

J sub D doesn't understand the concept of overshooting.

Egosumabbas|12.1.08 @ 1:33PM|#

"I don't even have to read the rest of that. Egosumabbas knows what people were thinking, because of government policy. Mmm-kay."

Do you disagree that people respond to government incentives? If the government builds a road, I can rationally deduce that people will decide to use it. I don't have to know exactly what people are thinking to make that prediction.

Nigel Watt|12.1.08 @ 1:33PM|#

But when "the other option" is framed as some libertarian-friendly policy changes intended to prevent this from happening again, the pain caused by the nosediving economy is the worst thing in the world.

See the constant? I don't trust the government.

SIV|12.1.08 @ 1:34PM|#

joe,

Knowing the economy is in the crapper isn't quite the same as calling a recession.
I'm not claiming to be "first" or the "only" just that I was right and early when a whole lot of people who should've known weren't.
Hell I was "too early" in calling a housing bubble basing it on prices and bubble behavior in my local market.

short, fat bastard|12.1.08 @ 1:34PM|#

Sadly, there is no Santa Claus, or Easter Bunny, or Tooth Fairy . . .

|12.1.08 @ 1:35PM|#

SIV,

Do you mind if I grab a ladle while you're serving up the crow?

robc | October 30, 2008, 3:46pm | #

joe,

"During Q3, Hit and Run was full of posts about how we were so totally not in a recession.

Anybody think the Q4 numbers aren't going to look worse than the Q3 numbers?"

You called us in a recession before the third quarter. IF we are in a recession, it officially started July 1st. You were just as wrong before that as anyone who said we arent in a recession after July 1 was.

They at least had an understandable position, as we hadnt yet had 1 quarter of down numbers yet.

Egosumabbas|12.1.08 @ 1:35PM|#

SIV:
"I'd be interested to see who called it in "advance" in 2006."

here you go!

|12.1.08 @ 1:37PM|#

"Lots of young uppwardly mobile people bought houses they couldn't afford in the 90s and 00s and now expect the rest of us to make good on their losses. Name one. C'mon, one. I want you to name a single person who wants "the rest of us" to cover the amount of money their home's value has lost."

Propping up housing prices to an artificially high level so that these people can keep their equity in their homes is making good on their losses. Just exactly what do these people want if not for the rest of us to make good on their losses? They took irresponsible mortgages on houses that are now worth less than what is owed and want the tax payer to bailout the mortgage industry to keep housing prices high. That is making good on their losses at the expense of the rest of us.

|12.1.08 @ 1:37PM|#

Ego,

I don't have to know exactly what people are thinking to make that prediction.

Then don't write things like

Egosumabbas | December 1, 2008, 12:29pm | #

Also I have no sympathy for those who are upside-down in their homes, because they irrationally bought a home because that's the thing to do.

First, you tell us that people bought houses "because that's the thing to do," and now you're telling us they responded to incentives.

First, you tell us that people were acting irrationally, and now you're telling us that you were making a point about people responding to incentives.

|12.1.08 @ 1:39PM|#

See the constant? I don't trust the government.

Yes, Nigel, that's the point; you think backwards. You have your ideological conclusion, and your thinking consists of figuring out how the evidence proves you right.

|12.1.08 @ 1:40PM|#

Unless you're upside down and can't get a down-payment together.

THEN RENT.

joe, im not sure what you are upset about, yes there are 'unlucky' people in good times and the bad, there are more 'unlucky' people during bad times, but the demographic that has been disproportionately impacted by this are not the unlucky ones, but the stupid and speculators.

Why cant you get a downpayment together? You were able to get one before I assume. Again yes there will be some unlucky ones, who were at the wrong place and the wrong time, that is they were able to get a 5% or 10% downpayment together and bought a modest house within the last year or two, and the recent downturn wiped out their downpayment equity, but are now forced to move for other reasons. But again they are the exception, the majority of those impacted are the people that bought 500K homes on zero down who had no equity to begin with and now cant find buyers to take over their overpriced debt without taking a loss.

For example I bought my house with over 25% down for approx 235K, the latest valuation placed it at around 220K, which means that if I were forced to sell now I would loose 15K or so, first I don't plan on moving any time soon so I may still recover that loss in the long run, but even if I was forced to move, I would be able to afford the loss, it sucks, but it would not cripple me, because I chose to live, arguably, within my means.

As far as your mom having a hardtime with her investments in the 401K, again you expect the taxpayers to bail her out for poor investment vehicles, that why she has a loving son like you.

toshiro_mifune|12.1.08 @ 1:42PM|#

Robbie I can see the problem, but I have no idea about the solution...
Neither do I, I'm hoping someone does though.

Nigel Watt|12.1.08 @ 1:43PM|#

Yes, Nigel, that's the point; you think backwards. You have your ideological conclusion, and your thinking consists of figuring out how the evidence proves you right.

If looking at history is "thinking backwards", then I'll admit to that.

|12.1.08 @ 1:44PM|#

Propping up housing prices to an artificially high level so that these people can keep their equity in their homes is making good on their losses. It's also an effort to prevent the economy from going into a depression.

Just exactly what do these people want if not for the rest of us to make good on their losses? I don't presume to know what "these people" want. I don't even know what people you're talking about. I don't think you do, either. C'mon, name one.

They took irresponsible mortgages on houses that are now worth less than what is owed and want the tax payer to bailout the mortgage industry to keep housing prices high. Who?

Who are these people, these homeowners? I haven't met a single actual homeowner who has called for the government to spend tax dollars to prop up their homes. Have you?

I've met a lot of people who think the economy is in danger of going into a depression, and think that a policy that puts a floor under the cost of homes is necessary to do that. I can't think of a single person I've ever spoken to who has expressed the opinion that the government owes it to them to keep their equity intact.

Or are you doing that thing you do, where you assume you know what Group X is saying, because people

robc|12.1.08 @ 1:46PM|#

joe,

Ordinary Americans have 401ks, and sometimes try to sell their homes.

I sold mine last year during the crash. It took longer than it would have pre-crash but not a big deal. And I probably got 10% less than I would have 1-2 years earlier. But I saved more than that on the house I purchased.

Of course, I dont live on a coast either. Ordinary Americans live in fly over country. :)

SIV|12.1.08 @ 1:49PM|#

Ego,

He was wrong about the 2006 economic growth of neg %2. But hey, I was wrong about Hillary Clinton producing a (then) underage white girl who bought cocaine from Barack Obama back in 1981.

Naga Sadow|12.1.08 @ 1:49PM|#

Damn your luck, robc. I'm young and don't have a lot in my 401k but I still almost cried when I got my statement last week. I understand that 401k's deliver solid returns over a 30 year period but realizing I've been bumped back to year one contributions hurts!

|12.1.08 @ 1:50PM|#

Joe,

You are talking in circles and you know it. "I haven't met a single actual homeowner who has called for the government to spend tax dollars to prop up their homes." Joe that is exactly what you advocate above you just call it "preventing a depression". Preventing a depression by taxing poor people and non home owners to save the paper wealth of home owners. That is one hell of a progressive way to look at things isn't it Joe?

robc|12.1.08 @ 1:51PM|#

In fact, if you are older and stayed in the same house, the market flucuations shouldn't effect you one bit.

My parents had their house paid off before I was born. They didnt notice the boom or the bust. They also still live in the "starter home" they bought in 1962.

Their retirement investments have taken a beating but my Dad got margin called in 1987, I think this is minor compared to that. Plus, at their age, they have a significant part of their investments in non-stocks.

Egosumabbas|12.1.08 @ 1:53PM|#

"First, you tell us that people bought houses "because that's the thing to do," and now you're telling us they responded to incentives.

First, you tell us that people were acting irrationally, and now you're telling us that you were making a point about people responding to incentives."

You can have both at the same time you know. In fact, the irrationally is what created the government policy in the first place. There is an irrational peer pressure to own a home (which is fine as long as they don't use coercion). Then these people elect politicians who dictate it is a "good idea" to own a home. This then encourages other people who do not respond to peer pressure but respond to financial incentives.

|12.1.08 @ 1:56PM|#

val,

THEN RENT.

Perhaps you say the same thing to people priced out of homeownership because of regulatory-created scarcity in homes, but I doubt it.

joe, im not sure what you are upset about The effing hypocrisy of people who feign concern about much smaller losses created by the government, who then insist that there is no problem with much larger losses when they might be alleviated by the government. And oh, btw, don't ever, ever say that such people lack compassion.

the demographic that has been disproportionately impacted by this are not the unlucky ones, but the stupid and speculators. The demographic disproportionately impacted by a deep and sustained recession - maybe depression - will be the poor and working class, who are much less likely that average to have a mortgage in the first place.

Why cant you get a downpayment together? Because the economy's in the crapper, and because you had to stroke a check to get out of your last home, and because you don't have the five years it took you to get your last down payment together before you need to move.

You were able to get one before I assume. When the economy was better, and you had more time?

But again they are the exception, the majority of those impacted are the people that bought 500K homes on zero down who had no equity to begin with and now cant find buyers to take over their overpriced debt without taking a loss. You keep ignoring the fact that the economy is in the crapper, and that the collapse has spread beyond the re-fied yuppie flippers.

As far as your mom having a hardtime with her investments in the 401K, again you expect the taxpayers to bail her out for poor investment vehicles Really? Let's make a $100,000 bet. If you can find a comment from me saying...well, saying anything at all about what I want the taxpayers to do, I'll send you $100,000. If not, you send it to me.

Psst: don't take the bet. I didn't write a word about bailing anyone out; I merely made the observation that people are hurting, and gave an example.

What you've done here is demonstrate another variety of thinking backwards - you start with the assumption that the existence of a problems means such and such about policy, you realize you don't like that policy, so you insist that the problem doesn't exist. Well, there is an objective reality out there, whether it includes facts you consider politically inconvenient or not. Start with the facts, then let your political beliefs flow from that.

robc|12.1.08 @ 1:57PM|#

joe,

at 1:35 you quoted a post where I proved you were wrong?

Weird. But okay.

Calling the recession early is just as wrong as failing to call it after it has happened.

SIV|12.1.08 @ 2:01PM|#

I understand that 401k's deliver solid returns over a 30 year period

Naga,

Past performance is no guaranty of future results

|12.1.08 @ 2:01PM|#

I love the smell of a flailing John in the early PM.

You are talking in circles and you know it. I'm dancing in circles around you, clearly.

"I haven't met a single actual homeowner who has called for the government to spend tax dollars to prop up their homes." Joe that is exactly what you advocate above you just call it "preventing a depression". Remind me again, what am I advocating for? Could you quote it, please? If not, please reread what I just wrote to val.

Preventing a depression by taxing poor people and non home owners to save the paper wealth of home owners. That is one hell of a progressive way to look at things isn't it Joe?

I'd try to change the subject, too, if I were arguing your side.

Last chance: who are these people who are advocating for the government to repay them for the value of their homes? You've come up with exactly one - me - and you can't point to me actually saying that.

Oh, BTW, you know what makes your meltdown even sweeter? The fact that, upthread, you yourself wrote that, unpleasant as it is, a bailout might be necessary, and now you're ducked so far behind your RAH RAH TEAM RED barricade (progressives? why are you yammering about progressives?) that you need to insist that anyone else making the same argument is a terrible, greedy person.

FAIL

|12.1.08 @ 2:01PM|#

Wouldn't this logically call for us to break the banks up then so that we can allow them to fail?

I would have been happy (delighted) to see Wachovia chopped up, and sold off piecemeal, instead of crammed whole down Wells Fargo's gullet.

Naga Sadow|12.1.08 @ 2:05PM|#

Logical fallacy, SIV. What do you use then? A crystal ball? Assumptions are always built into any model of the future my friend.

|12.1.08 @ 2:06PM|#

robc,

at 1:35 you quoted a post where I proved you were wrong? No, I quoted a post where you asserted I was wrong - where you told me I was wrong to say we were in a recession - when I was in fact right.

In case you hadn't heard, the Recession officially started in Q4 2007 and continues to the present day. I quoted you running me down for saying we were in a recession in a comment dated October 30, 2008. We'd been in a recession for almost an entire YEAR!

"Recession in U.S. Started in December 2007, NBER Says" - Bloomberg.

!|12.1.08 @ 2:07PM|#

I merely made the observation that people are hurting, . . .

As god is my witness, I thought turkeys could fly.

|12.1.08 @ 2:12PM|#

To sum up:

If you want to make an argument against a bailout, go right ahead.

If your argument depends on one of the three following assumptions, you're going to look like an idiot:

1. Everything's fine! There's no problem!

2. The only people doing badly in this economy, or as a result of the problems in the credit and housing markets, are BAD PEOPLE who did STUPID THINGS.

3. Nobody really wants to prevent a recession. That's just code by people trying to keep their home value rising.

4. Depressions and recessions are periods when it becomes a lot easier for people towards the bottom of the income scale to buy homes.

|12.1.08 @ 2:12PM|#

This talk about being upside down is a red herring. People who buy a new car off the lot are upside down for pretty much the life of the loan. But you buy a car for its utility value; if you bought a house, because you wanted a home, for a price which made sense to you at the closing, and are making the payments you contracted to make, then you are getting what you agreed to.

If you made a bet, and lost, too bad; that's the way the cookie crumbles. I hope you don't think the guy who bought a million dollar HemiCuda solely because he thought it would eventually be a two million dollar HemiCuda deserves a bailout.

|12.1.08 @ 2:12PM|#

5. If you miscount your assumptions, there's a sub-heading to joez Law that applies.

economist|12.1.08 @ 2:15PM|#

I've enjoyed the last eight years of assrape. Doubtless I'll enjoy another eight years with more of the same and being told that the problem with the last eight years was that it didn't involve enough assrape.

short, fat bastard|12.1.08 @ 2:16PM|#

2. The only people doing badly in this economy, or as a result of the problems in the credit and housing markets, are BAD PEOPLE who did STUPID THINGS.

There is lots of collateral damage as well. The primary argument against a bailout is that future collateral damage from the bailout will be worse than the collateral damage from the crash.

Naga Sadow|12.1.08 @ 2:17PM|#

economist,

If assrape was so terrible would prison rates be so high? Words to ponder . . .

|12.1.08 @ 2:18PM|#

So in joetopia is anything bad allowed to happen to anybody? Are any investments, regardless of how intelligent or stupid, allowed to fail?

Because getting things wrong is how most human beings learn. I mean do you really think anyone is going to invest in a MBS again?

economist|12.1.08 @ 2:18PM|#

sfb,
Remember: Public debt is never collateral damage.

robc|12.1.08 @ 2:20PM|#

joe,

NBER is wrong. They have no authority to declare recessions. Im talking stickly textbook recession which began July 1st (assuming 4th quarter is down, which I think is a safe assumption).

You and NBER are both wrong.

|12.1.08 @ 2:20PM|#

I don't give a fuck who is losing money, who is gaining money, who cant buy a house or whatever. The important thing here is to keep money flowing and to keep the currency stable. If we can do while minimizing distortions to the market, that is what should happen.

economist|12.1.08 @ 2:21PM|#

While I'm not happy about the current economy, I maintain a smug self-satisfaction from seeing the disaster coming and shifting my investments accordingly. It'll probably turn to anger and frustration at some point in the next 4-8 years, but it's an intoxicating feeling while it lasts.

Naga Sadow|12.1.08 @ 2:21PM|#

Pain,

In joetopia, there is some sort of "Boys from Brazil" thing going on as only a population of joes live there.

robc|12.1.08 @ 2:23PM|#

joe,

My argument against the bailout:

Recessions and depressions suck. They are also good things. Wheat/chaff/schumpeter/etc.

The clear,safe course leads ever downward into stagnation.

concerned observer|12.1.08 @ 2:39PM|#

The libertards are back from their shut-in vacations, and are having fun deluding themselves. Tell me robc how an econmic collapse doesnt lead to "stagnation"?

rhywun|12.1.08 @ 2:43PM|#

These fuckers who made off with billions by gambling away our 401Ks on computer-generated phantom "investments" should be fined & tossed in jail, not rewarded with bailouts. Too bad they mostly converted the loot into yachts and mansions already.

robc|12.1.08 @ 2:43PM|#

co,

It does the exact opposite, it sets the stage for the next phase of growth.

This is an unproven conjecture that even joe has agreed may be true:

The boom/bust cycle leads to greater long term growth than unending "managed" growth.

The latter is what many, especially in power, seem to want. But that is the stagnant solution.

In fact, as part of my theory, the unending growth cant last forever and eventually builds to a much larger crash than would have happened without the attempts to manage things. Its analogous to the junkie economy theory. Eventually the junkie will crash - "just one more hit" wont work forever.

Naga Sadow|12.1.08 @ 2:44PM|#

rhywun,

I'll take a yacht.

CO/Edward,

Jesus! Don't you ever have work? Honestly!

Egosumabbas|12.1.08 @ 2:45PM|#

"I maintain a smug self-satisfaction from seeing the disaster coming and shifting my investments accordingly"

Long in guns, gold, and MRE's?

|12.1.08 @ 2:48PM|#

short, fat bastard,

There is lots of collateral damage as well. The primary argument against a bailout is that future collateral damage from the bailout will be worse than the collateral damage from the crash.

I can respect that. I'll say that the need is severe enough that the best use of the skepticism about government you give voice to is to figure out ways to structure the response so as to limit the undesireable longterm effect.

Pain,

Isn't it amazing what you can do by using terms like "any," "all," and "none" in an argument?

Don't you worry - under even the most optimist big-government bailout scenario, there's going to be plenty of people hurting. We're still going through a recession, and lots of stock and real estate value will be gone forever.

economist | December 1, 2008, 2:21pm | #

While I'm not happy about the current economy, I maintain a smug self-satisfaction from seeing the disaster coming and shifting my investments accordingly.

I saw it coming. I told the guy who manages my investments in the summer of 2007 that I wanted to go safe for a year or two. Then I let him talk me out of it.

Why, oh why, do I ever listen to other people? Other people don't know shit!

Egosumabbas|12.1.08 @ 2:49PM|#

In all seriousness, cash is king until real estate hits bottom in 2010. I'll buy up a home and parts of the student ghetto, then I'll ride the hyperinflationary tidal wave without a problem.

That's my plan anyway.

concerned observer|12.1.08 @ 2:51PM|#

@Naga-Yes, I actually have a job, unlike the adolescents and college students who compose this site's libertarian posters. I actually do have to work for a living.

|12.1.08 @ 2:51PM|#

This is an unproven conjecture that even joe has agreed may be true:

The boom/bust cycle leads to greater long term growth than unending "managed" growth.

This recession, maybe depression, is not a consequence of the boom-bust cycle. We should be right in the sweek spot of the upturn after the 2001 recession. This isn't a situation where some investments and homes lost value because the economy sucks; rather, this downturn was CAUSED BY cascading failures in investment markets.

Can anyone name the last time the economy went into recession as a result of cascading failures in the financial sector?

robc|12.1.08 @ 2:52PM|#

Why, oh why, do I ever listen to other people? Other people don't know shit!

Is joe turning objectivist on us?

concerned observer|12.1.08 @ 2:52PM|#

@robc-thats a bunch of crap. The economy didn't have near the same problems it has now when we practiced an (admittedly imperfect) form of Keynesian economics.

|12.1.08 @ 2:53PM|#

I'm a joe-bectivist:

A is your mother.

short, fat bastard|12.1.08 @ 2:53PM|#

I can respect that. I'll say that the need is severe enough that the best use of the skepticism about government you give voice to is to figure out ways to structure the response so as to limit the undesireable longterm effect.

I do not oppose safety nets. If you want to stretch that concept to it's extreme, then you can give half a trillion dollars directly to those that suffer collateral damage.

But the businesses that fucked up need to go under. And the people that overextended to buy things they couldn't afford should suffer the consequences.

We'll be better off in the long run.

Naga Sadow|12.1.08 @ 2:55PM|#

CO,

Ah . . . so you're an old high school drop out who hates his job and feels he's been passed over for raises and promotions by know-nothings with degrees. Your rage is explained.

robc|12.1.08 @ 2:56PM|#

joe,

You familiar with the multi-wave boom bust cycle concept? Any reason to think this isnt the trough of 2 of the longer term cycles hitting simultaneously? With multiple cycles of different length, you cant say this is the sweet spot after the 2001 recession.

I personally dont know if that concept is BS or not, but it appeals to me as an engineer. Or I could just take the Austrian approach and say this is the result of Fed cheap money policies.

The cascading failures are all part of the same thing. All are housing related. Sure if we didnt have the MBSs it wouldnt have been a cascade, but its all inter-related.

Also, the recession preceded (especially if you go by the NBER dates) the cascade. The housing market failure preceded the recession, but the other failures were after July 1st, mainly. People were starting to talk about the MBS stuff late last year/early this year, but its failure is very recent.

robc|12.1.08 @ 2:57PM|#

Edward didnt live thru the 70s.

|12.1.08 @ 2:58PM|#

Don't you worry - under even the most optimist big-government bailout scenario, there's going to be plenty of people hurting. We're still going through a recession, and lots of stock and real estate value will be gone forever.

Nice deflection. So under joe's special theory of economics how we are supposed to grow an economy with little or no risk in investment? That's what you are advocating right?

|12.1.08 @ 3:03PM|#

sfb,

Safety nets, by themselves, won't fix a dysfunctionaly economy.

The purpose of the Wall Street bailout isn't to save those companies and their jobs, but to save the credit markets, so that people can run their businesses.

My nightmare is ten thousand builders who have solid business plans unable to begin work on their next job sites because they can't get builders' loans. I worked with one guy, from a $billion assisted-living company, who's had to put off construction because they can't get financing for a project that will easiy sell all of its units at a huge profit in short order.

My question is, why doesn't the government just lend the money it's loaning to the investment bankers (and using to buy shares and investment bonds) directly to borrowers itself? Heck, Citi and Merrill can manage the accounts on a fee-for-service basis.

robc|12.1.08 @ 3:03PM|#

I told the guy who manages my investments in the summer of 2007 that I wanted to go safe for a year or two. Then I let him talk me out of it.

I decided to sell all my bank stocks before things got bad. I forgot about some WaMu I owned until it crashed. Then I decided to ride it out because surely they wouldnt go under.

short, fat bastard|12.1.08 @ 3:06PM|#

My question is, why doesn't the government just lend the money it's loaning to the investment bankers . . . .

Such an obvious idea, except the long term result would be to destroy the private credit market, because no one can compete with a government agency that is not required to show a profit.

That's big collateral damage.

robc|12.1.08 @ 3:06PM|#

joe,

My nightmare is ten thousand builders who have solid business plans unable to begin work on their next job sites because they can't get builders' loans.

Im going to pull a Dave Ramsey and say that the builders should run their business on cash. Build the next job site with your own money.

who's had to put off construction because they can't get financing for a project that will easiy sell all of its units at a huge profit in short order.

If its that obviously "easiy" to sell, someone with some cash burning holes in their pocket looking for an investment will jump on board. They may expect entrepreneur ROI not bank loan ROI, but still.

Naga Sadow|12.1.08 @ 3:07PM|#

robc,

Ouch! You should talk to Pro Lib. He had a lot in WaMu I believe.

|12.1.08 @ 3:09PM|#

robc,

I haven't read about the longer-term cycles you mention, but I think I grok the general idea.

I don't think we need to look for zebras here. The economy went deep into the crapper because MBSs tanked a lot harder than anyone thought they would, and a lot of people owned MBSs. This froze the credit markets, which slowed the economy, and the combination of the housing market, the credit markets, and the real economy slowing brought down the Dow, deepening the problem.

Sure if we didnt have the MBSs it wouldnt have been a cascade, but its all inter-related.

I think it's likely that the decline in home values is a consequence of a natural boom-bust cycle, albeit one on steroids from fiscal policy. That, by itself, might have caused a shallow recession. (Remember, it was the housing market's strength that caused the industrial/real economy recession of 2001 to be so shallow).

Also, the recession preceded (especially if you go by the NBER dates) the cascade. The housing market failure preceded the recession, but the other failures were after July 1st, mainly. People were starting to talk about the MBS stuff late last year/early this year, but its failure is very recent.

Right, right. The housing bubble popped, which did two things - sent the economy into recession, and caused the MBSs to melt down. That's my understanding, too.

|12.1.08 @ 3:10PM|#

Pain,

That's what you are advocating right? No, not even close. You have made several wholly-unsupported leaps of logic beyond anything I've written.

|12.1.08 @ 3:11PM|#

And it's not a deflection, but a response to your central point; there will still be plenty of market discipline comint out of this, even if we don't let another Great Depression happen.

robc|12.1.08 @ 3:12PM|#

Naga,

I didnt have much, I would have remembered it if I had.

That was nothing, you know the "bulls make money, bears make money, hogs dont make money" concept? Yeah, my hog story cost me 80k in a single stock. Because I didnt want to pay the taxes on it. And it was long term capital gains, so it was only 15%.

|12.1.08 @ 3:14PM|#

sfb,

Such an obvious idea, except the long term result would be to destroy the private credit market, because no one can compete with a government agency that is not required to show a profit.

Well, yeah, if they stay in business forever. I'm thinking about a temporary fund that ends when the appropriation gets tapped out.

robc,

Im going to pull a Dave Ramsey and say that the builders should run their business on cash. Build the next job site with your own money. You saying that will surely cause said money to appear in the builders' pockets.

If its that obviously "easiy" to sell, someone with some cash burning holes in their pocket looking for an investment will jump on board. Uh, yeah, between the MBSs and the stock market, there sure are a lot of people with money burning a hole in their pocket looking to invest. Certainly enough to make up for the disappearance of the credit markets.

|12.1.08 @ 3:16PM|#

robc,

WaMuuuuuuuuu! Where's my money?

Should've sold at $46.

|12.1.08 @ 3:19PM|#

Naga,

I didn't have a lot in the grand scheme of things, but I had enough to be pissed off about my shares being worth zero.

robc|12.1.08 @ 3:19PM|#

joe,

You saying that will surely cause said money to appear in the builders' pockets.

Nope, but they can save money from their other job (right now, I hope all builders have an other job) until they can fund their building projects. They will be much more profitable with much less risk self-funding.

Uh, yeah, between the MBSs and the stock market, there sure are a lot of people with money burning a hole in their pocket looking to invest. Certainly enough to make up for the disappearance of the credit markets.

Show a clear cut case for profit and offer a 20% return and I dont think there will be much problem finding the funding. Like I said, it wont be found at bank rates.

robc|12.1.08 @ 3:21PM|#

Should've sold at $46.

I should have sold at $15 after the drop and I realized I still owned the shit. But that was when I decided to go for broke. And I succeeded.

|12.1.08 @ 3:21PM|#

joe,
What is your prescription for the ailing worldwide economy?

Do you think the government can prevent recessions?

Do you support this abomination?

Rep. Conyers is urging rapid passage of the Emergency Home Ownership and Mortgage Equity Protection Act of 2007. The bill recognizes that for many families who face foreclosure, the amount that remains on their mortgage is more than even what the house is now worth.

The reforms contained in the bill would allow bankruptcy judges to reduce principal and runaway interest rates so at-risk homeowners can avoid foreclosure, stay in their homes, and pay off their modified mortgages. This small change to the bankruptcy code would help half a million at-risk families avoid foreclosure, including many white, African American, and Latino families. [italics added]

|12.1.08 @ 3:23PM|#

robc,

Save? Save...money? Save it from what? You're talking gibberish, man! ;-)

Yes, more savings would be a good idea, at all levels. I hope that that outcome will be a silver lining from all of this.

Show a clear cut case for profit and offer a 20% return and I dont think there will be much problem finding the funding. Like I said, it wont be found at bank rates. OK, I'm sure the very tip-top investments will be able to find money, but there's still the problem of there being too little investment dollars out there to go around.

|12.1.08 @ 3:27PM|#

It's the government official policy to cram as many people into homes as possible, no matter what the cost. Bush coined this the "ownership society".

I don't recall if home ownership was part of that marketing pitch. I seem to recall it being used mostly to push defined contribution retirement plans, social security reform, health savings accounts, that kind of thing.

robc|12.1.08 @ 3:28PM|#

joe,

there's still the problem of there being too little investment dollars out there to go around.

That isnt a problem. In a recession only the very, very good ideas should be able to find funding. Its part of the whole wheat/chaff separation process. The bailout is fucking that up.

I think this is the ultimate point of the disagreement, you see a tightening credit market as a negative and I see it as a positive. It wont last that way forever.

|12.1.08 @ 3:28PM|#

robc,

Me, too! I also succeeded!

I made the same decision you did. By the time it was in the teens, I decided to ride it out. I never thought the bank would completely bottom out until right before the end. Stupid bailout would ignore the one bank I held stock in. I'd have preferred no bailout, of course, but if we simply must have one, why not WM? Seattle needs help these days, with Boeing mostly gone, and Starbucks heading dramatically south.

|12.1.08 @ 3:28PM|#

No, not even close. You have made several wholly-unsupported leaps of logic beyond anything I've written.

You are advocating the government bailout companies to "unfreeze" the credit markets correct? How is this not rewarding poor investment?

There are a lot of companies and banks that are not in this situation. They could very well make a killing buying up or taking business from the failing institutions. Instead they get the shaft for being smart while poorly managed companies get a bailout so they can limp along a few more years and continue to put a drag on the economy.

The only thing any of the current government action will do is delay the inevitable. And more than likely make the fallout worse due to continued uncertainty and market distortions.

robc|12.1.08 @ 3:29PM|#

I hope that that outcome will be a silver lining from all of this.

US household saving rate is positive again, so that good has already happened. That was also part of the problem this time around. 5 years (or however long it was) of negative savings rate is just asking for a bitch slap.

|12.1.08 @ 3:29PM|#

J sub D,

Question 1: Stimulus spending on things like defered maintenance on infrastructure and the creation of new infrastructuve will get us through the bad times while laying the groundwork for stronger future growth. Even if we have to tolerate some bid deficits in the short-term.

Do you think the government can prevent recessions? No. What goes up must come down. The economy goes through cycles. The government can mitigate them, and the pain they cause, but only to a certain degree.

And I think allowing bankruptcy judges to treat first-home mortgages debt like every other debt held by a bankrupt party makes sense. I'm not sure what the argument for making first-home (and only first-home. People with second homes can get their mortgages written down by the judge already) mortgage debt uniquely untouchable is based upon.

|12.1.08 @ 3:35PM|#

robc,

That isnt a problem. In a recession only the very, very good ideas should be able to find funding. Its part of the whole wheat/chaff separation process. The bailout is fucking that up. I'm saying, we're past that. A "normal" amount of investment dollars drying up, as in normal recession, is one thing, but a collapse of the investment markets themselves is less competition-for-resources than enduring drought.

If there had been no MBS meltdown, and we were in a the type of recession that a popping housing bubble, by itself, could cause, I'd see no need for a bailout. Nobody was talking about a bailout in 2001.

robc|12.1.08 @ 3:37PM|#

joe,

Not sure about this, but I think the rules on mortgage debt are due to the fact that homes are also protected in a bankruptcy. In other words, its a tradeoff. Mortgages arent treated like other debt and homes arent treated like other assets*.


*This varies widely depending on your state

robc|12.1.08 @ 3:40PM|#

joe,

I'm saying, we're past that.

Im saying, its the same only bigger. Their is a whole fuckload of chaff that needs to be cleaning up. Heck, in some areas of the country we NEED housing to drop another 50% in value before they hit bottom.

|12.1.08 @ 3:42PM|#

"but a collapse of the investment markets themselves"

Can you please point me to said collapse? I've been hearing people screaming about it for months, but haven't seen any evidence. Sure, some short-term inter-bank lending has slowed, but that's a volatile market to begin with. Consumer lending hasn't halted by any degree last I heard. I still see banks advertising about home loans as much as before. It might be a little harder to get a loan if your rating is bad, but that's the way it should be...

robc|12.1.08 @ 3:43PM|#

Isaac,

Im doing a refi so it hasnt completely collapsed.

|12.1.08 @ 3:44PM|#

Question 1: Stimulus spending on things like defered maintenance on infrastructure and the creation of new infrastructuve will get us through the bad times while laying the groundwork for stronger future growth. Even if we have to tolerate some bid deficits in the short-term.

Actually that's an improvement over throwing money at bad debt. Of course polio is an improvement over smallpox. Does this mean you're willing to let GM go belly up/chapter 11 early next year?

No. What goes up must come down. The economy goes through cycles. The government can mitigate them, and the pain they cause, but only to a certain degree.

And meddling in the economy only makes things worse.

And I think allowing bankruptcy judges to treat first-home mortgages debt like every other debt held by a bankrupt party makes sense.

That would be every other debt backed by collateral, right? You default, you lose the collateral. That's not what this bill is.

|12.1.08 @ 3:58PM|#

robc @ 3:37.

Ahhh, I get it. That complicates things, then, dun't it?

Im saying, its the same only bigger. I'm not so sure. It's not like the investment banks just have 20% less money. What if the "heartbeat" isn't just weaker, but gone? We need to restart it.

Heck, in some areas of the country we NEED housing to drop another 50% in value before they hit bottom. Maybe so. Like I said, it's not the real estate market's drop that has me worried, but the damage that (rather ordinary) event did to the credit markets that's the real worry.

Isaac Freeman,

Can you please point me to said collapse? Ever heard of the Baltic Shipping something or other? It's basically the price of sending a shipping container around the world. It's dropped from 30k to 5 or 6, because so many shipping companies can't get the credit they need to set out. Or, look at what happened to the TED spread this year. Like the recession that BEGAN IN DECEMBER 2007, the signs are all around, if you aren't actively working not to see them. The credit markets are screwed.

robc|12.1.08 @ 4:02PM|#

Anyone have any idea what the mafia bad debt rate is? Guido will eventually kill you but that doesnt help you pay the loan back.

|12.1.08 @ 4:03PM|#

J sub D,

1. Does this mean you're willing to let GM go belly up/chapter 11 early next year? No, not under these circumstances. The Big Three shutting their doors would be incredibely counter-simiulatory, and we need stimulus to work.

2. And meddling in the economy only makes things worse. I tend to be skeptical of vague statements. If you can draw a conclusion about a proposal without the need to actually know anything about it, it's probably not a conclusion I need to think too hard about.

3. That would be every other debt backed by collateral, right? You default, you lose the collateral. That's not what this bill is. Right, robc set me straight. Still not sure what I think about this.

robc|12.1.08 @ 4:04PM|#

joe,

Ever heard of the Baltic Shipping something or other? It's basically the price of sending a shipping container around the world. It's dropped from 30k to 5 or 6, because so many shipping companies can't get the credit they need to set out.

Thats not a collapse, its just very selective credit. Big difference.

robc|12.1.08 @ 4:05PM|#

joe,

The Big Three shutting their doors would be incredibely counter-simiulatory

Actually, it would be very stimulatory, as the former Big 3 employees found productive jobs.

robc|12.1.08 @ 4:08PM|#

Completely off-topic, but this headline on fark is so full of win I had to post it:

Swedes shoot 63 to win World Cup of Golf. Muslim extremists in Mumbai laugh and call them amateurs

|12.1.08 @ 4:21PM|#

Right, robc set me straight. Still not sure what I think about this.

Y'know it's shit like that quote that keeps you out of the troll/LoneWacko column? ;-)

Xeones|12.1.08 @ 4:33PM|#

Edward didnt live thru the 70s.

Are you sure he's alive now?

SIV|12.1.08 @ 5:07PM|#

NBER is wrong. They have no authority to declare recessions.

NBER are the only ones who have the "authority" to do so.The "2 Qs of neg growth" is not a "textbook definition".

SIV|12.1.08 @ 5:09PM|#

FWIW, I'm not agreeing with joe on anything here.
Just celebrating my recession call of beginning Q4 of 2007.

Paul|12.1.08 @ 7:52PM|#

It's a very helpful signpost that tells me a) the government has no idea what its doing, b) its going to proceed anyway, and c) the writer of the article (or his/her editor) approves of the whole mess whole heartedly.

Big ideas...big ideas...

Paul|12.1.08 @ 7:54PM|#

"You just throw everything you have at the problem to try to fix it as quickly as you can,"

We are. It's called:

American Structured Securities Rescue Act for a Prudent Economy

Paul|12.1.08 @ 7:58PM|#

I would also like to add that politicians and media keep referring to these "solutions" as "stimulus".

I find that very interesting. Take, oh, RAPE! Really, it's all just a matter of perspective. To the person getting raped, it's well, rape. It's unpleasant and violating. But to the people doing the rape, it's generally thought of as "stimulating".

The government wants stimulus. I just want to be left alone. The analogy fits more every day.

Paul|12.1.08 @ 8:01PM|#

BTW: I'm slowly coming to the opinion that the best thing that could happen to the U.S. auto industry is exactly a big-3 meltdown. Imagine the innovations and new competition we'll see spring up from the ashes. As an auto-enthusiast, I'm actually excited to see this happen. Hundreds of thousands of new jobs could be created over the next decade in a well-diversified and fast moving industry.

|12.2.08 @ 5:27AM|#

During the campaign there were big arguments about how we couldn't afford "earmarks" and other programs that cost a few billion. How quaint.

Aren't there something like $500 trillion in derivatives hanging out there? I know they were designed to balance out to zero (that's what 'hedging' is all about), but what if the hedge fund managers' economic models are, say, 10% off? (Would it be surprising if these models were beginning to fail about now?) Will the Fed have to create $50 trillion and hand it out?

The monetary base just last August was $0.85 trillion, according to the St Louis Fed.