New at Reason

Steve Chapman reveals the government's solution to problems caused by reacting to economic crises without thinking out the consequences: Do it again, with less thinking!

Comments

Billy Beck | April 3, 2008, 7:33am | #

"More speed, less direction. No brakes, why steer?"

Casey Serin | April 3, 2008, 8:09am | #

Barney Frank is a nearly septuagenarian gay man... not that there's anything wrong or unseemly about that!!

Tbone | April 3, 2008, 8:45am | #

It absolutely pisses me off that I'm again bailing out the greedy.

However, and while I agree with Chapman's sentiment, is it any "cheaper" if millions declare bankruptcy, a number of mortgage lender and banks go under (some federally insured), and we end up paying a significant outlay of unemployment insurance to homebuilders/construction trades? I'm guessing the federal balance sheet looks similar. Further, allowing an unabated foreclosure implosion (since many ARMs still have to reset) might create the kind of sentiment that causes a run on the banks. Probably part of congresscritter thinking.

Episiarch | April 3, 2008, 8:53am | #

"More speed, less direction. No brakes, why steer?"

"Go this way, really fast. If something gets in your way: turn."

John-David | April 3, 2008, 9:08am | #

Casey,

Could you go fuck yourself? Pretty please?

ed | April 3, 2008, 9:19am | #

I'm again bailing out the greedy

And the stupid. Never forget the stupid.

R C Dean | April 3, 2008, 9:50am | #

is it any "cheaper" if millions declare bankruptcy, a number of mortgage lender and banks go under (some federally insured), and we end up paying a significant outlay of unemployment insurance to homebuilders/construction trades?

Unemployment insurance is paid for by employers. Sure, they pass the costs on, but unless you are planning a house, any impact on you will be very attenuated.

Besides, this line of thinking essentially socializes any cost to anyone. I don't think we need to go any further down that road.

TallDave | April 3, 2008, 10:38am | #

Gridlock looks better and better.

toshiro_mifune | April 3, 2008, 10:51am | #

If the federal government can do anything to goose growth, it's already doing it. The Federal Reserve has slashed interest rates since last summer
This has nothing to do with goosing growth and everything with de-valuing the dollar so the big IBs and CBs can paper over their losses. It's nothing more than a bailout.

Invisible Finger | April 3, 2008, 11:25am | #

It's not a real crisis until Congress stops getting paid.

Douglas Gray | April 3, 2008, 11:38am | #

If Govt. sector growth, skewered, bogus figures, and "growth" in the financial sector are taken into account, we have been in a recession for some time.

One people out of ten in Michigan are using food stamps.

Chapman is basically right, however, a recession and the decline in housing values are necessary

Steve Verdon | April 3, 2008, 12:16pm | #

A recession is technically defined as two consecutive quarters of negative economic growth—meaning total output actually declines.

Uhhhmmmm no. Or, at least not anymore. That was the old definition, but using that definition there hasn't been a recession since the one back in 1990/1991.

The NBER uses a more...nuanced definition found here

Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dating procedure?

A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.

Still, the gist of the article is correct. Discretionary government policy has generally been only so-so in its effectiveness and perhaps the most effective tool are those that the Fed has control over....what a coinkydink that the Federal government is talking about taking over the Fed now.

And the "crisis, plague, disease, epidemic, scourge" language is typical of the government when it wants to expand its powers. Portray something as really, really bad. Then point out that extra-ordinary intervention could solve the problem (not really--e.g. drug war, poverty, terrorism, etc.) and there you the standard recipe for increasing government power.

Steve Verdon | April 3, 2008, 12:22pm | #

However, and while I agree with Chapman's sentiment, is it any "cheaper" if millions declare bankruptcy, a number of mortgage lender and banks go under (some federally insured), and we end up paying a significant outlay of unemployment insurance to homebuilders/construction trades? I'm guessing the federal balance sheet looks similar.

Be careful of what you are talking about. During the Great Depression simply pursuing inflationary policies and having the Fed act as a lender of last resort could have gone a long way towards solving the problem.

Instead we had FDR, damn him to Hell, who decided that make work programs and Social Security were the way to go. Make work programs are bad in that they are making work that nobody wants or needs. It is very much like spending your days digging hole then filling it in and getting paid for it. In the end you have less than nothing. Social Security is periodically in trouble due to insolvency and reduces the incentive to save.

On top of that the reinterpretation of the Constitutions Commerce Clause is what paved the way for really big boondoggle programs like Medicare and its projected 50 Trillion dollar short fall (no, economic growth can't save us).

So just because the short term balance sheet doesn't look all that different under policy A vs. Policy B doesn't make both policies equally good in the long term.

Further, allowing an unabated foreclosure implosion (since many ARMs still have to reset) might create the kind of sentiment that causes a run on the banks. Probably part of congresscritter thinking.

Again, the Federal Reserve's job is to act as the lender of last resort to prevent this kind of thing. So long as the Fed does its job this isn't really a serious problem save for the ignorant.

Travis | April 3, 2008, 12:28pm | #

"Gridlock looks better & better"

I agree, but none of the people running for president now are going to cause gridlock.

Travis | April 3, 2008, 12:33pm | #

"So long as the Fed does its job this isn't really a serious problem"

That might be hoping for too much.

Steve Verdon | April 3, 2008, 12:37pm | #

Travis,

Given that the Fed has already announced that it would act as lender of last resort, I'm thinking your fears are unfounded.

toshiro_mifune | April 3, 2008, 12:48pm | #

Be careful of what you are talking about. During the Great Depression simply pursuing inflationary policies and having the Fed act as a lender of last resort could have gone a long way towards solving the problem.

The Fed is currently pursuing an inflationary policy and it hasn't been helping much at all. Japan went ZIRP in the 90's and that didn't help, in fact they lost an entire decade.
This is not a matter of liquidity, this is a matter of solvency. The underlying assets are not worth their face value. How much do you want the Fed to trash the dollar until they learn this?

ANM | April 3, 2008, 1:00pm | #

"There's three ways to do things: the right way, the wrong way, and the Max Power way."

"Isn't that just the wrong way?"

"Yeah, but faster!"

T | April 3, 2008, 3:01pm | #

This is not a matter of liquidity, this is a matter of solvency. The underlying assets are not worth their face value.

Bingo! Somebody is going to have to take the hit for overvaluing the assets, and I'd rather it be the lenders and borrowers than everybody.

Steve Verdon | April 3, 2008, 6:33pm | #

The Fed is currently pursuing an inflationary policy and it hasn't been helping much at all.

Do you really think the economy turns on a dime and that the changes are immediately apparent? Just curious, because if the answer is yes, I'll know that any further conversation with you is a waste of time as you are complete crank.

This is not a matter of liquidity, this is a matter of solvency. The underlying assets are not worth their face value. How much do you want the Fed to trash the dollar until they learn this?


A few points:

First, my comment was about the Great Depression. This is not the Great Depression. By the way, eventually the Fed did pursue an inflationary policy and guess what both the recession ended and the dollar were fine. So I don't see the problem here.

Second, according to some views of interest rates and their role in the macro-economy cutting interest rates is what you want to do when the economy slows down. The problems with the dollar are not simply the result of the Fed's actions. The balance sheet for the U.S. government looks like shit, and it has damn little to do with the current possibility of a recession.

Third, solvency and liquidity as you are using the terms are closely linked, IMO. The problem is that houses, which say a year ago, had higher liquidity in that they could be sold fairly quickly and with little loss of value. That isn't the case anymore.

Liberty? | April 4, 2008, 6:17am | #

Barney's bill to decriminalize marijuana would do more to fix the economy than his bill to bailout the housing crisis, except it doesn't go far enough. Treat Mary Jane like Lucky Strikes and:

*The dollar gets stronger

*Oil prices go down

*Kids now have to be 18 to get pot instead of 5

*70 billion in annual drug war expenditures back in the treasury

*Crime reduced by 30% or more

*Prison overcrowding solved

*And most of all, a President too lazy to get us into messes like Iraq!

Tommy_Grand | April 4, 2008, 12:12pm | #

Very good article, Mr. Chapman.

Zac in VA | April 4, 2008, 1:03pm | #

Good article.
Also, Tbone?
EXACTLY! That is exactly how I feel. While it sucks that we have to pay for people's mistakes, we need those people to retain their jobs and homes and such, or the ripple effect of mass unemployment (due to mass bankruptcy) would be far worse.