Tuesday, September 30, 2008

Bailout Schmailout

Right now, there seems to be a dearth of writers AGAINST the bailout. Everyone just assumes that we must do SOMETHING, but we cannot seem to agree on what that something is. Further, we don't even really understand any of it.

As much as I watch the news, I cannot find anybody who can explain to me why we need a bailout without using banal analogies like "The economy is the car, and the credit market is the engine. And the engine is broken!" Makes me sick. Nobody, even Henry Paulson, I'm convinced, is smart enough to figure out what is really wrong here. That's why I'm not in favor of giving a one trillion dollar blank-check to a single man who was never elected, and who doesn't fully understand the problem at hand.

How can we apply a solution without first understanding the problem? We cannot, without wasting enormous amounts of money due to poor oversight and inadequate planning.

Neither political candidate has any real 'skin' in this game. Both are sideline watchers (despite McCain's recent antics) simply trying to land on the right side of whatever happens--so they can claim victory and get elected. Neither candidate knows anything more about this bailout than I do, which is truly frightening, because I don't know JACK. And George Bush's approach on this is "Trust us. You have to act now." George Bush lost my trust a long time ago.

So it was refreshing to see the main stream media come out with one well-reasoned, apolitical article against the bailout:

Time: Let Risk-Taking Financial Institutions Fail

I'm not asking which party has the better solution to this, or which party is the root cause of all this trouble. Both parties are complicit in this mess, if for nothing else than lack of oversight. But, most importantly, what is the correct solution going forward? I believe the writers in that Time article are more onto the solution than any others I've read.

We're starting to see banks fail, to be bought up by stronger banks--most recently, Wachovia's purchase by Citigroup. Actually, I view the consolidation of the banking sector as the ultimate solution to this problem. The weak and foolhardy banks will be ultimately consumed by the larger, more stable banks. I believe this is ultimately what capitalism is all about. In the meantime, get ready for a wild ride in your 401(k)s and IRAs.

What do you think?


dad said...

I wanted to add a comment Newt made last night. He said what we have is a liquidity problem (which I believe is correct) and that the new banking rules that came around with the bill that started all this changed the accounting methods used by the banks.

I can't remember the term he used, but basically it said you could write up your assets based on latest sales. So, if real estate current purchases were up 10%, you could write up your entire inventory of houses 10%. That worked well when things went up. But, when things went down, you had to do the same thing. So, when current values dropped the banks immediately started losing value, and the value is the basis for them getting loans.

Newt said banking always used to use a 3 year rolling average, which is more conservative, especially going up. He said if they switched to it tomorrow, the liquidity problem would disappear.

Sounds realistic to me. I'm glad someone is trying to look for other alternatives that giving the ex-CEO of Goldman Sachs $700,000,000,000.

Scott said...

I agree. Newt has been refreshingly conservative (in the old sense of the word) in this hysteria. I actually don't disagree with him.

Chuck said...

I'm reluctant to give more deregulatory slack to the financial industry right now. It sounds like treating alcohol poisoning with a double martini.

We're watching a bubble pop in slow motion. Trying to reinflate the bubble through accounting tricks sounds quite dubious, and I doubt very much that it would give investors renewed confidence in a market that doesn't seem to correspond with the reality-based community of people, things, and work.

Although it's trite to lambast the "corporate media", I think it is telling that the media is controlled by huge conglomerates (GE, anybody?) who have a huge interest in propping up an overvalued stock market. We're doing better analysis than the media: it's in our interest to do so. So great article, Scott – keep it up!

Chuck said...

Joseph Stiglitz, former head of the World Bank and the world's most cited economist, says the bailout plan wouldn't have worked and that there are better options available (though nothing is going to make it all go away). There are good ideas floating around – this issue merits significant debate, not precipitous giveaways.

Chuck said...

If you feel strongly about this issue, it's important to keep calling & writing your congressional representatives. The Senate is getting ready to vote, and that conglomeration of bloated plutocrats is quite predisposed to line their friends' pockets (and their own). But the house is still in play, so call and write your reps and let them know you're still watching. Right now they're getting calls from angry investors that want the Dow Jones average lifted through legislation. Hah!

The "invisible hand" of the "free market" indeed... funny that paleoconservatives deride the "nanny state" when nannies serve only rich kids.

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