I was pointed to this Paul Krugman article, which is a sequel to this piece. The Bear Stearns buyout is what touched it off. To which, someone wrote:

“Ahh, GOP capitalism—where profits are privatized and losses are socialized.

Conservative blogs start quoting Paul Krugman and the Times… You hear that? That’s the sound of the pendulum swinging back to reality.

I started writing after the 2004 election—the disaster we have wrought. But sometimes, we have to have a little faith. So, even in the face of futility, we send our words into the ether, the internet, this community we are a each a citizen of.

Nobody loves a recession, but four years was not a long time to realize our mistakes… and our social obligation to right them.

7 thoughts on “Bailout

  1. Personally I don’t buy that the government was left with no choice. Nor do I buy the hand-waving claims you hear about how every bank would have crumbled if BS had been allowed to file for bankruptcy today. This shit just proves that the government is not smart enough to make monetary policy. They think they understand enough and “solve” one problem (2001 recession) by creating new ones (2008 recession.) I do not think giving the same people (the gov) who screwed things up so bad even more power would help the situation. It’s the mentality that the government has to fix everything that leads to both bailouts and regulation.

  2. There is a confusion on who is responsible for what when we label things as “government.” How much responsibility was the Federal Reserve? How much was the Treasury? How much were the laws we passed to remove transparency from the system? How much was the chilling effect done by not enforcing existing regulations? When I use the term “government had no choice” above, I am specifically referring to the Federal Reserve. I should have been more clear.

    I’m certainly angry about the position we’re in. I’m certainly angry that we complain about government handouts for the poor but have no such compunction engaging in Corporate Welfare for the rich. I’m angry that such a sociopathic company like Bear Stearns isn’t already dead and buried ten years ago. I’m angry that the people who were telling us everything they had everything under control last week are the ones who are needing the government handout today. However, I fail to see how the Feds bailout in this case is really bad beyond the danger of Moral Hazard. I fail to think we should just let J.P. Morgan Chase (the real beneficiaries here as you’re pretty much dead at $2 for what was selling at $60 yesterday and $130 last year) go down in flames and take every other market down with them. I fail to see how this is that much more than the derivatives trading Rubicon we crossed when we bailed LTCM in the late 90’s.

    As for your “hand-waving” dismissal, I find the dismissal the hand-waving part. Why would J.P. Morgan Chase would take such an exposure ($12 billion not covered)? Could it be because J.P. Morgan was a counterparty to a lot of Bear Stearns’s trades or indirectly/directly already owns a lot of Bear Stearns worthless shares? And if that was truly “hand waving” then why wasn’t there a run on the other investment banks today? While Bear Stearns was one of the worst investors in mortgage-backed securities, it is naive to think that every investment bank in the country (world?) doesn’t have their hands in that cookie jar, and the problem at the other end of the dike isn’t a lot worse here.

    It seems to me that all parties are highly self-interested in trying to prevent a complete financial meltdown. That hand-waving you see is the invisible hand trying to do its damnest to prevent a deep recession.

    Much of the crisis we have now was caused by encouraging flawed mechanisms which were crimes of commission by the Bush Administration, by Congress and by wishful thinking on the people of this country. It is a more extended and nuanced version of the actions, politics, and rationalizations which caused the S&L collapse in 1989, with the basic pieces being termed a trainwreck by most since 2004 at least. When you look at the mechanisms the Federal Reserve had under their control, one can only accuse them as a crime of omission. And the chairmanship of the Federal Reserved changed during this time period—blame Bernake or Greenspan?

    But please, let’s go make this worse by saying that a small amount of money (28 day, $30 billion loan guarantee, of which $20 billion is in almost worthless mortgage-backed securities) as something more than a finger in the dike of a potential collapse. Maybe I’m a pessimist, but I think that this bailout will be so much chump change by the time we’re through—that years from now, we’ll be talking about this particular bailout with air-quotes around them because a real bailout is still in the works, of which this is the first skirmish.

    If the government is going to engage in bailouts, then the government is going to have to engage in regulation (or else face Moral Hazard) and vice versa. It is an issue of politics to discuss which side of that line is acceptable, but that equation doesn’t change, it hasn’t changed.

    If you are going to demand that government is going to opt-out entirely by not engaging in any bailouts and any regulation, then fine, you can advocate that and return to the days that caused the Great Depression. I, for my part, would like to believe we’ve put that stupidity behind us.

  3. I think of heroine addicts. It’s kinda their fault. But we pay, without any request for future payment, to un-addict them, and stick them in the slow line at Wal-Mart to check you out. It’s a public good.

    I think of the banks. It’s their mess. Every ten or twenty years, we bail them out, give them bank holidays and close some of their doors. Why do we do such a silly thing? It’s in our own self interest. In our interdependent world, we bail out the drug addicts, unemployed and banks, because one day, and they will pay taxes and keep our society working.

    Banks are too big to fail, because they do not simply sell the government’s money. They sell trust. If the trust fails, and it’s failing pretty badly right now, I cannot move out of my condo into a real house. I hope a bunch of them go to jail, but in the mean time, I want a huge bailout to occur as soon as possible.

  4. More discussion.

    I was listening to this on NPR. Back in 1930, the federal government choose not to bail anybody out and let the big banks simply fail. It was the Coolidge / Hoover policy of laisse-faire economics – no regulation and no oversight, but no bail outs either.

    Bear Sterns did something foolish and stupid. They are still a pillar of the financial community. If they go under, they drag a bunch of other people with them. One bank run becomes dozens of bank runs. And the resulting fall-out is much, much worse than the damage done by inflation caused by a bail out.

    Now, the question still stands – where does the government get the bail out money from? If we lived in a truly socialized society, these guys would be paying 50%+ tax rates and our Congress would be sweeping in to regulate the unregulated market that caused this clusterfuck. But we don’t.

    The problem isn’t the bail out. Bad market events like this are – to some degree – inevitable. The problem is that the banks refuse to pick up the tab during the good years for the damage they do in the bad years. Ten years down the road I suspect people will be more receptive to big taxes on the rich. When a JP Morgan exec bemoans the death of capitalism, fewer people will take him seriously. I hope.

    The thing that bothers me is the hypocrisy. What was good for the goose (individual bankruptcy laws) was never good for the gander (large banks). Everyone knew that, but we went on cooking the goose anyway—its meat was more tender.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.