Do Not Pass "Go"
Get rid of cleverness and abandon profit,
and thieves and gangsters will not exist
--Tao Te Ching, Lao-Tze
Have more than thou showest,
Speak less than thou knowest,
Lend less than thou owest.
--King Lear, Shakespeare
Go to now, you rich men, weep and howl
for your miseries that shall come on you
--James 5:1
_______________and thieves and gangsters will not exist
--Tao Te Ching, Lao-Tze
Have more than thou showest,
Speak less than thou knowest,
Lend less than thou owest.
--King Lear, Shakespeare
Go to now, you rich men, weep and howl
for your miseries that shall come on you
--James 5:1
Why do we need a federal stimulus program if we are a capitalist society? The weak corporate entities should be allowed to die. The loser car companies should go into bankruptcy and face total reorganization. Investors may lose, but that is the risk one takes playing the market. No one gives me a loser's bonus if I bet wrong at Jai-Alai or the racetrack.
Why would we artificially extend the life of terminally ill companies? Because we have been primed to believe that artificial life support is the only option when faced with sickness.
Our former Governor JEB! Bush took up the cause of persistently vegetative state patient Terry Schiavo, laying in the idea that even a being which was not viable without life support should be forcibly kept alive. His brother George Bush famously restricted stem cell research under the argument that each divided gamete was a potential life, therefore must be "protected" even though never in fact living.
The WaPo says, "The hodgepodge of tax cuts and spending programs won't solve the country's basic problem of rot at the heart of the banking system and excessive borrowing by large numbers of people and corporations" (Time is of the Essence for Stimulus.)
Nobel Prize-winning economist Joseph Stiglitz said that the stimulus package was "probably too little, especially given that it is badly designed [and] we haven't yet fixed the mortgage problem so the financial sector is likely to continue bleeding." We must staunch the bleeding first.
An excellent Post essay laid out the problem thusly:
As the real income of Americans stagnated and their debt mounted, the wizards of Wall Street grew rich by collecting commissions on derivatives of derivatives of derivatives. By 2007, when Wall Street's profits amounted to an astonishing 40 percent of all American profits, the business of American finance was no longer American business -- providing loans for domestic production, technological innovation, that sort of thing -- but swapping bets and hedges on bets and hedges, all for hefty commissions (The Money-Changers.)
Ranger thinks that bailouts and surges are not the answer. While not an economist, how can spending more on credit because you spent too much to begin with be an answer to liquidity problems? Living a viable individual economic life seems pretty simple: expenditures should not consistently exceed income (End the War on Savings.)
The U.S. has reached a point where the people are afraid of the institutions they must trust. This issue must be addressed before the economy can begin a recovery.
Labels: economy
posted by rangeragainstwar at 11:10 AM
25 Comments:
it's a very fine line that economists must walk. it's almost as tense a rope as the quantum mechanics need to survey.
when it all boils down there are few things that can be predicted with any regularity. like battle plans, economic packages often do not survive the first few minutes of engagement, and one still has to thing about, unfactorable, unquantifiable things like luck and emotion.
i heartily recommend the great wave by david hackett fischer.
he examines the economic structure of the world at the macro level. shows the flows and ebbs of commerce and wealth.
we might simply be at the neap of a very long tide. that's been here before.
Actually, there's another reason. One of the things that make a capitalist society possible is money. Money is a token that stands for real stuff -- food, clothing, housing, so forth. We negotiate *contracts* for these things -- we will give a certain amount of money in exchange for rent on an apartment for example. What we are really saying is that we will give a certain amount of *stuff* that the money represents in exchange for the apartment, but the *stuff* would be too bulky, so we give them these tokens representing the *stuff* instead.
Now, the problem is that banks create and destroy money via the operation of fractional reserve lending. If banks fail, there is less money in the economy because it basically wipes out all the money that the particular bank created via the action of lending. If there is less money in the economy, but the same amount of "stuff", the value of money rises -- a given amount of money will buy more "stuff". The problem is, the contract we wrote for our rent calls for paying a fixed amount of *money*, not a fixed amount of *stuff*. So we are now being penalized -- the money we give them will buy more "stuff*. The entire system of contracts upon which capitalism depends unravels if suddenly you cannot rely on the value of money being roughly the same (or slightly less) from month to month.
So anyhow, that's why unlike, say, auto makers, we cannot let banks simply "fail". We have to do something to ensure that the money they created by lending against their reserves doesn't disappear from the economy. That is because banks LITERALLY print money every time they lend. UN-print all that money, and you rip the underpinnings out from under the capitalist system that has served so well at generating real wealth for our society. We've gone from my grandmother's day, where she pulled water by hand in a bucket from a shallow well, shat in an outhouse, lived in a drafty tar-paper shack where the only heat was a pot-bellied stove and they took one bath per winter because it took too much wood to heat up that much water, to today's modern world of indoor plumbing and central heating and hot water on tap anytime we wish (and do not underestimate hot water on tap), and all that wealth that allowed this to happen was created by capitalism. If we throw out the banks out of spite, we're throwing out the baby with the bathwater.
So something special has to be done to handle the situation of banks, since otherwise we have a deflationary spiral that causes a massive transfer of wealth from the debtor class (you and I) to the creditor class (all the wealthy a-holes who own massive apartment apartments and such, or who buy foreclosed properties for pennies on the dollar). A deflationary spiral would be worse for us than propping up the banks, because *all* of us would end up on the streets begging for spare change then -- well, except for the creditor class, who will laugh because they will own *everything* then. But I must admit that the current way that the government is going about propping up the banks sucks major rocks... it's time to just admit reality, that they're done, baked, done for, and take them over and re-capitalize them and throw all the bad assets to a "bad bank" and get them back in business lending and printing money again. Because a capitalist society simply cannot operate without functioning banks, England's excellent banking system is why the British Empire ruled the world -- it allowed them to leverage current earnings to create future earnings that more than paid off the loans taken out to build an empire. A society without a functioning banking system simply cannot compete with a society that has one... and if it is the destiny of the U.S. to have a failed banking system, we might as well all move to Mexico because that's how we're going to be living shortly anyhow.
- Badtux the Monetary Penguin
Badtux,
But... we'll get shot in Mexico -- they've got guns!
Your last statement smacks of futility: "we might as well all move to Mexico because that's how we're going to be living shortly anyhow." So you see us becoming paupers, regardless of the bank option chosen?
Err, no. I see us all becoming paupers if we allow a deflationary spiral to commence and get out of hand. Which is what happens if we allow all the money these banks printed to be un-printed by just collapsing them rather than by taking them over and creating new banks behind the carcass of the old ones.
Oh, I see the problem. You're wondering where the money comes from to re-capitalize the banking system. You think the government will have to pauperize the rest of us to prop up the banking system. Well, see, the Federal Reserve has this marvelous new invention called the PRINTING PRESS...
Printing money is a valid mechanism to use to re-inflate a currency that is being deflated by zombie banks unwinding their lending, as long as it's being used for some useful purpose -- such as UN-zombifying the banking system so it resumes its business again.
Yet, as a corollary to Badtux's post comes the math of our economy which posted some on blog.
Our national debt, just national debt is 10 trillion dollars.
Yes big number, but trust me...it's quaint when you see the rest of the numbers.
Our national GDP, rounding up, ~14 trillion dollars.
Our total national debt, that is just the United States alone, which includes the government debt, the public debt, and the individual debt is ~56 trillion dollars.
World GDP is ~54 trillion dollars.
So, as you can see the US debt in toto is two trillion dollars more than the world GDP output.
But it gets worse...because this is where it begins to get muddled...Credit Default Swaps...that is all the banks/investors/hedgefundmanagers/corporate finance instituions, et al...their debt ratio is ~164 trillion dollars.
Wait, it gets worse...the Over the Counter Derivative market value debt is 453 trillion dollars.
Basically, what it comes down too is that there is not enough cash on our planet to cover that kinda of debt, so that means a lot of "wealth" is really little more than electronic wealth.
Kind of like stock values...sure, today the market says your stock is "worth" $10, but that is subject to change if you try to offload it.
Your money in the bank...electronic wealth.
Sure you can make a run on the bank, but really, if me, you, and our neighbors all went to the bank today to "cash out" the bank would only be able to "cash out" perhaps...a couple of hundred people, thats it.
So the problem with all this is that we live in a world where weath "disappears" daily, reappears...with no real "itemization" to support it's value.
So, in truth, the whole thing is a house of cards, and what we are seeing is the tumbling of that house of cards.
Jim, I regret to say it, is right. This whole thing, the whole salvation package is just an attempt to get the economic Frankenstein monster back on it's feet again.
I'm of the mind that perhaps, it's time to let the decaying corpse call it quits, and start over again.
Yet the marvelous thing about the Federal Reserve's new printing press, sheerahkahn, is that it doesn't even require paper. All it requires is crediting 1's and 0's to a bank's books. That's it.
You seem to be under the delusion that money has value other than in the amount of goods and services that it'll buy. It does not. If all those credit default swaps disappear into vapor, there's no problem as long as money is "printed" to replace it in order to re-capitalize the system. If we want to get *really* drastic we can do a Day Zero -- we can just value all the CDS's down to zero, value all MBS's other than Fannie/Freddie down to zero, value all consumer debt down to zero, basically wipe all debts off all bank books, re-capitalize them with freshly printed (via electronic printing press) Federal Reserve money so they are 100% capitalized, and then we have a banking system again. That's pretty much "wiping the slate clean" as you put it, without throwing the baby out with the bathwater.
Budtux,
So you see an inflationary spiral, resulting from the newly minted currency to be preferable to the deflationary one? Does not "unzombifying" zombie banks sound a bit crazy, even to Geo. Romero?
I'm with Sheerahkahn. Anything else is plugging holes in the dike.
This comment has been removed by the author.
Bernanke's got that covered, Lisa. I suggest you go read last Wednesday's speech by Bernanke, where he talks about his measurements of inflation, and about how he can deflate the currency whenever inflation shows up via market operations and increasing interest rates. And inflation, BTW, is a MILLION times preferable to deflation -- inflation at least deflates the real value of your debts. But it's not an either-or, modest inflation (in the 2% per year range) allows deflating your debts long-term without wiping out bank activity and investment activity in the short term.
Day Zero, the most drastic option that I mention, basically is what you mention -- putting a stake through the heart of the current banking system and opening a new one behind the facade. The old system would be used just to provide a handy facade so people would know where to go to get their money or borrow money, the banking system as such would be totally new. We probably will end up doing Day Zero in the end, just via a thousand cuts on the old one. It's as if we'll be putting a zombie skin around a human being. The result will be human, it'll just look like the old zombie did.
"deflationary spiral to commence"
But that is what is going to happen if the government takes over.
The new plan would actually dilute the value of the bank shares, which means a lot of investors will be holding shares that are, for all intents and purposes, worthless.
The only thing they'll have is...well...hope that things get better.
Hope is not an asset that can be cashed in.
Therein is the worse part of it all...no one, not Krugman, Bloomberg, Goldberg, or anyone of the economists can assess if this plan will work.
But I agree, something has to be done, but the unfortunate reality is that the will for the change to occur is not there; and to be perfectly honest, I'm not sure I want to go there, either.
And the sticker of it all is that this little hiccup we got going...is nothing compared to what is coming...all this we're going through was the result of 8% of the housing market going through an ARM reset...8-freaking-%...and we're all screaming...there is an ~ 23% ARM reset coming in the next two years...look at the housing market...seriously, look...there are a lot of foreclosures...not just "oh hey, looky there, wow, a lot of empty homes"...I'm talking whole-sale emptying neighborhoods.
And that was just with an 8% ARM reset...imagine what it's going to be like with a 23% reset on the housing market.
My friend, I shiteth you not, the excrement has yet to hit the rotating oscillator for us.
That is why Obama and congress are all trying to bum rush this through, because something, anything is better than nothing...the unfortunate thing is that this plan of theirs...well, may or may not forestall the inevitable, but that is hobgoblin we must address...the inevitable arrival of the bill.
Too many people lived too high on the hog for too long on someone's elses dollar, and now that their engorged butts can no longer move...maitre'de arrives with the bill.
I haven't read Bernake yet, so I can't comment on what he has said, but I'll read it today.
right now, I need a beer.
The bank shares *are* worthless. Any of them that are above $0.01 are because of the implicit thought that the U.S. government is backing the bank and won't let it fail. The banking system is insolvent and pretending it's not insolvent is not a solution. Day Zero, the most drastic means that I mention above, would re-inflate the currency after writing down all those shares and all those assets by addressing the underlying solvency problem with nicely printed electrons. Sure, an investor holding $1K of Bank of America (that was worth $100K only five years ago) will be holding $0 of Bank of America afterwards. But really, that's what he holds today since Bank of America is insolvent, so what's the difference?
There is an easy way to deal with the ARM rate resets. Just pass a law stating that all ARM loans are illegal and any rate reset from the original written rate is null and void. The investors will scream, but the loans are worthless once the ARM rate resets anyhow, so it's not as if they're *really* losing anything. Really, such a simple solution, yet people would prefer to believe that they can prop the zombie up by pretending that the mortgages would have value after the ARM reset... just toss all that crap over to the "bad bank", write it down to the value of the non-adjusted rate, and be done with it. Sheesh.
Ahhh, BadTux:
You seem to espouse a lot of Nouriel Roubini's thoughts on how to dispose of the Errrr Banking problem.
Nassim Taleb, of Black Swans fame is on board, as well. Both of these Yentilmen predicted our current crash, due to some of the lovely products (CDO's, CDS') that the banking/investment banking Kommunity invented (for their gratification).
I am a confirmed acolyte of theirs, and, given their records, give a jaded eyeball to other Savants on the subject of rebuilding from the detritus at hand.
I know, that it is politically incorrect for me to spout off so, but can't the country come up with a "final Solution" for all these Banking/Insurance geniuses; and the attendant infrastructure to carry out this necessary task?
Oh, didya notice, them two fellers are sportin Ayrab sounding names. It seems, they have Phoenician blood coursing through their veins.
Phoenicians???? Now what were them fellers famous for again? The Irony of two such guys predicting an "untergang" much more serious to the republic than 9/11 is delicious to behold.
Fasteddiez, we already have the infrastructure for a "Final Solution" for dealing with all the banking/insurance gentlemen who got us into this messes. They have them in most major cities. They're called "bridges" or "overpasses", and if there were any justice in the world, we'd see these "gentlemen" living under them rather than sitting fat and high on the government hog.
I.e., strip them of all their assets to pay back some of the harm they've done, seize their homes, seize their cars, seize any property they have other than the clothes on their back, seize the contents of their wallets other than their photo ID and $10 in spending money, and throw them on the streets to wander as homeless bums. That's the "final solution" that these gentlemen have earned and deserve.
"But... we'll get shot in Mexico -- they've got guns!"
Well, gee, Lisa, harkening back a bit, some of us have guns, too. And we've been trained and are experienced in using them. Can we have our licenses now?
WRT to the economics discourse from Bad Tux the Monetary Penguin, I have to say that although I'm certainly no expert, what he's saying is consonant with what some folks I respect say. I share Fast Eddiez's (nice to see you're still around, Eddie) respect for Roubini; Roubini says the same things. I'm not going to go any further here because we ain't solving this one here, kiddies.
Sheer: You may not realize it, but when you throw that $56 trillion debt figure around, you're repeating a Republican talking point, one favored by such leading lights as Rush and Sean.
You oughta look into that figure a little bit. Much of it is Social Security obligations going out 70 years, which would be fine, but conveniently omitted from the debt figure discussion is any mention that it assumes NO contributions from current workers over those 70 years. I'll bet members of those three generations working get a real hoot out of that whenever they look at their paychecks. Their employers, too.
Social Security has actually been a money-making activity for several years now, specifically because of fears of long-term liabilities. It's not Social Security recipients' fault if politicians routinely steal billions from the trust fund. Everybody laughs at Al Gore and the "lock box" (that dolt Bush may have gotten close enough to steal the Florida vote because sufficient numbers of other simpletons chortled about how "dumb" Gore was), but the subject isn't funny at all.
Social Security is projected to go into the "red" in about 2037 and then only by a little bit.
Bad Tux: I like the bridge/overpass idea, but I've got a slight refinement. You know, if you allow the bankers to live under the bridges, they'll still be a drag on society. You know, begging, stealing, etc. Why not just use the bridges and overpasses as gallows?
Hang "em high.
Hangin's too good for these folks, Publius, and a waste of good rope. Let'em wander the streets for the rest of their lives as the homeless bums that they laughed at and despised for so many years. Just in case they might figure out some way to get off the streets, let's add an additional twist, though: Let's brand their foreheads with a scarlet "B" so anybody who meets them knows just what kind of scumbag they're seeing and can treat them accordingly.
Ah, in an ideal world, sigh. Too bad it won't happen.
- Badtux the Wistful Penguin
"Oh the rich man stood on his castle wall
And said that the poor deserve bugger all
So no one turned the wheels or oiled the locks
And all our economy went to cock
And soon the Blame Game Boys are out there , and at it again
First they tell you they're every Englishman's friend
Its all these blacks and all these Asians
Ruining the fabric of our nation
An theres blokes on the street sayin' stuff like this
With a mind like a jackboot and mind like a fist!"
© Alan Whittle 25/11/2008
So we're not the only ones...
Publius/Lisa,
Actually Mexico has very strict gunlaws.Just try to get a weapon or ammo across the border.The drug dealers and kidnappers have AK47s-so much for gun laws.
jim
"Sheer: You may not realize it, but when you throw that $56 trillion debt figure around, you're repeating a Republican talking point, one favored by such leading lights as Rush and Sean."
/ouch
I hadn't known that Publius, I actually came across it myself in my research.
Covergent evolution applies to economics as well to biology.
Thank you for the heads up, I'll have to qualify that some more.
For me, the application of all that debt is a way to get people stop buying crap with money they don't have.
Hence the use of it, though that was my intention, I'm sure the aforemention two trolls from the faux news station are using it for something else entirely.
FDChief,
Thanks for injecting the note of universality into our condition.
Publius,
Re. Mexico: I'm afraid they won't let you bring your guns even if you can afford the scary black ones, as Jim says, and that prohibition is their right :)
From my understanding, Social Security is not the great problem it is made out to be, but Medicare is due to the fact that it is a bloated behemoth contingent upon the piecemeal, greedy whims of the health care industry.
Some kind of regulation / nationalization seems called for here. As our population ages, health care costs promise to loom out of control without it.
A gringo caught with a firearm in Mexico gets to spend the rest of his life in jail, and Mexican jails are no place to be. The only people allowed to carry guns in Mexico are the narcotraffickers and the Army and the police, which are one and the same in many places.
Sheer: No problem. I just wanted to get the word out and illustrate the truth to the old axiom that figures don't lie, but liars figure. When we're talking Social Security, I think we need to talk truth. To update a bit, I just came across the new projections for Social Security, and they're better than I thought. Absent any changes in the current formula, the program will be fully funded and will pay full benefits through 2041, vice 2037, as I'd posted. Following that, and again absent any changes, benefits payouts would have to be reduced to 78% of the current amounts. ISTM this lends itself to one pretty simple fix, which is raising the current income threshold, which hasn't gone up in years now. A surprising number of people also aren't aware of the fact that the age for full benefits was raised to 66 for those born after 1943 or so, and will increase to age 67 for those born in the 60s and later.
So it's my sense, and this is shared by virtually every economist of whom I know, Social Security is not in trouble. Medicare, OTOH, is a serious rathole and those who warn against the obligations here are, IMO, absolutely correct. It could indeed be the Monster that ate Cleveland. Medicare must be reformed. And in this case, I'm with Obama, who addressed it last night. He says we need to first wrestle with overall national health care costs, with a national health plan being implicit in that. I do agree with him. BTW, anytime you hear a Republican decrying Medicare costs as government gone amok, you might wish to remind that individual that it was President George Bush who came up with a drug policy that's helping immeasurably in pushing Medicare over the cliff. And what's especially striking is that there was little public pressure to do this. I guess it was just Bush being Bush.
Any older GI who served in the Far East should understand Bad Tux's explanation of "Day Zero." Recall Military Payment Certificates (MPC)? We were paid in this scrip, or funny money, which stood for real dollars. Periodically, after too much of it had migrated out to the foreign devils, the military authorities decreed a "Day Zero," where the compounds were all closed and scrip was changed; the only people who could get the new scrip were those entitled to have it. This meant GIs could cash their old stuff in, but the IPs were shit out of luck. Imagine the scenes where those locked out of the compounds were literally throwing bundles of old scrip over the walls, begging GIs to cash it in for them.
Lisa/Ranger/Bad Tux: WRT the firearms issue in Mexico, I was really thinking about how it would be after we take over. Far fetched? Well, we went all of the way to Iraq. Mexico would be a lot cheaper logistically and in some respects it poses more of a threat to the U.S. than Iraq ever did.
Publius,
You're right about c day or day zero.One effect would be to destroy/hurt the underground economy.Those folks would be forced to bring their money up to the table- just like the whores did on c day.
jim
Publius,
You see, the lion can lie down with the lamb! We are together on so many points: SS just needs a bit of tweaking to stay viable; The health care system needs a complete overhaul, and Mexico is a lot closer shot for a fight.
Our own borders should be our correct concern, no?
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