Thursday, October 02, 2008

On Rescuing the Economy

What's a skeptical person supposed to think about the proposed bailout/rescue?

I know I'm irrational; I have a bias against the investment bankers who made millions of dollars shuffling Other People's Money around. I know that modern finance can be a wonderful thing; hedging risks and investing money in productive activities are worthwhile activities, but I have no idea how much of what Wall Street has been doing is financial snake oil and how much is essential to a well-oiled economy.

I have a bias against people who run up their credit cards or max out their home equity lines of credit to live beyond their means. If no bailout means housing prices fall further and it's impossible to buy a car with no money down... OK.

I also have a bias against the idea that giving a government bureaucracy $700billion to play with will fix the problem. There's just too long a track record of bureaucratic bungling, corruption and outright lying to trust them.

For example, the bill that passed the Senate last night contains, among other things:
  • Exempting children's wooden arrows from excise tax

  • Income averaging for Exxon Valdez litigants for tax purposes
Set aside whether or not you think rewarding domestic wooden arrow manufacturers or oil companies is a good idea or not. The fact that these little "sweeteners" made it into the bill means that some congress-critter is thinking, "Gee, I don't think I should support this; I don't believe Bernanke and Paulson when they say that we'll have a financial meltdown if we don't do this. But you know, if it helps out good-ole Rose City Archery, I'll vote for it..."


Anonymous said...

I share your confusion about just what the effects were going to be from NOT doing the bailout.

Although I think that your libertarian perspective is primarily the provocative pie-in-the-sky stuff of college seminars, cocktail parties, and radio talk-shows, in this particular crisis, I also share your inventory of instincts about this particular mess. As you point out, the effect of doing nothing would have included altering some very bad individual behavior that has become habit-forming. But some institutions are just too big to fail, so we socialize the losses and privatize the gains.

What we are learning for sure here is that the average voter is in no better position to assess what's going on in the financial sector than we were in thinking about the wisdom of invading Iraq in 2003. We're at the mercy of the elites, reduced to taking the word of presumably more knowledgeable people we choose to trust. So when Warren Buffett decides that this is a good deal, people fall into line. But it's not the same as having an informed opinion.

As with Iraq, we're stuck sitting on our hands, and waiting to do the Monday morning quarterbacking recriminations later. But the initial voter reaction at the time of the decisionmaking is essentially guesswork. It's certainly no Jeffersonian ideal of democracy.

The best gallows humor that is in the same spirit as your post was on The Daily Show this week (archived on line at, some of the funniest stuff they've ever done. Stewart points out the absurdity of "700 billion is too much so I need 150 billion of added spending in order to vote for it". And then there's the shameless self-congratulation of Congressmen afterwards, patting each other on the backs for just doing the job that they were elected to.

As Saturday's New York Times reports, only Barney Frank was not smiling at the press conference. Perhaps he alone grasps how this craziness is playing to us in the hinterlands.

It occurs to me that what we are witnessing in this decade is the beginning of The Chinese Century, in which the US takes its subordinate place in the world, just as the Brits did in the last century.

Rich Morse

Gavin Andresen said...

Even the Monday-morning quarterbacking will be controversial and tough; no matter WHAT happens, it will receive both credit and blame ("we would have recovered QUICKER without the bailout" if things go well, or "it woulda been worse without the bailout..." if things go poorly).

Liberals are blaming mismanagement and under-regulation; conservatives are blaming incompetent government regulators ("Fire the SEC chairman!") and congress.

My Libertarian-colored glasses see the crisis as a result of perverse incentives created by an over-reaching government (banks put risky new mortgage-backed securities on their books to get around banking regulations and boost their earnings). I think it's a straightforward case of what often happens when you don't KISS-- keep it simple, stupid. Complex systems have a way of getting out of control in ways that are very hard to predict.