Submitted by Brett Stevens on Wed, 10/01/2008 - 05:22.
The problem seems to relate to the money-market fund sector, which suffered an outflow of assets when one of them “broke the buck” (failed to repay clients at face value) last week. Other funds are desperate not to repeat the trick, so are desperately opting for safe assets, which means those offered by the American government.
At that level, it is simply uneconomic for banks to lend money to customers. So they won’t. Banks are getting by on borrowing overnight, but the markets for one and three-month loans have dried up. That explains why central banks have been forced to offer billions of dollars at those maturities.
This cannot last long without causing immense damage. Companies will be unable to raise new money and, more importantly, refinance old loans. Corporate bankruptcies will soar. Consumers will also find it difficult, or expensive, to borrow. The result will be a sharp downturn in demand that will push the economy into a deep recession.
So some kind of bailout deal is necessary.
If you listen to the media and your politicians, you'll see that the average voter is hoppin' mad over this bailout and determined to squash it however possible. (Of course, the media and politicians listen to a few average voters, make a conclusion, and then bloviate on TV until other average voters imitate what they're saying others are doing, so this isn't wholly scientific).
This prime example of democracy's failure illustrates a basic problem: a minority of people understand what's going on, and among the rest, only a tiny minority can set aside emotion long enough to see the structure of what's going on beneath the appearance. It's not rocket science, but like all things non-social in life, it requires a diligent, orderly, logical approach.
What we hear from the crowd is resentment of wealthy bankers and thinking, heck, if these guys screwed it up, we shouldn't save them. They get paid to take risks. This is the rich looting America. This is a select elite getting a free ride. Screw them. But this is the monkey, and not the mind, in humanity.
Imagine if instead of banks, this was about your local water treatment plant. It loaned too much water to people who grew rocks in the desert, and now it is bankrupt. You have a choice: either you find someone to buy it, and water keeps getting to the people, or you let it dissolve and -- well, it's every man for himself to figure out how to get water.
We don't like to be reminded of this, but we are dependent on the banking system. It keeps capital flowing through the economy. You use money? You need banks, or that money would lose value. If too much money is printed, it loses value; the value of the money is based on the productivity of the nation, roughly, although politicians like to play with these figures. If the economy becomes garbage, the money also becomes garbage, because money is like a share of stock, if the stock you're buying is USA, Inc.
Back to the water treatment plant: suppose your economy has $10 in it. It's going to cost you $2 to buy out the water treatment plant. Sounds like a ripoff, no? Consider this: if no water flows into your land, your crops are gonna die, you're not going to be able to manufacture anything, people will be fighting for water and so infrastructure will collapse. Your economy will lose value. If you don't bail out your water treatment plant, you'll save that $2 and you'll still have $10 -- but that $10 tomorrow will be worth the equivalent of $5 today. The numbers will remain the same, but what you can buy with that $10 or trade it for in other currencies will be a lot less. Relative motion. It's a beast sometimes.
The American People are demonstrating yet again why democracy always fails. Most people don't know what they're talking about not because they are stupid, but because they're emotionally out of control and unwilling to sit down and do the reading required to understand what's going on. At some level, very few -- like a tenth of a percent, maybe -- are going to understand the economics, because it involves brain-busters like relative value and sequential calculations. That doesn't stop the average Joe from having an opinion.
Especially damaging are the average urban cosmopolitan Joes, who went to college and have jobs designing web pages, writing advice columns, working in marketing and so on. Their job is not to manage reality but to dress up reality as a fancy positive image in order to motivate people. They are high in verbal power, and low in the ability to understand complexity, so they're good at swindling you with outrage and making you bypass essential moves to save your economy from itself. They do it by making you feel dumb in their presence, like hipsters: "You haven't heard of Colonic Epiphany? What are you, ignorant?"
The so-called "bail-out" isn't a bailout at all, but a buy-up in which the government basically loans cash to an industry, but ends up owning its assets. It's like a turn-based board game. The government will own all this stuff for a turn so that it doesn't lose value, and will then sell it back at a profit, sending cash zooming through the game more quickly -- which gives others the option to do stuff with it, and so generate more real income, giving the face value of the cash more actual value.
But of course this isn't popular with the people, because it's not a handy sound bite like "They stoled our money for fat rich bankers, they should give it to us instead!" The amount of money involved is a tiny part of our economy. The results will be good. But all those voices out there -- everyone from your favorite TV stars, white nationalists on underground forums, politicians, talking heads on C-SPAN, corporate profiteers and hippies on the street -- they all agree this bailout is a ripoff, without having the slightest qualification to make that statement. Ever wonder why if all these uninformed people think something's a bad idea, you're agreeing with them?
Guess they fooled you.
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As far as the bailout is
As far as the bailout is concerned, I do believe that if nothing had been done that there would have been a massive hike in "price inflation"(am i wrong in this interpretation?). This price inflation could have done, and still may do serious damage to the economic infrastructure.
One can rightfully fear that the bailout counteratcs the markets natural tendency to correct itself and that government intervention will only cause higher "price inflation" at a later date. However one must consider that the bailout may also be a positive way to combat "price inflation", in part due to the fact that it does not involve other inflationary measures on behalf of the government, they arent printing new money in order "combat" the "price inflation" nor are they controlling prices(which would lead to more "inflation" in the long term).
Backing with real assets...........
I may be wrong in my interpretation, perhaps its too simplisitc.
With that said at this time corrupt seems to believe that we are in the midst of new cold war against an increasingly aggravated eastern block. I am not speaking for corrupt but i believe the reasons they are all for the bailout is because it provides an oppurutnity to put real value beheind the dollar again (their words) and avoid the massive internal breakdown that would make the country much more vulnerable. This is an important point, as a position of vulnerability is probably not where the U.S. wants to be in these tense times. Maybe im wrong.......but i would say that the advocation of the bailout on this site is the result of variables we are not taking into consideration.........
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Making us feel stupid.
Hi mate, average Joe here.
The ' They do it by making you feel dumb in their presence, like hipsters: "You haven't heard of Colonic Epiphany? What are you, ignorant?" ' paragraph sent me to the floor laughing. You are using EXACTLY this type of manipulation approach in this article in case you did not notice.
Eh?
The so-called "bail-out" isn't a bailout at all, but a buy-up in which the government basically loans cash to an industry, but ends up owning its assets. It's like a turn-based board game. The government will own all this stuff for a turn so that it doesn't lose value, and will then sell it back at a profit, sending cash zooming through the game more quickly -- which gives others the option to do stuff with it, and so generate more real income, giving the face value of the cash more actual value.
The govenment owning illiquid assets does no more to shore up their value than the banks doing so. Home prices are plumetting because market pressures are forcing them: we overbuilt on cheap credit and risk-free borrowing and are facing the consequences. Securities markets exacerbated the problem. Insolvent entities tumble. The government and the Fed were complicit and the American people expectedly ignorant. Lesson learned by all: you can't get something for nothing.
Or, perhaps it wasn't. The Fed wants there to be price discovery for these assets, which is sensible, but is basically a euphimism for the notion that house prices belong where they were and will inevitably move back in that direction. Even forgiving all the factors that fails to take into account, these are debt-creating entities, which is why we don't see any of the private firms that DO have capital chasing them at their market values. A drop in house prices serves as a quasi-inflationary relief valve as an added bonus; check out the deviation between median home price and median income in the last 12 years. All of this seems like a healthy return to some normalcy.
Regarding credit, we already had a recent credit crunch, to which the Fed responded with multiple interest rate cuts in order to feed the fire just a little longer. The idea that some rushed legislative bill with an arbitrary $700 billion value, extending more credit to an as-yet-unknown amount of toxic debt will solve the same problem it created is unlikely given even recent economic history (remember dot-com?). There will still be solvent institutions; the idea that credit will die an immediate death if we don't act NOW is hard to swallow, particularly when the Fed has the ability to inject liquidity and credit without Congressional action, and has done so multiple times already in the weeks leading up to this PR event.
If you do end up down the same path, you've created extreme moral hazard up and down the line, insulated everybody from the hardship of their own actions until we run into a real limit, one that will be fundamentally unavoidable and almost assuredly far more devastating.
Our economy is not based on reality; we've had a series of speculative bubbles that we keep correcting with the causes (cheap credit) and count over 70% of our GDP as a result of consumer spending. Why CORRUPT, an organization that brands itself as anti-globalist first and foremost, consistently rallies against consumerist materialism and champions the environment would want to see these unsustainable illusions kept going is beyond me, regardless if supposed idiots find the wrong reasons to resent something.
Corrupt losing its sights
Here, here! I also agree that Corrupt is losing its sights. This spitefulness against modern political dilemma must stop. It is not an issue worth regarding. It is a failure in its own right, and criticizing minor inconsistencies is far too redundant. Corrupt, please offer more content, and less babble. Thank you.
Wait...
What then do we say about the economists, such as those in the Austrian School, that oppose bailouts on economic grounds? Surely they aren't part of the hoi poli you describe.
re: Or you know...
Understanding where you're coming from, Taure, but read the entry from Morgion: Corrupt.org supports outside-the-box thinking (like abolishing the Fed and the IRS - we don't need central banks and our federal government shouldn't be taxing us). These are the broad strokes and many of the articles here are comprised of staff analysis as well as interaction with members of the mailing list who share links supporting the viewpoint.
One thing you're right on: no one should be rushing this decision, and in this "now-now-now" world controlled by bankers and wall street types, it's no surprise that stocks took a nose dive after not getting instant gratification. The point is, we never should have been in this situation in the first place. Whether or not gold can be used to back an economy that was (at one time) ever-expanding, the idea of sound currency supported by Ron Paul is one that makes too much sense for most bureaucrats.
Or you know...
...Maybe we want our congressmen to have time to actually think about the situation, look at other plans, and come to an actual decision instead of being rushed, forced to vote, and told this is the only way to solve the problem. With all due respect myself and several other professors at my university (yes, I'm one of those "college kids") in the political science department aren't 100% sure about what to do either. They agree that we need to alleviate the credit clog, but mentioned that there are several ways to attempt to do so and they don't all involve 700 billion dollars. Looks to me that it's not just the regular joes that seem to have made up their minds a little hastily, but there are those like yourself that have made it up pretty quickly for the opposite conclusion. Further more, you should find better and more in depth analogies than the one you've given as it barely does justice, to, well, anything. If you seem to have the answers, which professional scholars and trained economists don't even have yet, then I would love to hear it, except much more in depth and serious this time, not a pathetic "water plant" example.
Banks
Yes, obviously a civilization requires banks for a number of reasons.
However, what we don't need is a central bank that can create money of out thin air. The Federal Reserve does exactly this. Without gold backing the money that the Fed issues into the economy, the money is essentially worthless. This causes massive inflation. Not to mention that the greedy private bankers at the Fed charge interest for every dollar loaned to the government. There is a reason why an enormous chunk of the national debt is owed to the Fed. This system is inherently flawed and can ONLY result in more debt.