Just say no (to the financial sector bailout)

I’m conflicted about the collapse of the financial bailout package. On the one hand, I’m losing a lot of money on the stock market and in my 401K. Losing money never made anyone happy. But hey, I’m young (just one year out of college), so my risk tolerance only draws the line at loss of limb or life. On the other hand, I really do think this is in the nation’s collective best long term interests, including my own. Here’s why.

We don’t need our money going toward a bailout of the failing industries of the past. We need it to foster the groundbreaking companies of the future. I’m talking about a New Deal-style investment in carbon-free renewable energy and energy independence. Why waste this $700 billion on companies that royally screwed up, companies that don’t actually create any tangible products I might add? They’re real good at printing paper, sure, but this latest economic collapse shows how successful of a strategy that is. The problem is that when you’re printing your own paper (CDOs, derivatives, etc.), the industry as a whole is effectively able to decide how large of a number they want to write on each piece of paper, regardless of any intrinsic value. And then when the house of cards inevitably comes falling down, hey, they’re all “too big to fail”, so the government has to bail them out! What a great scam.

I’m really hoping that Barack Obama is elected president, because he’s the only major party candidate (i.e. has a shot in hell at getting elected) proposing a massive investment in energy independence. He has a plan to get America off foreign oil in ten years, and along the way we’d significantly reduce our carbon emissions as well. Saving the planet is something we can all agree on. John McCain, on the other hand, is more of the same. His campaign is run by lobbyists. He’s consistently been on the dead wrong side of economic issues (when he understands them anyway), supporting the massive deregulation that got us into all of this mess. He has no real plan for America’s energy independence, only lip service. After eight years of Bush, another four years in the same style with McCain (or God forbid, Sarah Palin) would be an absolute disaster.

America is experiencing a class war of sorts: the massive looting of the lower and middle class by the ultra-wealthy. During Bush’s two terms, the median household income decreased by $2,000, while the ultra-rich got much much richer in comparison to the rest of us. This proposed $700 billion bailout of the ultra-wealthy from the tax revenues of the rest of us would only be the latest and most flagrant attack in the ongoing war. The most amazing thing about the Republican machine over these past decades is how they’ve consistently abused moral/cultural wedge issues (such as abortion, religion, and gay marriage) to distract people into voting against their economic self-interest by the tens of millions. Only people making $250,000 per year and up will save money by voting for a John McCain presidency — that is a really small percentage of the populace.

So say no to the bailout. Let the companies that screwed up to the combined tune of over a trillion dollars crumble as they so richly deserve. And instead of giving them one more cent, put that money to work in renewable energy. Injecting that amount of money will have the same stimulative effect on the economy whether it’s spent on the finance industry or on the green industry, except spending it on the former is rewarding the failures of the past while spending it on the latter is building the path to the future. The correct choice for America’s future is obvious.

15 Responses to “Just say no (to the financial sector bailout)”

  1. Jeff V Says:

    I agree partially.

    The problem with your take is that it overlooks the usefulness of finance.

    Without banks and other investors lending money by the trillion, the economy slows down to a standstill. The finance industry bail out is really more of a bail out of the economy as a whole since finance is sort of like the oil in a car’s engine. Without credit available to companies that produce more than paper (tech, consumer goods, etc.) those companies will cut jobs and lose money which will only cause to further contract the economy.

    On the other hand, this latest proposal was shoved down the American tax payers throat. We were rightfully skeptical because it would have been an incredibly bad deal. I think it would be much more positive to low ball the financial community with an offer of $350 billion for assets that although they are illiquid are probably worth more than $350 B. That isn’t a bail out. That is providing liquidity.

    Then the other half of that 700 billion could be used on a New Deal style investment in green energy.

    The truly interesting–and possibly tragic– part of this though is the political side of things. The fact that this is happening mere weeks before an election is a mixed blessing. On the one hand it may cripple our legislature with fear of a constituential backlash. On the other hand, the fact that this problem is being covered so much by the media on the eve of elections may force politicians not to rush into a bad decision that could be held over their heads.

    Keep your fingers crossed…

  2. Rich Says:

    I think Jeff V is right. We can’t let a bunch of banks fail. We also shouldn’t be giving out free money, but we can’t let them all fail.

    Just as an example, related to the sort of consulting work we do, think of a company that has an inefficient paper process currently in use. They want to make this process more efficient by changing from paper to an electronic process. This improvement in efficiency will help them save money/provide better service, but it might take 5 years to actually pay for itself. As long as this hypothetical company can take out a low interest loan to pay for the upfront costs of the upgrade, it is in their best interest to do it. They can keep paying their normal bills with their normal revenue, but they can also simultaneously afford the upgrade. Then they can pay off the loan with their cost savings over the years.

    This is the type of positive economic activity that we need to happen all over the country, but which requires banks that are willing to lend money cheaply. If all the banks are worried that they don’t have the liquidity they need to survive, they will be much less likely to lend any money, and the money they do lend will have an interest rate that reflects the risk they are taking.

  3. Kelly Martin Says:

    I’m not fond of deflationary spirals, which is what will happen if we allow massive failures of banks. Every time a bank fails M1 contracts (because of deposits that cease to exist when the bank is unable to honor them). The reduction in the supply of money causes prices to drop (there’s less money available to pay for the same goods, which means prices drop). This leads to producers bringing in less revenue for the same production, leading them to be unable to meet their credit obligations, causing M1 to contract further. The central bank can counteract this by increasing either M0 (by printing money) or M1 (by lending money, and by assuming obligations that would otherwise be dishonored). Increasing M1 creates less inflationary pressure than increasing M0, which is why it’s generally preferable.

    Unfortunately, not nearly enough people understand macroeconomics, and so don’t understand that a 30% reduction in M1 will mean a similar reduction in wages, without a concomitant reduction in their mortgage payment. Anyone living paycheck-to-paycheck better start packing; they won’t be in their home much longer if we don’t get some sort of bailout soon. Our only hope is that the economy will be able to stumble along until November 5th, at which point the lame-duck Congress can pass the bailout without concern to the impact on reelectability, the main reason it failed yesterday.

  4. Jeff V Says:

    Our only hope is that the economy will be able to stumble along until November 5th, at which point the lame-duck Congress can pass the bailout without concern to the impact on reelectability, the main reason it failed yesterday.

    The funny thing about that is the full ramifications of this bailout won’t be felt for years. Congress, for once, shouldn’t worry about reelection and should just do what they think is correct.

  5. Cyde Weys Says:

    Phew, I had a feeling this would elicit some blog comments, and I was right!

    My main opposition to the bailout stems from the fact that it was written by Republicans as a bailout to the ultra-wealthy, and the version that recently came up for a vote wasn’t significantly altered. I’m not necessarily opposed to a bailout, but it has to be done correctly. We need to get a return on our investment over the long term, not just throw $700 billion down the drain. I read recently that $700 billion could purchase every single home that is currently up for foreclosure. Granted, that wouldn’t be a good idea since it would prop up home prices that don’t have any business being that high, but wouldn’t it still be better than writing blank checks to large financial companies since it would at least benefit normal people instead of the uber-wealthy? It would also rescue the banks, I should point out — the government isn’t going to default on those foreclosed homes like the occupants did.

  6. Kelly Martin Says:

    Cyde, please return when you are going to talk about what was actually voted down, instead of the fictitious nonsense that so many uninformed people are spreading about what was voted down. The proposal that the House just voted down had quite a few controls on it, doesn’t resemble the administration’s original proposal all that closely, and was mainly written by Democrats. It would not have just given money to large banks. It’s because of loud-mouthed, uninformed people like, say, you, that so many Democratic members of the House broke party discipline and refused to vote for it — they were afraid that their constituencies would pay more attention to the ignorant loudmouths braying nonsense about the proposal and vote them out. They’re probably right, but that’s no excuse for you to contribute to spreading ignorance, or even more to contributing to worsening an already bad situation.

  7. Rich Says:

    Damn, Kelly Martin is in your base, killing all your dudes.

  8. Cyde Weys Says:

    Rich: Yeah, not quite. Ad hominems don’t win debates; arguments win debates. And I don’t see much of that besides “You’re wrong” in her comment. Reading over some analysis of the Emergency Economic Stabilization Act of 2008 bill (by the Congressional Budget Office), I see that it authorizes the US Treasury to purchase any financial asset at any price and then sell it at any price at any date — in other words, a blank check. That’s not acceptable to me.

    Kelly, if you’d like to discuss some of the controls you claim wouldn’t make things so bad, I’m all ears, but from what I’m seeing right now, they don’t look particularly good. Reference this discussion of the main control:

    The bill includes a provision intended to protect against such future net losses by requiring that firms selling troubled assets to the government also provide warrants or senior debt instruments. CBO anticipates that this provision would not have a substantial effect on the net cost of the TARP, however. On the one hand, warrants or senior debt instruments might reduce the incentive for sellers to overcharge for low-quality assets. On the other hand, since the warrants or debt instruments would have value, Treasury would generally face higher prices because sellers would seek compensation for both the value of the troubled asset and the value of the warrant or debt instrument. In addition, the warrants or senior debt instruments may be difficult for the government to value, complicating even those auctions in which the government is otherwise most likely to obtain a fair market price.

  9. drinian Says:

    Arguments ad hominem are poor technique; so are arguments ad partem, which certainly applies to “written by Republicans as a bailout to the ultra-wealthy.” This is an especially bad one, as it obscures the bailout to the (currently) ultra-poor who took out loans based on incredibly bad or risky assumptions. The huge group of people who have made sacrifices and prudent choices to save for the future are now going to pay the price in inflation once this bailout happens.

    I imagine that leaders from neither major party are willing to create a bill with too many specifics for a number of reasons, from the fact that the market will change quickly (while the legislative process is slow), to that little voice in the head of most politicians that shirks blame and takes credit: passing authority to the executive branch makes it the Bush administration’s problem again.

    Having only made it through economics 101, I don’t want to comment in depth any further, but I do know what moral hazard is and we seem to be creating quite a bit of it.

  10. William (green) Says:

    I haven’t heard of ad partem before. I wasn’t able to find anything on it, either, but some dictionary work gives me the idea it means “making stuff up on the spot”. Is that what you were aiming for?

  11. drinian Says:

    pars partis f. [a part , piece, share; a direction, region; a side, party; an actor’s role]; in gen., usually plur., [office, function, duty]; ‘pars…pars’, [some…others]; ‘pro (sua) parte, pro virile parte’, [to the best of ones’s ability]; ‘magna ex parte’, [to a great extent]; ‘multis partibus’, [many times, much]. Adv. partim, [partly]; used like a noun, [some].

    Since we were using Latin phrases, after all. Ad hominem, to the man, ad partem, to the party.

    I figured that the Latin root was close enough to the modern English noun that it would be clear in context, especially as ex parte, “from one party,” is somewhat common in the legal world. Then again, sometimes I forget that most schools don’t have mandatory Latin like mine did.

  12. William (green) Says:

    I never trust Latin words to be what I think they are. Most of the time, they make some kind of sense, but probably… a third or so of the time, it ends up being a duck, or something else I totally wasn’t expecting.

  13. drinian Says:

    A contributor over at k5 (which I find to be a woefully underrated site these days) has written a pretty good guide to the mortgage banking system that presents a pro-bailout stance. Definitely worth a read.

  14. Knacker Says:

    Nobody really understands any of this crap.