Thoughts on a crisis

30 September, 2008

Thought this might be cathartic to get these things on paper. Forgive the rambling, typos, runons, tense changes, danglers, etc....

As we have discussed, I'm a bit of both minds on this bailout. I wish I could be the "one-armed economist" for which Harry Truman so longed (i.e. when his econ advisors would offer advice then end with "but on the one hand,")!! In any case, ON THE ONE HAND, I think the bailout is critical because it extends to every adult who has ever applied for a credit card, Sears or Mastercard or otherwise, a student loan, a car loan and or a small business loan (remember small business is the backbone of the economy). All of those people are and will be affected (because just like oil, we're addicted to credit). Borrowing has been very cheap the past decade or more. Money for nothing. Add that to the American Dream. Americans double-downed on it for the past 20 years; shoved in their faces by Hollywood, Madison Ave and the Joneses -- own a bigger home, buy a better car, pursue more happiness in whatever consumer form you can, etc. Which, by the way, I support and supported wholeheartedly! But to be populist and say, "let the Wall Street fatcats figure it out for themselves!" or "Why bailout the billionaires?" etc, etc, is like blaming your heart for having clogged arteries. Sure banks are pernicously evil with fees (to paraphrase dad, if fees had wings, we'd never see the sun), but we do need them and they need Wall Street. Yes, it's unfair if you've paid your mortgage and paid your bills on time and you played by the rules. But ultimately, this is the real trickle-down. It seems like it doesnt matter now, but soon credit card companies will tighten restrictions, penalties, and cut your borrowing. No new auto loans or higher hurdles to get them. Way more stringent mortgage lending. Possibly fewer college loans -- and what are those people going to do? Find jobs that are starting to dwindle because everyone's in the same boat? And the jobs are dwindling because no one's buying anything, so corporations will start cutting back inventories, which means fewer people to make stuff. They wont expand product lines because they cant borrow, so they cant sell any new stuff. Even if it all doesnt come to a standstill, the whole process will slow dramatically, causing recession and all the other descriptives that mean a nonfunctioning economy. And what of foreign holders of US assets (countries and companies)? We've been financed by foreign investment for ages. That will come to a halt (if it hasnt already); and what assets they do have will be worth far less, sending their economies into the void. The only bright side here is the old saying, which goes something like "If I owe you a $1 million, you own me, if I owe you $10 million, I own you!" In other words, they own way too much of us! Hooray!

BUT ON THE OTHER HAND! Why not let the market take its course? Why not let banks fail? Let's get the pain over with. As someone said on TV, let damaged firms "go through the fires of receivership" so that the bad stuff just gets burned off and healthy companies come in and buy the good stuff? Despite all the uncertainty there remains plenty of cash out there. Healthy financial companies or private equity and the like that are in good shape and willing to buy the good stuff once the bad stuff has been burned off. Or, why shouldnt we give that money, in the form of tax breaks or something, to the fiscally responsible people who played by the rules, paid their mortgages on time and didnt go overboard. Maybe if we do nothing and let the chips fall where they may or whatever other cliche you want to use, things will turn out right? And besides, where did $700 billion come from? If no one on Wall Street knows the worth of these bad assets, how does the government know? Is $700bln enough, too much, what?

The problem with both these scenarios is that no one knows the answer; there is no precedent. You dont know how long the pain will last. It seems reasonable that letting things fail now may be short pain, and dragging them out with a rescue is long pain. But it could be long no matter what. Too many unknowns. No one knows how much any of this stuff is worth, or who has it (that's why banks arent lending to each other, they dont trust each others' balance sheets). No one knows how deep the well is. Does it have a bottom? Will more banks fail? What if so many fail that there are not enough healthy banks to buy them? What if perfectly healthy banks start to see their assets continue to crumble in value and they fail? And if all these banks fail, does the FDIC have enough to ensure that every Tom, Dick and Harry get's his money back (up to$100,000)? And how long would that take?!? "Yes, you're insured up to $100,000. Just fill out Forms 11C, 12B and 101XY, and send it in to FDIC at 20018 Connecticut Ave." Great! But what do I do in the meantime? Panhandle? Sell apples? Squeegee at the stop light? And, let me be cynical for a moment, we all know how insurance works, if you had $10,000 in the bank, they'd figure out some way of giving you $6,500 back after "processing fees" with maybe a "penalty" for good measure. And congress would figure out some way of taxing the money....

And what will the government do? Taxes will go up; doesnt matter who is elected. Congress already has let lapse fixes that temporarily stopped the AMT (now it'll hit millions more people -- middle income and lower) and many other small business taxes. So what happens then? How do we pay for all the FDIC insurance? How does the US service the debt that it already has? And the government has to keep running (whether small or large); medicare, medicaid, welfare, infrastucture, defense (small compared to entitlements but still huge), and countless other things; who pays? You. Me. the Kids, the Kids' kids. Which all then hit the states, who get less from the feds, and have been getting less from local taxes (a great time to be on the Board of Ed!!). To combat this, local tax increase caps will start popping up, which is basically like bleeding someone for a cold.

So maybe we as Americans are in need of some financial humbling; to go back to the rummage sale days and the hand-me-downs, used cars, sloppy joes and leftovers. But it will be a long way back to that. At this point, it's closer to the Stone Age than the Internet Age! Much as I cherish those days personally (rummage sales at Porter Memorial, Jefferson Street, Grandma Delaney's basement, etc) I dont want to go back there or more accurately, I dont want to be forced back there.

In any case, I dont mind the fighting over what form the rescue takes. It means, at the very least, people are hammering out something. Much as I support the Paulson Plan, I didnt read it. I'm not expert enought to know if it'll work (seems plausible). I do hate the finger pointing and the politicking. The US government, past administrations, are to blame, and we are all to blame to some degree. I just want to move forward (in old or new shoes!).