Ponderstorm My Brainstorm on Life & Politics

In my opinion, after the recent massive financial bailouts and other interventionist federal actions (and in some cases nationalizations) within our economy (i.e. the private sector), several pressing questions remain unanswered. I have been pondering on five of them for some time now. These are listed below in no apparent order.

1. If bad loans got us into this situation, then why is there so much effort to get banks to loan even more money?

If there is a dollar to be made and people are free to act in rational ways, then somebody creative will find a way to earn that dollar. My thinking is that in spite of the negative news regarding financial markets right now, there remains a market for loaning money to people with good credit. If this is the case, then there must be people willing to make a profit in such a market and so they will loan money to those with the means to pay them back. No crisis there.

On the other hand, the market for people with bad credit (i.e. people who you shouldn’t loan money to) has dried up and rightfully so. That should be a good thing. It made no sense to make risky loans but such actions were encouraged by foolish government policy that distorted reality and created an artificial market for bad loans. No loans to people who should not get loans means no crisis there either.

So let’s fast forward to now. I want to know why there is all the fuss about banks not loaning money then? It’s good banks are not making more bad loans. To push them to loan on a large scale again seems to me to further push us into the mud. We’re supposed to be getting ourselves “unstuck” but loaning more would seem to do just the opposite and compound our already bad situation. That doesn’t make a bit of sense.

2. Bailouts rewards bad performance.

Corporate leaders are paid to lead. Part of leading means avoiding problems. It seems to me that we have a bunch of bad leaders at many financial institutions (and in government) since they led their companies (and federal policy) on a path of suicide. Why should the government reward these guys with a bailout? Seems to me that such actions simply reward their poor judgment and punish those who kept their companies out of trouble.

As for the auto industry in particular, I have some specific thoughts along these lines. They were on an Read More…

Posted under Business, Government, Politics

Jeffrey A. Miron is a senior lecturer in economics at Harvard University. He is a Libertarian and was one of 166 academic economists who signed a letter to congressional leaders last week opposing the government bailout plan. His commentary, entitled Bankruptcy, Not Bailout, is the Right Answer, was published today at CNN.com and the American Future Fund, an organization that advocates conservative, free market ideals.

The latest bailout plan that was voted down yesterday would have authorized $700 billion for the U.S. Treasury to purchase “troubled assets” from Wall Street financial institutions. Miron argues that this bailout proposal was a “terrible idea” and explains why. First, however, he explains how we got ourselves into this mess.

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.

Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.

After pinning the blame squarely on failed government policy, Miron correctly reasons that it is unwise to let government do more of the same in the name of recovery.

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

Miron then builds a case for allowing financial institutions to declare Read More…

Posted under Taxes

Think about this with me for a minute if you would. The government is asking us taxpayers to hand over $700 billion more dollars on top of the $2+ trillion we already give them (or they obligate us with in the form of debt). That’s an enormous amount of money.

Today there is an Associated Press article that looks at what just how big $700 billion is compared to other spending. I quote some of the article below:

You could buy yourself a war with that kind of money – the U.S. has spent $648 billion on Iraq war operations so far.

You could match Franklin Roosevelt on his New Deal and raise him billions more.

Even in a town where billions come and go without anyone blinking, the money that could go into the Wall Street rescue is eye-popping. The House on Monday voted down a proposed $700 billion bailout package, but congressional leaders said they were committed to trying again.

What else could the government do with a $700 billion blank check? There are, well, billions of possibilities.

It could ensure universal health care coverage for six years, for example, or upgrade the country’s most deficient bridges four times over. All the work to upgrade coastal levees that’s been done since Hurricane Katrina? It’s a mere drop in the proverbial $700 billion bucket – $7 billion, or just 1 percent. You could build 1,750 bridges to nowhere.

Or run an entire country. Seven hundred billion dollars is more than twice the size of the economy of Denmark, which had a gross domestic product of $312 billion in 2007.

Seven hundred billion dollars would buy 70 Hubble-type space telescopes. Or about seven international space stations. It would finance the National Institutes of Health, the nation’s premier medical research institute, for two decades. Or pay the U.S. national intelligence budget for 15 years.

According to the Wall Street Journal, half the money FDR spent on his New Deal program to lift the country out of the Depression and banking crisis was for public works projects. For $250 billion in today’s dollars, the nation got 8,000 parks, 40,000 public buildings and 72,000 schools.

The article provides even more examples but I think you get the picture. My question for the government is simple: You created this problem so why should I trust you to fix it with more government?

Posted under Taxes