View Single Post
Unread 3 Aug 2009, 08:45   #35
Tactitus
Klaatu barada nikto
 
Tactitus's Avatar
 
Join Date: Mar 2000
Location: St. Paul, Minnesota
Posts: 3,237
Tactitus spreads love and joy to the forum in the same way Jesus wouldTactitus spreads love and joy to the forum in the same way Jesus wouldTactitus spreads love and joy to the forum in the same way Jesus wouldTactitus spreads love and joy to the forum in the same way Jesus wouldTactitus spreads love and joy to the forum in the same way Jesus wouldTactitus spreads love and joy to the forum in the same way Jesus wouldTactitus spreads love and joy to the forum in the same way Jesus wouldTactitus spreads love and joy to the forum in the same way Jesus wouldTactitus spreads love and joy to the forum in the same way Jesus wouldTactitus spreads love and joy to the forum in the same way Jesus wouldTactitus spreads love and joy to the forum in the same way Jesus would
Exclamation Re: Is Bigger Government Better

Quote:
Originally Posted by Tietäjä View Post
I was actually considering putting out a more complex reply involving a discussion of why the lender of last resort needs to be there, and why the bail outs are necessary to keep confidence especially on the financial sector despite it creating moral hazard, but I've come to second thoughts. If your point is, that companies that fail should never be bailed out I'm simply better off asking you a question.

How crippling do you think letting the half the financial system go down in a blast would have been? How long do you think it'd take for the market to regain confidence in the system again, when, the system is technically an essential part of resource allocation between corporations?
Much damage happened anyway, or happened even before the bail out; but nobody really knows what would have happened (or for that matter, what may yet happen).

The first question to ask is: how does one determine the likely outcome of not bailing out a company or an industry? Which "experts" do you believe? The Wall Street bankers insisted they--and hence the entire financial system--were teetering on the brink of apocalyptic meltdown, but didn't they have an incentive to overstate the problem? (I can think of about 700 billion incentives, actually) What about the government regulators? People like Henry Paulson (Treasury Secretary under Bush) who spearheaded the bailout. These regulators have no bias, right? But wait, most of the regulators come from the industries they regulate (Paulson was formerly the CEO of Goldman Sachs) and many regulators return to their industries when they leave government service. Are the regulators really impartial or are they virtual insiders themselves--recommending favorable deals for their former companies and cronies? And what of the politicians who ultimately vote on these measures? Many of those in Congress responsible for oversight of the banking industry, and for sponsoring the banking bailout legislation are themselves recipients of campaign contributions from Wall Street firms (or other favorable arrangements, like special below-market-rate mortgages or relatives employed by these firms). Did they support the bailout because it was the best solution, or were they simply 'paying back' their benefactors?

This is the problem with bailouts in general. Even if you can convince yourself that the first bailout is absolutely necessary and proper (and I'm not sure how you would do that), what about the tenth bailout? The twenty-fifth? And yes, more bailouts are inevitable: look how quickly and seamlessly the bailout for the financial industry was expanded to include the car companies. With billions of dollars being handed out, how can we be sure the system is immune from corruption, and even if it is how long can it remain that way? Better to not start down that path in the first place because it seems to me that it must--sooner or later--end badly.

Given all the cheerleading by vested interests in the industry and in government, it's not surprising that many people believe the bailout was essential; but nonetheless, many independent experts (primarily economists in academia) were opposed to it. Some were opposed to specific details of the bailout (the almost total lack of accountability, oversight and transparency, for example) but some were opposed on more general principle.


The second question to ask is: what are we getting for our money? There is no guarantee that the banks or even the whole "financial system" has been 'saved'. Wall Street may be back for more money next year, or the banks may go under anyway, or the meltdown that so many people were worried about may come to pass regardless. We may find we've spent our last reserves trying to prevent what was, perhaps, inevitable (except that we will then be hundreds of billions of dollars poorer to deal with the fallout). In fact, there's no guarantee that the bailout isn't going to make things worse overall. Keep in the mind that virtually all the "experts" who crafted the bailout and/or swore it was essential are the very same "experts" who either (a) caused this problem in the first place and/or (b) saw it coming and did nothing, or (c) never saw it coming at all.

I'm reminded of the Hoover administration, which during the early years of the Great Depression, poured taxpayers’ money into influential Wall Street banks (via the Reconstruction Finance Corporation) in an effort to save them from bankruptcy. Most of the banks went bankrupt anyway; the bailouts only bought them a few years (and possibly made their inevitable failures worse by creating a false sense of security which lured many investors back).
Quote:
This is, considering that it wasn't only the shadow banking responsible for the subprime packages and toxic waste funds, but a good part of the "actual" banks as well? How happy do you think those few hundred thousand UK and Netherlands clients of certain Icelandic banks would've been if, umm, their savings in these banks had simply defaulted?
Probably not very happy, but then the taxpayers who will get stuck paying for someone else's poor choice in banks aren't going to be very happy either. How is it that the happiness of the first group trumps that of the second?

But I'm curious: Why would savers in the Netherlands and the UK deposit their money in Icelandic banks (as opposed to their local banks)? I suspect it was because the Icelandic banks were paying a higher interest rate. Why were they paying a higher interest rate? Probably because they were making riskier loans (the first rule of investing is that higher returns generally involve higher risk) and I guess we can assume that the Icelandic banks weren't paying any money to insure deposits.

Basically, it looks to me like these savers got a little greedy. They saw a better interest rate and didn't know (or didn't care) what that might have implied towards the risk of their deposit. It's unfortunate they lost their money, but why should the taxpayers foot the bill for what was, ultimately, someone else's mistake?
Quote:
I'm not sure if you're actually saying that, the government should, never, bail anything out, but if you are, then I'm keen to hear how you think the financial market would actually work.
How did financial markets work before governments started bailing them out?

Markets, financial or otherwise, have the ability to sort themselves out. By definition, that's what a market does. Prices rise or fall, and eventually the market clears. Of course, when you leave it up to the market, sometimes powerful interests can get hurt. Sometimes, these interests take their case to the government, along with fantastic claims why they should be exempted from the effects of their respective markets (through bailouts or other special legislation). That they should make these claims is not very surprising; that these claims should be believed, is.
__________________
The Ottawa Citizen and Southam News wish to apologize for our apology to Mark Steyn, published Oct. 22. In correcting the incorrect statements about Mr. Steyn published Oct. 15, we incorrectly published the incorrect correction. We accept and regret that our original regrets were unacceptable and we apologize to Mr. Steyn for any distress caused by our previous apology.
Tactitus is offline   Reply With Quote