Messing With The Price System

The general problem with bailouts (or tariffs or subsidies) is described well here. Any form of government interference messes with the market’s price system. So what? I’ve tried to explain the virtues of the price system, but the basic idea is that it keeps us from producing what no one wants and minimizes shortages of what we actually do want. Massive intereference with the price system (like what the Soviets did) results in chronic shortage of really important stuff (like food) and surpluses of less useful stuff like huge statues of Lenin and Stalin. Small interference results in small inefficiencies. The bailout is a pretty large tweak, which will have large repercussions. We got into our current situations because politicians played with the price system; it’s hard to believe that further messing about will make things better.

Politicians can’t seem to help messing with the price system, lowering your standard of living in the process. It’s probably inevitable due to the true nature of politics, but it sure would help if they would show some restraint.

Paulson’s Plan

Most of what is being said about the Paulson Plan (a.k.a The Big Bailout) is superficial at best and utter nonsense at worst. Nevertheless, there are some pockets of clear thinking. I suggest reading this to get a better understanding of what’s going on. Because of the uncertainty of valuations, financial risk is much higher than usual. When financial risk is high, the risk premium increases and we see higher interest rates. Higher interest rates mean that more speculative endeavors are scaled back or eliminated. This is just the Invisible Hand’s way of telling us that we were investing too much in speculative things (like flipping condos) and not enough in bread and butter. As much as some folks like the go-go frenzy provided by low interest rates, there is no plan (Paulson’s otherwise) that will bring back easy money until capital is allocated more efficiently. Intervention might speed it up, but it might slow it down too. Remember – the geniuses trying to fix the mess are the same geniuses who got us here in the first place!

Inanity & Claptrap

Don Boudreaux has the quote of the day:

Gov. Palin is merely less skilled in passing off inanities and claptrap as profundities.

I couldn’t have said it better.

Wealth Shock

Whether the much discussed bailout happens or not, the underlying reality will not change. Arnold Kling points out that we are seeing the first wave of wealth shock, i.e. the shock of losing a great deal of wealth. The important point is this: this is only the first wave. You and I can’t control the fate of the bailout, but we can make adjustments to live with wealth shock. I think the main effect we’ll see, aside from plunging home prices, is a healthy increase in interest rates. Should that happen, it will ripple through the economy. It will be uneconomical for some companies to grow or even run in place. I expect higher unemployment and more economic stress on households where costs are growing faster than income.

Gosh, aren’t those the things we’re trying to avoid with the bailout? Yep – it looks to me like the consequences of past actions are unavoidable. The only real choice is whether we take our medicine all at once or slowly over time.

Lipstick On A Pig

It looks like the Congressional Carnival of Clowns® has reached agreement about a bailout. I agree with Arnold Kling: the more I learn about this, the less I like the bailout, and the guys who are really responsible for starting the whole mess are trying to look like heroes. But I hoped for little better. Reading the letters to the editors in the local rag, I’m convinced that the public’s understanding of what’s going on is less than its understanding of string theory. At least people are mad. Unfortunately, they’re mad at the wrong people for the wrong reasons. I’m sure the real culprits will be re-elected.

Bank Failures and Other Grim Tales

Our grim story continues and Megan is doing a yeoman’s job of chronicling it and offering insight. But I am becoming less enthused about the bailout plan. Yes, I understand that we want to avoid bank failure, but that doesn’t mean we want to allow every single bank to survive. I’d be rather happy to see poorly run banks replaced by well run banks. Not all bankers feel this way, for obvious reasons.

The dilemma is this: we don’t want to reward bad behavior by bankers or home buyers, but we don’t want pain to be inflicted on the innocent as well. No one has figured out a way to do this. Watching the clown convention called Congress, it seems unlikely that a good idea will materialize. We’re all going to have to take the medicine, whether we’re sick or not. The only question is whether it’s a sudden one time one year shock therapy or a decade long torture by a thousand cuts. But, rest assured, Congress is on the job, so we’ll probably get the worst of both worlds.

Meltdown

Most people are blissfully unaware of how the world’s financial system works and may not have a good feel for what all the fuss is about. There are lots of pieces to this mess, but the Armageddon scenario (which we narrowly averted) is a run on the money markets. What’s that? Megan offers a good explanation with her customary clarity.

UPDATE: Megan goes on to explain why we need a bailout.

UPDATE: At last, the WSJ publishes an analysis of the root cause. Surprise! It’s political!

Financial Fable

The current economic situation is complex, and our politicians are simple. Old Moralist McCain blames greed, Young Marxist Obama blames a lack of regulation. It’s taken a lot factors to create this mess, a near perfect storm. In general, the legacy media and politicians tend to overlook the role of government. The WSJ has a great editorial today which outlines the government’s involvement and also outlines the “financial fable” being slowly created by the gullible media. And, of course, the politicians are eager to avoid all culpability.

COBOL’s Revenge

Read all about it (if you’re an old time computer geek).

Whew!

Some people don’t understand that we narrowly averted a major crisis in the US economy. Most of the commentary in the legacy media, and most everything being said by politicians, betrays a total lack of understanding of the problem. The current financial crisis is a big complicated mess, but, with a lot of work, it is understandable. Maybe you don’t care to do the work, and I don’t blame you. But understand this one thing: the final shoe to drop was the beginning of a run on money market funds.

So what? Well, without money market funds and other short term credit facilities, a lot of companies would not be able to meet payroll. Some would not be able to keep the lights on. If a run materializes yet in September, we will see a wholesale closing of stores and factories. It will be only weeks before companies go belly up – not just banks, but every kind of company. Millions could lose their jobs overnight. Think there’s a housing crisis now? Mortgage default rates are pretty low (around 4% last I looked), but suppose 10% of Americans lost their jobs? Or 20%, like in the Depression? And it’s not just companies – state and local governments, as well as non-profits, would all be impacted the same way. We’d be seeing huge cutbacks in services.

So, like most everyone else, I don’t like the huge tax liability we’re creating and I don’t like the socialization of industries and big bailouts. People resent the bailout of Wall Street Fat Cats, but understand this: the bigger bailout was for you and me.