Let me just say up front that I don't know much about high finance and macro-economic policies and can't say what the best response to the current financial melt-down on Wall Street is. In general I'm glad that the Federal Government is taking steps to prevent a massive economic collapse by bailing out institutions like Fannie Mae and AIG.
On the other hand, I find it very interesting that the Feds are far more willing to bail out wealthy investment bankers who have made bad decisions, than they are to bail out average everyday Americans who have also made bad decisions. They'll give billions of dollars to Bear Stearns and make sure their failed CEO's are provided with the so-called "gold parachutes" (i.e. multi-million dollar severance packages), but they won't provide any help to people who are losing their homes because they were foolish or optimistic enough to buy a sub-prime mortgage, or, as is often the case, through no fault of their own, but simply because they've hit unexpected hard times and yet can't sell their home because of the housing market melt-down.
The subtext seems to be that when the little guy is in danger of losing everything it's "tough luck" and, quite probably, "his own damn fault", whereas when the super-rich or just those wealthy enough to have stock portfolios (of whom I am one, in the interest of full-disclosure) are in danger, then the government decides it's worth stepping in.
Again, I don't know a lot about economics or what exactly should or shouldn't be done about this crisis, but my gut tells me that something ain't quite right here.
posted by Mike Clawson at 10:38 AM | Permalink
At 9/19/2008 10:40:00 PM,
I'm also finding the pattern of bail-outs quite disturbing. It seems that things keep getting worse after each one, yet the government continues persuing the same (apparently) failed strategy nonetheless.
One thing to note is that the U.S. dollar is tanking versus most every other currency in the world and govt policies with regard to bail-outs and interest rates seem almost designed to make it even weaker. I won't suggest that the companies involved haven't been making bad decisions (necessarily), but I think the fact that our medium of exchange (currency) is rapidly becoming worthless is probably a large factor in the credit collapses, in which case the Fed's attempted remedies would indeed just be making things worse.
But of course, I'm not an economist either.
At 9/20/2008 09:48:00 AM, Jonathan Brink
Mike, as sad as it may seem, economic turmoil isn't created on a wide scale when Average Joe loses his house. But when we see a massive titans fall like Bear Stearns, and then Lehman, people panic when its broadcast on every paper and news channel. The bailout keeps people from making a run on the bank, as unfair as it seems.
At 9/20/2008 11:32:00 PM, Mike Clawson
Yeah Jonathan, I get that, which is why I'm glad they are bailing out most of these companies.
But on the other hand, one Average Joe losing his home doesn't cause turmoil, but several million Average Joe's losing them does. After all, isn't the subprime mortgage mess what they're saying has caused these big financial giants to crumble?
Again, I don't know much, but I wonder what would have happened if, say, five months ago, instead of spending billions of dollars on the "stimulus" checks they sent to everyone, they instead spent billions to "bail out" the millions of Average Joes who were losing their homes. (Sure, most don't "deserve" to be rescued from their own bad decisions, but then, neither does Bear Stearns or AIG.) If we had done that, I can guess at two positive results:
1) Families would have been able to stay in their homes.
2) The big financial giants would have gotten their money for these bad loans, which means they wouldn't have melted down in the first place, thereby saving us the billions of dollars we are now spending to bail them out.
Of course, then you might say that no one learns anything from their mistakes and both home buyers and big business are still encouraged to make or take bad loans. But that's where the positive role of government regulation could come into play (which, I notice, both presidential candidates are now saying we need more of, despite the fact that it goes against the party orthodoxy of one of them). If the government had stepped in years ago and put restrictions on what kinds of loans institutions could make in the first place, none of this would have happened. We wouldn't have had the real estate boom that made a lot of people rich a few years ago, but neither would we have had this crash after the bubble burst.
Anyway, I'm just thinking out loud now. Again, I don't know all the intricacies of this stuff at all.
At 9/21/2008 11:17:00 PM,
Which orthodoxy are you suggesting is opposed to regulation? It seems pretty typical of both sides to me. At any rate, this sounds like empty rhetoric and wishful thinking to me: "Don't worry about the economy; I've got a magic regulatory fix if you vote for me." Saying "regulation" without detailing EXACTLY what you want to do and EXACTLY why it'll work is dangerous. McCain in particular was describing himself as completely ignorant about the economy a few months back, leaving me in great doubt as to whether he's suddenly figured out the solution to a problem that's stumped economists almost universally.
Incidentally, it's worth pointing out that over-regulation is a large part of what got us into this mess: the Federal Reserve has taken intrest rates well below what a free market would ever produce (and they can get away with it, since they get money directly from the printing presses at the mint, unlike other banks who can only lend money if they have money), which is both the source of the bad loans the businesses were taking and the cause of the overall credit crunch (as other institutions couldn't compete with the Fed's rates), as well as our current inflation problem. None of this means that regulation isn't necessarily a solution: just that regulation in the past has had unintended consequences and rushing in to new regulations without being sure we understand all of the consequences isn't advisable now.
At 9/22/2008 05:53:00 PM, Mike Clawson
I'm not sure the Fed's interest rates are what most people are talking about when they talk about government regulation, but I get your point.
At 9/25/2008 04:09:00 PM, Kester
I don't have enough knowledge to speak intelligently about this, but I agree that it's strange that this economic crisis requires a bailout while a crisis like homelessness or lack of access to healthcare is seen as something to be solved by individuals themselves.