In 1979 Congressman Ron Paul gave a speech on the House floor in opposition to the bailout of Chrysler.  His words are extremely relevant to the new round of bailouts being discussed today.  Some excerpts:

“Do we in Congress have the authority, either moral or constitutional, to cause this suffering? I can find no provision in the Constitution authorizing Congress to make loans or loan guarantees to anyone, let alone to major corporations. Nor have I yet seen a valid moral argument concluding that we, as representatives of all the people, have the right to tax the American people – most of whom receive less in wages and benefits than Chrysler workers – to support a multibillion-dollar corporation. What right have we – and I pose a serious question that deserves an answer – what right have we to force the American taxpayers to risk their money in a business venture which private investors dealing in their own funds have judged to be too risky? Chrysler paper is now classified; that means that any private investor who is handling funds for his depositors, shareholders, or clients may be judged as violating his fiduciary responsibilities should he invest in Chrysler. Don’t we have a trust equally important from the American people? Are we not betraying their trust by voting for a Chrysler bailout? I believe so.”

And

“Last year there were 200,000 bankruptcies in this country, according to U.S. News & World Report. Yet we have selected only the largest for our aid. This is discrimination of the crassest sort. We ignore the smaller victims of this government’s policies simply because they are small. Only the largest, those with the most clout, the most pull, get our attention. This aristocracy of pull is morally indefensible. What answer can be given to the small businessman driven into bankruptcy by government regulations when he asks: “You bailed out Chrysler, why not me?” No justification can be given for this discrimination between the powerful and the powerless, the big and the small.

It is an axiom of our legal system that all citizens are to enjoy the equal protection of the laws. That axiom is violated daily by our tax laws, and now by this proposed corporate welfare plan for Chrysler. Apparently some citizens are more equal than others. That is a notion I reject, and I hope you do, too. I urge you to reject this proposal for all the reasons I have stated.”

I highly encourage you to read the whole speech.

From SFE blog Chris’s Color Commentary:

From SFE blog An Observation or Two:

A lot of time is wasted in the halls of government in intense debate and discussion over how government should do various things.  To a casual observer, this may appear to be a good thing - a sign that our system is working properly; that each policy is being fully debated and vetted.  A closer look reveals that there really is no debate at all.  The hours of boring hearings full of “expert” opinion, data, and anecdotes turn out to be a complete waste of time.  The “debate” is on the minute details of how the policy should be done, but there is no debate on if it should be done in the first place.

Partisan politics often provide the pretense of disagreement.  Each party has a different idea of how policy X should be implemented, who should administer it, etc.  Meanwhile, policy X is still a bad idea to begin with.  Yet, more often than not, bad policy X (which inevitably gives more power to government) is simply taken as a given, and all further discussion is on how to manage it and who will get the credit.

Don Boudreaux reminds us of this in the specific case of the bailouts.  No matter how much you polish it, excrement is still what it is:

“Over in The Wonk Room, Pat Garofalo argues that “If It Happens, The Auto Industry Bailout Needs To Be Done Right.”  While it’s true that some ways of bailing out this industry would be less harmful than other ways, there is absolutely no “right” way to do it.  To advise government to do the auto industry bailout “right” makes as much sense as advising a burglar to burgle the neighborhood houses “right.”"

SFE blog Consectatio offers some excellent food for thought on the bailouts:

Every reaction the government has to the current “crisis” keeps leaving me with the question “How could we possibly dig ourselves any deeper?” Needless to say, I have been amazed at our ingenuity in this regard. Fr. Sirico’s observations (”Isn’t it obvious that once we concede the principle of a bail-out for those ‘too big to fail,’ we invite a queue that will wrap around the globe?”) are becoming more and more realized, with one of the latest announcements that the FDIC is now proposing to “help delinquent homeowners”.

Dictionary.com defines delinquent as: “failing in or neglectful of a duty or obligation“, and these are the folks who are getting the bailouts.

This begs the question, if you fathered two twin sons who were very, very different (one was very responsible and planned ahead, the other was reckless and failed in fulfilling or was neglectful of duties or obligations), who would you drop the big bucks to send to college? Which one is going to take care of you when you retire? Which could you trust with your money? Which investment guarantees that the money will be spent for productive purposes?

It is true that people had varying degrees of awareness about the oncoming dip in the housing market, but, as Christopher Deming pointed out:

“The banks are regulated. They have to tell you everything. They can’t make you read it, and really, why should they have to? They spend the time to write it, the least you could do is go through it.”

When you sign a mortgage agreement, you know what you are getting into. This is why, Chris says “there is a reason why you don’t see mortgage agreements written on cocktail napkins.”

I’ll wrap this up with a personal example: I am starting a new Electrical Engineering job in January. I have to move across the state, and, while I knew that I would be given no relocation fee, I knew there was a signing bonus included with the job. I was later notified that the signing bonus would be given to me in the first paycheck, which will appear about a month after I start (…and four months later than I had expected).

This means, I’m on my own for a U-Haul, securing an apartment, and all of the additional charges associated with moving to a new place. This may not seem like much, but it is quite a bit for a student to handle (I haven’t been making nearly as much as the typical starting-salaried engineer in my internship). Regardless of my smaller salary, I have managed to save enough in my bank account to allow me to get a U-Haul, secure an apartment, buy an engagement ring, and have several months of groceries or whatever else I may require.

This does mean, however, that I do not have an mp3 player (not even a cheap one). As a bass guitar-playing, electrical engineer, I do not even own a Sansa. I also do not have a cool, flashy cell phone, and my car is probably 25% rust. I rode my bike 26 miles a day last summer to work and back to avoid buying gas, and I ate two packs of oatmeal for lunch every day instead of going out to eat.

I’m not trying to make myself sound spectacular, but I know my own story the best.

There are plenty of people who have saved. There are many people who did not rule out the possibility of this “crisis” and they planned accordingly. These are the good sons that are not only going unrewarded, but paying out of their pockets for those who were reckless.

An excerpt of the newest proposal (with some more specifics) can be found on CNN here:

“The proposal would have the government share up to 50% of the losses if the homeowner re-defaulted on the modified loan.”*

Yes, it appears that the age of personal bailouts is on the horizon.

How could we possibly dig ourselves any deeper?

———————–

*Recent talk of “help” for people struggling with mortages has included the idea of offering lower rates or exemptions from payment only to those who have missed at least three payments.  Talk about moral hazard.

Russell Roberts writes for NPR.org:

“[Treasury Secretary Paulson] can inject all the money he wants into the consumer credit market and it isn’t going to make us want to buy cars or use our credit cards.

We did enough of that for a while. More than enough. Too much. And right now, before we spend, spend, spend, we’re going to wait and see if we keep our jobs. [...]

When no one knows how the rules of the game are going to change — and they seem to change from week to week — who wants to take a risk? Who wants to borrow money? Who wants to invest? Business and consumers are hunkering down, waiting for the storm of change to pass.

The problem isn’t liquidity.

It’s uncertainty.

Paulson doesn’t realize that his erratic attempts at creating liquidity are creating the uncertainty that makes liquidity meaningless.”

An excerpt from an article at the Ayn Rand Center:

“Why then should capitalism take the blame today–when capitalism doesn’t even exist? Consider the current crisis. The causes are complex, but the driving force is clearly government intervention: the Fed keeping interest rates below the rate of inflation, thus encouraging people to borrow and providing the impetus for a housing bubble; the Community Reinvestment Act, which forces banks to lend money to low-income and poor-credit households; the creation of Fannie Mae and Freddie Mac with government-guaranteed debt leading to artificially low mortgage rates and the illusion that the financial instruments created by bundling them are low risk; government-licensed rating agencies, which gave AAA ratings to mortgage-backed securities, creating a false sense of confidence; deposit insurance and the “too big to fail” doctrine, whose bailout promises have created huge distortions in incentives and risk-taking throughout the financial system; and so on. In the face of this long list, who can say with a straight face that the housing and financial markets were frontiers of “cowboy capitalism”?”

Doug French writes for Mises.org reminding us that this is not the first time in history free-markets have been falsely blamed for government-created economic havoc:

It is often said “there are no atheists in a foxhole.” The other week, as world financial markets melted down, CNBC go-to wise man Art Cashen put a market spin on that familiar line drolly saying, “there are no libertarians in a market crash.”

The crusty Cashen is certainly right for the most part. Plenty of financial talking heads who argue for free markets and smaller government on a daily basis suddenly screamed that government must intervene to “save capitalism.” Of course, the idea that government must print multiple blizzards worth of money to save a system where individuals and businesses trade with each other unfettered makes as much sense as presidents who claim that war must be waged to “protect the peace.”

The fact is that what we’ve been enjoying since the Federal Reserve was created is anything but free-market capitalism. The value of the dollar has been pushed down 99 percent and the economy has been a series of booms, followed by busts, ad nauseam since J.P. Morgan partner Harry Davidson and other big bank chieftains secretly took a train to go duck hunting on Jekyll Island in 1910. Of course, the ducks were safe, but Americans since have paid the price for the Federal Reserve–system idea that was hatched that weekend.

The Detroit Free Press Reports: City Council: Detroit needs $10-billion bailout

Oct. 30, 2008 Fr. Sirico, president of the Action Institute said in a speech:

“Isn’t it obvious that once we concede the principle of a bail-out for those ‘too big to fail,’ we invite a queue that will wrap around the globe?”

First insurers, then banks and other financial entities.  Now Autos.  Next state and municipal governments?  This immoral and counter-productive government wealth-transfer (i.e. “theft”) needs to stop.  But who will stiop it?

From Chris’s Color Commentary:

“Little did I know, until a recent exposure to this concept at certain gala event, that banks really are villainous monstrosities.  I was not aware that banks gave loans.  I was always under the naive assumption that people asked for them.  Silly me.”

From Consectatio:

“…let me get this straight. We are going to seize people’s private savings and force them to deposit a percentage of their earned income into a “guaranteed retirement account”. That sounds roughly like Social Security to me… I suppose that is why it makes sense to have this new account be managed by the Social Security Administration…

…This sounds strikingly similar to the definition of the “guaranteed retirement account”, so why is this proposal gaining any ground whatsoever? Is it because we don’t currently have a “guaranteed” social security?”

By Briggs Armstrong at Mises.org:

General Motors has once again approached the federal government with its hand out. It should not be forgotten that in September of 2008, Congress gave the “big three” automakers a loan totaling $25 billion. Now they are back. This time they say that with a mere $50 billion they can turn things around and become profitable in the future. The management of GM and Ford as well as the UAW have been meeting with Nancy Pelosi to arrange a deal. GM claims that if the government does not give them the money they demand it will spell doom for the company and thus the entire US economy.

Let’s consider the impact of GM ceasing to exist — highly unlikely even if they declare bankruptcy. Hypothetically, GM would close its doors and all 266,000 workers would be unemployed, never to find work again, or so GM would have the public believe. GM maintains that it is really in the best interest of the country and economy to continue to support their failing business model. After all, in what kind of a world would the government allow a company that employs 266,000 workers to fail?

Descending into an abstract economics lesson about shifting resources to marginally more productive activities may be ineffective; therefore, I will approach this issue from a more philosophical angle.

The basis of GM’s claim is essentially that they are too big or too important to fail due to their massive labor force. But how massive is their labor force relative to other American companies? It may be surprising that the following companies employ a larger number of workers than GM: Target, AT&T, GE, IBM, McDonalds, Citigroup, Kroger, Sears, and Wal-Mart. It is also worth noting that Home Depot, United Technologies, and Verizon all employ nearly as many workers as GM.

The question must be posed: Should the government bail out all 12 of these companies and, if so, at what cost? I doubt that if Wal-Mart, with their 2.1 million employees, went to the government or the American people and demanded a bailout that they would receive much sympathy, let alone money. But if we are going to base worthiness of bailout on number of employees alone, then Wal-Mart is almost 7 times more worthy than GM.

(I have largely neglected Ford, whose executives are also demanding a bailout. I believe that it is enough to simply state that Abercrombie & Fitch employs almost 7,000 more workers than does Ford. Would the failure of Abercrombie & Fitch’s threaten the economy? I think not.)

It is unethical to force taxpayers to pay billions of dollars in order to bail out a company with a failing business model. After all, they cannot even claim, as banks did, that it is an industry-wide problem. Because if it were industry-wide, Toyota, Hyundai, Honda, Volkswagen, etc. would all be joining their American counterparts on Capitol Hill with their collective hands out.

What is the best solution? In a word, bankruptcy. By filing for bankruptcy protection, GM can escape the death grip the UAW has on the business. Bankruptcy would allow for restructuring on an unprecedented scale. There is a good chance that a highly competitive company could rise from the ashes of what we today call GM. Even if GM itself was unable to survive bankruptcy, the resources freed from its grasp could be hugely beneficial to other automotive companies that make products that American consumers value more. As taxpayers, we have a right to object to this misuse of our money.

From today’s Wall Street Journal editorial page:

Nationalizing Detroit

In the Washington mind, there are two kinds of private companies. There are successful if “greedy” corporations, which can always afford to pay more taxes and tolerate more regulation. And then there are the corporate supplicants that need a handout. As the Detroit auto makers are proving, you can go from being the first to the second in the blink of an election.

For decades, Congress has never had a second thought as it imposed tighter emissions standards on GM, Ford and Chrysler, denouncing them for making evil SUVs. Yet now that the companies are bleeding cash, and may be heading for bankruptcy, suddenly the shrinking Big Three are the latest candidates for a taxpayer bailout. One $25 billion loan facility has already been signed into law, and Senator Debbie Stabenow (D., Mich.) wants another $25 billion, this time with no strings attached.

Speaker Nancy Pelosi and Senate Majority Leader Harry Reid met last week with company and union officials, and they later sent a letter urging Treasury Secretary Henry Paulson to bestow cash from the Troubled Asset Relief Program (Tarp) on the companies. Barack Obama implied at his Friday press conference that he too favors some kind of taxpayer rescue of Detroit, though no doubt he’d like to have President Bush’s signature on the check so he won’t have to take full political responsibility.

We hope Messrs. Bush and Paulson just say no. The Tarp was intended to save the financial system from collapse, not to be a honey pot for any industry running short of cash. The financial panic has hit Detroit hard, but its problems go back decades and are far deeper than reduced access to credit among car buyers. As a political matter, the Bush Administration is also long past the point where it might get any credit for helping Detroit. But it will earn the scorn of taxpayers if it refuses to set some limits on access to the Tarp. If Democrats want to change the rules next year, let them do it on their own political dime.

A bailout might avoid any near-term bankruptcy filing, but it won’t address Detroit’s fundamental problems of making cars that Americans won’t buy and labor contracts that are too rich and inflexible to make them competitive. As Paul Ingrassia notes nearby, Detroit’s costs are far too high for their market share. While GM has spent billions of dollars on labor buyouts in recent years, they are still forced by federal mileage standards to churn out small cars that make little or no profit at plants organized by the United Auto Workers.

Rest assured that the politicians don’t want to do a thing about those labor contracts or mileage standards. In their letter, Ms. Pelosi and Mr. Reid recommend such “taxpayer protections” as “limits on executive compensation and equity stakes” that would dilute shareholders. But they never mention the UAW contracts that have done so much to put Detroit on the road to ruin. In fact, the main point of any taxpayer rescue seems to be to postpone a day of reckoning on those contracts. That includes even the notorious UAW Jobs Bank that continues to pay workers not to work.

A Detroit bailout would also be unfair to other companies that make cars in the U.S. Yes, those are “foreign” companies in the narrow sense that they are headquartered overseas. But then so was Chrysler before Daimler sold most of the car maker to Cerberus, the private equity fund. Honda, Toyota and the rest employ about 113,000 American auto workers who make nearly four million cars a year in states like Alabama and Tennessee. Unlike Michigan, these states didn’t vote for Mr. Obama.

But the very success of this U.S. auto industry indicates that highly skilled American workers can profitably churn out cars without being organized by the UAW. A bailout for Chrysler would in essence be assisting rich Cerberus investors at the expense of middle-class nonunion auto workers. Is this the new “progressive” era we keep reading so much about?

The car makers say that bankruptcy is unthinkable and “not an option.” And bankruptcy would certainly be expensive, not least for Washington itself, which could be responsible for 600,000 or so retiree pensions through the Pension Benefit Guaranty Corp. In that sense, the bailout is intended to rescue the politicians from having to honor that earlier irresponsible guarantee. But at least that guarantee would be finite. If Uncle Sam buys into Detroit, $50 billion would only be the start of the outlays as taxpayers were obliged to protect their earlier investment in uncompetitive companies.

* * *

If our politicians can’t avoid throwing taxpayer cash at Detroit, then they should at least do so in a way that really protects taxpayers. That means handing a receiver the power to replace current management, zero out current shareholders, and especially to rewrite labor and other contracts. Anything less is merely a payoff to Michigan politicians and their union allies.

We nationalized large chunks of the banking, finance, and insurance sector, why not the auto industry!  Wise words from Don Boudreaux over at CafeHayek.com on why bailing out the “big” 3 is stupid:

Re “Nationalizing Detroit” (November 10): How ironic is it that the gaggle of politicians now ascendant in Washington croak especially loudly about their ‘courage’ in standing up to corporate interests while they seek to force taxpayers to hand over $50 billion to private corporations?  And how odd is their belief that the same businesses that these politicians are sure don’t respond negatively to being taxed will respond positively to being subsidized?

An excellent post from SFE blogger Nathan Biller on this whole credit crunch, market crisis, housing bubble, recession or whatever you want to call it.

Here’s an excerpt:

So is there a credit crunch? Absolutely! If you define a credit crunch as a situation where more people want loans than can obtain them. What about all the other crunches? Don’t you have a vacation crunch? A nicer car crunch? As a child I experienced many candy crunches (and not the good kind from Nestle). My parents knew, though that if I was given everything I wanted, I would never learn to appreciate those things. People definitely want credit, and it would sure make things easier if everyone were able to get everything they wanted: unfortunately, as one will learn in Econ 101, economics is about how limited resources get distributed to individuals with unlimited wants. If another business or individual is unwilling to loan you money, that’s really the end of the story. You’re not entitled to loan just as a child is not entitled to candy.

Now go read the whole thing!

Great letter to the editor of the Michigan Daily by SFE student Vincent Patsy:

U.S. capitalism fails because it isn’t really capitalism

The most important word in the phrase “free market capitalism” is free. Freedom, I believe, can only be defined as the absence of coercion. Free market capitalism is the economic system where all property (and therefore means of production) is privately held and all exchanges are voluntary.

Recently, much disdain and derision has been directed at free market capitalism. But we don’t have a purely capitalist system. To blame capitalism for the latest economic crisis is like blaming the spread offense for Michigan’s losses this year. Whether it’s a monetary manipulation, price controls or the lack of a running quarterback, it is clear that the idealized system can’t be blamed if it doesn’t exist.

What is often called capitalism today is actually closer to corporatism or fascism. We have a market, but due to a manipulation of prices, we have influenced the allocation of goods away from what consumers want. In a free market system, there would be no Federal Reserve, no Department of Energy or Education and certainly no World Trade Organization or International Monetary Fund. When I was reading the Daily’s review yesterday of the film “Battle in Seattle,” it wasn’t clear if the author was able to make this distinction (Seattle calling, 10/14/2008). This is a common error. People from the right like Larry Kudlow and those from the left like Eleanor Clift have presented our system as free market capitalism.

Free market capitalists would protest and fight alongside whoever wanted to abolish the WTO or the IMF. Add the Federal Reserve to this list, and I will drive the tank.

Sometimes I feel bad for reporters who are charged with producing up to the minute news on the financial world.  There are times when there just isn’t anything to say.  Take this headline from the AP:

“Stocks fluctuate as investors weigh economy”

Isn’t that kind of like saying, “the market is acting like the market, based on the things that make the market do what it does”?  At least the make-news people are simply looking for something to say, whereas the much more dangerous creatures in Washington are always trying to manufacture problems so they have something to do. And it’s never good for us.

Great article from Mises.org on how absolutely stupid it is to claim that laissez faire caused the credit crisis.

A fundemental rule of sound argument is to define your premises.  In this statement, “laissez faire caused the crisis”, one of the premises is that we currently live under a system of laissez faire.  This requires a definition of laissez faire, which is seldom given by those making the claim, yet the phrase gets defined de facto in the context of the article in which the statement appears.  And it ussually comes to mean completely unleashed free-market capitalism - a definition which would destroy the original statement, since we do not live under such a system.

Read the article.

From SFE Blogger FreeToChoose:

The real tragedy of the ongoing financial crisis is not the $700 billion bailout, the moral hazard that will accompany it, or the fact that our children and grandchildren will have to pick up the tab for the irrational spending habits of politicians. Instead, it is the false notion that “deregulation” and capitalism are to blame for where we find ourselves today. The answer isn’t so simple. John Stossel has more:

“It’s deregulation’s fault!”

That’s the conventional explanation for the economic mess.

Barack Obama said, “This is a final verdict on the failed economic policies of the last eight years … that essentially said that we should strip away regulations, consumer protections, let the market run wild, and prosperity would rain down on all of us”.

Is deregulation is the culprit? It can’t be. There was no relevant deregulation in the last 25 years. Meanwhile, highly regulated institutions eagerly bought risky government-guaranteed mortgages, stimulating excessive housing construction and an unsustainable price bubble.

Deregulation wasn’t the problem, and reregulation isn’t the solution.

It’s intuitive to assume that regulation prevents problems, but it’s rarely true. First, how would regulators know what to do? Leaving aside the bias they might have and the brutal fact that regulation is physical force, how can a small group of people understand the workings of a market sufficiently to regulate sensibly? Markets, especially financial markets, are far more complicated than any mind can grasp. They consist of many millions of participants making countless decisions on the basis of unarticulated know-how and intuition. To attempt to regulate such activity requires knowledge no one can possess.

You can find the whole article here at Real Clear Politics.