The proposed big three bailout is a bad idea for many reasons.  The graph below, from economist Mark J. Perry’s blog Carpe Diem, is striking.  A bailout would mean all the people on the yellow bar to the far right would be forced to subsidize those on the blue bar to the far left of the graph.  Robin Hood in reverse.

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 financial bailout was not neccessary.  Even if all the big Wall Street banks failed, there would still be people who wanted to lend money and there would still be people who wanted to borrow money.  Do you think they would be unable to find each other?

The bailout of the big three is not neccessary either.  Even if all three Detroit companies failed the auto sector would still motor on ahead.  There are still people who want to buy cars and there are still people who want to make them.

The bailouts are a giant wealth transfer from normal, productive citizens and businesses to businesses who are losing money - because of their own poor decision-making and management.  The economy will not be healthy again until we stop rewarding bad companies at the expense of wise and efficient consumers and producers.

I don’t care what the rent-seeking fatcat taxeating grovelling lobbyists from the bailout-hungry big corporations tell you, the world would be better off if we were left to use our own money the way we see best; on the things which bring us the most value.

We need to cut the pigs off at the trough.  If we do not, we stand to lose much reasonable, peaceful, voluntary social cooperation and commerce and devolve into a mess of panicked special interests clamoring to please politicians, instead of clamoring to please customers as a free-market would require.

It’s not that complicated; the bailouts are immoral and ineffective.

(Not to mention, bailouts are a distraction from the causes of many of our current economic problems.  The same political class who overspent, over regulated, and overinflated the currency is now deflecting attention from these causes and attempting to swoop in as savior and give more of your money to well connected interests, the big three being the most recent.)

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?”

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.

By SFE Blogger aaronmead:

There has been some speculation on how the weak economy and the bailout of banks will effect the government’s ability to enact policies favored by the Presidential candidates.  At the debates, moderators have tried with little success to get candidates to talk about this.  At the first debate, Obama said grimly that we’d really need to tighten the old belts, but programs reflecting his, or maybe it was America’s, “values” must be exempted from such austerity.  If you can demonstrate that a program is not merely desirable or useful, but constitutes a Values Issue, it is rhetorically invulnerable to considerations of trade-offs and affordability.  Obama went on in this fashion to verbally spend countless hundreds of billions of dollars in a minute thirty.  McCain mentioned his plans to oppose earmarks diverting small amounts of allocated money to Congresspeople’s favored projects.

Matthew Yglesias, star blogger at the Center for American Progress blog (thinkprogress is the somewhat awkward and Orwellian name for their blog headquarters) has been arguing that worries about deficit spending are misplaced:

“You need to respond to a downturn with expansionary policies of some kind. In recent decades, we’ve preferred relying on expansionary monetary policy (Fed interest rate cuts) rather than Keynesian deficit spending. But at the moment, there’s no real room left for the Fed to cut rates. That means you need deficit spending.”

Even if he is right about the need for a Keynesian stimulus, Yglesias’s analysis has problems.  The deficit is already high due to weakening tax revenues and the Keynesian stimulus that passed earlier this year.  It seems like ages past, but in fact earlier this year a bipartisan consensus in Washington, proving that we can rise above our differences, created a spending package that, they told us, was specifically designed to engineer the economy out of recession.  When the economy continued to falter, the Party in power urged us to “give the stimulus time to work,” while the opposition began to hint at the need for another.  Presumably any good Keynesian would find merit in continuing these measures for at least another year.

Further, the bailout, another bipartisan effort specifically designed to rescue the economy, will add further to the deficit.  We are engaging in deficit spending designed specifically to provide a Keynesian boost, which seems to crowd out deficit spending designed to achieve energy independence or universal health care.

Even if we do believe that deficits in the trillions of dollars, dwarfing the totals of the Keynesian heyday, or that spending on certain proposals ought to be a non-negotiable “values issue,” it might be difficult to convince a Congress composed of hundreds of people with their own agendas, priorities, and values to go along.  When Presidents make campaign promises they implicitly ask us to suspend disbelief and ignore the political realities involved in dealing with Congress.  The idea is that election will give them a popular “mandate” and change these realities somewhat, but inevitably only a small portion of a President’s agenda actually gets passed.  It would be far more useful for voters, therefore, to know a President’s priorities, how he will deal with the real world, then what his ideal world would look like absent tradeoffs.  Presidential campaigns allow few hints at this, and those only for voters paying close attention.  We should applaud the media’s effort to create incentives for candidates to more directly show their hands and lament the fact that disincentives to honest answers are still greater than inducements in that direction.

A great post by SFE blogger vapatsy on why the business cycle is NOT a product of capitalism:

From townhall.com:

The bailout passed!

Too bad.

When so many politicians speak with one voice in support of the biggest act of government intervention in the economy in generations, I cringe.

Everybody talked about the “freeze” in the credit markets, but why, I wonder, were the cable news programs that repeated the credit-freeze mantra pausing for commercials from companies trying to lend me money? Ditech and LendingTree still hawk mortgages at under 6 percent. Some credit freeze.

Economist Robert Higgs of the Independent Institute looked at the credit numbers kept by the Federal Reserve. He writes: “Although certain financial institutions are undeniably in deep trouble — difficulties of their own making … — credit markets in general have not ceased to operate. Moreover, lenders are extending credit in historically great amounts“.

Maybe this is why CNN business reporter Ali Velshi broke ranks when reporting on “dried up” credit and said, “When I say ‘dried up,’ I don’t mean there’s no money. But you’d better have good collateral and good credit.”

What’s wrong with that?

To those who say that without banks nobody can borrow, economist Steven Landsburg offers this response: “Banks don’t lend their own money; they lend other people’s (their depositors’ and their stockholders’). Just because the banks disappear doesn’t mean the lenders will. Borrowers will still want to borrow, and lenders will still want to lend. The only question is whether they’ll be able to find each other [A]s any user of Match.com can tell you, the technology for finding partners has improved since [the 1930s]. When a firm wants to raise capital, why can’t it just sell bonds over the web? Or issue new stock? Or approach one of the hedge funds that seem to be swimming in cash? Or borrow abroad?”

I suspect that the bailout will do more harm than good, like “aiding” an alcoholic by giving him booze. It perpetuates the moral hazard produced by government guarantees that created the problems in the first place. It acts as an enabler by giving more money to opportunistic lenders who assumed they’d be bailed out. And of course the politicians made a bad bailout bill worse by adding in tax breaks for stock-car racers, movie producers, “alternative” energy, etc. Then they insisted that all health insurance must cover mental illness, a requirement that will launch an orgy of fraud and make health insurance unaffordable for millions. The conceit of the anointed knows no bounds.

After the bailout passed, the stock market turned lower. Was it because investors then thought harder about how the politicians will misspend our $700 billion? All government can do is move money from one part of the economy to another. What makes anyone assume the government knows best where the money should be?

Steven Horwitz, an economics professor at St. Lawrence University, got it right when he wrote, “There will be short-term pain if we don’t bail out these firms, but that is the hangover price we pay for 15 years or more of binge lending. The proposed bailout cannot prevent the pain of the hangover; it can only conceal it by shifting and dispersing it among the taxpayers and an economy weakened by the borrowing, taxing and/or inflation needed to pay for that $700 billion. Better we should take our short-term pain straight up and clean out the mistakes of our binge and then get back to the business of free markets without creating an unchecked executive branch monstrosity trying to ’save’ those who profited most from the binge and harming innocent taxpayers in the process“.

Sure, without the bailout, there might have been a severe recession. Bubbles must pop. But it’s important that we let bubbles pop. Markets would then find a floor and recover.

Now the politicians are blowing some new air into the bubble, but we may have a recession anyway. And with more intervention, regulation and ambiguity about what the real market prices for those government-supported securities are, investors won’t know where the real bottom is.

So any recession will last longer. And the moral hazard the bailout perpetuates will lead to new bubbles … and then demands for another bailout.

Free enterprise sounds nice. We should try it sometime.

If anyone is interested this looks to be a great event!  Details below were sent to me by professor Veryser at the University of Detroit Mercy (a fine place to get a Masters in Econ. I might add!) along with this note on the event:

“The Symposium will emphasize the Austrian School of Economics’s position on the present crisis.  It should be mentioned that this school gives the best explanation of the today’s situation.  Austrians have been consistently warning about the probability of this crisis because of the tremendous expansion of bank credit in the recent past.  This symposium will describe the causes and possible solutions to this meltdown.”

“The American Economy in Crisis”

Saturday, November 1, 2008, 9 a.m. - noon

Macomb University Center
44575 Garfield Road,  UC-1
Clinton Township, Michigan

Featured speakers include:
Joseph A. Weglarz, senior lecturer at UDM on
“The Winners and the Losers”

Ryan Mackinder, financial associate at Thrivent Financial on
“Capital Based Macro-Economics”

David R. Breuhan, vice president and portfolio manager at Gregory J. Schwartz and Company, Inc. on
“Capital Markets: An Overview”

Harry C. Veryser, senior lecturer at UDM on
“A Program for Monetary Reform”

Paul M. Veryser, vice president of PMA on
“Manufacturing: Requirements for Recovery”

Seating is limited!! RSVP at 313-993-1589.

This event is sponsored by the University of Detroit Mercy, Department of Economics, Macomb University Center, Clinton Township, Michigan and the
UDM Center, Michigan Council on Economic Education