Arnold Kling  

My Current Feelings on the Bailout

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Canadian Caplania... Revolt of the Elites...

1. During the crash of 1929, the gossip sheet Variety ran a famous headline, "Wall Street Lays an Egg." In those days, that was what you said about a show that the audience hated. If things keep going the way they are on the stock market today, will some newspaper tomorrow run a headline, "Washington Lays an Egg"?
(UPDATE: I didn't realize that the bailout was in a precarious position. So the stock market was worried about it failing, and they were right. So it was the failure to pass the bailout the laid the egg.

I am willing to take the chance of having the plan voted down.)

2. When you hear the phrase "protects the taxpayers," consider the sources. If you believe you really have protection, then I've got some Lehman stock I'd like to sell you.

3. Think of the mortgage securities market as a poker game being played on a ship. The game is grinding to a halt, because so many players have lost most of their chips. So they come out on deck and shout, "Emergency! Emergency! The ship is about to sink! Everybody needs to give the ship's Bursar authority to play poker, using money from the ship's vault!"

It's not clear that the ship is sinking, or how reviving the poker game would help if it is.


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TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/919
The author at DiscussEconomics Blog in a related article titled Market Shocked - House Rejects Bail-out writes:
    The US and global markets are in shock after the House rejected the proposed Bush 700 billion dollar bail-out package. In an effort to stem the tide in appears the invisible hand of capitalism reigned supreme as majority of voters in the House opted to... [Tracked on September 29, 2008 3:09 PM]
COMMENTS (12 to date)
Brad Hutchings writes:

Congrats Arnold. You did your part to kill this thing. This week, anyway.

Matt writes:

Nice work to you and Mish for killing this, for now.

Brad is starting to think twice about letting me post since I cam out aginst it.

Gary Rogers writes:

I am in this with you in thinking the world will not come to an end without the bailout. Now we have the chance to find out. Unfortunately we cannot take back all the dire predictions by all of our leaders stating unequivically what the result will be. Was that poor leadership? I know they wanted to convince everyone that their position was necessary, but now how do they convince the world that "The only thing we have to fear is fear itself." Do we now fall into finger pointing and blaming?

David Thomson writes:

"Do we now fall into finger pointing and blaming?"

That is the wrong question. It should be reworded to read:

Do we now fall into finger pointing and blaming in a fair matter?

The evidence clearly shows that the Democrats are mostly responsible for this mess. They are ones who forced lending institutions to provide mortgages to minorities with bad credit histories. Were they well meaning? We might want to leave that question alone for another day. Nonetheless, they definitely placed the dominoes in a precarious position.

Brad Hutchings writes:

@David: I say we blame you instead for bringing a water pistol argument to a nuclear discussion. Maybe you missed Arnold's BloggingheadsTV discussion with Will Wilkinson, but there are 3 C's, only one of which is character (or credit worthiness). The neighborhood I live in is littered with bank owned homes which used to be owned by white people who didn't see a car or a vacation that couldn't be paid for with a HELOC. That's effectively another "C" -- collateral.

It's tacky and non-sequitur to bring "minorities" into this discussion. An intelligent point might be made in the vicinity of where you're going, but you aren't making it.

Grant writes:

Could someone please explain something very simple to me? I see the problem as follows:

1) There is a supply and a demand for credit.
2) The firms which supply credit are going out of business.
3) The supply of credit will drop.
4) The cost of credit will increase.
5) New credit-supplying firms will be started to take advantage of this higher price for credit?
6) Profit?

What am I missing? Why can't 5 and 6 happen? Is it too hard to start a bank in this day and age? Is the possibility of new regulation (nationalization?) too much of a problem for entrepreneurs? What about credit unions?

The Snob writes:

Grant: The issue is the time it takes for step 5 to occur.

If you think credit is like ice cream, then it's not so big a deal and may do us some good. If you think it's like water, we have a little time to work things out and learn a lesson. If you think it's like oxygen, then we are about to find out what happens to the world when we start to choke.

David Thomson writes:

"It's tacky and non-sequitur to bring "minorities" into this discussion."

This nonsense started when the Democrats forced these lending institutions to behave in a reckless manner. However, you are half right. Eventually a number of white people wanted a piece of the action. But they got aboard the train after it had already left the station.

You are simply are indulging in politically correct behavior. The possibility that you will be charged with racism is an intimidating factor.

Grant writes:

Snob,

Any idea how much time that is? This situation has been a long time in the making, so entrepreneurs have certainly been forewarned. I'm just wondering why economists haven't argued for the textbook solution to the failure of existing firms (even if it takes some legislation to make banks easier start), instead of propping them up.

R. Pointer writes:

I thought it a bit strange that the Government just didn't start its own credit lending operations with the 700 billion. Why hand it out to schmucks that failed at it before?

The problems, of course, are crowding out of new market participants and agency problems with regard to the government, but it was never laid on the table. Think what a congressman could do with his own lending institution.

Many of the fat cats who circulate from board to board and from job to job throughout the financial industry, are also members of the Bilderberg Group and or the Trilateral Commission. When someone takes your money and steals your car, it makes an impression. When they belong to such secret political cliques, it leaves an indelible impression. Many elected officials even belong to these cabals. When Bill Clinton eased banking restrictions, he dished out $8-billion dollars for community reinvestment loans. When the financing schemes fell through, as is their wont whenever 30-million Mexican nationals buy inflated properties and default, it left banks in the lurch. Hillary Clinton counted on the loan giveaways to buy votes. Interestingly enough, had Hillary secured the nomination; she, instead of Barack Obama would preside over the bailout. I know, instead of confronting Hillary, lets ask Sarah Palin how she’d spread democracy to the world. So, where’s that $8-bilion plus dollars? The Global Initiative people (code speak for car thieves) took my money; they stole my car. If you or I did half the things these people have done, we’d be serving consecutive life sentences. Now nobody really wants you to know this stuff, so thank the originators of this blog. Wise up, get angry, and let the bubble burst. Gentlemen, I want my money back: http://theseedsof9-11.com

Lew writes:

"Perfect Storm" Next Bailout?
City of Vallejo, Ca. files Bankruptcy, State of California Broke!...What Municipality is next?

States, Counties, Cities, across this country...

With high property foreclosures, Job loss, Business closures & revenue declines is the recipe for the "Perfect Storm" No Municipal tax revenue (Property Tax, Income Tax, Sales Tax, No New Bond Buyers or Loans available etc.) which can cause a Municipality to file bankruptcy.

What problems does this cause?
1. Limited to No funds to pay for daily operations, i.e. Administration, Police, Fire, Medical, Teachers etc.
2. Large Losses to Wall Street Investors, Pension Retirement Funds, Municipal Bonds are up to 50% or more invested into 401k's.
3. Extreme cases, "Temporary Chaos"

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