So Bush and Paulson failed in their attempt to conclude a deal with the congressional leaders yesterday on the proposed financial bailout. And it was their fellow Republicans in Congress, egged on by a grandstanding John McCain, who stymied the plan. Today, the negotiations resume.
My judgment is that Obama came out of the events of the past two days looking a lot better than than McCain. (Sorry that in an earlier version I put that the wrong way round. I’m working on a very small screen here) Here’s the NYT’s account of yesterday’s White House emergency summit. It was McCain who’d injected campaign politics into the negotiations by insisting that both he and Obama should be at the table– but then he came out looking like a childish drama queen and spoiler, while Obama came out looking much more statesmanlike.
That political judgment is quite independent of the actual content of the plan, which still looks like a pig however much lipstick they daub onto it. This is a good round-up of the views of many academic economists. Calculated Risk pulled out some money quotes, as follows:
- “There is a kind of suggestion in the Paulson proposal that if only we provide enough money to financial markets, this problem will disappear,” said Joseph Stiglitz, a Nobel Prize-winning economist. “But that does nothing to address the fundamental problem of bleeding foreclosures and the holes in the balance sheets of banks.”
… “The root of the issue is recapitalizing banks,” said Glenn Hubbard, dean of Columbia Business School and a former chairman of President Bush’s Council of Economic Advisers. “That could be done more efficiently through the government injection of preferred equity. Then the market could figure out the prices of the assets.”
As I see it, the crisis is overwhelmingly one of confidence within the banking/’financial system, and also of the underlying credibility of the figures and claims produced by many of the system’s leading actors. (The word “credit” has to do with trust, as much as with the technical details of borrowing or lending.)
But the problem of confidence goes much further than just between one financial institution and another. There is a much deeper crisis of confidence in the US financial and economic system as a whole– one that is made a lot worse by the fact that the regulatory structure underlying the financial part of the economy has been so badly eroded that we’ve arrived at a point almost of “anything goes”, and certainly, one of great unpredictability.
The crisis of confidence now infects the whole of the US’s governance system, regarding this issue and perhaps other issues, too. From that perspective, having John McCain rushing around like drama queen makes the problem worse. But it is already bad enough.
What an amazing week. To see Bush apparently handing over control of the economy to a cabinet member, said cabinet member coming in with a massive blackmail demand against taxpayers, the congressional Democrats dancing to the tune of the big bankers, the congressional Republicans and McCain working hard to demagogue the issue, the economy heading south, and the US’s international reputation plunging even more rapidly… And all this, while the Chinese are doing their first space walk, and Russia has stuck a nail in the coffin of Bush’s lengthy campaign of coercive diplomacy against Iran…
And we haven’t even seen Friday’s news yet.
Did you reverse McCain and Obama here in the first sentence?
“My judgment is that McCain come out of the whole affair looking a lot better than Obama. … It was McCain who’d injected campaign politics into the negotiations by insisting that both he and Obama should be at the table– but then he came out looking like a childish drama queen and spoiler, while Obama came out looking much more statesmanlike.”
Yup, I’m so sorry. I’ve since corrected it. The screen I’m working on is ways too small. But basically, no excuse.
There is a much deeper crisis of confidence in the US financial and economic system as a whole– one that is made a lot worse by the fact that the regulatory structure underlying the financial part of the economy has been so badly eroded that we’ve arrived at a point almost of “anything goes”
I’m really wondering why you are labeling the “US financial system” particularly under-regulated, when the majority of mortgage backed securities were traded in London (where most of the world’s currency, oil, credit and equity trades) In every category London is a more significant financial trading center, and since most of it is OTC (as opposed to on a CFTC or SEC regulated exchange) it’s far less regulated and more opaque.
Someone please explain to me how you can have a credit crisis with real interests rates near zero!?! Give me a break! If they need money, let them simply PAY MORE FOR THE MONEY and price in the risk. Let the free market work.
This smells like a gigantic fraud to me.
The only explanation I can think of is that Goldman-Morgan-Citi-BofA are trying to shake the banking system so that there is only a handful of market makers left–an hugely profitable oligopoly.
The current credit crisis is bringing forth calls for financial reform: We need to reregulate capital markets. We need transparency and accountability. (In a just society financial accountability would involve jail sentences. Robbery is robbery even if the criminal has an Ivy League education and wears $1000 suits.). Financial institutions which are ‘too big to fail’ need to be broken up. And so forth.
These ideas are reasonable enough if your goal is to prop up capital markets and keep them functional for as long as possible into the future. If, on the other hand, your goal is to create a system of economic production which has long term stability, then these proposals are wholly inadequate. Capital markets require composite economic growth for proper functioning. This is not a controversial assertion. Read Adam Smith, whose advice was to make sure that you live during a period of continuous economic growth because otherwise you will be royally screwed. If anyone out there believes that they have discovered a new form of arithmetic which allows them to conclude that capital markets will work just fine in the absence of composite growth please don’t bother explaining it to me. I have better things to do with my time than to get into arguments with the inventors of perpetual motion machines. I know, of course, that many people believe that the end of economic growth is not near at hand and that some combination of investment in new energy sources and higher efficiency can comfortably drive many more decades of global economic growth. My best engineering judgment (which may or may not be worth very much) tells me that such people are wrong. But even if they are right, I do not see why keeping the pedal to the metal with respect to growth until physical necessity forces us to ease off is an intelligent policy. In a finite world sooner or later we have to shift our economic focus to maintaining human physical and psychological health (the only economic outputs worth producing) with a minimum amount of production and consumption. The sooner we begin this shift of focus the less likely we are run into problems of disastrous overshoot in our use of resources. Capital markets are a terrible tool for achieving this new kind of economic goal.
Of course, the minute you challenge the usefulness of capital markets as an economic tool people start raising the specter of the man-eating socialist monstrosity which any person with half a brain knows is the only alternative to capital markets. Perhaps I do not have even half a brain, but it seems to me that the financial universe has room for more ideas than those contained in the Wall Street investment bank and the Soviet five year plan. What about public finance? What if the extenders of credit were not investment bankers, mutual fund managers, insurance fund managers, and so forth but public banks whose reserves consisted of tax monies. The purpose of these banks is not to increase shareholder value as rapidly as possible and line their own pockets in the process, but rather to make sure that vital forms of economic production are carried out in a continuous and uninterrupted manner. If a business needs an infusion of cash they go to an appropriate bank and request a loan. The bankers evaluate the request in the light of the importance of the product being produced, the likelihood of eventual repayment of the loan and so forth. If they deem it in the public interest that credit should be extended to the business in question then they do so. Since this is a process of investment as a public service there is no need to charge interest. Such banks could also advance credit to startup enterprises which are deemed to represent a worthwhile risk. The bankers receive salaries for services rendered, and their income does not depend on the volume of loans that they float.
Such public banks could also turn down requests for credit on some other basis than the risk of short term loss. Suppose some entrepreneur comes to the banker with a proposal to manufacture some new form of home entertainment system with a wall filling screen and incredible 3D special effects unheard before in the video industry. “They will sell like hotcakes,” the entrepreneur assures the banker. The public banker scratches his chin and says, “Yes, they may well sell like hotcakes over next several years, but given the long term resource situation, manufacturing such systems in probably not a wise choice. I am going to have to decline to extend you any credit for this project.”
You may ask what will happen to private investors if public finance becomes the norm. The answer is that they will have to get used to making money the old fashioned way: by working for it. What a concept! I never cease to be amazed by the number of people who call themselves ‘conservatives’ who tout the virtues of hard work and self-reliance, and at the same time believe that the right of rich people to get richer without lifting a finger is the only possible basis for a moral society.
One objection to such a system of public finance is the claim that such public bankers will inevitably be dunderheaded bureaucrats who are incapable of recognizing a good investment opportunity even if it hit them over the head with a sledgehammer. Only ruthless, heartless bastards, who are trying to get rich quick can possibly make intelligent investment decisions. It is strange, though, how the ruthless bastards running Wall Street now do not seem to have shown much intelligence with respect to the long term health of our economic system. I am extremely skeptical that short term greed can be turned into long term intelligence simply by passing a bunch of rules and regulations. If you want someone who is making investment decisions to display long term economic and ecological intelligence, then you have to make such intelligence part his or her job description. Even in the glory days of the post WWII economic expansion governed by the Bretton Woods system of monetary management there was not an investment banker in the world who acted as a steward of the earth’s resources.
If the idea of investment as public service is a laughable joke, and if human beings are incapable of foregoing any short term luxury for the sake of long term economic stability, then civilization as we now know it is doomed. In this case attempting to prop up capital markets for as long as possible in the hopes that some other set of poor bastards will be left holding the bag when resource overshoot brings the growth party crashing down has a certain cynical logic to it. You will have to pardon me, however, if I do not sign up as a working member of this school of ‘thinking’.
Indictment
For crimes against the English Language
In that you did on or about the 26th September 2008 use a Bushism in place of the simple noun Distrust.
Roger: good post.
One highly probable consequence of the bailout that nobody is talking about YET.
Pressures to slash outlays on social security, medicare, and indeed all government programs except the sacrosanct military will escalate enormously.
We could see a day in the not too distant future when the powers that be threaten ANOTHER market meltdown unless these programs ae gutted at a time when the American people will need them more than ever.
One highly probable consequence of the bailout that nobody is talking about YET.
Pressures to slash outlays on social security, medicare, and indeed all government programs except the sacrosanct military will escalate enormously.
We could see a day in the not too distant future when the powers that be threaten ANOTHER market meltdown unless these programs ae gutted at a time when the American people will need them more than ever.
Using the bail-out to slash Social Security faces one big proble–the program is generating a surplus today. Stealing people’s retirement to subsidize Wall Street just isn’t going to fly.
They’ll have to wait 10 years until Social Security is in “deficit” to try to slash it, conveniently forgeting the surplus that Baby Boomers generated over the last 20 years, enough to pay for their own retirements until about 2045.
The Schadenfreude Watch
A shattering moment in America’s fall from power[!] / The global financial crisis will see the US falter in the same way the Soviet Union did when the Berlin Wall came down [!!] / The era of American dominance is over[!!!]
Buckle your e-seatbelts, gentlebeings, we are probably in for a long patch of turbulence along Mr. John Gray’s lines. Or the Guardian‘s headline editor’s lines.
Happy days.
John H just to try and answer or at least respond to your question most commentators I’ve read say real US interest rates have bee NEGATIVE since before the start of this year and those commentators I’ve seen disagree usually do so on the premise that there is no such thing as a real interest rate or you can’t calculate it at least in the established way. Oh, sure, how handy!
A lot of foreign investors in American credit certainly seem to have believed the US real interest rate has been negative during 2008 and as they would therefore loose on investments there, so this year they have predictably taken their funds elsewhere, often putting into speculation on essential commodities like various fuels, a consecutive bubble that also seems to be bursting now, rapidly turning cash into gold as has happened before.
I guess this investor flight suggests that nominal US interest rates must now be bottomed out at what is it 2% which sure cant go much lower! However, until there was global confidence that real US interest rates had again become and would remain attractively positive to draw remaining overseas money back, America will either have to go into a deep, rippling credit squeeze or keep making even more pretend money in an effort to “refinance” credit, injected through trickle down from hand outs to members of George and Dick’s “buddy lists”. Well, if not that, then your Fed presumably hopes to at least prevent deflation (because homeless people won’t be taking out HPs on big screen TVs).
Unless I guess America can suddenly start making and exporting a whole bunch of stuff cheaper than the Chinese can, so as to earn remaining foreign money by “working for it”, to borrow Roger’s term from his very interesting post.
Thanks to the global scope and massive scale of this series of burst investment bubbles all of the above will probably have to resolve within the context of rapidly increasing currency competition, and global recession, which has only made pessimistic speculators on humanity love America’s fear mongering militaristic cronyist demagogues all the more.
Some interesting analysis here, apparently from experts:
http://www.creditwritedowns.com/2008/06/bis-warns-of-worsening-credit-crisis.html