bailout q & a (best as I can muster)
Q. What's the big deal about the bailout? So what if a bunch banks and Wall-Street types lose some money?
A. Well, it could be a very big deal. There are a lot of banks and financial institutions of many sizes that are on the brink of failure. This will lead to a contraction of the supply of money, the amount of available loans and a big hike in interest rates (which is the price of money). From that, businesses can't get credit, meaning that businesses without cash on hand will go out of business. Furthermore, the increased price of capital makes it so that fewer new businesses start up.
Financial Panic -> Bank Failures -> Contraction of Money Supply -> Business Contractions -> Unemployment
The number of banks and financial institutions at risk make the idea that the damage could be quite extensive.
Q. Isn't this just a bunch of free money for rich people?
A. Well, yes and no. In the sense that the bailout is going to cost the taxpayers something and save a bunch of banks from bankruptcy, yes. But these banks are going to be selling these assets for far less than they bought them for, under most mutations of the plan. But that doesn't make the bailout less expensive to tax-payers. However, the cost of not doing something should be considered too. The U.S. stock market lost $1.3 trillion in the value of it's assets when the bill didn't pass the house. That's only what happened while there is still time to fix this, and not counting lost wages from secondary effects.
And another thing, you know most of these so-called bailouts end up turning a profit for the taxpayer (though I'm not saying this one will). AIG's bailout was a loan with an interest rate something like what I get on my credit card if I miss a payment. Our bailout of Mexico during the so-called Tequila crisis turned into a net gain.
Q. I don't like the idea of saving these silly banks from their own folly.
A. That's not a question, but it is a sentiment that I understand. Very few people shed a tear for a hedge fund manager. The problem is that finance is a load bearing industry. To let the market deal out harsh justice on the deserving few may well screw millions of innocent people.
Q. Shouldn't there be tighter regulation on these guys? Isn't this just a temporary fix?
A. Yes and Yes. I'm pretty far afield from my expertise but it seems like loosening the rules on how long a bank needs to keep a mortgage after it makes a loan was bad idea. But a long term fix won't get us out of a short-term trap. Even if you change the rules, you've still got all these insolvent banks threatening the financial system as a whole.
Q. Isn't this all the fault of "Mark-to-Market" accounting?
A. Uh . . . I don't know about this one. Mark-to-Market accounting has been around for a long time, but post-Enron it's rules were tightened to prevent firms from using mostly imaginary future revenue streams to determine the value of an asset. I suspect that a lot of people are saying that if banks are allowed to value their assets at some imaginary future value, then they won't be insolvent. I'm skeptical of both the first part and the second part of that, but I'll admit that I'm no expert on accounting, so I'll let Jonathan Weil take this one.
Q. Isn't this the fault of the CRA and affirmative-action?
No. This is really the sort of crap that only someone really committed to defending an ideology could believe. The guy who's name is on both my Macroeconomics and Banking and Finance book should put this one to rest. Best quote, "And that is not political correctness. It is correctness."
Q. I'm against the bailout because I think it violates free-market principles.
A. Congratulations. You've put an ideology ahead of the good of your country, and the world.
Seriously. Fuck your stupid principles.
Q. This mess is all the fault of [Democrats/Republicans/Jews/Media Elites].
A. I'm not interested. The only thing to do is save the financial industry, no matter what scapegoat you pick. If your congressman didn't vote for it, call them up and yell at them. Here I'm looking at you, constituents of John Doolittle and Lynn Woolsey.
A. Well, it could be a very big deal. There are a lot of banks and financial institutions of many sizes that are on the brink of failure. This will lead to a contraction of the supply of money, the amount of available loans and a big hike in interest rates (which is the price of money). From that, businesses can't get credit, meaning that businesses without cash on hand will go out of business. Furthermore, the increased price of capital makes it so that fewer new businesses start up.
Financial Panic -> Bank Failures -> Contraction of Money Supply -> Business Contractions -> Unemployment
The number of banks and financial institutions at risk make the idea that the damage could be quite extensive.
Q. Isn't this just a bunch of free money for rich people?
A. Well, yes and no. In the sense that the bailout is going to cost the taxpayers something and save a bunch of banks from bankruptcy, yes. But these banks are going to be selling these assets for far less than they bought them for, under most mutations of the plan. But that doesn't make the bailout less expensive to tax-payers. However, the cost of not doing something should be considered too. The U.S. stock market lost $1.3 trillion in the value of it's assets when the bill didn't pass the house. That's only what happened while there is still time to fix this, and not counting lost wages from secondary effects.
And another thing, you know most of these so-called bailouts end up turning a profit for the taxpayer (though I'm not saying this one will). AIG's bailout was a loan with an interest rate something like what I get on my credit card if I miss a payment. Our bailout of Mexico during the so-called Tequila crisis turned into a net gain.
Q. I don't like the idea of saving these silly banks from their own folly.
A. That's not a question, but it is a sentiment that I understand. Very few people shed a tear for a hedge fund manager. The problem is that finance is a load bearing industry. To let the market deal out harsh justice on the deserving few may well screw millions of innocent people.
Q. Shouldn't there be tighter regulation on these guys? Isn't this just a temporary fix?
A. Yes and Yes. I'm pretty far afield from my expertise but it seems like loosening the rules on how long a bank needs to keep a mortgage after it makes a loan was bad idea. But a long term fix won't get us out of a short-term trap. Even if you change the rules, you've still got all these insolvent banks threatening the financial system as a whole.
Q. Isn't this all the fault of "Mark-to-Market" accounting?
A. Uh . . . I don't know about this one. Mark-to-Market accounting has been around for a long time, but post-Enron it's rules were tightened to prevent firms from using mostly imaginary future revenue streams to determine the value of an asset. I suspect that a lot of people are saying that if banks are allowed to value their assets at some imaginary future value, then they won't be insolvent. I'm skeptical of both the first part and the second part of that, but I'll admit that I'm no expert on accounting, so I'll let Jonathan Weil take this one.
Q. Isn't this the fault of the CRA and affirmative-action?
No. This is really the sort of crap that only someone really committed to defending an ideology could believe. The guy who's name is on both my Macroeconomics and Banking and Finance book should put this one to rest. Best quote, "And that is not political correctness. It is correctness."
Q. I'm against the bailout because I think it violates free-market principles.
A. Congratulations. You've put an ideology ahead of the good of your country, and the world.
Seriously. Fuck your stupid principles.
Q. This mess is all the fault of [Democrats/Republicans/Jews/Media Elites].
A. I'm not interested. The only thing to do is save the financial industry, no matter what scapegoat you pick. If your congressman didn't vote for it, call them up and yell at them. Here I'm looking at you, constituents of John Doolittle and Lynn Woolsey.
Labels: 2008 bailout, economics, finance, pantheon of the dumb
posted by otis @ 7:39 PM
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