Is Wall Street welfare a good idea?

A few aspects of U.S. life make it onto CNN, google news or other worldwide news services, but sometimes I miss the sensible realities I only get from talking to people there. Some friends and family advocate the small government conservatism which seems to have fallen out of fashion with the Republican party. Others support progressive environmental and humane health policies. A handful of friends almost fit into the R and D stereotypes which fit neatly into blue-state red-state dichotomy which makes for colorful TV graphics. But I haven't yet met anyone who thinks using $700 billion of taxpayer money to bail out bad Wall street bets is a good idea. Why is Congress even considering going against the wishes of nearly all of their constituents and following the singular advice of treasury secretary Paulson, who along with Bernanke, Greenspan an other so-called experts obviously misjudged the way a free market economy should work? Time and time again I hear these powerful men speak as though the core problem is that house prices are falling. They are completely oblivious to the fact that these prices rose too high in the first place, a problem that the Paulson bailout prolongs by using tax money to play "stupid buyer" and purchase assets for far more than their fair market value.

While discussing the U.S. government's relatively harmless economic meddling (Cheese subsidies) during the Reagan/GHW Bush years, a friend suggested that the government should buy computer chips and bury them in order to prop up the falling domestic chip market. Since then, inexpensive imported chips led to the personal PC market, the cell phone market, the video game market, the associated software markets and the internet economy. None of this might have happened if the government had imposed tariffs or burned chips in order to prop up that part of the economy. A few years later, this Bush administration tried and failed to meddle with WTO-defying steel tariffs which theoretically might have saved a handful of steelworker jobs while irritating the US's staunchest allies and endangering hundreds of thousands of domestic auto industry jobs.

Now Congress is trying to reinflate an asset bubble which desperately needs to deflate. Taxpayers may soon own a million foreclosed homes which were priced far beyond local wages in water depleted deserts and hurricane-prone lowlands. There is an old saying which goes back to the 1925 Florida property bust, "How would you like to buy some swampland in Florida?" If "heads gamblers win, tails taxpayers lose" is the new economic paradigm, why not put taxpayers on the hook for $700 billion dollars worth of tulips or dot coms while you're at it and re inflate those bubbles? Are any IT companies in the magical "Too big to fail" category? Many well known IT companies have a market cap and asset/debt ratios far better than Fannie Mae or Freddie Mac.

Why is it that what seems so obvious to the person-on-the-street, "governments shouldn't pick economic winners and losers", is being debated in Congress? We've learned this lesson before, the people of the former U.S.S.R. learned it. A forced market economy doesn't work and it never will.

...And the failure hands over the State like a great sorrow. The works of the roots of the vines, of the trees, must be destroyed to keep up the price, and this is the saddest, bitterest thing of all. Carloads of oranges dumped on the ground. The people came for miles to take the fruit, but this could not be. How would they buy oranges at twenty cents a dozen if they could drive out and pick them up? And men with hoses squirt kerosene on the oranges, and they are angry at the crime, angry at the people who have come to take the fruit. A million people hungry, needing the fruit—and kerosene spayed over the golden mountains.

- From "The Grapes of Wrath", John Steinbeck 1939

If the taxpayers are forced to own millions of overpriced vacant foreclosed homes, won't there be a temptation for the government to destroy these homes in another misguided attempt to prop up a single favored industry. That's my $.02, ymmv, this is simply the opinion of a single disappointed voter and is not intended to represent Sun Microsystems or anyone else.

Comments:

Brian,
"Government monies financing ANY failing or troubled GLOBAL business, recall Wall Street represents businesses of all types, is as Representative Bunning termed it 'Un-American'."
Apparently lobbyists, for all manner of industry, are operating non-stop these past few days inside Washington's 'beltway'.
Far as I can tell the common folk of America are NOT amenable to Government indentured servitude for generations!
Last time that was tried the British were forcibly removed from power and occupation.
Washington had better thread carefully else witness the wrath of America's masses.
More to come as 'This ain't over ...'
Photography Note -
Love Canon's new twenty-one (21) mega-pixel cameras, HD photo AND video capability is MOST WELCOME!

Posted by William R. Walling on September 25, 2008 at 06:44 PM GMT+00:00 #

So-called "free market" governments have had a hand in many aspects of its economy for a long time. Cheese subsidies, bailouts of Chrysler, AIG, farm set-a-sides, medicade, amtrack, oil subsidies, the supreme court's terrible new ruling which allows eminent domain seized property to be given to private developers... They're even subsidizing set top boxes for digital TV! Even when the intentions are good, (e.g. clean energy subsidies or superfund cleanup money or the 1% fed rate post 9/11), human nature and greed dictate that this "free money" from taxpayers can do more damage than good. You end up with subsidized solar panels which subtract heat from your house, superfunded "asbestos cleanups" where there never was any free asbestos, speculation... Another fine mess.

The digital camera does sound interesting. I hope I can hang onto this one for a while. I'm still using some of the same Pentax K lenses I used in the early 1980s!

Posted by bnitz on September 26, 2008 at 01:35 AM GMT+00:00 #

P.S. In light of government's historic propensity for economic micromeddling, I'm certain some 'rescue plan' will be passed in the near future. But I'm very suspicious of Paulson's plan, especially the "urgent" need to pass it before Sunday (and before careful consideration by congress or any significant public debate.) This urgency, coming from an individual who only weeks ago said everything was fine, smells of either incompetency or deceit.

Whatever plan finally passes must consider winners, losers, moral hazards, taxpayers, inflationary forces and young post-boomer generations who hold more assets in the form of ramen noodles and cash savings than in stocks and real estate.

Posted by bnitz on September 26, 2008 at 01:56 AM GMT+00:00 #

Actually, a bailout is a must, albeit this particular style of bailout is a disaster waiting to happen. The problem is excesive leverage. A $100K mortgage might well have $3million of funny money riding on it in derivative products. Now, in isolation, thats no big deal, but everyone and his brother esp the bond rating agencies who put AAA ratings on worthless garbage, figured the $3million had convertible assets backing it up... and $100K doesnt go very far towards $3million.

Its a similiar deal with GM, the market cap is around $3billion, but... derivatives are upwards of a trillion. If GM goes under, there are 400K jobs at stake, and, a trillion dollars would be vaporized in a flash, and no one has the ability to make that whole. Thus the investors and the counter parties would have such a ripple effect, virtually no one would be untouched.

The whole mess needs to be de-leveraged over time, or the world economy will likely come to a halt, and it would make the 1929 depression look like a cakewalk if things crashed out in a matter of days or weeks.

Where they blew it, was not taking over... and whether thats tossing out management teams and replacing them with G-men, or just putting a couple guys in there, govt needs control... otherwise, as expected, the money will be used not for lending, or shoring up the equity side, but for aquisitions, bonuses, and likely even additional leveraged deals. The $700billion will be gone in 6 months or less, unless they start coming down hard as to how said funds are to be used. AIG has blown through $123 billion, and now needs more..... and their 2nd qtr report showed they were good to go. Sure they were on the books available to the public, but crazy accounting rules and such allowed them to hide how close they really were to insolvency.

Its a no win deal... and now that we have started down the path, everyone wants a bailout... meddling makes for a mess. Had they not stepped into Bear Stearns months ago, and had forced the issue of real transparecny in accouning, the free markets might well have self corrected. Now, things are in death spiral, and its likely golnig to get pretty ugly, unless govt goes on a major nationalization effort.

Posted by Ron on November 01, 2008 at 12:45 PM GMT+00:00 #

Ron,
Thanks, I knew you'd have an insightful comment. Yes, once things started to go pear-shaped with the Fed's past intervention, the intervention had to escalate. Check out my most recent comment for some alternative ideas ;-)

I just read a NYT article about how failure of an Irish bank almost brought down the German financial system, the NYC transport system and several school systems in Wisconsin. I'm also starting to understand why our grandparents buried cash in their mattress.

Somehow SEC rules and GAAP have done nothing to reveal trillions in imaginary money and fraud at GSEs and other companies only days before everything hit the fan. But the same rules have been extremely effective at killing R&D at U.S. publicly traded companies by forcing a 91 day "long term" fiscal time horizon.

Posted by bnitz on November 02, 2008 at 02:49 PM GMT+00:00 #

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