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Don’t Do That Bailout

President Bush has proposed a three-page document that he says will cost up to $700 billion of taxpayer’s money. There aren’t many people who think that the document has enough detail. There aren’t many that think it actually will stop at $700 billion. Senator Dodd puts it better than I could: “After reading this proposal, I can only conclude that it is not just our economy that is at risk, Mr. Secretary, but our Constitution, as well.”

We don’t need this bailout. Some companies made some bad decisions and loaned money to people who also made bad decisions. The people can’t pay, the homes aren’t enough collateral, and the companies are losing money on the deal. I tell you what should happen next: bankruptcy.

Paul Krugman appears to have fallen into some wisdom on the question. (Krugman is one of those nitwits who drives me crazy because he is smart enough to know better; regardless, he got this one right).

He reviews why the bailout is on the table in the first place: banks have a crappy set of assets, and that makes them nervous, and they don’t loan money when they’re nervous. They’d unload their crappy assets, but no one will take them until they know just how crappy they are. That makes the assets look even more crappy. The result is no new loans into the economy and a big logjam while everyone stares at their crappy assets.

Krugman’s key point: the banks “will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense.” Restating: The only way the banks will sell is if they get a good price on their crappy assets. The government plan is to buy the crappy assets at deliberately inflated prices.

So, we have a financial logjam. We shouldn’t try to solve this problem by overpaying to remove the logjam. That’s the brute force method, and a dumb one. We should be smarter. Let the logjam go bankrupt – they’re getting what they deserve. Instead, create an alternate channel around the logjam. Create another method for citizens and companies borrow money. Permit a new market to be created, next to the old and broken one. Lenders still have money, and borrowers still need it. They’ll find each other.

Warren Buffet’s investment in Goldman Sachs is an example. Goldman isn’t going to go under with Buffet’s leadership. Goldman can take the money from lenders and match it with borrowers. Meanwhile, the idiots who loaned the money to the idiots who pretended they could make the payments will continue to suffer their way through bankruptcy. It’s the way the system should work.

Comments

Comment from Wayne Pitcher
Time: September 25, 2008, 3:29 pm

My sentiments exactly. Although I am undoubtedly more socialist than you Dan, I still believe those you made unsound financial decisions shoul have to face the consequences of those decisions, not seek a bailout from taxpayers. I am also not thrilled about the huges amounts of debt the federal government is incurring. Although as a % of GDP our national debt is in line with that of other western countries, our willingness to push the problems of today onto the citizens of tomorrow is most troublesome. I guess it’s not the actual debt that worries me, but rather the attitude toward debt.
I also find it ironic that republicans are now a tax-and-spend party. More accurately, they are a spend-and-don’t-tax party, which is probably worse. Don’t worry, Dan, I don’t blame you, you’re from Massachusetts. 🙂

Comment from dunster
Time: September 25, 2008, 11:50 pm

I’ve long held that Bush is actually a Christian Socialist.

The Republican party that you and I grew up with is dead. I don’t think they’re done with their metamorphosis. We’ll see in 4 or 8 years.

Comment from Wayne Pitcher
Time: September 26, 2008, 12:19 pm

Yes, the days of the Rockerfeller Republicans seem to have been over for a while now. Fiscal conservatism seems nonexistant. Talking with Mithran a couple of months ago, he maintained that appealing to the religious right brought in more votes than appealing to fiscal conservatives. That’s probably true, but that doesn’t mean I have to like it.
Oh yeah, in my previous comment the phrase “those you made…” should be “those who made…” Sorry about my sloppy typing.