Random thoughts on a financial "crisis"
Joseph McHugh
November 25, 2008
These are some random thoughts from a layman on today´s financial "crisis."
1. The government is planning to spend at least 700 billion to a trillion dollars to bail out banks and ailing financial institutions. Where is this money going to come from? Will it be printed, thus cheapening the dollar more, or borrowed, further clogging tight credit markets. Either way, it doesn´t sound like much of a cure, even if we do believe the claim of the government that we´ll get this money back. When will we get this money back? What guarantee do we have that the government won´t spend the new money on another government program, or even another bailout? Will the money we allegedly get back, offset the losses to our economy of the original borrowing?
2. Billions upon billions of dollars of dollars were loaned out to borrowers who couldn´t repay their mortgages. Sound crazy. Only the government could have created a crisis like that.
3. Are you dubious about thought 2 above? If lenders are so allegedly greedy why on earth would they give out loans to people who couldn´t afford to pay them back? Where´s the profit in that? Enter the GSE´s government backed agencies that bought these bad loans, making what would have been painfully unprofitable into something the banks could profit from. Indeed, the whole point of the GSE´s buying these loans and securitizing them was to encourage loans to borrowers who otherwise wouldn´t qualify.
4. Does this bailout set an ugly precedent for the future? In the future can the government say no anytime an industry such as autos and energy come before them and say "Hey we provide a vital national need?" Already the auto makers have their hats out.
5. The revised plan duplicates European statist policies. Do we really want European levels of economic growth?
6. Why is failure so bad? Failure is how we learn. If we didn´t make mistakes and fail, we would never learn and never correct our mistakes. Imagine subsidizing someone every time they did something stupid. Would the stupid behavior disappear or continue? Failed firms need to have the ability to be rebought, reorganized, or replaced by new firms that engage in rational behavior.
7. While many hands have been wringing about "corporate greed" one really needs to put oneself in the shoes of the loan agency managers. Just imagine that you´re Jimmy Mitchell. All your life you´ve dreamed of going into banking, and finally, joyfully you´ve achieved your dream. You know your business. You know that one should never give a loan to a bad credit risk. But soon you find that everyone around you is giving out these risky loans and they´re profiting so much that they´re putting you out of business. Moreover, Uncle Sam comes in and says, "Hey I´ll make you rich off these loans." You have two children and you worry about how you´re going to put them through college (which, incidentally, costs so much because of government intervention.) What should you do? Perhaps, you could let the other banks making these risky loans put you out of business, but then what becomes of your dream? Maybe, you could sacrifice your daughter´s college education by turning down the government´s offer to pay you for making these loans. Maybe, you could leave the industry forever, sacrificing your dream and starting all over from scratch. It's a horrible moral dilemma, not created by greed, but rather by the government. The government made rational, moral behavior virtually impossible. The same principles apply to the Wall Street firms that got involved in this profitable scheme to increase "affordable housing" in the U.S.
8. Where did the lending institutions get all this paper from to make these loans? Could it be the Federal Reserve printing spree from 2001 to 2004? Once again, let´s say somebody hands you a million dollars for your business. Do you refuse it? Do you decline to use it for your business? Well, again, all your competitors are grabbing this money and lowering their interest rates. Do you go out of business? See thought 7 above.
9. The politicians and pundits in Washington blaming this all on "corporate greed" ought to be ashamed of themselves.
10. After this bailout can we truly call ourselves a Capitalist country? Capitalism depends on the market deciding winners and losers. It depends on a rational pricing system determined by buyers and sellers. The government´s role is to stand by and enforce contracts. Does that resemble at all our current situation?
11. Rather than offering a massive subsidy, why didn´t the government simply declare a "tax holiday" for the key Wall Street firms, and for bankers? Tax incentives could even have been focused on increased lending. Wouldn´t that have the same effect, without our borrowing and printing more money, and setting the ugly precedent of government takeovers of private businesses?
12. When will somebody stand up and say that the goal of getting everyone in a house, regardless of whether they can afford it or not, was and is a brainless idea.
1. The government is planning to spend at least 700 billion to a trillion dollars to bail out banks and ailing financial institutions. Where is this money going to come from? Will it be printed, thus cheapening the dollar more, or borrowed, further clogging tight credit markets. Either way, it doesn´t sound like much of a cure, even if we do believe the claim of the government that we´ll get this money back. When will we get this money back? What guarantee do we have that the government won´t spend the new money on another government program, or even another bailout? Will the money we allegedly get back, offset the losses to our economy of the original borrowing?
2. Billions upon billions of dollars of dollars were loaned out to borrowers who couldn´t repay their mortgages. Sound crazy. Only the government could have created a crisis like that.
3. Are you dubious about thought 2 above? If lenders are so allegedly greedy why on earth would they give out loans to people who couldn´t afford to pay them back? Where´s the profit in that? Enter the GSE´s government backed agencies that bought these bad loans, making what would have been painfully unprofitable into something the banks could profit from. Indeed, the whole point of the GSE´s buying these loans and securitizing them was to encourage loans to borrowers who otherwise wouldn´t qualify.
4. Does this bailout set an ugly precedent for the future? In the future can the government say no anytime an industry such as autos and energy come before them and say "Hey we provide a vital national need?" Already the auto makers have their hats out.
5. The revised plan duplicates European statist policies. Do we really want European levels of economic growth?
6. Why is failure so bad? Failure is how we learn. If we didn´t make mistakes and fail, we would never learn and never correct our mistakes. Imagine subsidizing someone every time they did something stupid. Would the stupid behavior disappear or continue? Failed firms need to have the ability to be rebought, reorganized, or replaced by new firms that engage in rational behavior.
7. While many hands have been wringing about "corporate greed" one really needs to put oneself in the shoes of the loan agency managers. Just imagine that you´re Jimmy Mitchell. All your life you´ve dreamed of going into banking, and finally, joyfully you´ve achieved your dream. You know your business. You know that one should never give a loan to a bad credit risk. But soon you find that everyone around you is giving out these risky loans and they´re profiting so much that they´re putting you out of business. Moreover, Uncle Sam comes in and says, "Hey I´ll make you rich off these loans." You have two children and you worry about how you´re going to put them through college (which, incidentally, costs so much because of government intervention.) What should you do? Perhaps, you could let the other banks making these risky loans put you out of business, but then what becomes of your dream? Maybe, you could sacrifice your daughter´s college education by turning down the government´s offer to pay you for making these loans. Maybe, you could leave the industry forever, sacrificing your dream and starting all over from scratch. It's a horrible moral dilemma, not created by greed, but rather by the government. The government made rational, moral behavior virtually impossible. The same principles apply to the Wall Street firms that got involved in this profitable scheme to increase "affordable housing" in the U.S.
8. Where did the lending institutions get all this paper from to make these loans? Could it be the Federal Reserve printing spree from 2001 to 2004? Once again, let´s say somebody hands you a million dollars for your business. Do you refuse it? Do you decline to use it for your business? Well, again, all your competitors are grabbing this money and lowering their interest rates. Do you go out of business? See thought 7 above.
9. The politicians and pundits in Washington blaming this all on "corporate greed" ought to be ashamed of themselves.
10. After this bailout can we truly call ourselves a Capitalist country? Capitalism depends on the market deciding winners and losers. It depends on a rational pricing system determined by buyers and sellers. The government´s role is to stand by and enforce contracts. Does that resemble at all our current situation?
11. Rather than offering a massive subsidy, why didn´t the government simply declare a "tax holiday" for the key Wall Street firms, and for bankers? Tax incentives could even have been focused on increased lending. Wouldn´t that have the same effect, without our borrowing and printing more money, and setting the ugly precedent of government takeovers of private businesses?
12. When will somebody stand up and say that the goal of getting everyone in a house, regardless of whether they can afford it or not, was and is a brainless idea.
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