Skip to comments.(Vanity) The Wind and The Trees, or, When You Wish Upon A TARP
Posted on 01/18/2009 9:41:37 AM PST by grey_whiskers
With the inauguration of Barack Obama imminent, all eyes are focused on Washington. Questions abound. Will there be enough security at the inaugural? How will he handle the Gaza situation, the war on terror? What about the Supreme Court nominations? All of these are important, but of more immediate impact is, what will his approach be towards the economy?
To answer this, let us look at what has been done so far. We have the TARP program -- the vote that is widely credited with sinking John McCain in the polls and giving Obama the Presidency. This bill, rushed through in a few days, (remember the dire warnings of martial law?) authorized the spending of some $700 billion in aid for financial institutions, with very little oversight except that it was to be doled out in two pieces of $350 billion each. There was a "handshake deal" that the Treasury Secretary would use it faithfully to shore up banks; and that the banks would use the money to thaw the credit markets. So far, neither of these things has happened to the degree expected.
As far as the money being used to shore up banks? Yes, that's right, if you consider General Motors and Chrysler as banks. And if you consider the Hartford Insurance group as a bank. And if you consider some of the oldest institutions on Wall Street converting to bank holding companies so they can get their greedy paws on their share of our money as "shoring up banks".
And how about the banks' end of the bargain? How are they making out? Like bandits, apparently. If you consider helping pay executive and other bonues as "shoring up". If you consider buying healthy institutions as "thawing the credit markets".
But there is more to the story than just this. We have to look a little more closely at how we got here, and why the "stimulus" package won't work as advertised.
As to how we got here -- was it greed and too little regulation, as Congress claims? Or was it the interference of governement, and the push to increase home ownership? Actually, both, and then some. Recall that one of the initiatives of the Bush administration (along with the push for amnesty) was the drive to increase home ownership rates. This included home loans to "undocumented workers" where necessary. But the blame was elsewhere too (despite what Congress, and the Democrats claim). Congress abandoned its role of overseer of Freddie Mac and Fannie Mae -- and repeatedly shut down investigations into them. Barney Frank (Lollipop - MA) was having an affair with a high official in one of those organizations, a while back. And Congress didn't stop there. Have you ever heard of a practice called "redlining"? This is where the bean-counters at a bank draw a "red line" around a neighborhood, because of the higher risk of default within that neighborhood, and either don't make loans within that area, or subject applicants to *much* greater scrutiny. Can anyone guess the knee-jerk reaction of Congress (...oh yes, and ACORN) to this? All together now -- "THAT'S RACIST!" So banks were compelled (by government pressure) to make loans to two sets of high-risk groups.
Did the banks take this in stride? No, that's not how you keep control of untold billions of dollars. Despite current appearances, the bankers *are* very intelligent. They came up with a creative way of dealing with the problem -- they made the loans, alright. But they didn't keep the loans on their own books. Instead, they bundled together packages of loans into marketable securities. The idea was that by mixing in good loans with some bad ones, the risk profile of the entire bundle would be improved. By adjusting the ratio of good and "less-than-perfect" loans (don't you just love euphemisms?) in each package, they could adjust the riskiness of each package. And then they could sell these packages to outside investors, with higher interest rates for the riskier packages.
And, just to make everything *doubly* sure, companies began to use "credit default swaps" -- that is, buying insurance against the risk of a default.
All of these things sound well and good, right? Well, except when the companies got into full lemming mode. That is, everyone wanted in on the selling of mortgages, since they became so profitable. And since the risks were borne by other people, who bought the packages of mortgages, why not, you know, nudge the standards down a little? These efforts, combined with the lowering of interest rates to generational lows (done to stimulate the economy after 9-11), led to the beginnings of a bubble.
But this was only the beginning of the structural problems. The borrowers noted the rise in price of housing, and decided that they could get rich quick "flipping" houses. This increased demand even more, leading to even more lax lending standards. The banks' reasoning was -- hey, we *can't* lose money, right? Even if the borrower defaults on their payements, we can repossess the house, and sell it for more than the original mortgage. And besides, we are insured. The insurance companies, too, noted the trend, and overextended themselves, having only 2% or so of the money necessary to make their clients whole.
This went on until the point that the houses were getting too expensive to buy, even using "liar's loans" and tricks such as interest only or variable-rate financing.
And the whole house of cards came tumbling down.
The upshot of this, is that a lot of the prosperity was dependent on electronic assets, not backed up by the "intrinsic" value of the property. And now, having been burned before, and unsure of what toxic sludge is present on the books of the other banks, the banks are unwilling to lend to one another, or to anyone else who might actually *need* the money.
And many other companies -- retailers, small businesses, construction firms -- are not sitting on warehouses and vaults of cash. They are dependent on debt to finance the ongoing, day-to-day operation of their business. And so the credit crunch -- if the banks *had* ceased all lending -- could have led to freezing up the economy.
So we have TARP. That is one leg of the proposed governmental remedy. The other leg is Obama's stimulus package of hundreds of billions of dollars to invest in infrastructure. "We need to get America working again" is the thinking: like FDR with the New Deal, we are facing a crisis of confidence. People need jobs. And this stimulus will do that.
This sounds very good, but it gets confused as to the way the economy really works. It is true, that people need jobs -- they cannot spend (anymore) without a job. But it makes a difference who the money is spent *by*, and what the money is spent *on*. And no, this is not an attack on "welfare queens" or "they'll just blow the money on beer, cigarettes, and lottery tickets." I'm talking about the stimulus money itself: the $700 billion or so in the TARP program or the $850 billion or so in the "stimulus package". Perhaps a non-economic quote, on another topic, will help. This is from G.K. Chesterton's book, Tremendous Trifles:
"I am sitting under tall trees, with a great wind boiling like surf about the tops of them, so that their living load of leaves rocks and roars in something that is at once exultation and agony...The wind tugs at the trees as if it might pluck them root and all out of the earth like tufts of grass...
As I look at these top-heavy giants tortured by an invisible and violent witchcraft, a phrase comes back into my mind. I remember a little boy of my acquaintance who was once walking in Battersea Park under just such torn skies and tossing trees. He did not like the wind at all; it blew in his face too much; it made him shut his eyes; and it blew off his hat, of which he was very proud. He was, as far as I remember, about four. After complaining repeatedly of the atmospheric unrest, he said at last to his mother, "Well, why don't you take away the trees, and then it wouldn't wind.""
The analogy is this. Just as the little boy mistook the violent thrashing of the trees for the cause of the wind, those behind the Keynesian stimulus mistake the velocity of money, the mere motion of money, for the cause of prosperity. The truth is almost exactly backwards. In a prospering, free market economy, people are busy. Their jobs are involved in the production, the distribution, the sales of things. Things that other people want, and are willing to pay for. The velocity of money that you see, is the exchange of money between parties in return for goods and services which are desired, to the benefit of both parties.
And it is the production of new goods and services which creates wealth. What is a handful of sand? Good for traction on snowy roads, good for a plaground, maybe useful for concrete for bridges. But use the Silicon in the sand, and you can make computer chips. Computers help us to keep track of data, to make project plans more quickly, even to surf the internet. This is a "value added" use for the sand -- a computer isn't just bought once, and then consumed. The computer is used to create more wealth, and use to do things more efficiently than before. Which means it promises more wealth in the future. And finally, the buyer of the computer has the choice how to use the computer. Spreadsheets, project plans, website, payroll.
The similarity is that both with a Keynesian stimulus, and a free market, money is exchanged for goods and services. There is velocity of money either way. But with a WPA-like stimulus, the goods and services exchanged are not as important as paying the workers. It's all one to the bureaucrats whether the workers dig holes and fill them up again. With a free market, the people paying for the goods and services choose what to purchase; and how to use those goods. Many of them end up used to create even more wealth later on, rather than being consumed or staying in place. This is how an economy grows and flourishes, over the long term.
But the backers of the Obama plan apparently don't see this. As long as money is flowing into the wallet of Joe Sixpack, everything is fine, as far as they are concerned.
There are only two problems, both of which will show up down the road.
First, who's going to pay for all this? No, it won't be the taxpayer: the debt will be too much to pay back, except by massive increases in the productive economy. And the productive economy won't grow if we are taxing it to pay for these programs.
Which brings up the second problem. I just said that the productive economy -- that which produces goods and services people are willing to pay for -- will not grow. I was wrong. It will grow. It just won't grow here in the United States. If this country won't do productive work, there are plenty of other people, plenty of other countries, all over the world, who will be glad to do so.
And *their* labor is not taxable by the US Treasury, as long as they do it overseas.
Which will lead to one of three things.
1) Massive inflation down the road, as the US must print worthless money to pay off the debt, since it can't do it on the strength of its own economy
2) Other countries who are willing to work, taking the role of economic (and then, by extension, military) power of the world
3) A greatly falling standard of living in the U.S.
None of these are pretty. But the only way to avoid them will be for both individuals, and the government, to live within our means; and to rely on ourselves, and the free markets, rather than half-baked, half-assed socialist ideas.
The TARP program is a liferaft with a hole in it. The ship has already gone down.
To the Tune “When You Wish Upon a Star”
When you wish upon a TARP
Makes no difference if you’re a member of AARP
(your turn for the next two lines)
(this could be fun)
Bumped and bookmarked.
Ping to post #3 and replies, make a contribution!
Lotsa luck to you?
Tinkerbell is laughing at you?
Or, how about
"If you're AARP instead of TARP,
Get ready for the ..........
Matters not you belong to AARP
Zero to owners to be fair
Pennies to bondholders that dare!
My Muse is quiet today, but the piece was well-said, g_w!
The government bet of sub-prime loans via Freddie Mac and Fannie Mae, the signs were there, certainly as of 2002. And, as gambling addicts do, they refuse to examine how we got here. We dont even criticize the incompetents, public or private. The answer is to take out a marker and split a pair of threes in the last big hand of blackjack. Good luck with that!
I wish some economist - just one - would talk about the negative return on money invested in the govt.
That is: For every tax dollar they take in we get about sixty cents back (IMO) as a return. Govt. cannot create anything. And, when Obama talks about govt. creating jobs I want to scream. Government spending is always a negative on the economy.
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