Posts Tagged ‘bailout’

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A few thoughts on the AIG outrage

March 18, 2009

Lynne Kiesling

It’s gotten to the point where I just can’t believe the whole freakin’ thing. My disgust, anger, and cynicism in buckshot form:

Here’s an idea: If you stop nationalizing banks, there will be no need to engage in phony-baloney indignation over bonus payments anymore. …

These same senators who voted to nationalize banks with nary a precondition are also, apparently, stupendously talented actors. After all, most of these senators voted for a bill that contained a provision that specifically protected bonuses that were agreed upon before Feb. 11 in the bank bailout legislation. It was put there by Sen. Chris Dodd (D-Conn.), who is the chairman of the Banking Committee. [although note the correction in the Reason post comments to this contention -ed.]

  • Seriously. There’s no way the members of Congress took the time to read that bailout bill, or the previous ones that they passed under the Bush administration in the fall. They have no one to blame but themselves for their own failure of due diligence. But hey, it’s my money, and your money, and my mother’s money that they’re pissing away, so why bother with this due diligence crap when there’s rent seeking booty to be had?
  • With the federal government owning 80% of AIG, as a taxpayer I want some executives who have institutional memory and experience as well as the financial expertise to unwind the counterparty cluster#$%& that their predecessors created. It’s not the most clear and intellectually satisfying definition of “being paid for performance” … but if the alternative is that a bureaucrat appointed by Barney Frank takes on the work of unwinding AIG’s counterparty contracts, I choose the tainted and fallen financial expert over the government functionary any day.
  • Speaking of Congress … if we think pragmatically about the magnitude of the AIG bonuses relative to the amount of taxpayer money that Congress wastes routinely, year on year, the AIG bonuses are the saline eyedropper going into an ocean. I challenge you all to be as pissed off about that as you are about these bonuses, and to sustain your ire as Congressional waste continues, and to do something about it, as we move forward. Assuming we can dig ourselves out of the debt-lined trench that Congress has bulldozed for us …
  • If I were Edward Liddy, who came out of retirement to become AIG’s CEO in September, is being paid an annual salary of $1 and no performance bonus, and is receiving death threats, I would have pointed out that many members of Congress are lawyers and can interpret the legal status of the contracts into which they have entered on behalf of the American taxpayers, if they had read them. I would then have resigned. If the politicization of this issue leads to individual death threats (not to mention Senator Grassley’s crass reference to Japanese executive suicide), and all of this outrage, how is this a better alternative than just having let them declare bankruptcy, gone through the bankruptcy court, and get on with the reallocation of assets to more productive uses at more realistic asset values?

I did not think it was possible for me to get even more disgusted with politics than I usually am. But apparently it is.

Posted in Economics | Tagged , | 3 Comments »

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An economic history lesson on fiscal responsibility

February 24, 2009

Lynne Kiesling

At the Atlantic’s newish business web site, Greg Clark has a very good post on the history of government spending in Britain. He starts in the early post-Magna Carta period:

In England, for example, from the Magna Carta of 1215 until the Glorious Revolution of 1689, public debt was always tiny — a few percent of national income.  This was because while the King controlled expenditures, the English Parliament controlled taxation. And Parliament refused to tax. …

Without a ready tax source, the early Kings were the ultimate sub-prime borrowers. Royal borrowing was at extremely high interest rates. The only lenders were financial adventurers willing to risk periodic defaults.

Then after the Glorious Revolution constrained the ability of the sovereign to borrow, putting both the taxation and expenditure function in Parliament. Quelle surprise, spending increased dramatically! But since taxation was extremely unpopular, Parliament funded this spending with, you guessed it, borrowing. Thus the 18th century saw unprecedented levels of government debt leading up to the Napoleonic wars, debt that only lessened with the reduction in government military spending after Napoleon’s defeat.

He then draws some conclusions for our current debt situation, highlighting the costs of government debt-funded spending. Part of Greg’s conclusion really struck me:

But because this damage is creeping and insidious — not as obvious as hacking off a limb — it will never motivate real political action.

Yet again, as in my post yesterday about the erosion of civil liberties in Britain, I am moved to invoked the “frog in a pot of water” metaphor. The costs of crowding out private spending and private entrepreneurial activity are not only creeping and insidious, they are part of Bastitat’s unseen. When we don’t pay attention to those costs, we underestimate the costs of this debt-funded spending, and therefore derive an incorrect estimate of the net value of the spending.

Posted in Economic history, Economics | Tagged , , | Comments Off

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Update: The Tea Party’s brewing …

February 20, 2009

Lynne Kiesling

[sorry for the pun-ed.]

In doing my morning reading I find posts at EconLog from both Arnold Kling and David Henderson that are in line with my thoughts on government bailouts and increasing anger and frustration. Arnold says

Starting last September, our country has gone through six months that shook the world. We have abandoned free markets. We have abandoned democracy, in the sense of having policies that reflect the popular will. The United States has become a technocratic dictatorship.

David’s post is on Rick Santelli’s CNBC video that I mentioned in my previous post. And as of this morning, there is now an official Rick Santelli’s Tea Party web site, with Tea Party plans for July 4, 2009 in Boston, Chicago, and Los Angeles.

Posted in Economics, Liberty, Politics | Tagged , , | 1 Comment »

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Mortgage bailouts and the Chicago Tea Party

February 20, 2009

Lynne Kiesling

Count me in as a taxpayer, mortgage holder, and economist who thinks that the Obama mortgage bailout program is bad policy-it’s expensive with little obvious benefit, it creates bad incentives and ex post rewards bad decisions (bad decisions that were abetted by bad government policy), and it’s morally reprehensible. Peter Klein’s remarks on the plan reflect my beliefs:

I am bewildered. But, more than that, I am angry. I can’t count how many news accounts I’ve seen about the poor, struggling homeowners who can’t make the monthly mortgage payment, are about to be foreclosed, and risk losing the family home, yard, white picket fence, and piece of the American Dream. But I haven’t heard one word about the poor, struggling renters, the ones who scrimped and saved and put money away each month towards a down payment, who kept the credit cards paid off, stayed out of trouble, and lived modestly, and thought that maybe, just maybe, the fall in housing prices meant that they, finally, could afford a house — maybe one of those foreclosed units down the street. These people are Bastiat’s unseen. For them, Obama’s housing plan is a giant slap in the face. To hell with the prudent. Party on, profligate! Now that’s what I call moral hazard.

I join Peter in being both angry and bewildered. That’s why I was heartened to see the groundswell of support for CNBC commentator Rick Santelli’s “Chicago Tea Party” mortgage revolt video from the floor of the Chicago Mercantile Exchange yesterday. Santelli, a former trader who has been a critic of the Fed’s monetary policy and its effects in the housing market, gives voice to the feelings of anger and injustice of many taxpayers and homeowners. After his show yesterday he talked with Stephen Spruiell of the National Review, and continued to be firm and eloquent:

The issue is, you can’t pick out 8 or 9 percent and give them things that weaken the 90 or 92 percent who are carrying the water. You need to come up with legislation that may help the people that need it but not hurt the people that… listen, my 401k’s a 201k, my kid’s college tuition is going up 10 percent. This is tough for everybody. Maybe a tax break, maybe everybody who has a house gets something. They need to quit picking winners and losers, and they have to quit alienating the classes. You have to figure out a way to float all boats, and I think that’s where the administration has gone wrong, and I think that’s the nerve I hit.

He sure did hit a nerve; CNBC has set up a poll page where you can vote on whether or not you would join Santelli’s Chicago Tea Party. When I voted “yes” and saw the results, it looked like this:

And now someone (calling himself “Patrick Henry”) has set up a Chicago Tea Party blog.

These invocations of the American Revolution reflect the important fact that the origins of the United States rest on the economic consequences of unjust government policy. We are a country founded on a tax revolt, and more importantly, on the ideas of individual liberty and autonomy that are crucial for us to be able to live together in civil society. To the extent that more and more people see the bank bailouts, loans to the auto industry, the “stimulus” bill, and mortgage bailouts as unjust government policy, we are going to tap into these beliefs.

And frankly, I say bring it on. I usually “keep on keepin’ on” with respect to politics; I’m non-partisan, I hate politics, and no politician has ever represented my philosophy and values, so I just take politics as a drag on productive activity and move on. But this is beginning to worry me and make me angry.

As an aside, this is one reason why I think the “liberaltarian” conversation that Will Wilkinson and others have been having will always be strained — if American progressives embraces fiscally irresponsible government policies that are seen by many people as unjust, this progressive liberal-classical liberal confluence is going to be very shaky indeed.

Posted in Economics, Liberty, Politics | Tagged , , | 6 Comments »

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Bailouts, stimulus, and debt: John Cochrane and Russ Roberts on EconTalk

February 2, 2009

Lynne Kiesling

I recommend this EconTalk podcast between Russ Roberts and John Cochrane very highly:

John Cochrane, of the University of Chicago, talks with EconTalk host Russ Roberts about the financial crisis. He talks about the origins of the crisis, why the Troubled Assets Relief Program (TARP) was flawed from the beginning, why mark-to-market accounting isn’t the cause of the problem, argues for letting banks fail, and makes the case against the large increases in government spending.

I share the skepticism and caution of both Cochrane and Roberts with respect to the financial bailout and the likely short-term and long-term effects of large amounts of government debt-financed government spending, and this discussion captures those ideas clearly.

Posted in Economics | Tagged , , | 1 Comment »

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“Fixing” the economy: how do you “fix” an ecosystem?

January 21, 2009

Lynne Kiesling

In the post-election show of sleeve-rolling-up meeting between Barack Obama and John McCain, their main rhetoric revolved around how they could work together to “fix up the economy”.  At the time I wrote about how that language rankled me (and Russ Roberts), because the economy is not a closed-system project, and politicians who have the hubris to believe that they can treat the economy like it’s a construction project will do us great harm. This hubris is what Hayek called the “fatal conceit”, but the phenomenon was apparent in the 18th century as well, when Adam Smith wrote in Theory of Moral Sentiments about the perils of giving “the man of system” power (as I discussed in this post from 2005).

In the intervening (pun intended!) two months, the prospect has gotten worse, with a proposed stimulus package approaching one trillion dollars that promises decades of debt to fund current spending that will have uncertain outcomes. Certainly this expenditure and debt obligation will “fix the economy”, won’t it?

In a very important article that I urge you to read, Max Borders joins me and Russ (and others) in observing that “fixing the economy” is precisely the wrong way to think about fostering economic growth and productivity. The economy is not like a house, it’s not like a machine,

The economy is an organic ecosystem.

Thus Max titles his article “The Economy Is Not A Machine”. In his explanation of why that’s the case, he invokes precisely the concept from which the name of this web site is derived:

But the whole idea of fixing, running, regulating, designing, or modeling an economy rests on the notion that, if the right smart guys are at the rheostats, the economy can be ordered by intelligent design. But the economy is no mechanism. There is no mission control. Government cannot swoop down like a deus ex machina to explain the inexplicable and fix the unfixable. Why? Because the knowledge required to grasp each of the billions of actions, transactions and interconnections would fry the neural circuitry of a thousand Ben Bernankes. This is what F. A. Hayek called the knowledge problem.

He then goes on to give an excellent description of why and how the economy is a complex adaptive system (one example of which is an organic ecosystem).

Both ecosystems and economies are distributed systems. In the former, billions of interdependent means-ends activities are a reflection of a billion preferences and choices. In the latter, species are dynamic and interwoven in a web of relationships. For both, the whole system is an ever-evolving cascade of change that is unfathomable to a single mind. Data snapshots may be useful for some things, but should not be intended as blueprints for government planners. Even sophisticated computer models will, like the old Philips machine, eventually fail. There are no oracles.

And the laws of ecosystems are not the mechanistic laws that allow us to predict with very good accuracy how machines will behave. Ecosystems evolve by trial and error, by experimentation. Any entrepreneur who has been responsible for a new product launch can tell you that markets are not mechanistic, and that distributed non-mechanistic nature aggregates up across markets into an economic that is a complex system.

His recommendation will sound familiar to you, because I have recommended it many times here and in my published work: design clear and transparent institutions that reduce transaction costs if you want economic growth.

By fundamentals I mean rules. Only rules can be the product of human design. These are the simple rules that lower “transaction costs,” which is a fancy way of saying help us trade with each other easily, minimizing conflict. We call these rules “institutions” (property rights, contract enforcement, and so on) – not legislation meant to regulate failure away, but to protect people from force, theft and fraud. For these are the rules that bring market discipline in a system of prices, profit and loss.

Policymakers cannot “fix” our organic economic ecosystem, but they can create an environment conducive to beneficial decentralized coordination, and through coordination, growth, by implementing institutions that reduce transaction costs and by eliminating institutions that throw up barriers to such coordination and exchange. If we could find a way for the politicians to profit from doing that, instead of profiting from promising to “fix the economy”, then we would see true, resilient, meaningful economic growth out of this recession.

Posted in Economics, Liberty, Regulation | Tagged , , , | 3 Comments »

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Couple of bailout and stimulus links

December 21, 2008

Lynne Kiesling

Going into 2009 with a recession, the discussion of a federal stimulus plan has kicked into high gear. This useful aggregation at the New York Times has some recommendations from economists about the form such a stimulus should take. Like Tyler Cowen, I find Andrew Samwick’s comments particularly important to bear in mind:

If I had my druthers, the word ’stimulus’ would be expunged from public discussion, along with ‘bailout’ and ‘rescue.’ These words convey the idea that, because we have so mismanaged our economic and financial affairs, we are somehow able or entitled to conjure up additional funds out of thin air to fix our problems.There are two problems with this idea. ….

First, the purpose of government spending is to purchase goods and services that the government needs to meet its responsibilities, not to hand out resources to those who panhandle most loudly for them. … Second, there is no free lunch: the money we spend today is a loss to the Treasury, whether as ‘timely, temporary, and targeted’ tax cuts that have no discernible impact; payments to delay bankruptcy for large, mismanaged entities, whether A.I.G. or the Big Three; or the largest public works program since the Interstate highway system. That loss to the Treasury must be made up at some future date, by later cohorts of taxpayers.

With respect to the ultimate fate of the auto manufacturers, which may be delayed due to Friday’s White House announcement of a bailout plan, Matt Welch and Mark Schmitt have a good Bloggingheads video discussion of the pros and cons of auto company bankruptcy declarations.

Posted in Economics, Politics | Tagged , , | 2 Comments »

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Biofuels: where’s our bailout?

December 18, 2008

Lynne Kiesling

Via Ron Bailey at Reason: the biofuels industry asks where their bailout is. I had to chuckle when Ron pointed out that the Renewable Fuels Association says that they, unlike other lobbying organizations, are offering ideas instead of just asking for a handout. OK, I did more than chuckle …

Ron quotes a couple of critics of a biofuels bailout, including this choice one from Andrew Moylan from the National Taxpayers Union:

“Since corn ethanol boosters have never known a day when they weren’t benefiting from government largesse, it’s sadly predictable that their response to times of economic distress is to push for more handouts rather than consider reality-based business models. Ethanol lobbyists won’t call their latest loan and mandate schemes ‘bailouts,’ but after seeing so many other interests line up for federal cash recently, taxpayers know when they’re being shaken down. Americans should be outraged that yet another industry, especially one that is already dependent on the government, has the gall to ask them for even more of their hard-earned money.”

Posted in Economics, Energy markets, Politics | Tagged , , | Comments Off

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