When Should the Government Step Back from All This? 13 comments
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Over the past year, as the global economic crisis went from bad to worse and the federal government announced one hastily-conceived emergency intervention after another, the proximate cause of all this carnage was generally agreed to be financial models that essentially failed to contemplate all possible variables of risk and therefore failed, with disastrous consequences. When investment banks across the globe used 30 – 50x leverage to buy debt instruments tied to mortgages that were generally assumed relatively safe, they did so only because they had modeled these decisions and concluded that the risk that accompanies using that much debt to purchase financial assets was manageable under almost any conceivable circumstance. However, as we all now know, those models missed the circumstance that began in 2007 with the collapse of the domestic, sub-prime mortgage market. This little ripple spread and eventually developed into a tsunami that now has swamped all major global economies.
Over the past few months, all relevant instruments of federal economic policy have been brought to bear to contain this tsunami and stave off a global depression. To their credit, so far, it appears that such an outcome has been avoided. And make no mistake, the world does not need to endure a depression at this point in time. However, as the government ponders rescuing yet another industry (domestic automakers) and is even going so far as to now dictate interest rate terms to mortgage lenders, one has to wonder where this all ends.
In almost every part of our economy, market forces are being pushed aside by heavy-handed and—seemingly desperate—measures. While most observers don’t disagree that desperate times call for desperate measures and virtually all acknowledge that avoiding a depression is essential, one cannot help but wonder how we are going to undo all of this and when? Also, one has to wonder at how much forethought and back-testing is going into some of these programs.
I would doubt that the same amount of computer and brain power that went into risk models for the investment banks and hedge funds that bought mortgage debt with leverage is being used right now to assess the costs, benefits and potential pitfalls of current government interventions. In some cases, you almost get the impression that things are being hammered out on the back of a napkin at three a.m. in some boardroom in Washington or New York. Given the probable lack of full risk assessments for many of these emergency measures, should we not consider what could possibly go wrong and what steps might be necessary at some point in the future to undo the damage?
For instance, with government now in greater control of the U.S. economy than at any time in its history, at what point down the road will it be a good time for it to step back? Governments are not particularly good at ceding power. Is it realistic to expect both an Administration and Congress controlled by a party which openly advocates greater governmental control and oversight to willingly step back once this economic crisis has passed? I mean, if the federal government can actually dictate the interest rate that can be charged on a conventional home mortgage, when will it ever be politically astute to let that rate rise to a level determined by actual market forces?
How and when is the federal government going to start unwinding all of this? If we are in an economic recovery in late 2009 and surviving banks are starting to restore their balance sheets, will they be able to return their TARP investment and regain full control of their own destiny? When will corporate boards in rescued industries be able to establish their own pay policies without deferring to Washington? I assume that would occur after all government money has been repaid, but what if not?
Lastly, the actions of our own government, as well as that of virtually every other major economy on earth, are all quite inflationary right now. In the midst of creeping deflation, that is a good thing. However, at some point in the not too distant future, inflation is going to become a very bad thing and it will require economic pain as severe if not worse than what we are experiencing now. Will the government—run by politicians interested in the next election—have the will to deal with it? It is funny that the recession that analysts keep comparing the current one to is the recession of 1981-1982. It was a 16 month barn-burner as Fed Chairman Paul Volker raised interest rates to choke off double-digit inflation and President Reagan’s tax policies just began to kick in. In the end, the recession did come to a conclusion and the nation began a long period of economic prosperity. However, with an incoming Administration that is on record as wanting to undo some of the Reagan-era tax code changes and Congressional approval ratings at very low levels, will there be enough courage on Capitol Hill to fix the problems that current emergency measures will surely create?
It is hard to see how Washington is going to put this genie back in its bottle. That thought is keeping a lot of people up at night.
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This article has 13 comments:
"The business of America is business" Calvin Coolidge said and he knew what he was talking about.
Socialism is the form of government where the business of a country is the government.
Fascism is the form of government where the business of a country is controlled by government but remains what it is.
America has never even flirted with socialism but the same cannot be said about fascism.
Henry Ford, GM and many other American business leaders liked German,Italian and Spanish fascism and it is well known that the "big three" built most (?) of the tanks and airplanes that were used in Hitler's army. www.washingtonpost.com...
Prescott Bush had a hand in Nazi Germany as well. www.guardian.co.uk/wor...
We need to fear fascism and not socialism. In America, if government bureaucrats fail it is because they are working in their own self-interest by colluding with business and not because they are enforcing good laws.
News Flash:
Research Laboratories have discovered the heaviest element yet known to science.
The new element, Governmentium (symbol=Gv), has one neutron, 25 assistant neutrons, 88 deputy neutrons, and 198 assistant deputy neutrons, giving it an atomic mass of 312. These 312 particles are held together by forces called morons, which are surrounded by vast quantities of lepton-like particles called peons.
Since Governmentium has no electrons, it is inert. However, it can be detected, because it impedes every reaction with which it comes into contact. A tiny amount of Governmentium can cause a reaction that would normally take less than a second, to take from 4 days to 4 years to complete.
Governmentium has a normal half-life of 2 to 6 years. It does not decay, but instead undergoes a reorganization in which a portion of the assistant neutrons and deputy neutrons exchange places. In fact, Governmentium's mass will actually increase over time, since each reorganization will cause more morons to become neutrons, forming isodopes.
This characteristic of moron promotion leads some scientists to believe that Governmentium is formed whenever morons reach a critical concentration. This hypothetical quantity is referred to as critical morass.
When catalyzed with money, Governmentium becomes Administratium (symbol=Ad), an element that radiates just as much energy as Governmentium, since it has half as many peons but twice as many morons.
About 95 years ago.
The greatest gov't intervention in US history on a daily basis.
Why? Because Paulson knows they need $75 Billion bailout for the Pension Guaranteed Corp, Bush told him to prevent any further losses in pensions!
Bush's Patriot Act makes it all stealtly legal as a "nation security" provision.
Socialism replaces owners and managers with government bureaucrats and distributes all profits (and losses) back to the general population.
On Dec 05 02:08 PM Socialism cannot compete! wrote:
> @carey_jim -- America has never flirted with Socialism? What the
> h3ll do you think the New Deal was? What do you think has been the
> progression and growth of entitlement government ever since? What
> the flip do you think CAUSED this whole current mess?? Precisely
> socialism, in the form of government getting into the biz of low-income
> housing! Socialism has been growing for a long time in America,
> and it has failed yet again. Why do you refuse to see that? And
> btw, socialism IS a fascist -- what does a fascist do if not abolish
> personal rights...in this case, property rights?
Lots of raving ideological idiocy from the permanent loser class, mostly.
To answer the article's question "when will it ever be politically astute to let that rate rise to a level determined by actual market forces", as soon as the low rates result in all such loans being made exclusively by the government, and it then discovering it is running the program at a loss.
Doesn't take long. In student loans, it has pretty much already happened.
But for private enterprise to replace government, there has to be some private enterprise. Right now there is a lot of screeching by losers, but no actual enterprise. Proof - spreads. Anyone who thinks he can tell sound from unsound credits or who thinks the government set rates are too low, can step up where the bankers haven't and lend to the sound credits.
If private bankers were doing so, there wouldn't be any call for the government to jump in, instead. They aren't. They are all looking in a rear view mirror and herding into overcrowded treasuries, trying to front-run the Fed, but not being bankers at all.
As for how American is all is, the raving ideologues simply don't know American history. They know Cato press releases and the Heritage Foundation line from the Reagan era and think that is American history.
America was founded by private corporations. The state governments were corporations before they were states. But it took an act of a legislature to create a company, down to 1850. Public and corporate business were so in bed with each other, you couldn't pry them apart or sometimes even tell them apart. The first treasury secretary created the banking system. The first manias in the country were for investment in canals after the success of the Erie canal, and were usually funded by local governments through bond issues. In the second half of the 19th century, the private in private enterprise consisted of the government giving half of the land of many western states to railroad companies, frequently in return for private payoffs, but for the public purpose of opening and developing the land.
The idea that the state had nothing to do with business is a late ideological idea with its historical origins in continental European centrist liberalism, which wasn't in power there incidentally. It was not the practical reality in the US or any other English-speaking country. (East India Company ring any bells? How about Cecil Rhodes?)
Enlisting private business and its energy, organizing power and efficiency, is simply our characteristic way of getting things done. What needs to get done has always involved a large say on the part of the government --- which has in turn often been quite heavily influenced, not to say bought outright lock stock and barrel, by large scale private enterprise.
That is reality. Your loser ideologies simply aren't.