The NY Times is on a tear this week. In addition to Floyd Norris rolling out the red carpet for the “end of the recession”, Andrew Ross Sorkin is now rolling out the red carpet for every banker, politician and economist who had a hand in the bailouts. This is a Bush-like case of declaring “mission accomplished” long before the evidence is in.
To begin with, Mr. Sorkin clearly has no idea how our monetary system works by implying that the U.S. government might “make a profit” from the bailouts. He believes the U.S. government gets a gold coin in return for the bailout “investment” and turns around and says:
Well ladies and gents, looks like we have some more money to spend since we made a profit from the latest government spending spree!
That’s just not how the monetary system works. The government is not a household or corporation that generates revenue or income in order to operate. I’ve beaten this point to a bloody pulp in recent weeks, but the U.S. government never has nor doesn’t have dollars. We do not fund our spending via investments, taxes or debt issuance. This is vitally important when discussing the bailouts because the true cost of the bailouts is not remotely akin to the costs that a household or corporation might incur when spending money. Implying that we somehow make money from the bailouts not only displays an ignorance with regards to our monetary system, but takes the focus off the important issues at hand.
In my view, the only true costs from this highly inefficient form of government spending is increased moral hazard, potentially higher inflation and malinvestment (which has multiple downsides and is almost certainly occurring as too many dollars seek too few productive sources). The argument that we somehow “saved the system” is a moot point. There is simply no way of knowing whether the alternatives might have been more beneficial over the long-term. All we truly know is that we resurrected a banking system that was broken. But I digress.
Aside from not understanding how the monetary system works, where Mr. Sorkin goes wrong is when he implies that somehow this money “earned” is:
Enough to make us all feel rich.
Well that just depends on who you ask. As I described earlier, the U.S. government doesn’t have “more” money because of the bailouts. So they didn’t get rich. The U.S. taxpayer didn’t receive some sort of paycheck or dividend from the bailouts so they didn’t get rich (though they’ll almost certainly become poorer when higher taxes and inflation hit their wallets – thank you inefficient government spending!). Global household equity wealth is still 23% below its pre-recession levels.
So who actually got rich from this? Not “all of us” like Mr. Sorkin implies. So who? Of course the banks and bankers – the primary culprits of the entire credit crisis. After all, the only true v-shaped recovery in the last 12 months has been the one in bank profits and banker bonuses (click to enlarge image):
The obvious counter-argument is that things might have been much worse without the bailouts. Regular readers know I don’t buy into the fear mongering argument that we were on the precipice of Great Depression 2.
Clearly, we can’t prove what might have happened so let’s stick with the facts. This is the worst time to be a middle class American in 25 years. Household net worth is down substantially since the recession began. We have 8.1MM more unemployed than we did 18 months ago. The unemployment rate is at a 25 year high. Wages are deflating. Small businesses continue to struggle. Real S&P 500 revenues ex-financials are up a measly 5% year over year.
If the bailouts worked for most of America, we’re sure not seeing much evidence of it. Sure, the bailout worked for the bankers (and it certainly worked for the New York Times!), but this country isn’t only comprised of bankers and writers. The fact remains – while bankers have been made whole the majority of this country is far worse off than before the credit crisis.
Yes, there are very real signs that the economy is improving, the stock market has surged, but these victory calls are eerily similar to the same victory calls that followed each of Alan Greenspan’s disastrous market interventions and bailouts. I don’t mean to rain on the stock market parade here. I sincerely hope this is a new bull market and not a cyclical turn in a secular bear (trust me, my job is much easier during a nice ripe bull market). I want a strong, organic and robust economy more than you can believe and I have been bullish at several points during the last 18 months when no one on the planet wanted to own stocks, but let’s keep things in perspective.
In my opinion, the banking crisis was simply market forces at work imposing their will on a sector that is too large, too unproductive and too destructive. This is a sector that steals our brightest youths out of college, produces few real goods and makes most of their money by further indebting their customers and/or shifting dollars from one pocket to the other (while shaving a fee off the top).
Is this an absolutely vital facet of the economy? Of course. But that doesn’t mean it should be THE economy. Only time will tell if reinflating this sector was the right thing to do. I have a feeling the market will once again impose its will on this sector as time passes.
I fear more and more that Bernanke’s great reflation gamble has simply reinflated the problem child of the entire credit crisis – the banking sector. We have handed them money on silver platters with which they recklessly speculate. The inflationary (and potentially deflationary) consequences of this will not be realized for many years. The destructive social and psychological impacts of the bailouts will be remembered by Americans long after the recession is over. Ultimately, we will not be able to judge the success of the bailouts for many years.
I think the crew of writers at the NY Times have unveiled the “mission accomplished” banner a bit too early. I have a feeling investors will feel quite differently about the bailouts the next time we suffer a banking crisis. And yes, there will be a next banking crisis. After all, the worst part of this entire fiasco is that nothing has changed over the last 18 months. Banks remain unregulated, have become too bigger to fail and now wield even greater power over the U.S. consumer and the government….
Unfortunately we are doing the same thing over again while expecting a different result. Einstein referred to that as the very definition of insanity. And with all due respect to Mr. Sorkin, I am going to side with Mr. Einstein this time around.