More on Interdependence and This Crisis

Because yesterday's post on interdependence generated some interesting questions (and some very strong reactions), here are a few more thoughts on the topic to clarify our thinking...

As we wrote in the footnote to the yesterday's item, we're quite concerned about the concentration of power in this or any other administration. The now-infamous section on the Secretary's un-reviewable powers won't survive the legislative process, as well it shouldn't. We're concerned about the interests of the taxpayers as well. It appears that the legislative train has slowed a little, and that's good. A deliberate process will surely produce a better outcome than a hurried one.

We believe very strongly in market mechanisms. We also think business and government need each other to function properly. That's the point about shedding dogmas of all kinds. Perhaps the process will play out and the "solution" will be a stripped down version of what we've seen to this point. If that's the right answer, that would be great. If it takes a big commitment, so be it. It's both tragedy and farce that it has come to this, but come to this it has.

As relatively small-scale investors a thousand miles from Wall Street, we feel plenty sour toward the masters of the universe who put us all in this position. The point about interdependence is that whatever sorts of recriminations people might want to offer, the fact is that the credit markets stared into the abyss last week. As pragmatists (or so we'd like to think!), we'll support efforts that walk us back from the edge and get the system functioning again.

We certainly don't pretend to have all the answers, but we doubt the best available solutions will (or can) conform perfectly to anyone's idealized and abstract notion of the perfect balance between market mechanisms and state power.

Comments

[JohnKing:]

Paulsons plan wouldn't prevent a meltdown anyway so why add insult to injury if such an event were to occur?

If there is to be a melt down, so be it. We have survived worse.

2008 Sep 23 04:02 PM

[whidbey:]

Very polly anne don't you think? But are you being honest with us and yourself. Of course you want to avoid the problems, and we all for market based solutions -- until we are personally thrown before the market processes. The Ben and Hank fix is based on their having always thought in institutional terms, they are institutional men after all, and they trust institutional solutions. So that is where the buy-back program comes from - fixing the institutions. Others might of asked about the structures of our society, or its processes (including markets), but not institutions first. The processes of our decision making is that a few are movers/actors and the rest of society is sort of a Greek chorus moaning in the wings that the hero is going to screw up and ruin his life and everyone elses life too. You dear friend are part of the chorus and your moaning is predictable so live it up and belly ache about the form, substance and likely outcomes, but remember most of the time it worked reasonably well and you said nothing but sunned yourself and scratched your fleas. Be patient the kennels will open again and you will be home safe and sound. Z

2008 Sep 23 04:14 PM

[User 265729:]

I don't agree with you when you state, "We believe very strongly in market mechanisms. We also think business and government need each other to function properly." The two sentences are not consistent if you really believe in free markets. When government is allowed to interfere too much in the markets, as we are seeing now, it spells disaster for both the free market, the government and the citizens of this country. How much is too much interference? That's the problem with government involvement, ask 20 people and you'll get 20 different answers. If the U.S. continues down this path, I would expect various sectors to move to overseas locations with less government interference. None of this bodes well for our country.

2008 Sep 23 05:39 PM

[David in D:]

Thanks for the follow up post. I have a question about scale for you and your readers. Let's suppose that the $700B loan to buy up sketchy mortgages does work and provides capital to keep lending practices moving forward and we fast forward one-year from now. In my assessment home prices in my neighborhood are running somewhere between 20-40% higher than they should be (and this is after already losing 20-30% from their 2005 highs) in realtion to real working-class earnings. With 20-40% additional "melt" in the market it seems that a sea of additional foreclosures will occur and the root problem (bad mortgages and other lending) will only compound even with this bailout. I just can't see how the $700B helps with the reality that too much money is lended on assets that simply aren't worth what is owed on them.

I'm no professional economist, but in this "best-case" scenerio wouldn't the only real solution be to actually encourage inflation to bump incomes upward 20-40% to make the existing paper loans affordable? I recognize that inflation also produces adverse effects in terms of savings being gobbled up, but it seems to me that the only sort of solution is an "adjustment" of asset prices as it is related to (particularly) working class earnings and I don't see how to do that outside of inflating our economy.

I am curious to hear your (and other's) thoughts on this.

2008 Sep 23 06:55 PM

[User 265729:]

David D, Suppose it does work... Then the private sector should have sniffed this out. If it "works" for the government, isn't this on the scale of the biggest "insider trading" case in our history?

This is another problem, how does the government set policy fairly when it has a vested interest in several firms?

All of this government intervention = BAD NEWS

2008 Sep 24 05:10 PM

[User 265729:]

In regards to:

"I'm no professional economist, but in this "best-case" scenerio wouldn't the only real solution be to actually encourage inflation to bump incomes upward 20-40% to make the existing paper loans affordable? I recognize that inflation also produces adverse effects in terms of savings being gobbled up, but it seems to me that the only sort of solution is an "adjustment" of asset prices as it is related to (particularly) working class earnings and I don't see how to do that outside of inflating our economy."

Excellent observation, but it encourages big $$$ trade deficits and makes the cost of everything that's imported (almost everything at Walmart/Target - you get the picture) more expensive. The other factor: Would employers allow wages to keep up with the inflation? Doubtful. Less consumer spending power...

There are NO EASY ANSWERS to this situation and the options, if Bush/Paulson want to really be honest with the American people are awful, bad, worst, horrible. If they sell you a bill of goods that you'll soon be back in your SUV, charging everything under the sun, well, that ain't going to happen for the next 10-20 years.

2008 Sep 24 05:20 PM