Reasonable economic concepts contradict the bail-out the free-trading pirate ship approach
Apparently what we have now in the United States, is a free-trading government's money being used to 'bail out' organizations that have lost money, on the grounds that such is necessary in order to save the economy.
What comes to mind--pirates on ships, employed to transfer products that could have been made a mile from the point of sale thousands of miles to the point of sale, attempting to save their ships which are leaking the fuel required for propulsion, by pouring more fuel into the engines that have developed leaking holes, as opposed to patching up the leaking holes in the engines.
Several real or potential problems with the current government approach come to mind.
Investors can lose money without any loss being incurred to the economy as a whole; investors can lose money as a result simply of realism being restored to a situation featuring overvalued assets.
Such types of losses do not involve money disappearing into a black hole in space and do not warrant hysterical over-reaction as if the money had indeed vanished into thin air.
Investors can lose their money with the result that the money they once had falls into the hands of other persons in the economy. In such cases, the argument that money should of course be obtained indirectly from the taxpayers through govt borrowing and govt printing of money, to use on 'Economic Recovery' govt spending programs, as if the money had somehow vanished into some kind of black-hole, does not hold water--because the money has not vanished from the economy, but, rather, has changed hands.
If the money has simply changed hands, one has to wonder: if the goal is to restore lending, borrowing, sales, and purchases to a high level would'nt the economically and governmentally efficient thing to do be to encourage and motivate those who now have the money to use it in ways that promote lending, borrowing, sales, and purchases?
I now (off-the-bat, see the useful CNN piece at http://money.cnn.com/news/specials/storysupplement/bailout_scorecard/ ) estimate that about a third of the 2.6 trillion dollars the US has spent so far since 2007 on unusual 'Economic Recovery Programs', about 900 billion dollars, has been spent 'bailing out' institutions that directly or indirectly lost money by providing mortages to persons who could not repay the mortgages.
In simple terms, they bought houses from house-builders, allowed persons to live in the houses and gradually pay them back the value of the house plus interest; then the persons living in the houses were unable to make the payments.
Thus we ended up with not the money disappearing into a black hole in space, but rather with the homebuilders having the money, and the investors having the houses, which via application of their famous imaginative-investor abilities, they can use to make money with after they kick out those who were unable to keep up with the mortgage payments.
One has to ask why this should result in a crisis atmosphere, as if the money disappeared into a black hole in space, requiring massive govt intervention to bail out the investors who lost money.
Given that govt expenditures are famed for being susceptible to corruption, it is incomprehensible that the govt should spend money restoring the fortunes of the investors who lost money betting on mortgage-backed-securities (polite language, 'hard-to-sell securities', much more common impolite term, 'toxic securities'), without being careful with regards to possible collusion between the investors and the homebuilders.
Various scenarios come to mind in which there is no actual loss to the economy, when overvalued assets become valued at a realistic level.
For example: investors mistakenly bet that some company will fail, but it does not; investors foolishly bet some company will succeed but it fails; investors bet that some commodity will rise in value but it falls in value; investors bet some commodity will fall in value but it rises in value; investors believe some loan will be repaid but it is not; investors believe insuring risks for others will pay off but lose the gamble; persons insured think they have insurance but lo and behold the insuring party cannot make good on its promises.
These situations can result in reduced consumer confidence and reduced investor confidence, resulting in macro-economic weakness. However, it is irrational to assume that consumer overconfidence and investor overconfidence is of course a good thing or that 'bailing out' those whose overvalued investments have become realistically valued is the optimum approach to restore health to the economy.
Tough-love conservative types used to opine that foolish men who build their houses in an improper place, lose their houses, and then find themselves without the insurance they thought they had experiencing loss and suffering, whereas those who wisely choose the location of the house they build experiencing joy, is just a natural part of life and promotes the general economic health.
Consumer overconfidence does not promote the investments and savings that are needed to produce economic growth. Consumers cutting back on spending may mean reduced sales and incomes for some people for some time; but it also means increased incomes for those involved in new added production via the use of the money that is saved.
The free-trade hyper-enthusiasts have been repeating the no-pain no-gain bodybuilding mantra (in part addressed to the gullible mentally inactive ignorant types who worship their own biceps): "free trade will cause painful adjustments, retraining of the work force, but in the end everything will be better".
Yet somehow they forget this mantra when it comes to domestic trade--a philosophical inconsistency similar to the inconsistency wherein by way of some kind of magic trade that crosses a national border is far superior to trade that does not.
When overconfident persons build up organizations featuring unrealistically high valuation of assets, and then their dreams come crashing down to earth and the overvalued assets become realistically valued--govt responding to this by intervening to restore the value of the overvalued assets to an unrealistically high level, could end up at best having no positive impact.
Such government intervention encourages overconfident or fraudulent persons to build up organizations whose assets are overvalued, because they are confident that when the assets become valued at a realistic level as opposed to overvalued, The government will step in to restore the value of the assets to a realistic level.
One has to wonder, what will happen when persons have become used to being overconfident because they think Uncle Sam will bail them out, and then lo and behold Uncle Sam cannot bail them out because nobody will loan money to Uncle Sam and Uncle Sam's money-printing-press has so to speak run out of ink? Conservatives historically have enjoyed pointing out how dependence on government leads to bad habits.
Thus you have (overconfident?) persons spending their time energy and money in complicated schemes designed to produce, or that unintentionally produce, overvalued assets which are then restored to their normal level when the assets come down to a realistic value; if the stakes are high enough the persons involved in such could be persons of superior competence.
Problem is, persons of superior competence putting their time and energy into such fraudulent or overconfident schemes is a waste compared to other ways in which the time and energy of especially competent persons can be used.
What you end up with is a transfer of resources from (humble, not overconfident?) persons who make real actual contributions to the economy by working in organizations whose assets IN REALITY rise from a low value to a high value, to (overconfident?) persons who do not in reality add to the economy through their production of assets that are unrealistically overvalued. This discourages and penalizes those who make actual contributions to the economy by way of participation in organizations whose assets increase in real actual value.
Efficient allocation of resources, involves money being put into activities that produce actual additions to the economy and thus reward the prduent investors. Efficient allocation of resources, does not involve, overconfident investors putting money into fruitless activities that produce no addition to the economy and thus also losses for investors.
Bailing out foolish investors combined with taxing wise investors, does not promote efficient allocation of resources.
Even if bailouts improve things to some extent, one has to ask, what would be the result if the trillions of dollars were used in other different ways? If you could get ten times better results using the trillions in other different ways, the fact that the bailouts accomplish a little, is meaningless.
Money spent on 'Economic Recovery' that is spent on activities which promote the replacement of imports with domestic production, can be expected to improve the US economic situation. Money that is spent on 'Economic Recovery' that does not promote import replacement can be expected to at best cause no harm.
This declared without malice for our friends in foreign lands; perhaps one day we will be friends in some world in which friendships are not disrupted by national economic policy controversies.
When every nation takes care of itself, and has a strong national economy going, you have the basis for lasting international trade pathways that improve the health of the world's economy.
Some nations can produce certain goods and services at relatively high costs of production. Other nations produce certain goods and services at relatively low costs of production. The world's economy is optimized when a given good or service is produced not just in the nations where such are produced most cheaply, but rather, in the nations where they are produced cheaply and ALSO in the nations where they are produced expensively.
When the goods and services in question are produced in both types of nations, the world's overall possession of goods and services exceeds the world's possession of goods and services when goods and services are produces only in the nations where they are most cheaply produced.
Whereas with the current momentum in the direction of producing goods and services only in the nations where such are most cheaply produced, there is a high level of unemployment and underemployment in the world, featuring persons not involved in productive activity, when the goods and services are produced in both nations where such are expensive to produce and ALSO in nations where such are inexpensive to produce, there is employment, persons involved in productive activity.
A prosperous, employed world is in a better position to achieve flourishing international trade compared to a poor unemployed world, because the prosperous and productive can buy and sell whereas the poor and undproductive cannot.
The hyper-enthusiasm re international trade involves the inefficiency of goods that could have been made a mile from the point of sale being produced thousands of miles away from the point of sale and then transported.
The fact that a strong imagination can invent situations where the restriction of trade becomes absurd and harmful to all parties involved, does not disprove these points.
When trade involving goods and services that do not need to be internationally traded is de-emphasized, the result is a beneficial emphasis on trade in goods and services which is necessary.
I do not mean to be excessively harsh with unfortunate persons who have lost money due to investments. There should be a safety net allowing for such persons to have the basics of life at a level similar to those who get SSI and SDI because of some disability.
@2009 David Virgil Hobbs
What comes to mind--pirates on ships, employed to transfer products that could have been made a mile from the point of sale thousands of miles to the point of sale, attempting to save their ships which are leaking the fuel required for propulsion, by pouring more fuel into the engines that have developed leaking holes, as opposed to patching up the leaking holes in the engines.
Several real or potential problems with the current government approach come to mind.
Investors can lose money without any loss being incurred to the economy as a whole; investors can lose money as a result simply of realism being restored to a situation featuring overvalued assets.
Such types of losses do not involve money disappearing into a black hole in space and do not warrant hysterical over-reaction as if the money had indeed vanished into thin air.
Investors can lose their money with the result that the money they once had falls into the hands of other persons in the economy. In such cases, the argument that money should of course be obtained indirectly from the taxpayers through govt borrowing and govt printing of money, to use on 'Economic Recovery' govt spending programs, as if the money had somehow vanished into some kind of black-hole, does not hold water--because the money has not vanished from the economy, but, rather, has changed hands.
If the money has simply changed hands, one has to wonder: if the goal is to restore lending, borrowing, sales, and purchases to a high level would'nt the economically and governmentally efficient thing to do be to encourage and motivate those who now have the money to use it in ways that promote lending, borrowing, sales, and purchases?
I now (off-the-bat, see the useful CNN piece at http://money.cnn.com/news/specials/storysupplement/bailout_scorecard/ ) estimate that about a third of the 2.6 trillion dollars the US has spent so far since 2007 on unusual 'Economic Recovery Programs', about 900 billion dollars, has been spent 'bailing out' institutions that directly or indirectly lost money by providing mortages to persons who could not repay the mortgages.
In simple terms, they bought houses from house-builders, allowed persons to live in the houses and gradually pay them back the value of the house plus interest; then the persons living in the houses were unable to make the payments.
Thus we ended up with not the money disappearing into a black hole in space, but rather with the homebuilders having the money, and the investors having the houses, which via application of their famous imaginative-investor abilities, they can use to make money with after they kick out those who were unable to keep up with the mortgage payments.
One has to ask why this should result in a crisis atmosphere, as if the money disappeared into a black hole in space, requiring massive govt intervention to bail out the investors who lost money.
Given that govt expenditures are famed for being susceptible to corruption, it is incomprehensible that the govt should spend money restoring the fortunes of the investors who lost money betting on mortgage-backed-securities (polite language, 'hard-to-sell securities', much more common impolite term, 'toxic securities'), without being careful with regards to possible collusion between the investors and the homebuilders.
Various scenarios come to mind in which there is no actual loss to the economy, when overvalued assets become valued at a realistic level.
For example: investors mistakenly bet that some company will fail, but it does not; investors foolishly bet some company will succeed but it fails; investors bet that some commodity will rise in value but it falls in value; investors bet some commodity will fall in value but it rises in value; investors believe some loan will be repaid but it is not; investors believe insuring risks for others will pay off but lose the gamble; persons insured think they have insurance but lo and behold the insuring party cannot make good on its promises.
These situations can result in reduced consumer confidence and reduced investor confidence, resulting in macro-economic weakness. However, it is irrational to assume that consumer overconfidence and investor overconfidence is of course a good thing or that 'bailing out' those whose overvalued investments have become realistically valued is the optimum approach to restore health to the economy.
Tough-love conservative types used to opine that foolish men who build their houses in an improper place, lose their houses, and then find themselves without the insurance they thought they had experiencing loss and suffering, whereas those who wisely choose the location of the house they build experiencing joy, is just a natural part of life and promotes the general economic health.
Consumer overconfidence does not promote the investments and savings that are needed to produce economic growth. Consumers cutting back on spending may mean reduced sales and incomes for some people for some time; but it also means increased incomes for those involved in new added production via the use of the money that is saved.
The free-trade hyper-enthusiasts have been repeating the no-pain no-gain bodybuilding mantra (in part addressed to the gullible mentally inactive ignorant types who worship their own biceps): "free trade will cause painful adjustments, retraining of the work force, but in the end everything will be better".
Yet somehow they forget this mantra when it comes to domestic trade--a philosophical inconsistency similar to the inconsistency wherein by way of some kind of magic trade that crosses a national border is far superior to trade that does not.
When overconfident persons build up organizations featuring unrealistically high valuation of assets, and then their dreams come crashing down to earth and the overvalued assets become realistically valued--govt responding to this by intervening to restore the value of the overvalued assets to an unrealistically high level, could end up at best having no positive impact.
Such government intervention encourages overconfident or fraudulent persons to build up organizations whose assets are overvalued, because they are confident that when the assets become valued at a realistic level as opposed to overvalued, The government will step in to restore the value of the assets to a realistic level.
One has to wonder, what will happen when persons have become used to being overconfident because they think Uncle Sam will bail them out, and then lo and behold Uncle Sam cannot bail them out because nobody will loan money to Uncle Sam and Uncle Sam's money-printing-press has so to speak run out of ink? Conservatives historically have enjoyed pointing out how dependence on government leads to bad habits.
Thus you have (overconfident?) persons spending their time energy and money in complicated schemes designed to produce, or that unintentionally produce, overvalued assets which are then restored to their normal level when the assets come down to a realistic value; if the stakes are high enough the persons involved in such could be persons of superior competence.
Problem is, persons of superior competence putting their time and energy into such fraudulent or overconfident schemes is a waste compared to other ways in which the time and energy of especially competent persons can be used.
What you end up with is a transfer of resources from (humble, not overconfident?) persons who make real actual contributions to the economy by working in organizations whose assets IN REALITY rise from a low value to a high value, to (overconfident?) persons who do not in reality add to the economy through their production of assets that are unrealistically overvalued. This discourages and penalizes those who make actual contributions to the economy by way of participation in organizations whose assets increase in real actual value.
Efficient allocation of resources, involves money being put into activities that produce actual additions to the economy and thus reward the prduent investors. Efficient allocation of resources, does not involve, overconfident investors putting money into fruitless activities that produce no addition to the economy and thus also losses for investors.
Bailing out foolish investors combined with taxing wise investors, does not promote efficient allocation of resources.
Even if bailouts improve things to some extent, one has to ask, what would be the result if the trillions of dollars were used in other different ways? If you could get ten times better results using the trillions in other different ways, the fact that the bailouts accomplish a little, is meaningless.
Money spent on 'Economic Recovery' that is spent on activities which promote the replacement of imports with domestic production, can be expected to improve the US economic situation. Money that is spent on 'Economic Recovery' that does not promote import replacement can be expected to at best cause no harm.
This declared without malice for our friends in foreign lands; perhaps one day we will be friends in some world in which friendships are not disrupted by national economic policy controversies.
When every nation takes care of itself, and has a strong national economy going, you have the basis for lasting international trade pathways that improve the health of the world's economy.
Some nations can produce certain goods and services at relatively high costs of production. Other nations produce certain goods and services at relatively low costs of production. The world's economy is optimized when a given good or service is produced not just in the nations where such are produced most cheaply, but rather, in the nations where they are produced cheaply and ALSO in the nations where they are produced expensively.
When the goods and services in question are produced in both types of nations, the world's overall possession of goods and services exceeds the world's possession of goods and services when goods and services are produces only in the nations where they are most cheaply produced.
Whereas with the current momentum in the direction of producing goods and services only in the nations where such are most cheaply produced, there is a high level of unemployment and underemployment in the world, featuring persons not involved in productive activity, when the goods and services are produced in both nations where such are expensive to produce and ALSO in nations where such are inexpensive to produce, there is employment, persons involved in productive activity.
A prosperous, employed world is in a better position to achieve flourishing international trade compared to a poor unemployed world, because the prosperous and productive can buy and sell whereas the poor and undproductive cannot.
The hyper-enthusiasm re international trade involves the inefficiency of goods that could have been made a mile from the point of sale being produced thousands of miles away from the point of sale and then transported.
The fact that a strong imagination can invent situations where the restriction of trade becomes absurd and harmful to all parties involved, does not disprove these points.
When trade involving goods and services that do not need to be internationally traded is de-emphasized, the result is a beneficial emphasis on trade in goods and services which is necessary.
I do not mean to be excessively harsh with unfortunate persons who have lost money due to investments. There should be a safety net allowing for such persons to have the basics of life at a level similar to those who get SSI and SDI because of some disability.
@2009 David Virgil Hobbs
Labels: bail-out, bailouts, economic recovery, fannie mae, freddie mac, mortgage backed securities, Obama trillion economy economic stimulus alternatives, tarp, term auction facility
posted by David Virgil at 1:53 AM
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