Wednesday, September 10, 2008

Economy Dichotomy

The other day I mentioned the galling inequity of asking taxpayers to foot the bills for bailout after bailout. Both McCain and Obama, of course, back these measures as "necessary" for stabilizing "the economy."

What, exactly, does that really mean?

To economists, politicians, pundits, and the like, "the economy" is a complicated series of interactions indicating strength of the US Dollar and buying power involving the GDP, interest rates, national debt, the stock market, jobs gained vs. jobs lost, and a whole lot more.

To the average American, however, "the economy" is:
  • How much money I have coming in vs. how much I have going out
  • How much I can buy with that money
  • How secure is my employment and salary
  • How much am I actually saving for my retirement
  • How much is my lifestyle changing

You know the saying, "all politics are local?" The economic corrollary should be that "all economics are personal." The amount of money one has for groceries when one goes to the store is a much less abstract measure of personal economic stability than what the interest rate is on any given day. While the recently laid off UAW employee may be concerned that he or she is just one of many without a job, that concern is secondary to feeding his or her family.

And yet, neither McCain nor Obama has put forth a plan to change much about how these corporations and semi-private entities that are on the receiving end of taxpayer bailouts do business. (Breaking them down into smaller companies without getting rid of the huge tax subsidies for the housing industry doesn't count.)

Like I said, economics are personal. And right now, it doesn't even pay to have a savings account:

Maybe savers' ultimate vindication will arrive when and if every asset is so deflated, credit is so choked off, and misery is so prevalent that only those with cold hard cash can lob in lowball offers for homes, cars, and everything else. Assuming, of course, they didn't stash all their money in one of the many banks that is about to go under; the feds are closely watching 117 of them—and counting. The phone lines have never been so jammed with nervous clients.

If we follow the present path of bailing out those institutions deemed "necessary to a stabilized economy," we run the risk of devaluing the hard work that American citizens perform everyday in order to make this country function as well as it does. Taxpaying citizens are left holding the bill for citizens who defaulted on loans they shouldn't have taken out in the first place, and for corporations and banks that made bad financial decisions.

From The New Yorker (emphasis mine):

The fall in housing prices, the drying up of new construction, and the sharp rise in oreclosures in many areas are having a serious impact on employment and economic growth. But these are not problems that the Fed’s action will solve. Cutting the iscount rate is not going to help subprime borrowers get new loans, nor will it get the ousing market moving again. What it will do is reassure investors and save some money managers from well-deserved oblivion. It may be that the risk of a full-fledged credit crunch was high enough to make this worth doing. But there is something unseemly about watching the avatars of free-market capitalism rely on the government to pay for their bad bets. And there is something scary about contemplating the even bigger bets they’ll make in the future if they know that the Fed is there to bail them out.
And take into account this summary from the NYTimes:

All of us will bear the cost, of course. The scariest part of Mr. Paulson’s economic acrobatics is that we won’t know for years just how much this will cost us. On CNBC on Monday morning, when asked about how big the bill might be, Mr. Paulson replied, “We didn’t sit there and figure this out with a calculator.” Apparently, he wasn’t joking.

Then there's news of our doubling budget deficit:

The Congressional Budget Office said the U.S. budget deficit for fiscal 2008 -- $407 billion -- will be more than double the deficit for 2007, hit by the wars and a weak economy, and predicted it is likely to rise further in fiscal 2009.
Once again, who's paying for that doubling deficit? Taxpayers.

So what's the solution?

There is one positive idea that I read about the other day, and it involves how we structure these bailouts. You may or may not recall how I mentioned in a previous post that we should be receiving dividend checks if we're investing in companies like Bear-Sterns. As it turns out, Ronald Reagan had the same damned idea:

In 1980, the government didn't lend any money directly to Chrysler, instead guaranteeing loans to the company made by private lenders, mostly banks, in the amount of $1.2 billion (bailouts, like everything else, were cheaper back then). But in return, the government got warrants to buy Chrysler stock at a very low price. When Chrysler staged its spectacular recovery and paid off the bank loans seven years early, the warrants soared in value and the government earned some $400 million.
If taxpayers are going to foot the bill for risks these companies take, then taxpayers deserve to share in the rewards. And the CEO's need to forego their "bonuses."

Uncle Sam isn't Uncle Pennybags. And neither am I. Are you?
There's something to be said for the school of hard knocks. Just as we must allow our young to venture out and make attempts that may fail, and learn from those failures, so must we allow companies to fail. Otherwise, how will they learn?

6 comments:

John in IL said...

To the average American, however, "the economy" is

You used "I" or "my" in every bullet point after that. The American economy is not an anecdote. There are numbers behind the "average" American. Use those instead.

The quote about bank failures is crazy. The FDIC guarantees deposits up to $100,000. And 117 banks going under... Is that a big number or a small number of banks in trouble?

"there is something unseemly about watching the avatars of free-market capitalism rely on the government to pay for their bad bets."

That might be true if we were talking about free market capitalism, but we're not. When the government has a hand in 50% of all mortgage loans, I don't call that a free market.

Once again, who's paying for that doubling deficit?

Bondholders.

And yet you hold up Chrysler as the bailout we should admire. Why?

Jamie said...

You used "I" or "my" in every bullet point after that. The American economy is not an anecdote. There are numbers behind the "average" American. Use those instead.

Those were supposed to reflect the thoughts of the average american. I had trouble getting them bulleted AND italicized.

Jamie said...

Once again, who's paying for that doubling deficit?

Bondholders.


Right. Those who hold savings bonds have seen their rates of interest decline to the point of negative savings--dovetailing nicely with my point that it doesn't pay to have a savings account right now, either.

And to back up to my previous comment, when you say "The American economy is not an anecdote," you're clearly missing the point of the post.

Most people don't study the economy in the abstract, and don't understand it in the lease. As I said in the previous comment, those bullet points were meant to show the thoughts of the average American taxpayer, culled from various sources. So I've tried to illustrate how the economy is perceived by those people. These aren't simply my thoughts, John. These are the questions we see again and again on the TV, newspapers, radio, and the net, by people wondering how they are going to get by right now. To them, the economy is less than an anecdote, it's an irrelevant concept except for their immediate concerns. That may be shortsighted on their part, but it's reality.

That might be true if we were talking about free market capitalism, but we're not. When the government has a hand in 50% of all mortgage loans, I don't call that a free market.

And since the government is funded solely by taxpayers, those taxpayers deserve the positive aspects of risk, i.e. dividends for taking that risk. We shouldn't be subsidizing mortgage companies without some payback for the taxpayer. (Disclosure: I, myself, have a VHFA loan. Lowest interest rate, and I'm not an idiot.)

And yet you hold up Chrysler as the bailout we should admire. Why?

I think "admire" is a fast and loose interpretation, TYVM. But if we are going to be subject to bailing out these megacorporations--which we absolutely should not--then we should mitigate the loss of taxpayers by making the bailout worth something positive, like a stake in the company.

Look, I'm not a tax expert and never pretended to be. I know full well that you're more informed on the subject, and that's great. This was meant to illustrate why the government has no business bailing out company after company after company without some recompense to the taxpayers that are funding these bailouts.

John in IL said...

those bullet points were meant to show the thoughts of the average American taxpayer, culled from various sources.

How do you(one person) know the thoughts of the "average American"? Sorry, that's a huge assumption even after your reading of multiple anecdotes. The generic problems you mention are always problems for some people, no matter what the economic conditions are. That's why I like some numbers behind the assertions.

Right. Those who hold savings bonds have seen their rates of interest decline to the point of negative savings--dovetailing nicely with my point that it doesn't pay to have a savings account right now

Savings bonds make up a single digit percentage of the national debt. And anyone who uses savings bonds as an investment is a fool. I was talking about treasury securities (T-bonds/T-bills).

Jamie said...

How do you(one person) know the thoughts of the "average American"? Sorry, that's a huge assumption even after your reading of multiple anecdotes.

My primary job involves helping the public work with government forms, and I talk to thousands of people a month.

My second job is at a gas station/truck stop/restaurant near the border, where I talk to hundreds of people each weekend.

So what you call "anecdotal," I call a strong pattern of empirical evidence. When I hear the same things thousands of times a month, that's good enough evidence for me.

Your mileage may vary.

Shawmut said...

While we're watching this whole slight of hand economy game, my worry is where we'll go begging for relief.... and how much we'll sell out to get it.
"Where's the bucks?"
Well, try 'Sandland'.
Maybe, even, the Islamic Development Bank.
And, try negotiating Sharia Financing.
I just finished a rather lengthy screed that ends with my interpreation of white-collor/white-thawb crime, seasoned with the parochial corruption and venality of Boston poliltics.