What’s a Free Marketeer to Think?
Such is the series of columns at American Experiment. The founder, Mitch Pearlstein, invited free market think tanks to contribute essays on the topic. If you go to their main page (linked above), you can see a list of the volumes. Most people are against the Paulson bailout, but some think it is a regrettable necessity.
My contribution is in the middle of this volume. An excerpt:
Many, if not most, policy analysts would agree that capitalism is a better social arrangement than socialism, and that free markets provide sustained economic growth showering prosperity on all citizens. Yet for some inexplicable reason, many of these same analysts lose all faith in the power of markets during times of crisis. All of a sudden, even many cynical right-wingers – let alone the liberals – believe that 535 people in Washington D.C. know better than legions of financial professionals in New York and Chicago. Yet this is just one of many contradictions in our current crisis.
For example, we are told that the housing boom was caused by cheap credit and lax oversight, where greedy lenders made it too easy for unqualified applicants to receive loans. But at the same time, we are told the limits on Fannie and Freddie, as well as the FDIC, must be relaxed, and that taxpayers must spend $700 billion in order to “unfreeze” the credit markets, that is, to get easy credit flowing to borrowers as it has been in the recent past.
We are told that the government must enact bold measures, lest we relive the Great Depression. Yet at the same time, we are told that the measures we need to take are precisely those adopted by Franklin Roosevelt in the 1930s. Indeed, this is why so many news articles over the last year have included variations of the phrase, “a government power not used since the New Deal.”
"Bailout Doesn’t Resolve Fears on Credit, Economy"
So announces CNBC the day the bailout passes. So let’s see: We’ll be generous and say the bailout only cost $700 billion, even though this thing actually is more, and even though the precedent will allow them to spend trillions when all is said and done. Also, we’ll be generous and say that there was a 3.5 hour window in which people thought this might actually have fixed things, even though people already knew going into today that the problems would still fester.
So, even with these two generous assumptions, that means the government just committed itself to spending $200 billion per hour of postponed anxiety. Sounds like a good deal. Remember, “Doing nothing is not an option.”
Humor in the VP Debate
The last two nights I have pulled “half-niters” so I have to crash now, rather than doing a full-length analysis. I am sure if I get an important project Friday morning, I will choose to write up more on the VP debate instead of the project…
Anyway, I just wanted to note that both candidates made me chuckle. Palin was funny when she explained that her summer comment about having to learn what the vice president does was a “lame attempt at a joke” and that Biden’s statement must have been also, since “nobody got the joke.” (I’m paraphrasing slightly I imagine.)
And then a few moments later, Biden cracked me up when took strong issue with Dick Cheney’s interpretation of vice presidential authorities. Biden said that the Constitution was explicit that the VP was in the executive branch, and could only vote in the Senate to break a tie. Ha ha, that’s a good one Joe. We know in your 35 years of being our servant that you won’t exercise powers unless the Constitution explicitly grants them to you.
Two Questions on the Conventional Bailout Commentary
Two issues keep bothering me in all this bailout talk. (Well, actually there are about 202 things bothering me, but you get what I mean.) Up till now I have assumed I was missing something, but now that I am reading other people voicing my internal confusion, I feel more confident in proceeding…
(1) “Instead of putting the taxpayer at risk, the government should expand FDIC’s coverage from $100,000 to $x,000.”
Now this is problematic for a bunch of reasons. First, it still puts the taxpayer at risk, albeit in a different way. Second, it just perpetuates the whole moral hazard problem. You want depositors to be wary of dealing with a shady or risky bank. You don’t want them just to assume the government has taken care of everything.
But beyond these quibbles, I have a practical issue: If the new limit is fairly low–like $200,000 or $250,000–then on the margin, how much does this really reduce the risk of bank runs? For example, if you think bumping up the limit from $100k to $250k will make a difference, then that means you think there are people out there with checking account balances in between $100,000 and $250,000, who would rush to withdraw their funds at the lower limit, but who aren’t worried with the higher limit.
How many such people are there in the country? I can’t imagine it’s enough to be the difference between a bank run or not. Keep in mind, if you are thinking of a small business that has to do payroll etc., then it still is going to be a real pain if your bank is shut down by the FDIC.
I am open to correction, but my hunch is that the proportion of people who would panic at $100k but not at $250k, is rather low. I don’t see how the FDIC coverage increase does anything, unless you posit a mere psychological effect.
(2) “If the credit markets freeze up, it hurts more than Wall Street fat cats. Plenty of small businesses won’t be able to do their payroll.”
This too didn’t make any sense to me, but I wasn’t motivated to mention it until reassurance from small business owner Steve Fairfax:
None of the small business owners I know depend upon easy credit to make their payroll. When things get to the point where you need to borrow to pay your employees, the end is near. Most small businesses fail in the first few years, in large part because business is not easy, it is hard. Not everyone is good at it. But it is an essential part of free trade and the market economy that businesses fail, so that new, better ones can arise in their place.
Few small businesses depend upon easy credit. Banks are generally reluctant to lend to small businesses, with good reason. Most small businesses are funded by owner’s savings. Sometimes start-up money comes from loans by parents or friends. While I can understand that small businesses involved in building houses might profit from easy credit, the market is sending unmistakable signals that there are too many houses that are too expensive. Flooding the system with still more easy credit can’t be the cure, it is the problem.
The Deflationists Have a Good Day
Many people, including Austro-libertarian Gary North, have been warning of deflation. This is unusual, since Austrians typically decry the Fed and its inflationary fiat money.
Today is certainly a feather in the cap of the deflationists. The stock indices are all down 3% or more, and at the same time all the commodities are way down–silver is down 12% as of this writing.
In a future post I will clarify the relationship between the “money supply” and the “price level.” For example, if the stock market “loses a trillion dollars in value” on a given day, that doesn’t mean there are a trillion dollar bills–or even 50 billion $20 bills–floating around with no home.
Chris Sciabarra Puts More Thought Into His (non)Blog Than Paulson Into His Plan
Chris Sciabarra has a long but excellent post on the whole mess. (Don’t worry folks, even I’m starting to get sick of this topic. It’s actually a subtle technique on my part: By the time this thing goes through, you will prefer an extra personal debt of $3000 in order to have me switch to something else newsworthy.) HT2 Steve Horwitz for the Sciabarra link.
Add Chadwick to the No-Short-Read List
I decided a few days ago to never ever read or listen to Jim Cramer again, on principle. Today I must add another frequent CNBC contributor, Patricia Chadwick, to the list.
I have criticized Chadwick before. But that was nothing. In today’s “article,” she offers absolutely zero arguments. She simply asserts that the American people are idiots–though understandably so, in Chadwick’s condescending pity–for thinking the Paulson Plan a bad deal.
And then, in order to placate those readers who maybe wanted some evidence or something, Chadwick links them to a Tom Friedman (!!) op ed on why Americans should support the bailout. You know, noted economist and successful day trader Tom Friedman?
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