March 31, 2009

• The folly of the do nothing Economic Theory

  You know in an ideal world I could spend all my time criticizing the Obama administration’s economic policies. I would call them out as being way too weak, too little, wishy-washy, unpredictable, and dangerous. I’d argue that this idea of public/private partnerships is quite an oddly backwards run around way to prop up failing banks with pure cash infusions just with another weird name. I’d argue that there’s almost no way in hell these mortgage backed securities and troubled assets are ever going to pay off and earn the tax payer money. I’d rage about how the regulation proposed by Timothy Geitner, although a good start, misses many of the real substantive causes of the economic crises. The economic imbalances between the US and other nations of the world, the docile acceptance of bubble economics, the US’s wild monetary expenditures backed by military force, etc. 

  I would spend all my time arguing about all that but I feel there’s something far more insidious and dangerous I have to refute first.  And that’s the absolutely deranged alternative course of action put out by so many of the President’s critics and gaining a ridiculous amount of momentum and support in public circles.

  That theory is, to put it simply, the do nothing approach to economics.   Do nothingism usually starts with this ridiculous premise that many Americans have sadly had drilled absurdly into their brains since their early youth.

  The premise is this:  Everything the government does or even touches is always automatically BAD.

  So then these do nothingists build the obvious conclusions from this premise. Basically they say that the way out of this economic crises is to stop spending any money. No bailouts, no stimulus. Eliminate the Federal Reserve. Get rid of the FDIC.  Heck who even needs a treasury department? 

  In particular cut programs and services until the budget is balanced. At the same time cut taxes and let private investment handle everything.

  And don’t you dare put any regulation on anything. In fact all institutions that regulate any business whatsoever should just close their doors and step away. We don’t need these audits, taxes, regulations. No unions. No accountability BS.

  Now anyone who has half a brain would realize that the immediate result of this would be stocks of major banks crashing and these banks and other financial institutions going out of business. Many many home owners would be foreclosed upon and out of a home and/or forced into bankruptcy. Of course these same do nothing advocates reject any proposal to make bankruptcy more helpful for homeowners or anyone else. The advocate a “no escape” policy for people facing economic bad times. You just suffer and take what you get. Even if that means being put out on the street.

  What a wonderful theory!

  If it stopped there, maybe it could be salvaged, but of course not to the liking of the do-nothingists. I might well argue that rejecting bailouts and letting financial institutions and other large institutions fail. There actually is a way that could work. But the sheer irony of it is, the only way letting these institutions fail could actually work is if the Government steps in more not less.

  You see, lending must occur. Somebody has to distribute wealth to individuals to engage in large projects or make large purchases. Otherwise nobody buys a car and then automobile industries fail. Nobody buys a house and so the entire housing industry fails. Nobody starts a new business or buys new property for their business. And so everything fails.

  So if you let the banks fail, there will be a period in which somebody must lend. Oh who oh who would that be?  Why THE GOVERNMENT of course! Gee what a surprise. 

  It’s not like the government can’t take over. It can very easily become the bank of the nation. It can do the loaning and financial processing needed to keep the economy rolling. In fact it’d probably be substantially cheaper for the government to do that then to pay for bailouts.

  But, that idea is anathema to the do-nothingists. A big central government bank!?!? NO WAY!! They would argue that instead the government should…. you guessed it…  DO NOTHING.  Presumably do nothingists don’t mind a little bitty ten year plus depression taking place until private individuals find a way to found their own banks using money from their fairy god mothers to get the economy rolling again.

  And I can’t stress how immeasurably horrible a future this will be. If you think this current recession is bad, you have no clue what a do-nothingist policy would yield. A run on the banks. No deposit insurance. Money stored under your matress. You won’t have a great depression. You’d have a GREATEST Depression.You better have a gun at hand cuz I wouldn’t be surprised if the United States devolves to state reminiscent of Afghanistan.

  But let’s say the do nothingists’ theory actually works and private enterprise does find a way out of the morass of chaos with the government just sitting on its heels twiddling its thumbs smiling at their zero deficits or whatever.  What happens then?

  Well we end up with bubble economy 2.0.  Why? Because there is no regulation! It was BAD remember? Government has to get out of our way! So sure maybe people will remember the derivatives scam and be too clever to fall for that particular scam, but somebody will quickly find a way to pull another one in a different market. Or heck maybe the same one. People’s memories are remarkably short. And people love their booms. They’re all getting rich. Of course you have the exact same crash all over again. Another ten years of depression at least and misery all around.

  And all along during this sickening boom and bust cycle you have actual real possessions and services being collected amongst the few wealthiest. The wealth disparity will increase and increase where the cleverest and most ruthless and most willing to cheat the system gain all the power. And the rest of us become eventual serfs forced into their servitude. In the meantime there would be no organization big enough or incentivized enough to engage in any kind of universally beneficial activity for society. Don’t expect new roads and infrastructure to be built. Global warming will just be allowed to rage rampant, and worse environmental destruction to the food supply will go unchecked. Major diseases will go uncured and untreated. And you can forget about space exploration, space travel will be confined to the very wealthy taking pointless trips straight up and down to look around.

  This the do nothingist’s future. Does it sound so great to you?

  Listen, for this particular banking/credit crises there are two extreme solutions. One is for the Government to BECOME the bank of choice and give out new loans to people to buy new houses after they are foreclosed upon. That could actually work. It’s one that assumes that we will simply let the banks fail since they are already effectively insolvent.  This is the government just letting markets go their way but refusing to let the economy suffer in the meantime. Presumably banks would try to survive and the government wouldn’t interfere with their restructuring under bankruptcy but since the government can offer loans cheaper and more easily to consummers there’d be no good reason for these banks to even bother trying to stay in business. Presumably later on, once the economy is stable, the government could, if it chose to, carefully create new banks and financial institutions and sell them off to competent leadership in the private sector. Or they can just be the bank forever.

  The other extreme is for the government to simply BUY all the banks. Stock prices are low so it’s not that expensive and probably ultimately way cheaper than the government trying to prop up these stock prices through bailouts. The idea though here is to keep the banks in business. It’s just that the government will have majority share in them. The government would then appoint new boards of directors for these financial institutions who in turn would appoint new CEO’s. The government could then dictate how these banks are run and ensure that they are loaning out to a sufficient amount to preserve the economic order. Existing shareholders effectively are out of luck as they get bought out at bargain prices for institutions that are effecitvely not worth anything.  The government then takes the troubles assets from these institutions and puts them into a separate institutions whose job it is to manage them and get as high a return as possible for the sake of the tax payers. But this would clean these instruments out of the banks making the banks themselves financially more stable institutions.

  After a reasonable amount of time, the government can then sell back these institutions to the private sector and would almost certainly do so. If they didn’t intend to why did they bother in the first place? It would make more sense to simply BE the bank itself and follow the first strategy. In any case to assauge fears that the government might own these banks indefinitely, a time limit could even be written right into the law that authorized the purchasing of these banks. Once they are profitable well run institutions, the private sector would jump at the opportunity to own these toxic-asset free money making institutions.

  These are the two rational extremes. What President Obama is doing is somewhere inbetween these two. He’s not fully buying the banks but he’s not fully supplanting them either. Instead he’s trying to use private money to induce others to buy the toxic assets, effectively “buying” them in disguise by putting gargantuan guarantees on every purchase. In the mean time in case this doesn’t work the Obama administration is also doing what it can to directly alleviate economic burdens on the economy by directly giving out loans, renegotiating mortgages, etc.

  If it works, the Obama administrations plan is Genius. It managed to save the government money by getting private institutions to put up the risk and on top of that it would have deflected the ownership of toxic assets into the private sector not saddling the government with that burden. At the same time it forestalls a stock market collapse and keeps shares in banks reasonably high, keeps people in jobs, and buys the economy lots of time to fix its fundamental systemic problems.

  If it doesn’t work, the Obama administration will have skyrocketed the deficit, wasted tons of money and only lost precious time needed to seriously make headway into one of the other two extreme strategies which have to be done first before real headway can be made in restructuring our economic fundamentals.

  But please take note, none of these plans involve doing NOTHING!  The government in all three scenarios does a great deal. And it’s *probably* the case that the Obama administration’s plan, so often criticized as being massive expansion of government, is probably the least government involved and most privately involved plan possible.  Indeed the Obama administration risks alienating itself from its international allies many of whom clamor for a more interventionist approach.

  Do nothingists have it all entirely backwards. They think government is and always will be the problem when all evidence speaks to the fact that in recent years it’s lack of government oversight that has gotten us into this mess. There’s no doubt there is a point where government intervention becomes onerous and dangerous, nobody is arguing against that. But now is decidedly not that time.

  The idea that the government is always wrong always should have been absurd on the surface. Governments are just people working towards an ends, doing their job. Yes they’ll make mistakes. Everybody does. So do, btw, people working in private industry. There’s no reason whatsoever to believe that there’s some special characteristic of having the label “government” assigned to people which automatically makes them suddenly inefficient, lazy, incapable, etc. Certainly there’s nothing that makes everything the government does an automatic failure. Sure we all have horror stories of government inefficients and absurdities, but don’t we have just as many for numerous fo the companies we interact with? I sure do. (ugh, Comcast!)  And can’t we also poitn to things the government has done right? Like building schools. Building roads. Defending our nation from attacks. If ANYONE ever tries to sell you the idea that the government or any other institution is inherently a failure inducing institution you should quickly start to question their motives. As well as their grip on reality.

  Do nothingists have no plan except for wishful thinking. We cannot and should not listen to them no matter how much they manifest and feed upon our discontent. If our rage and digust at massive bailouts and huge bonuses leads us into the hands of these insane theorists, we are in for a load of trouble.

  • 5:49 pm
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