Friday, December 19, 2008

I am appalled

I am appalled by the policy decisions currently taken in Washington. There should not have been a recession if these politicians had not started talking, and implementing, these bailouts. Let us first think about the origin: people realized that their mortgage backed securities may not be worth their market price. Some institutions may thus not be liquid or solvent. There are standard procedures for this, which do not involve climbing on roofs and shouting that the world will go under if huge amounts of money are spent bailing out these institutions. Essentially, Bernanke and Paulson have panicked, and showed it. The media and the market then believed them and started panicking as well. This dramatically increased the cost of the problem.

Now that the government seems to be in the mood of giving money left and right, with the blessing of the incoming administration, what is the reaction of banks? Wait until they see how much funds will come their way. Of course, they are not going to commit to anything until it is clear what they get. Even, they do not want to show that business as usual is possible, or they get nothing. With respect to banks, the bailout has achieved exactly the contrary of what it was supposed to trigger, get banks to lend again after the initial panic.

And why stop at banks? Now that the car industry is getting money, a provision that was not even in the bailout bill, any industry that somehow suffers will line up for more. And the US car industry should not get the money in the first place: it is structurally unsound. We are not talking about an emergency loan to a company that usually flourishes put goes through a temporary liquidity problem, we are talking about an industry that has had repeatedly losses even in good times, that never bothered to reform because of a "too big to fail" mentality and counted on its influence in Washington to postpone any adjustment.

And the current deal is money just thrown away: it gives a loan to the Big Three for three months, and by then it should have reformed. The car industry is incapable of doing so for several reasons: 1) it never did before, 2) part of the necessary adjustment is cost reform, and this money takes away any negotiating power against unions, 3) everyone is realizing that this throw-away money will be reflected in higher taxes, saves accordingly, and does not buy cars (and other things), 4) everybody realizes that this is just postponing the eventual bankruptcy, and you do not want to buy a car from a manufacturer who is soon incapable of honoring its warranty. If anything, the government should have imposed a transition form the Big Three to, say, a Mid-Sized One, and now, not after pushing this task onto the next administration at great cost.

This recession was completely unnecessary. By its declarations and its actions, the government talked the US into it. And unfortunately, no one, in the current or the future administration, seems to realize the impact of such short-sighted policy moves whose costs will linger for a long time.

6 comments:

Vilfredo said...

And politicians in other countries seem also to follow this pattern that something needs to be done to be cool. While Europe has always been on the forefront of bailout packages, it is really surprising to fin the US to be a World leader now... The only sane ones seem to be in Germany.

Kansan said...

You have been advocating on this blog all sorts on taxes to correct for externalities. With the current spending, it seems that the new administration will have no choice. And gas tax hikes seem to be prime candidates. And that will hurt car manufacturers, of course...

Canuck said...

The political stupidity is contagious. Ottawa has promised to match any car industry bailout with 20% of its own funds. But at least the government is in a much better financial situation than the US.

Former Republican said...

Paulson, who was at Goldman Sachs before he went to the Treasury, must have been afraid that his former employer could be affected and used scare tactics to get these funds. What really surprises me is that Bernanke went along. He should have known better, having studied financial crises in detail.

Phillip Ross said...

The reason that financial solutions won't solve the problem is that the problem is really a moral problem, with a financial symptom. The government can't solve the problem because it is the problem. We are experiencing moral bankruptcy across the board.

No one in power can acknowledge it without self-incrimination, so the fingers point elsewhere. I could be wrong, but it seems that only genuine Christians can endure self-incrimination. Christ not only allows for it, but insists upon it. And only in the light of self-incrimination can the real problem of moral bankruptcy be acknowledged. And only by acknowledging the real problemn can a solution be found.

The Demise of and Hope for American Capital

Jenava said...

One of the reasons you give for the car industry being incapable of reform is that they never have before. This isn't really a reason, but rather a predictor of their future behavior, don't you think?