Tuesday, September 30, 2008

My take on the bailout

It's been repeated at least a few times that it is apparent that those in charge, both Democrats and Republicans, seem to believe that one fundamental rule when legislating our economy is to privatize profits and socialize the losses, but primarily for the rich.
So, when the rich are making lots of money, we dare not tax them or else trickle-down economics will kick in and everyone will be damaged. But if the rich lose large amounts of money, tax payers must socialize those losses, because again, trick-down economics will kick in and everyone will be damaged.
This makes Obama's cautious support for the bailout less bad than McCain's cautious support for the bailout. Obama wants to eliminate the corporate tax moratorium. He is socializing both large gains and losses, versus McCain wants the rich to have their cake and eat it too.
I disagree with both of them though, in that we should not bail out these companies. Yes, there will be short term consequences. By short term I n probably a couple of years at least. Those/these times will not be easy, but that is part of how capitalism works, and I haven't hear anyone explicitly suggest in all this an end to capitalism. Bad market ideas are suppose to yield losses, which should encourage future venture capitalists to not try anything like this, knowing they will go under if they do. That's the theory at least.
Anyways, lending will start back up sooner rather than later, even without the bailout. In trying times people come up with really creative ways to make money. If there are potential lendees out there, and it seems reasonable that they can pay back their loans, then there will be an entrepreneur looking to lend that money. The number of people able to pay back their loans will certainly decrease, but it will only be for the short term. Once financially stable people are making loans and paying them back, the lending system's gears will start to greased, and the train will eventually be back in full motion. It may take a little longer than artificially inserting 7$bill, but it will happen, it will just happen more responsibly.
Let's look at the history of bailouts. The first bailout was in 1970, and in 2008 dollars Penn Central Railroad was awarded $3.2 billion. Since then a total of $662.5 billion has been awarded in tax-payer funded bailouts. Over half of the $662.5 billion has been under George W. Bush, and all of it has been under a Republican administration. Bush has already more than doubled the amount of bailouts we have paid out, and this legislation would double it again.
What is interesting is that this legislation is largely backed by Democrats, though many are strongly opposing it, and has little support amongst Republicans. Also, all Republicans not up for election support it, while all of the Republican dissent comes from congressmen up for reelection. That certainly seems to imply the reason for the dissent is primarily political and not practical, but the same is probably true for most of the Democratic side as well, even if the numbers crunch differently.
Another large problem with the bailout is that we don't actually have $7 billion. We are in the hole, big time. The only way we can come up with this money is to borrow it, which is pretty ironic in and of itself. The idea of borrowing $7 billion from other countries who actually have their finances together to pay rich bankers for screwing up our economy so that they can fix the problems they created, and that is must all be fast tracked without much deliberation is astounding.
What may be a good idea is to put a moratorium on all foreclosure for at least six months, and then use tax dollars to subsidize those loans as conservatively as possible in a fashion that allows those who became a victim of predatory loans to make their payments. Then make those reasonable payments that are affordable to the borrowers static so that they never go up. This will allow home owners to keep their houses and not file for bankruptcy, it will make good (in the long run) on those debts, and the banks that took out insurance on these bad loans to not have to pay out on those insurance claims. It will be a long way from fixing everything, but it should be less expensive and offer a better long-term solution to the problem.

http://www.propublica.org/special/government-bailouts
http://www.fivethirtyeight.com/2008/09/more-bailout-thoughts.html