Thursday, October 23, 2008

November 5th

Now, to be clear, I've been predicting that Sen. Obama will win the election for a long time. I still think that he will, and frankly, I think it's going to be in a landslide. And while he deserves a huge congratulations for winning the election, even still, is this really necessary?? You're not winning a contest or a beauty pagent, you're becoming the next President of the United States. I would, personally, prefer to see a more humble acceptance, and a display of some sort of acknowledgment of the tremendous responsibility that comes with being the most powerful person in the free world. (Well, for now... the way the economy is headed, that later title might belong to Vladimir Putin before too much longer. Sorry, that was cynical of me.)

Although, here's an interesting thought: Should Senator McCain somehow pull off the upset victory, what would his celebration look like? Or better yet, what will his seemingly inevitable concession speech be? My vote is he cusses all the way to the podium, smiles and says something gracious, and cusses all the way back to his home. Or maybe just goes on an extended hunting trip in northern Canada with Gov. Palin to forget his sorrows. Or maybe it'll roll right off him... I mean, this will be the third election he's going to lose. He's got practice.

Sunday, October 12, 2008

The Almighty Bailout: Sticking the Government's Finger in a Cracked Dike

I'm back... maybe! I took a break this summer from blogging as I was studying for some nasty exams and otherwise traveling various places all over the country. I'm hoping that my life has calmed down sufficiently that I can now resume this thing. Either that, or this is going to turn into something similar to journal writing... meaning I'll write a lot in short spurts with large breaks in between. How regular this blog becomes remains to be seen!

The big news seems to be the economic bailout package, and since my phone has been ringing off the hook for the past several weeks with people wanting to know my thoughts on it, I thought I'd preemptively respond to future such inquiries.

In my opinion, the bailout is a terrible idea. Now, I confess that macroeconomics and finance are not my specialties, but I just don't see how throwing $700 billion at failing companies is a good idea. I see two reasons for the current problems: 1) Poor investment decisions made my greedy companies concerned with quick profits and luxuries 2) Restrictive government regulations, particularly in the subprime mortgage industry, in essence forcing companies to make otherwise poor investment decisions. So, why does the bailout not fix either problem?

Lehman Brothers gave us a good example. How anyone thinks that accepting government rescue funds and then the very next day blowing half a million on a lavish company retreat is in any way ethical or good behavior is beyond me. This is why you shouldn't give large sums of money for free to people who have done a bad job of managing what they already had. They will continue to mismanage it. I don't see why we should step in and cover up the consequences of greed and a general lack of integrity. Let them reap the consequences of their bad business practices. Only when they feel the crushing defeat of their business going under will they begin to think that maybe they should have done things differently. No matter how much they cry in front of congress.

The second problem is just as bad. Particularly in the subprime industry, government oversight and regulation has been stifling. The government is generally staffed with people who have earned law degrees, political science degrees, and are otherwise very good at politics. Corporations tend to be staffed with people who have business degrees and have otherwise built their resumes based on work in industry. So who is more qualified to dictate how an industry should be run? Now, I understand that many of the regulation are made under the banner of protecting the consumer and keeping people in houses who may otherwise not be able to afford one. But still, the government all but forcing business (Fannie Mae) to lend to people with a history of bad credit is bound to be a big time money loser. And it's as much responsible for the current economic downturn as the greedy corporations. Now, I am not an advocate of kicking people out on the street just because they are living in unfortunate circumstances beyond their control. But I also don't think that requiring investors to lend them money, when they will not likely pay it back, is a great idea either. I would like to see programs where the unfortunate are provided with housing based on them giving some sort of effort back, and are held responsible for doing everything they are realistically able to do. Not one where they are protected and entitled to something they haven't really earned. It's a tough issue, and I don't have all the solutions. But I do know that current regulatory practices have proven clearly that they don't work.

The bailout is a classic example of masking the symptoms while failing to correct the underlying problem. Will it make things better in the short run? Ya, it might. And we might be able to put this thing behind us and continue on for a few more years thinking all is well. Until the bottom falls out again. Spending that large of a sum of money, when the government already carries a tremendous debt burden, will only hurt the economy's structure even more, and things will get only worse in 10 or 20 years.

Besides, it continues to further the mistaken idea that the government is the solution to our problems. The government is not the solution, but the government can help a solution to be discovered. By letting failed companies fail, and deregulating in order to allow the businessmen and people trained in, and having a deep concern over the performance of, these things do what they think will work. I believe that this will eventually result in our investments being shored up, and our economy being strengthened. It will, of course, be a slow and painful process. For the time being, investments will continue to fall. Loans will be hard to get. Foreclosures may continue. (But, hey, gas prices are tanking too!) However, eventually, the economy will rebound. Loans will start to free up, and investment portfolios will rise. People who lost their houses will be able to get into houses they can affort and will have more incentive to keep up on payments. Failed companies will correct their internal structures, come back more robust, and fire slimey CEOs who waste money. I worry that the bailout will prevent us from seeing the true problems and correcting them, by attempting to cusion the consequences of bad behavior. It is necessary to go through a little pain now so we can come back with greater strength.

So let the market run. As Adam Smith said, "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest." If we let the butcher, brewer, and the baker do what they do and get out of their way, we will get our dinner. And if their greed makes them engage in unethical practices to bake or brew or butch, their shops will fail, and a new, stronger one will come back to fill the hole. We need to have a little more trust in We The People, and not so much in the government.

***

That's the end of my ranting. If you want more, here are a few other economists:
Alan Blinder: Mr. Blinder doesn't agree with me. My only response to his story is that I only hope that when the little dutch boy does pull his finger out after help has arrived, the pressure buildup isn't so great that it kills the dutch boy, the help, and all the townspeople in much greater force.

Greg Mankiw: Although not responding to the current bailout, is much more articulate on these principles than I.

Steven Leavitt: The author of Freakonomics gives a much more technical, and neutral, list of answers to common questions about the current economic crisis.

And if all of this turmoil gives you a headache, a little satire should help.