New at Reason: Steve Chapman on the Bailout

The federal government wants to bail out an industry that can't meet its obligations. But as Steve Chapman writes, this will only increase the chance that next time, it will be the goverment itself teetering on the brink of financial doom.

Read all about it here. 

Comments

JMR | September 29, 2008, 7:17am | #

For some morning humor (and a dose of what's becoming typical antilibertarian media bias) watch the Fox News droids laugh as Peter Schiff states the obvious. Hmmmmm. I wonder who's laughing now? (I really love YouTube sometimes, and now's one of those times!)

Suck Warren Buffets Dick | September 29, 2008, 7:28am | #

Look at How AIG posted a dividend on 9/3 and two weeks later they are asking the federal government for money. Then the SEC makes shorting illegal and persecute "unjust profit" it must be nice to suck Warren Buffets dick.

Warren | September 29, 2008, 8:16am | #

Are you sure the Hadron Collider didn't alter the fabric of the universe? This has got to be the best article Steve Chapman has ever written. Not that it's the best I've read on the subject. But it's the best I've read from Steve on any subject.

Windtell | September 29, 2008, 9:01am | #

Nah, it couldn't be the Hadron Collider, that's already broken.

I think they let Chapman right up the article on this to throw him a bone. Taking pot shots at this bail out is easy. I think another writer could've done a much better job on it. Wracking up the federal deficit isn't nearly as scary as the gov't becoming the backer of the markets or the now explicit statement that risks are socialized.

Also, it isn't a trillion dollar outlay, the cost will be much different. See other (better) writers to get an understanding of the real costs involved although it'll depend a lot on the implementation of this plan, which is a big grey area now.

Nick M | September 29, 2008, 9:03am | #

David Henderson, a research fellow at Stanford's Hoover Institution ... The Federal Reserve could print a lot of money, reducing the real value of the debt and making it easier to pay off.

I would assume that we would be using dollars to buy back the debt. So I don't see how this could help.

scott | September 29, 2008, 9:07am | #

"...editor of The Concise Encyclopedia of Economics, ticks off the options: We could close the budget gap by drastically cutting spending or raising taxes. The Federal Reserve could print a lot of money, reducing the real value of the debt and making it easier to pay off. Or the government could default—in short, declare bankruptcy."

I want to analyze this.
Option 1: Cutting spending and raising taxes--we will likely only see taxes raised. Look at the demographics, Baby boomers are aging and old people vote. The politicians will pander to them at the expense of us younger folk. They won't cut spending but will raise payroll taxes.

The other major Fed. expenditures are War and Debt service. These both have bigger lobbies than we young people do, so guess who'll get screwed.

Option 2: Print money deflating the debt--this simply can't happen. When our debts are all set in T-bills or other fixed interest instruments this is indeed possible. However, our obligations are to Social Security and Medicare/Medicaid. These are pegged to inflation, so inflating the problem away is not possible. How Steve could think this applicable to our current situation is amazing.

Option 3: Declare Bankruptcy--The financiers have a very powerful lobby. So long as money is desired and needed for re-election the financiers will be able to pay off our legislatures millions for the debt service return of Billions, ney Trillions.

So there you have it. Look at the demographics, look at the winds of influence that blow. The powers that be will put this burden on our young shoulders for quite sometime. We don't vote, don't care and will get screwed.

Jogay | September 29, 2008, 9:09am | #

From a political standpoint, how stupid is McCain that he's going to vote for this crap? While some people think that the bailout is a good idea, absolutely NO ONE would base their vote solely on their support for the bailout.

However, there's got to be at least hundreds of thousands of people (if not millions), who'd enthusiastically vote for a candidate just because he stood up to this bill.

Episiarch | September 29, 2008, 9:27am | #

I, for one, look forward to the coming meltdown. I have my sawed-off shotgun, my last of the V8 Interceptors, and my faithful dog ready; and if you want someone to drive that tanker, you talk to me.

R C Dean | September 29, 2008, 9:40am | #

From a political standpoint, how stupid is McCain that he's going to vote for this crap?

The Republicans throw away yet another opportunity to both (a) do the right thing and (b) get on the right side of the voters. What a bunch of morons.

Mike Farmer | September 29, 2008, 9:54am | #

I agree -- the Republicans have blown it. I'm going back to my position that both parties are perpetual losers heading for collapse -- a good thing long term, but a lot of desparate floundering in the meantime.

Surely a viable third party will arise from all this.

Ironic | September 29, 2008, 10:16am | #

"But as Steve Chapman writes, this will only increase the chance that next time, it will be the goverment itself teetering on the brink of financial doom."

Would it be a bad thing if te government itself was on the brink of financial doom? They might actually have an excuse to limit themselves to only those things the U.S. Constitution permits them to do.

Ironic | September 29, 2008, 10:18am | #

"The Republicans throw away yet another opportunity to both (a) do the right thing and (b) get on the right side of the voters. What a bunch of morons."

Another good reason to vote for Charles Jay.
http://www.cj08.com/

JMR | September 29, 2008, 10:26am | #

Charles Jay is tempting because his candidacy says "fuck you" not only to the Democrats & Republicans, but to the Libertarians and the antilibertarian-biased news media, all of which need to hear it at once from me.

Libertarian-biased news media | September 29, 2008, 10:40am | #

Have fun with that, JMR.

John | September 29, 2008, 10:51am | #

Can we send the entire country to credit counseling? If you put it in credit card terms, we have a choice this election between who will spend the most while fighting to have the minimum payment made lower. I would ask why people don't have a problem with this increasing debt load, but just look at how the average American uses credit cards. Gasp! They spend more, pay less, and then have a heart attack when the bill comes due.

I'm about ready to pull a dine and dash on my fellow citizens. "Hey guys, I left my wallet on the sailboat. I'll be right back."

Citizen Nothing | September 29, 2008, 10:51am | #

So are Charles Jay and Wayne Root mortal enemies? Seems like, given their backgrounds, they must have run into each other a few times.
Cage match, anyone? We could let them handle the gambling end themselves.

Robert Enders | September 29, 2008, 11:05am | #

What happened to the last superpower that made really bad economic policy while involved in a protracted war in Afghanistan?

TrickyVic | September 29, 2008, 11:19am | #

"""Can we send the entire country to credit counseling?"""

I don't think the government wants that. One of the reasons they say the bailout is necessary is to keep the credit flowing. Irresponsible credit has helped drive the economy.

"""They spend more, pay less, and then have a heart attack when the bill comes due.""""

I couldn't agree more. If we increased the mimimum payment to something more responsible, we would be doing to the credit card holders, what the varible rate mortgages did to home owners. Make the payment out of reach, then major defaults.

I'm pretty much convinced that this problem is about a market built by irresponsible credit, and the solutions the government is discussing is about keeping irresponsible credit alive. If we all learned how to use credit responsibly today, few place would be able to lend tomorrow due to lack of borrowers. Isn't the lack of borrowers what the government is trying to prevent, but on the lending side?

bornskeptic | September 29, 2008, 11:31am | #

Wrong, wrong, wrong. Increasing US liabilities $1 trillion to buy $1 trillion of assets does NOT mean throwing $1 trillion down the crapper. Chapman is implicitly making this ignorant assumption in his article.

Additionally, the $85 billion credit provided to AIG was done at amazingly favorable terms to the gov't. As a result, not only did this action prevent the chaos that would have ensued had AIG defaulted, it also will with high probability generate nice returns for the gov't-now-turned-hedge fund. The Paulson plan could have a similar effect (see Barron's cover article for more on that).

TrickyVic | September 29, 2008, 12:05pm | #

"""Wrong, wrong, wrong. Increasing US liabilities $1 trillion to buy $1 trillion of assets does NOT mean throwing $1 trillion down the crapper"""

Maybe, maybe not. It depends on how those securities perform after the government buys them. It is using 1 trillion to bet on poor performing mortgage securities. We are using tax payer money to double down on a bad bet. In the name of keeping the credit door open. There is no crystal ball to see what the outcome will be. But the money is at risk of being lost, or greatly reduced.

If the securities were a good buy we wouldn't need a bail out.

John C. Randolph | September 29, 2008, 12:19pm | #

Wrong, wrong, wrong. Increasing US liabilities $1 trillion to buy $1 trillion of assets does NOT mean throwing $1 trillion down the crapper.

Your statement makes the mistaken assumption that the government will get a trillion dollars worth of assets when they spend a trillion dollars.

The only reason those assets are illiquid is because the banks that hold them aren't willing to take what they're worth. The entire purpose of the bailout is to let the banks off the hook for their poor decisions, by buying assets for vastly more than they're worth.

If I put a gun to your head and sell you ten pounds of bullshit in a five-pound bag for a trillion dollars, you don't have a trillion dollars worth of fertilizer.

-jcr

R C Dean | September 29, 2008, 12:22pm | #

What happened to the last superpower that made really bad economic policy while involved in a protracted war in Afghanistan?

The Russians were a corrupt, oligarchic kleptocracy before they went into Afghanistan, nothing like . . . Oh, never mind.

Silent Owl Scribe | September 29, 2008, 1:38pm | #

I agree with this article so much...our federal government in which its leaders are suppose to represent us, the people of the United States, are going to pass the bailout legislation. I have always disagreed with this plan because of principle (believing in a Libertarian way of government). I have little trust in our elected leaders as it stands right now. $700 billion? Please! As noted, already over a trillion ($ 1 trillion dollars) in new debt that must be repaid. Somebody, save our republic! No, no...we can not say that...no, no. We live in a democracy...even as you will never find the term "democracy" in the U.S. Constitution.

Ska | September 29, 2008, 2:05pm | #

The WSJ is now saying that the bill is not going to pass according to the current vote count.

bill | September 29, 2008, 2:12pm | #

I thought that FDR declared bankruptcy in 1933? The US has been in default since then.

Mike M. | September 29, 2008, 2:18pm | #

Breaking news: the House has just killed the bill in its current form, with significant Nay votes on both sides of the aisle.

Sometimes the good guys win.

bornskeptic | September 29, 2008, 6:14pm | #

"Sometimes the good guys win."

Ok, so who's winning here? Equity markets down big, and credit markets even more screwed up. How do I benefit from that? I can't borrow against my house, it's value will likely keep plummeting, my job prospects just got worse, and if I had any money in anything but cash, it's now worth less. Gee, I'm so glad I've been saved from the Salinist bailout. WTF???

TrickyVic | September 29, 2008, 6:48pm | #

If you were really born skeptic you knew your inverstments were at risk as soon you bought them, including your house. But it hurts to lose.

People said the same thing about their portfolio's, heavy with dotcom stocks, when that bubble broke.

I've invested in a stock that sunk to shares per penny, not even pennies per share. Toliet paper was worth more. I was smart enough to only bet money I could lose, good thing because I did.

That's the kind of wisdom we need now, don't bet taxpayer money if the tax payer can't afford losing it. One of the most stupid moves anyone could do is borrow money to play the stock market. That's exactly what the government proposes.

sage | September 29, 2008, 9:04pm | #

What TrickyVic said.

People need to change their behavior. I don't, because the only debt I have is my mortgage. But gee, I didn't go out and get an ARM without thinking that just maybe, the interest rate might go up AND real estate prices might go down. Apparently I'm a rare breed.

john brown | October 1, 2008, 1:48pm | #

The demographics are operating against us. After 2050, the world's population starts to decline, even in Africa, and the developed countries are all going to look like nursing homes. For the time being, we can afford to have the Chinese and the Arabs do our savings for us; what happens when the Chinese have to cope with their own retirees (hundreds of millions of them)?
Like the man says: Hope I die before I get old.