Uncertainty

This is a really great piece by Russ Roberts.

When no one knows how the rules of the game are going to change — and they seem to change from week to week — who wants to take a risk? Who wants to borrow money? Who wants to invest? Business and consumers are hunkering down, waiting for the storm of change to pass.

The problem isn’t liquidity.

It’s uncertainty.

Paulson doesn’t realize that his erratic attempts at creating liquidity are creating the uncertainty that makes liquidity meaningless.

I light of Russ’s comments, this makes for scary reading.

One of the most coherent explanations [of the causes of the Great Depression], which pulls together several of these themes, is what economic historian Robert Higgs calls “regime uncertainty.” According to Higgs, Roosevelt’s New Deal led business leaders to question whether the current “regime” of private property rights in their firms’ capital and its income stream would be protected. They became less willing, therefore, to invest in assets with long lives. Roosevelt had first suspended the antitrust laws so that American businesses would cooperate in government-instigated cartels; he then switched to using the antitrust laws to prosecute firms for cooperating. New taxes had been imposed, and some were then removed; increasing regulation of businesses had reduced businesses’ ability to act independently and raise capital; and new legislation had reduced their freedom in hiring and employing labor. Public opinion surveys of business at the end of the 1930s provided evidence of this regime uncertainty. Public opinion polls in March and May 1939 asked whether the attitude of the Roosevelt administration toward business was delaying recovery, and 54 and 53 percent, respectively, said yes while 26 and 31 percent said no. Fifty-six percent believed that in ten years there would be more government control of business while only 22 percent thought there would be less. Sixty-five percent of executives surveyed thought that the Roosevelt administration policies had so affected business confidence that the recovery had been seriously held back. Initially many firms were reluctant to engage in war contracts. The vast majority believed that Roosevelt’s administration was strongly antibusiness, and this discouraged practical cooperation with Washington on rearmament.

The Hole

Bailing out auto-makers Throwing money down a hole.
http://www.theonion.com/content/themes/common/assets/videoplayer/flvplayer.swf
In The Know: Should The Government Stop Dumping Money Into A Giant Hole?

HT to Will Wilkinson.

More on Detroit

From Powerline:

As of the close of business on Friday the market cap for General Motors was about $1.9 billion, Ford about 4.3 billion….Chrysler is privately held but it’s a safe bet that their FMV is less than $2 billion…probably a LOT less….so for approximately a lousy $7 billion….a rounding error for the federal budget…the government could simply BUY the entire U.S. auto “industry” — actually, of course, it’s just the U.S. nameplate manufacturers, but that’s another story — for what amounts to a pittance.

So why not throw $50 billion after a $7 billion value? Because $7 billion is too much to pay,

The numbers are literally absurd….Ford has $160 billion in debt!….with NEGATIVE book value of equity….GM has about $60 billion in debt…and a HUGE negative net worth on a book basis of $56 billion!….Essentially, the market is valuing the companies — well above their (negative) book values — but at what amounts to scrap value!…so $50 billion more from forced tax extractions should be thrown at them?….and that’s NOT absurd?

Of course it’s absurd. But they can’t let them fail. Why? Why should we bailout failing automobile makers when we don’t bailout the thousands and thousands of other firms that go bankrupt every year? Because auto workers vote and the UAW donates big to political campaigns.

Predicatably, we hear the scare storeis. 740,000 people out of work if we let the “big” three fail. All those auto parts suppliers and dealers… pushed out on the street.

But that’s absurd. The problem with the big three is that they’ve grossly, grossly overpaid their employees for decades. Their compensation and retirement packages are too great a burden. They simply cannot remain competitive.

Letting the companies fail doesn’t mean that we then fire-bomb the plants and dealers. The capital assets (plants, equipment, patents, inventories) would be sold — and they would be purchased by auto-makers who actually make a profit. The existing dealer network would be absorbed by the new owners.

Would there be lay-offs? You betcha. Would they be so catastrophic as to destroy the very fabric of American society? No.

This is from Peter M. De Lorenzo and it’s bullshit:

As I’ve said repeatedly the time for all of the idyllic, “let the free market run its course” hand-wringing is over. It’s far too late for that. This country’s leadership needs to get these loans to GM and the rest of the domestic automobile industry in the next 60 days, or life as we’ve come to know it in this country — and I mean every part of this country — not just here in the Motor City, will be severely and unequivocally altered.

It’s fear-mongering of the worst kind; it’s stupid, baseless and nakedly self-serving.

Of course, Peter and his cronies will get their bailout. Like the financial bailout, too many palms have been greased for this bailout to die. But this bailout, like the financial bailout, will make things worse, not better.

Detroit

Will Wilkinson has a really excellent post up on the Detroit bailout.

There is nothing that helps people more than high rates of economic growth, compounding, compounding. But everyone is not helped equally. Economic growth requires dynamism, requires “creative destruction,” and some people get trapped in the wreckage, become wreckage. Not everyone is hurt equally. That irks. We should do what we can to limit downside risk consistent with the goal of producing broad prosperity. And we should feel a pang for those whose expectations are disappointed, whose lives turn out harder than they’d hoped. But the impulse to freeze the system, to try to tape all the cracks and staple all the cleavages, to ensure that nobody has to explain to their kid why Christmas this year is going to be a lousy Christmas, that is one of our greatest dangers. Our sympathy, untutored by a grasp of the larger scheme, can perversely make itself ever more necessary. When we feel compelled to act on our uncoached fellow-feeling, next year’s Christmas is likely to turn a bit worse for everybody. And then somebody has to explain to the kids that they can’t find a job at all. Businesses that would get started don’t get started, wealth that would be created isn’t. And in just a few decades, the prevailing standard of living is much, much lower than it could have been had our sympathy been more far-seeing. There is no justice, and great harm, in diminishing the whole array of future opportunity to save a few people now from a regrettable fate.

New WPA?

Inanity from Wired:

Note to Next President: Modern-Day WPA Will Save the Economy

Beyond providing jobs — analysts say every $1 billion spent on transportation projects creates 35,000 jobs — a modern-day WPA would produce lasting benefits….

A country that’s gridlocked, crumbling, and collapsing isn’t going to serve us well. Spend the money now, enjoy the benefits later.

Mindless repeating falsehoods won’t make them true.

But in 1935 the Works Progress Administration came along. It is known today as the very government program that gave rise to the new term, “boondoggle,” because it “produced” a lot more than the 77,000 bridges and 116,000 buildings to which its advocates loved to point as evidence of its efficacy. The stupefying roster of wasteful spending generated by these jobs programs represented a diversion of valuable resources to politically motivated and economically counterproductive purposes. (Larry reed, FEE)

But hey, the political logrolling would be something to watch.

Borrow your way out of debt. Tax your way out of unemployment.

Hope and Change. Hope and Change.

Crisis of capitalism

David Boaz has a good piece up defending the relative “failure” of capitalism:

Harold Meyerson in the Washington Post has a column titled “Gods That Failed.” He’s referring to a famous book:

In 1949, a number of famous writers, among them Arthur Koestler, André Gide, Richard Wright, Stephen Spender and Ignazio Silone, wrote essays explaining why they were no longer communists. The essays were collected in a volume entitled “The God That Failed.”

And then he makes this analogy: “Today, conservative intellectuals might want to consider writing a tome on the failure of their own beloved deity, unregulated capitalism. “

Where to begin? Certainly we haven’t had any unregulated capitalism lately. As I put it the other day, the kind of capitalism that has encountered the current crisis is “the kind in which a central monetary authority manipulates money and credit, the central government taxes and redistributes $3 trillion a year, huge government-sponsored enterprises create a taxpayer-backed duopoly in the mortgage business, tax laws encourage excessive use of debt financing, and government pressures banks to make bad loans.”

Meyerson’s column is the worst kind of nonsense: not only is it morally insidious, it’s also wrong as a matter of science.

“The credo of budget-balancing has become nonsensical with the economy seemingly headed for a deep recession.”

Meyerson’s solution to deep debt, increasing foreclosures, and a decline in the value of real assets? More debt! It’s not just wrong, it’s grossly irresponsible and dangerous.

Reason

Nick Gillespie has a great article up at Reason: The Three Major Memes of the Great Bailout Bonanza

Give the Bush administration and its Democratic counterparts in Congress some real political credit: They’ve played the bailout of Wall Street in spectacularly smart fashion. If the markets had continued to tank after they announced their massive and still growing intervention and likely stimulus package, that would have been proof positive that they should have done more. But if the markets responded positively, well, that’s just proof positive that they knew exactly what they were doing. More important, they’ve conjured the soft bigotry of low economic expectations through sometime next year, or even over the next several years.

That’s a great gift to the next president of the United States and to Congressional leaders of both parties as the $700-billion-plus bill starts to come due in 2009 and beyond. And when the unintended consequences of yet again saving businesses from their own bad decisions start to appear. Moral hazard just hasn’t gotten much play this news cycle. Look for its stock to rise in a few years, when journalists and analysts get around to questioning the new conventional wisdom that having the government own a chunk of the companies it regulates is such a great idea.

…

Never mind that the financial industry is one of the very most regulated sectors of the economy here and abroad. Never mind that the two mega-corporations at the very center of the recent market meltdown, Fannie Mae and Freddie Mac, were massively regulated government-sponsored enterprises that were doing the bidding of the politicians to whom they gave cash so lavishly. Indeed, never mind that the Times story above features a chart showing that George W. Bush increased regulatory spending far more than any president since Richard Nixon (by some measures, Bush even routs Nixon). Forget about deregulatory successes in airlines, interstate trucking, and telecom. The culprit is now and will always be deregulation. And the answer will always be more regulation.

…

Now that Wall Street has been bailed out in what is routinely and unconvincingly dubbed “the worst economic crisis since the 1930s,” look for Main Street to start rattling its own tin cup, too. Government at all levels already shovels tons of direct subsidies, individualized tax breaks, and more to everything from farmers to professional sports franchises. Only a sucker wouldn’t start playing the me-too game. And no politician worth his or her salt is going to turn away from constituents in distress, especially if they can claim their dry cleaning chain of quick-lube joint is vital to the local economy of Anytown U.S.A. There’s strong logic here: If Wall Street sharks deserve grease, why not every business in peril? Or every family with a mortgage in peril (John McCain has already announced a plan that decrees all mortgages above 5 percent are rip-offs; during the vice-presidential debate, Joe Biden claimed the right to renegotiate the principal of mortgages)?

A Roundup

From Reuters:

On Monday, Pelosi and House Democratic leaders will meet with key economists to discuss a jobs creation and recovery plan that will complement the recently passed $700 billion rescue legislation for financial institutions. Participants will include former U.S. Treasury Secretary Larry Summers, former Securities and Exchange Commission chairman Arthur Levitt and former Federal Reserve vice chairman Alice Rivlin.

“I would put in place an infrastructure piece… bridges, water systems roads, highways, but not new projects that are going to take a long time to set up,” Rubin said [Clinton's Treasury Secretary].

The WPA! It’s almost as if they want another depression.

A great post by Peter Boettke over at Austrian Economists:

So back to the current crisis. The current financial fiasco is not a consequence of market instability, but because of the inability of government to engage in “apt intervention” due to knowledge and incentive issues, and that in reality it is nowhere as dangerous as in the hands of politicians who presume they have that knowledge to effectively tackle the problem that they in fact do not. Since they don’t have the knowledge required but must act as if they do, they will instead respond to political incentives of the election cycle and their ideological whim. When you breakdown the “institutional structures” of an economy to engage in “apt intervention” when you cannot “aptly” accomplish what you plan to do, then don’t be surprised when things go crazy.

Will Wilkinson has a great comment on Peter’s post:

The crisis was certainly caused in part by Wall Street-driven regulatory capture. The not-really-ideological point I seem to have a hard time getting across is that the root cause of an instance of capture is the set of prior institutional incentives that made capture possible and even likely. Our current period of newfound clarity about the need for reform does not put us in a position to finally and fundamentally fix the system. It just puts us in a different position — a position in which the incentives of the regulators have undergone a sudden and dramatic shock. Those with the power to influence the reform of regulation will now influence it in a different way — one that is not inconsistent with the regulators’ changed sense of mission. The chance that the outcome of this the process will be optimal approaches zero. And the chance that it sets in place a new set of unstable incentives that will take a decade or two to unwind approaches certainty. When the new regulatory settlement unravels, we’ll hear precisely the same things: that we didn’t have the right regulations in place because some opportunistic interests captured some part of the regulatory process. But if we know that’s going to happen in advance, shouldn’t we accept the limits on the possibility of effective long-term regulation and look for feasible alternatives to such thoroughly politicized financial markets?

And there’s this from Don Boudreaux:

Among the articles of faith of “progressivism” is the theory – which never yields to experience – that you can fill the sea with enormous quantities of fresh red meat and then, Moses-like, successfully command the sharks not to devour it.

As long as Uncle Sam continues to stock the Potomac by ripping from the body politic such enormous quantities of flesh and muscle – now more than three trillion dollars worth annually – sharks and vultures will inevitably swarm throughout Washington in a competitive struggle to gorge themselves on this unfortunate feast.

From Eric Posner at Volokh:

No one who believes that the government exploited fears after 9/11 to strengthen its security powers is now saying that the government is exploiting financial crisis fears in order to justify taking control of credit markets. No one who thinks that government would use fear to curtail civil liberties seems to think that government would use fear to curtail economic liberties. Why not?

Free fall

Since Sep 29, the Dow has fallen by 23%, from 11,139.62 to 8,579.19.

My prediction, regardless of bailout, was for a drop between 15% and 25%. It now looks like the drop could be even worse than I had initially imagined. The drops in the market this week have come on the heels of the bailout, the decision of the Treasury to buy equity in banks (both failing and healthy!), the decision of the Fed to extend its credit directly to corporations, and the additional money poured into AIG.

For real perspective, the Dow was at 14,164.53 on Oct. 9, 2007.

That’s a drop of more than 39% in a single year.

Free Ponies

HT to Don Boudreaux:

In a sane world, this would be the beginning of an epochal re-alignment in American party politics. Everyone who voted “no” on this monstrosity would immediately join a new party, let’s call it for the sake of argument the “For The Love Of God Don’t Do Completely Insane Shit” party. Everyone else would be in the “OMG FREE PONIES!!!11″ party. Except that’s too depressing a thought to contemplate, since based on the roll call, the Ponytarians have at least a 2-to-1 advantage. And by the way, whatever happens on November 4th, one of them is going to be President.