Monday, September 29, 2008

The Bailout Failout, and China

Newsweek's Fareed Zacharia says that Paulson and Bernanke's collaboration to produce a solution to the ongoing economic collapse is government working "as it should." I agree with him. And I predict that the refusal of congress to grant Henry Paulson the money he requests illustrates one of the great weaknesses of Democracy: It works only when voters understand the issues. Although the current issues are only moderately complex, they are so new that the public will not have time to understand what is going on before it is too late. It is in times like these that totalitarian states such as China pull ahead -- unfettered by politics -- while the land of the free and the home of the brave ties itself up in knots of fear.

The voters shout "Why!?"

Why should we dump taxpayer money into the greedy and corrupt institutions that caused this mess? Why shouldn't we let them perish? And how dare anyone suggest subsidizing these corporations before we help struggling homeowners?

All good questions. And I agree: new regulations need to be introduce to prevent corporations from getting us into this mess again. And I'm not opposed to raising taxes on the wealthy so that we can prop up the living standards of the poor -- including those who are losing their [modest] homes to foreclosure. But this is not Christmastime. Demand that congress deals with those issues next week. If we don't give Paulson the power he requests soon, we'll all be poorer, rich and poor alike (except for government employees, hehe).

But enough talking down to voters. Here is a condensed version of what happened and why we need a bailout:
  • Bad policies from Congress, such as pressure on Fannie Mae and Freddie Mac to subsidize home-ownership by purchasing more than a trillion dollars of subprime mortgages since 2004, expanded a surge of irresponsible lending that may have began with the low interest rates of Greenspan post 911.
  • The bad mortgages, in the form of all sorts of bizarre securities, are now held by a bunch of financial institutions, such as banks. As these securities lost value, lending institutions got poorer and started going bankrupt.
  • When a lending institution (which specializes in borrowing money to lend) goes bankrupt, whoever was lending their money to it looses that money.
  • Guess who I'm not going to lend money to anymore.
  • Nobody want to lend to anybody else.
  • Businesses can't find loans to pay their employees.
  • Sales falls as the public fears hard times.
  • Poor people lose their jobs.
So bad mortgages are the root. Henry Paulson wants to buy them all up to purge the system, and that would prop up all the flailing institutions and lenders would have confidence once more and the economy would go humming along.

But if the mortgages are really the problem, why not just help all of the home-owners who are threatened by foreclosure? Not a bad idea, but the implementation could take a very long time and be very complicated, not to mention potentially very unfair. How do you decide who gets help? And if the real concern is poverty, why not just start with the Paulson Plan and then, once the economy is strong again, jack up the taxes on CEOs and lower taxes on the poor.

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