Quote:
Originally Posted by afchic
nmap what do you make of some republicans, to include McCain and Palin that think the bailout is the wrong way to go? I heard on the Neil Cavuto show today that there are quite a few republicans that are going to try and block the passage of this bailout plan.
I for one think the private companies should be held accountable, but with my limited knowledge of the intricacies of this type of thing, what happens if the bailout is blocked? What does that mean for the rest of us.
|
I think there are some real issues about the free market, risk, and fundamental principles. There is a question about how much risk actually exists.
If the bailout is blocked, it seems likely that some banks will fail, and that the flow of credit to businesses and individuals will slow substantially. In addition, regulated companies, such as insurance companies, that include the troubled securities in their portfolios could fail. This implies less economic activity, both in the U.S. and globally. That can lead to business failures, increased levels of unemployment, and, perhaps, increased rates of default on mortgages and other debt instruments. In the process, more homes will be foreclosed on and more people evicted. This could result in further declines in the value of debt securities, stocks, houses, and so forth. Thus, we might see a cascading effect that could expose a great many people to a lot of discomfort. From a political perspective, this might not be a viable solution.
Could the situation be less serious than I've outlined? Of course. However, given the statements and actions by Secretary Paulson, Chairman Bernanke, and others, it seems that matters may be fairly serious.
McCain and Palin may think the consequences are overstated. Perhaps they think some financial distress now lets the market correct excesses without burdening the taxpayer. Or, they may think this bailout is merely the first step in a series of bailouts that will load the taxpayer excessively. There is also the issue of incremental socialism versus free markets. Inherent in the free market is "creative destruction". Existing allocations of resources, such as money and labor, are changed to better (more profitable) uses. By keeping inefficient organizations alive, we prevent the movement of resources to better, more productive organizations. Thus, the pain today leads to gain tomorrow. This vision of tomorrow contrasts with people losing their jobs, homes, and businesses today.
So - as a policy maker, what is best? At what point should there be interventions and bailouts? Add to this that no one really knows how matters will develop, so decisions are made based on ambiguous data. I do not see this as an easy decision for any leader.
Then we have the companies and accountability. Colonel Moroney makes the point that individual accountability needs to exist - not just corporate accountability. In the case of Fannie Mae, shareholders have been devastated. The same is true of Lehman, AIG, and others. Those responsible may lose their jobs, but little else. Without a doubt, some individuals should learn the finer points of license plate production.
Deep down, though, I think the real problem is implicit assumptions - the assumptions we make without thinking. We've all heard the idea that house prices always go up, and that they never go down. Now, consider - if that is true, then creating a mortgage with nothing down, and that the buyer cannot support, is NOT risky. The property may be foreclosed on and resold, the original mortgage will be paid off with the proceeds, and the securities based on the mortgage will remain viable. It gets worse. For awhile, houses were increasing in value rapidly. An unqualified borrower could borrow the entire sum, make a few payments, then get an additional loan on the appreciated value. The borrower had a bigger loan, but had the house, cash in their pocket, new cars, luxury vacations, and so forth. This is a classic case of expecting something for nothing. But notice - no one disputed the assumption that houses always go up. Greenspan did not. No politician or businessman stepped forward. No one argued against the accepted viewpoint. Thus, we come to grief. Can we blame unsophisticated borrowers for believing what so many repeated? Perhaps not. The more intelligent and better educated investment bankers should, perhaps, have known – but going against commonly held beliefs is never easy.
One might be tempted to ask what other implicit assumptions we depend on, and where they might be leading us. But that is something for another time.