Posted on 09/14/2008 8:09:39 AM PDT by Leisler
The failure of Fannie Mae and Freddie Mac, setting in motion the biggest government bailout/takeover in U.S. history, brings a grim sense of fulfillment to competent economists. After all, what did people expect, that water would flow uphill forever?
This financial mega-mess is the same sort of event as the collapse of the USSR’s centrally planned economy, another economically unworkable Rube Goldberg apparatus that was kept going, more or less badly, for decades before it fell apart completely. Along the way, of course, famous (yet actually unsound) economists assured the world that everything was working out splendidly. As late as 1989, when the pillars were crumbling on all sides of the temple, Nobel Prize winner Paul A. Samuelson informed readers of his widely used textbook, “The Soviet economy is proof that . . . a socialist command economy can function and even thrive.”
In the future, we will see a similar breakdown of the U.S. government’s Social Security system, with its ill-fated pension system and its even more inauspicious Medicare system of financing health care for the elderly. These government schemes are fighting a losing battle against demographic realities, the laws of economics, and the rules of arithmetic. The question is not whether they will fail, but when—and then how the government that can no longer sustain them in their previous Ponzi-scheme form will alter them to salvage what little can be salvaged with minimal damage to the government itself.
Our political economy is rife with such catastrophes in waiting, yet the public always seems startled, and outraged, when the day of reckoning can no longer be deferred, and another apartment collapses in the state’s Hotel of Impossible Promises, loading onto the taxpayers more visibly the burden of sheltering the previous occupants.
Each of these time bombs has at least one element in common: it promises current benefits, often seemingly without cost; but if it must acknowledge a substantial cost, it places that burden somewhere in the distant future, where it will be borne by somebody else. From the standpoint of society in general, every such scheme is a species of eating the seed corn. It satisfies the public’s appetite to consume something for nothing right now, with no thought for the morrow. It represents the height of irresponsibility by permitting people to live higher today than they can truly afford, financing this profligacy by borrowing recklessly and by taxing politically weak and ill-organized people in order to shower benefits on politically strong and well-organized special interests.
Call it democracy in action or utterly corrupt governance; they are the same thing.
The architecture of the Hotel of Impossible Promises is not arcane. All competent economists understand these things. Ludwig von Mises explained as early as 1920 why a centrally planned economy could not work as a rational system of allocating resources. The reasons why Social Security, especially its Medicare component, and many other such government programs contain the seeds of their own destruction have been explained time and again. Are the politicians who construct these structures really such idiots that they cannot understand the logic of what they are doing?
Not at all. But they are not striving to create economically viable institutions that serve the general public interest; they are feathering their own electoral nests in the only way they can in the context of our political institutions. As H. L. Mencken explained back in 1940, the politicians “will all promise every man, woman and child in the country whatever he, she or it wants. They’ll all be roving the land looking for chances to make the rich poor, to remedy the irremediable, to succor the unsuccorable, to unscramble the unscrambleable, to dephlogisticate the undephlogisticable,” because they understand that “votes are collared under democracy, not by talking sense but by talking nonsense.”
And are members of the public so dense that they will fall for such promises? Yes. Moreover, they are greedy, impatient, and immoral, because the present benefits they hope to gain via politics, however unsustainable in the long run, come entirely at the expense of the taxpayers from whom the government extorts its revenues.
“Politics, under democracy,” Mencken wrote more than 80 years ago, “resolves itself into impossible alternatives. Whatever the label on the parties, or the war cries issuing from the demagogues who lead them, the practical choice is between the plutocracy on the one side and a rabble of preposterous impossibilists on the other.” And in a declaration even apter now than it was at the time, he concluded that what democracy “needs beyond everything is a party of liberty.”
The trouble is, however, that now, even more than then, the American people have little interest in liberty. Instead, they want the impossible: home ownership for those who cannot afford homes, credit for those who are not creditworthy, old-age pensions for those who have not saved, health care for those who make no attempt to keep themselves healthy, and college educations for those who lack the wit to finish high school. Moreover, they want it now, and they want somebody else to pay for it.
If you think that Fannie and Freddie’s bust is a big deal, just wait until Medicare comes crashing down. Then, the wailing and gnashing of teeth will be truly unbearable. As that day rapidly approaches, however, you’ll notice that the politicians are doing utterly nothing to forestall it.
Excellent article. If we create socialized medicine it will make the problems with Social Security and Medicare pale by comparison.
No doubt it’s a market phenomena but “bailing” out any corporation typically involves distorting the market with taxpayer monies. We really don’t need to save many of these failing corporations. Fannie/Freddie may be too large to allow to fail but the principle is still the same.
Maybe, but it's guaranteed that we will get lots and lots of "comprehensive bipartisan reform." And you know exactly what that means. McCain's handlers threw conservatives a few scraps just so they would be too busy to notice that the real meat is being parceled out to liberals.
It's not the company the Fed is worried about, it's all the other companies that are still in business. The fed is trying to keep their assets from approaching a value of zero. Take a look at this FR thread as explaination.
Sorry, I blame Congress. They have the POWER to STOP spending. Seveal statespeople is all it takes. What we have in there now are LOSERS.
I was out in a rural county in Colorado ten years ago. The locals were getting property taxed out by retired California teachers that were demanding town services like they had back in California.”
I prefer the “Liberal Locust Syndrome”
I understand that but they are really just representing the constituencies who demand that government do for them. I’d vote Coburn as my senator if I could. I’d vote for anyone else who said “no” to spending on stuff that isn’t in the Constitutional mandate of the government.
Too many people vote for the people who bring home the bacon or provide subsidies using tax payer or debt payments/IOUs.
When enough people decide that they will vote for the limited government, fiscally smart types then things will change.
I'm afraid it's not money that you should be saving. I'm hedging my own bets, that's for sure!
I am just piling up cash. Yes, there is an inflation issue but those with cash can make some moves to secure other assets and do well.
Oh no. It is clear enough. It is just wrong.
When a bunch of guys and galz make collectively $100B's in bonuses over two decades pushing toxic paper into various portfolios and it turns out that the underlying debt cannot be repaid, I don't need to follow the pea under the derivatives shell to figure out who the crooks are. It is the oldest question in under the sun.
Cui bono?
Those are the fat cats that need to be strung up.
My only question is, why are you trying to defend them and what is the basis for the defense? I will take the former as self-evident, but you can defend yourself if you want. As to the latter, that they didn't know what they were doing when the stuck the public with the fallout is laughable. Michael Milken -remember him because he started it all - wrote papers at Wharton describing exactly how to do it, and that is what he did. He went to jail for other things, but not the chief fraud he perpetrated - making the FED bail the banks out for excessive debt expansion. So don't try this innocent they didn't know what they were doing nonsense.
There are a couple of madmen around here who are still laughing and sneering. I think it is sort of like Wile E Cayote before the anvil hits.
But the fact is I think it's a fair question if it were being present by someone with a more open mind so on the assumption that such a fair minded person might be reading this I'll tell you.
I've been on Wall Street for nearly 20 years. I started out on the exotic swaps desk at JP Morgan, but I didn't like it so I switched to the energy desk working with commodity derivatives. From there I bounced around a little and ended up as head of quantitative analysis for a 10 billion plus hedge fund. After a decade or so at different three hedge funds, I ended up a portfolio manager running a quantitative equity strategy for another major hedge fund.
I've spent my entire career with the people involved in this crisis. There are some real jerks in the industry, but the vast majority of the people I've met were good, decent, thoughtful people just like anyone else. All any of them were trying to do was to make a good living to take care of their kids, and have enough left cover at the end to retire in comfort. The didn't want handouts.. .they worked harder than any industry I know doing work that few people know how to do. They are real humans to me, not some cartoon character from the mind of someone who see's a conspiracy behind every tree.
What's more, I know what motivated them... and I know what they were thinking at almost every point in this process. And the picture that people like you paint of what went on is so distorted and so far from reality that I think it's unfair to represent it that way.
Since it's obvious that your viewpoint comes mainly from ignorance rather than malice, I was hoping that shedding a little light on the subject might help things be depicted more accurately. But I guess there is no convincing some people.
All the same though I wanted to tear away the cartoon that people with your view have been painting and replace it with something more accurate. Just because it's the right thing to do.
Look, I went to school with a lot of these guys and I know all of that stuff.
Three things. First - that good living doing this stuff is 100 - 10,000 times what their well educated and sometimes far better educated peers in other endeavours make. Two - They are down a couple of Trillion and counting and we have enormous debts to pay off. Three: an incredible amount of this debt was accumulated paying current account sort of stuff (paying for cars and houses produced today with credit to be repaid tomorrow) and not to expand the productive capacity of the US. It is paper pushing rather than real investing.
Finally, there is the problem that a lot of us saw this day coming and have been screaming our heads off about it for two decades. We didn't have our hands of the levers of cash flow. Who is to be held accountable those that did and those that benefited, or the rest of us.
The rest of us have to pay willy-nilly.
If those are your real exceptions then the people you have a problem with are all those individual people who went out and bought cars and lived on their credit cards. It's a free country. Those people were free to live any way they liked. The banker didn't force them to borrow and live foolishly.
If that's your big issue than you have a much bigger problem than the one we're talking about here. And in a free country, (or even one that's mostly free... or even partly free) your problem is not going to be solved ever, nor should it be. Freedom means the freedom to behave foolishly.
And if you want to claim that their foolishness has somehow affected your life, then you're mistaking cause and effect. The truth is, you're casting around for a demon and you're going to find one whether it's justified or not. If it isn't justified by the actual events you'll distort them or change their scale to include everything from the weather to the gold standard. You're going to "hold someone accountable" whether they were accountable or not. It's just too difficult for someone like you to face an issue without a clear villain.
OK ... fair enough. I made my point and I think you made yours but carry on if you feel the need. I'm prepared to let others decide based on the facts I've brought to the discussion.
Sadly for you, by that time your senior Senator will already have gone to meet Beelzebub long since.
A contemporary example why well written tragedy is so timeless. Aeschylus couldn't have done better.
Ding, ding ding ding. We have another winner. I was wondering how long it was going to take you to get around to calling me a socialist or a communist, or a poofy head or some other really mean and nasty things. Now my feelings are hurt.
If that is the best defense you can muster for your industry then I am moving you into the crook column too.
While you and your colleagues like to preach the virtues of free market capitalism, when the FED is allowing M3 to expand at double digit rates above inflation and GDP growth, we don't have free market capitalism. We have a banking system getting a free ride on the rest of us.
lol you must be joking. McCain is only marginally better than Obama when it comes to liberty.
There is no timebomb, a bunch of greedy crooks were stealing money left and right, this story is as old as man, nothing to see here folks, move along .... I’m tired of this BS story already ...
A "democracy" is best described as two wolves and a sheep deciding what to have for dinner.
I've come to believe that a better alternative would be to hold a national lottery for all congresscritters and the pres/vicepres. All legal residents who qualify for the position would get one "ticket". Could it really be any worse than what we currently have?
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