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Jump! Jump, motherfuckers, jump!

Your Humble Blogger has spent a good deal of time this week working on a blog note about the credit crisis. What I wanted to do was—wait, let me paste this in:

So. Let’s start with finding out what the actual effects [of the crisis on individuals] are. Then, for each major effect, let’s look at (1) why that constitutes a governmental problem, rather than a problem for individuals to address, (ii) how the proposed bailout would help avert or ameliorate the problem, and (c) what other possibilities might address the problem, and then perhaps a comparison of the costs and benefits of those possible solutions.

Well, that note just kept getting longer and longer, and less and less useful, and less and less accurate (because YHB knows almost nothing about macroeconomics and the details of the situation). There are lots and lots of possibilities for dealing with the problems, and each potential course of action has a variety of predictable consequences and of course an infinite variety of unpredictable ones. Almost everything the US government could do at this point will (a) have a lot of bad consequences, and (2) benefit a lot of people who have been dishonest and greedy, and besides (iii) won’t work. So I am not posting the whole note, but I will pass along the one thing I have learned from the exercise.

Corporate Capitalism is some fucked-up shit.

Tolerabimus quod tolerare debemus,


(1) It shouldn't, (ii) not much, and (c) some kind of corporate buyout? But who wants to pay for a flaming pile of dog shit?

No, no. I mean, besides the taxpayers?


Here's my two cents on the issue:

1) The reason the financial crisis is so difficult to respond to is the result, mainly, not of the subprime mortgage defaults--that is just the trigger. Rather, it's the unregulated credit instruments the banks have developed and traded, and which no one can now properly value. They are such a mess that it may be impossible to clean that mess up by any approach that is geared toward saving financial institutions from the consequences of their own greed and folly.

2) The government's primary response to the financial crisis, then, should focus on shielding the fundamental basis of the real economy--the workers and consumers who drive the real economy of goods and services--from the collapse of the finance industry. Once the government has a reliable plan for protecting the real economy, there's no harm in making an effort to salvage the finance industry (and reregulating it and demonopolizing it will be necessary steps), but the prospect for success in any such effort is highly uncertain, so putting all our eggs in that particular basket is not wise policy.

Here's the thing, without going and writing the crappy post I already threw away… we've already put almost all our eggs in the basket. Now, we are discovering that there's a big hole in the bottom. Well, I tell a lie, we always knew there was a big hole, but… um… I don't actually have an explanation, but anyway, there's the basket, there are the eggs, there's the hole. There's an argument to be made for patching the basket with duct tape while we're moving the eggs. There's an argument to be made for ditching the basket and trying to catch the eggs with our hands. There's an argument to be made for throwing straw on the ground and hoping. But honestly? I think there's going to be a lot of eggs broken.


Well, the eggs-and-baskets metaphor makes things look pretty grim, if the eggs are the wealth of the American people and the basket is the finance industry.

I was using that metaphor in a more limited way, with the eggs being the government's available resources for avoiding disaster and the basket being a bailout of the finance industry.

The government has three powers for dealing with this crisis

• the ability to raise and provide capital to distressed parties
• the ability to set the rules that govern how money circulates in the economy
• the ability to shape public opinion (national and international) about the condition of the economy

The big issue here is how to set the rules so that the provision of capital is effective, so that a) economic and social catastrophe is averted in the present and b) the long-term economic and social consequences of raising and providing this capital are minimized.

For the economy to work well, money needs to be flowing smoothly but not excessively through the economy, from people to businesses to banks to businesses to people in one circuit; from banks to people to businesses to people to banks in another circuit; from people to government to people to business to government to banks to business to government to people by another . . . and so on. That's what I understand "liquidity" in the system to mean.

As far as the "real" economy of people and businesses are concerned, we are first and foremost in a liquidity crisis--banks don't have money to lend, so businesses and people can't borrow to invest in businesses so that businesses will grow and create jobs, etc.

As far as the "paper" economy of the finance industry and the homeowners with big mortgages are concerned, we have an asset crisis--assets have been overvalued, and so we have less money than we thought we did, and so we can't pay our debts, which leads to bankruptcy. (There's another technical term like "liquidity" for this, but I can't remember it off the top of my head). The more bankruptcies there are, the more the value of homes and mortgage-based securities drops, further deepening the asset crisis, and so on. It is the banks' uncertainty about the value of their assets (except to know that it's a lot less than they once thought), that creates a liquidity crisis for the rest of the economy, which, if it causes businesses to shrink or fail, which leads to layoffs, which leads to people defaulting on their mortgages, which leads to further drops in the value of mortgage-based securities, which worsens the liquidity crisis. Wash, rinse, repeat.

So the question for government is -- how do you use the powers available to you to address the dual crisis? Do you concentrate on the liquidity side or the asset side? On the asset side, do you bail out banks by helping them shed their underperforming portfolios, or do you bail out homeowners to prop up the value of homes? On the liquidity side, are there things you can do maintain liquidity for businesses without relying on the banking sector?

If it were known, or knowable, how deep the asset crisis is, that would be the obvious place to inject the capital--it's straightforward, and we already have mechanisms that regularly move money between the federal government and the banks--that's what the Federal Reserve exists to do. Because of the crazy "Credit Default Swap" instruments that the finance industry has created without any oversight and sold and bought like mad, we can't readily judge how much capital would be needed to stabilize the banks.

That suggests to me that the sensible, though more complicated approach is to let the asset bubble deflate a ways, keeping the government's resources from getting sucked into the CDS quagmire, while moderating the asset bubble by assisting homeowners and creating new routes to keep liquidity going in the rest of the economy in spite of the banks' problems.

I don't know how exactly that would be done, but that's the course of action that seems to me to hold more promise than trying to bail out the banks.

Well, the problem with corporate capitalism is that lots of our wealth is tied up in complicated financial instruments--a 401(k) is a hella complicated financial instrument--so that a liquidity crisis in one place has real effects on other areas, and in fact throughout the whole economy. I agree that the priority of the government should be to help homeowners. Part of the idea of the government buying all these mortgage-backed securities is that the government is less likely to foreclose and more likely to negotiate, right? Also, one of the main problems seems to be that in most cases the original lender no longer has the authority to renegotiate, because they sold the mortgage, and the current holder of the mortgage can't renegotiate because that mortgage is backing some mortgage-backed security or other, and renegotiation affects the security, so the people with shares in the security have to give the approval, only those people aren't actually people, they are pensions and so on. If the gov't buys the authority to negotiate, at least it can do that.

Of course, I'd probably rather it do that through something like Brad DeLong's version of Northern European economics. Or just have the government keep writing big checks to homeowners every month. Why the hell not?

But there's some question of whether helping homeowners, however it's done, including the ridiculous Paulson plan, will help with several other problems of corporate capitalism that this crisis has made urgent. For instance, if the dollar were to suddenly drop 50% or so, it would be a disaster--and it could, and we don't have any good way of stopping it. If the Dow were to drop 50% or so, it would be a disaster--and it could, and we don't have any good way of stopping it. Our lesson from the last several stock-market and currency crashes does not seem to have been to cushion the bulk of people against repetition, but rather to make everybody even more vulnerable to a crash, in the hopes that… well, in the hopes that eggs would learn to bounce?

Seriously, I think that we have stuck ourselves in the position where if we try to wean ourselves from the excesses of credit-default swaps and the housing bubble by rationalizing our lending and investment and speculation systems, we vastly increase risk of having the whole thing crash. That's partly because the "wealth" of the country is much less than it appears; the US (and probably the world) is strongly overvalued. The banks' assets really are crap; not just the mortgages and HELOCs, but probably a billion dollars in credit card debt that is never going to be paid off. It just isn't; the money isn't there.

That's why I think there's going to be a period of very high inflation, wages as well as prices, to make that billion dollars in 2008 money be worth only half a billion in 2008 money in 2014. And all the mortgage and other nonsense with it. And all our assets as well. And during that stretch, before wages catch up, there are going to be a lot of homeless people and a lot of bankruptcies and a lot of poverty.

But I hope I'm wrong.


plus energy prices. "independence" aside, fuel costs mean trade is impaired as a credit/faith fix.

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