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September 29, 2008

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Joyless Moralist

The things I read were predicting (and I freely acknowledge being pretty dim on my understanding of the financial end of all this, but this is the buzz I got) that the Democrats may well push through another bill, this time on the party line, but containing lots of the socialist-type stuff that the Republicans got taken out of the original bill. So we may still get a bail-out, only with lots more nasties in it, like giving judges the power to rewrite mortgages and stuff like that.

Again, I'm not too savvy on all this, but we can't be certain yet that there will be no bailout.

Tom

Yeah, immigration would definitely help re-inflate the housing bubble.

I'm also glad that the bill failed; I think it's ethically important to reap what you sow. I'm not convinced the economy would go into another great depression if no bill were to pass. It seems that there is plenty of market incentive right now for new players to break into the financial industry. Let the old guard fail and be surpassed by a new guard; that's how the free market is supposed to work. Certainly, there may be some contraction of GDP, and we may technically enter a recession, but the people hurt the worst will be investors and formerly entrenched financial institutions. Joe Blow will be effected by the credit crunch in the sense that he won't be able to borrow money as freely and easily in the near-term. But in the long-term, new banks will take the place of the old, and lines of credit will be restored.

So I think we should either A) let the banks fail, or B) lend them money at a painful interest rate along with possible tax increases for banks that benefit from the bailout. Whatever money the tax payers give out should be returned with sizable interest.

Nato

No, too many businesses are dependent on borrowing to allow the credit market to freeze. No bank can pay their debits (because their credits aren't all liquid), and vicious circles mean that auctioning non-liquid assets would just make things worse. Considering how tightly linked supply chains are, the ripple effect of a financial meltdown would very quickly propagate throughout the economy, leading very rapidly to businesses closing down and so on. No, we can't just let it all go. That said, bailouts are very, very dangerous things and we should do the absolute minimum possible to prevent complete lockup. What that minimum is, I don't know, and I'm not convinced anyone else does, either.

Tom

The market is only temporarily frozen due to skittish investors. Investors provide the capital necessary for credit liquidity; banks can't lend money if they don't have any. Now that the US market is seen as vulnerable and weak, many investors are putting their money into less risky ventures, waiting for the markets to bottom out. The bailout would undoubtedly improve investor confidence and thereby liquidity, but is it really worth the cost? Should the government, in essence, invest in the stock market with tax-payer dollars? The bailout is more of a gift than an investment, however. If it were more like an investment, then maybe people would feel better about it.

I'm not convinced the market can't correct itself. I think the worst-case scenario is clouding people's judgment. It's not good to base policy on fear. All of that former capital liquidity didn't just vanish. It's out there somewhere being dammed up, collecting in pools. The government should try to break the dam, not add more water to overflow it.

Nato

At the risk of committing monetarist heresy, I aver that a credit freeze would slow the velocity of money and amount to a monetary contraction like that of the Great Depression, though I wouldn't expect it to be to the same extent or duration. A lot of liquidity would just disappear, and it wouldn't be a temporary thing, because real capital for which that money signals would be idled and sometimes destroyed. A case of hoarded seed-corn forcing fields to be fallow, permanently losing a season of output. Of course, this happens to some extent in every recession, but if the collapse of corporate paper only takes down, say, ten percent of credit-dependent firms, that represents a staggering impact, pushing unemployment into the double-digits for years.

If it's only US banks that fail, then it's not such a bad thing. We have a short, sharp recession as we realize a lot of bad investments all at once, plus a panic surcharge, then we go back to business, since the most sound and established firms will have found alternate sources of financing. If the failures are more general, then there may not be any liquidity available for years. Or, more likely, there will be a wave of nationalization that makes the $700 billion intervention we've been discussion sound minor.

Granted, the doom-talk does not help, and indeed increases the chance of the worst case scenario. It seems to me ridiculous to have basically said "give me a $700 billion blank check or the world will blow up!" The more likely the worst case scenario seems, the more pressure goes on the financial system in general. On the other hand, we need not talk about it for it to be on financier's minds, and banking failures have a long, very painful history.

Nato

I should add that liquidity has the same propensity as real seed corn to be consumed in a time of extreme crisis rather than be preserved for future production.

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