Wednesday, February 11, 2009

Geithner's Plan to Ruin Save the Economy

Henry Paulson's youthful clone, Treasury Secretary Timothy Geithner has floated the Adminstration's trial balloon of economic ruination recovery, Part II.

Details are sketchy, but it consists roughly of four parts:
    1) Provide up to $50 billion to help stem home foreclosures.

    2) Set up a public-private fund to absorb $500 billion of 'toxic' bank assets.

    3) Establish a consumer-lending facility to support up to $1 trillion in new lending. (Yes, that's one trillion in additional debt for a country already awash in it.)

    4) Create a "stress test" to determine if the bank is healthy.
There are a number of things, some of them unprintable on a public forum, to be said about this plan.

First, it's probably no accident that it's long on hope and sketchy on specifics. The Administration knows that the whole idea of the government 'fixing' the economy has been met with deep skepticism by the majority of the electorate. Even such typically biased polls as Pew and CNN show this.

The Feds have to keep the plan vague as long as possible to keep a lid on the simmering pot filled with people nearly ready to pull out the pitchforks and torches. Wall Street was not fooled. The market fell by nearly 5% from an already depressed state after Geithner gave his little talk.

Also, according to the Fortune story:
The administration said it will soon announce a comprehensive housing plan, which will lean in part on the Fed's efforts to drive down mortgage rates by buying mortgage-backed securities issued by government-sponsored mortgage companies Fannie Mae and Freddie Mac
Did you catch that? They want to make mortgage interest rates even lower. I.e. the plan will produce still more of the poison that has sickened the housing market, by putting still more people in still more houses.

Surely, one doesn't have to be an advocate of Austrian economics — and Geithner most certainly is not — to realize that cheap credit is at the foundation of the crisis. Then again, maybe one does and that's why the Feds keep stumbling over their feet month after month, regardless of the change of players, ever so much smarter than the previous crew.

Second, observe Item #1. Here we have the one element that most everyone agrees is a major part of the crisis and it gets, relatively speaking, a pittance. (That $50 billion can now be viewed as a pittance is a major part of the problem, too.)

Apart from everything else, this shows yet again what hypocrites these people are. They're not serious about addressing the problem as they themselves described it only months ago. But then, to pragmatists yesterday never happened and the future never arrives.

Third, the second item on the list at least does address some of the problem. Still, given how poorly TARP Part I worked out, as any honest person knew it had to, this will simply be more taxpayer dollars down the money hole.

Observe how it is to be done. By, "[c]reating a private-public partnership to take toxic assets off banks' balance sheets." This is exactly how fascism works in practice. The results will necessarily be similar to those of Italy in the 1920s or the U.S. in the 1930s. It is worse than explicit socialism, since it creates the illusion that a free market still exists, which will bear the blame when the whole thing turns out to be a disaster.

When that disaster comes, and capitalism is blamed once again, there will be increasing pressure for out and out nationalization of the banks, something to which this Administration is already far too philosophically inclined. (Some reports have them mulling it over already and, of course, to a degree, the implementation of TARP has produced that as a fait accompli.)

Observe, for example, the standard Progressive defense of the failure of FDR's policies (when and to the extent they're willing to admit they failed): it wasn't big enough. I.e. mixed socialism (fascism) fails, so we need the undiluted sort. The Italian socialists of the 1920s railed against Mussolini on exactly these grounds.

Why does Geithner believe this will work?
"Because the new program is designed to bring private sector equity contributions to make large-scale asset purchases, it not only minimizes public capital and maximizes private capital," the Treasury Department said in a fact sheet about the plan. "It allows private sector buyers to determine the price for current troubled and previously illiquid assets."
If he were serious about this, he would work to remove the barrier to private capital that exists now: the huge uncertainty created by TARP and other Fed actions in the first place. No rational businessman will move when he has no idea what the circumstances or rules are likely to be six months ahead.

But removing that uncertainty would require lessening government control of the financial markets, not increasing it. That is the one thing this Administration will never willingly do. Capping executive salaries is only the leading edge of the iceberg in this respect. The main body of destructive power is not far behind now.

So, instead, Geithner is relying — like any pragmatist technocrat — on some vague, hoped-for Rube Goldberg contraption to save his — and the country's — bacon. When it fails, he will be quietly dismissed with some excuse about his wanting to return to the private sector (where he'll rake in undeserved millions), and be replaced by an equally blinder's-handicapped technocrat with yet another 'plan'. And he will be ever so much smarter than Tim Geithner, according to the press.

Fourth, item number three is guaranteed to worsen the problem, a large part of which is the existence of too much debt that the Feds simply will not allow to be worked off in the only way known to succeed. As Vulcan Hammer quotes Tyler Watts explaining at
Capitalism depends on three highly complementary, yet distinct, institutions: prices, property, and "profit and loss." Classical-liberal economists have demonstrated the essential role of these pillars of prosperity for centuries. These fundamental institutions of the market economy are like legs of a stool. If we gradually weaken one leg, we will eventually bring the stool toppling down — economic collapse.

In this light, the implications of bailout are clear. Bailouts are designed to insulate people from the effects of bad decisions. When market prices change dramatically, exposing yesterday's poor investment choices, bailouts come "to the rescue," promising those left holding the bag that they won't have to endure the full cost of their errors...

...Bailouts, then, attempt to erase the effects of losses, or economic failure. But such efforts inevitably undermine the loss aspect of "profit and loss." Profit and loss go together — like up and down, left and right, good and bad. If we try to do away with losses, we'll wind up diluting the meaning of profits. After all, why strive for profits if Uncle Sam will cover your losses with a bailout? Why bust your butt to compete and succeed if you can just clamor for a handout instead? Bailouts destroy the profit motive — and all the benefits of a competitive economy." [Watts]

By removing the risk of failure, government inevitably creates an environment where crony-capitalism flourishes. And we end up with the same essential distortions in our economy that has led to the financial crisis. [VH]
I responded, quoting in part a previous post:
"It points to a much larger problem, one that reveals one of the root causes of the current crisis: the longing for the 'safety' of dependency, the desire to have an all-wise parent solve your problems."

When you surrender control of your economic decisions (or ask for the consequences to be modified by government) the economic results are bad for others, it's true. But the moral and practical consequences for you, too, are disastrous. It invites dictatorship via democracy, the hardest type to argue against or erase.

Apart from special circumstances, being an adult dependent is unhealthy for an individual. It's suicide for a culture.
But allowing individuals the freedom to succeed or fail is contrary to the entire mindset in Washington, as it is to much of the country on most points of the political compass. Many, far far too many, delude themselves — despite enormous evidence to the contrary — that government control of such matters is practical. This represents the (let us hope, temporary) triumph of large swaths of the Progressive philosophy, made possible in large part by unhealthy acceptance of Pragmatism over the past 100 years.

One result is item #4, the scariest of all. What Geithner can mean by a "stress test" we can only guess, but no reasonable interpretation bodes well for the banking system, and hence the economy. Major banks are still suffering from the arm-twisting performed only months ago.

Suffering from a free gift of billions of American taxpayer dollars? Yes. Free capital is morally corrupting and impractical, for many of the reasons discussed above.

It also furthers the popular view, only partly mistaken because it does occur, that this type of crony capitalism is the only type there is. (That this doesn't represent genuine capitalism, but is a misuse of the term, I leave aside for now.)

More narrowly, it also leads to questionable business decisions. As an example from a different area, Chrysler is in discussions with Fiat to offload a portion of their business, something Fiat would not have considered in the absence of the automakers bailout. It also means that the U.S. government is helping out an Italian carmaker, somewhat contrary to the foolish nationalism that, in part, justified the bailout in the first place.

Similar events are taking place in the financial sector, where M&As are underway that would not have taken place absent the infusion of government cash. It's been shown many times — for example, as far back as the botched railroad mergers of the 19th century — how an influx of government money distorts market decisions that generally have bad outcomes.

(Actually, Adam Smith discusses similar distortions resulting from government involvement a hundred years earlier, but that was prior to the useful experience of 100 years of a more or less full laissez-faire system.)

But, once again, the worst aspect of any such 'stress test' is the pernicious idea that the government should be in charge of picking winners and losers in the market, especially in the banking system. There are banks that need to fail in order to allow recovery to occur. As Spencer put it in the famous aphorism: "The ultimate result of shielding men from the effects of folly is to fill the world with fools."

Those bank assets, as has been pointed out many times by much more knowledgeable writers than me, do not disappear. They're absorbed by those who — one hopes, only time will tell — are better able to manage and deploy them. Witness, for example, how Wells Fargo snatched up WaMu from under the nose of the heavily subsidized and much better politically connected Bank of America, themselves suffering from the arm-twisting absorption of Merrill Lynch.

Finally, Geithner himself, discussing the plan said:
"Our challenge is much greater today because the American people have lost faith in the leaders of our financial institutions, and are skeptical that their government has — to this point — used taxpayers' money in ways that will benefit them,"
That "lost faith" is perfectly rational, given that it comes from the direct observation of the actions of our government now, and over the past few generations. Now, if only that skepticism would translate into broad resistance to the destruction of liberty — which is the real crisis, the hindrance of our rights to our freedom and property — then we could start to solve the economic one.


VH said...

I have to admit a sense of anxiety with the passage of the massive stimulus package; this will not end well and you are correct in saying that when it doesn't, the free-market will be blamed.

Jeff Perren said...

As accurate as I always thought Atlas Shrugged was in its depiction of human nature and society, I never imagined it would come true in quite so literal a form.

Unless there is a big backlash, and relatively soon, I can't see America ever becoming a free country again.

The so-called liberals are anti-liberty and most of the conservatives have no clue how to defend it.

I'm sincerely hoping that this only temporary pessimism on my part, but it's hard to see what will reverse the tide.