Patterico's Pontifications

11/15/2008

A Trillion-dollar Sandbox

Filed under: Economics,Politics — JRM @ 2:17 pm



[Guest post by JRM]

The $700 billion bailout of the banking industry had naysayers complaining that the government wouldn’t act consistently, that abuses would occur, and that it wouldn’t actually help the economy.

Let’s take that step-by-step.

Initially, money from the bailout was supposed to be used to buy bad mortgages under the theory that the government knew better than all of the other investors. The Treasury Department changed its mind Wednesday, deciding that, yeah, that wasn’t a good idea. This was after it got approval to spend the $700 billion pretty much as it pleased.

Now, the money will help to make the balance sheets better. Tomorrow is a new day, and who knows what fun the government will find to use the money on?

And abuses? Let us speak of a plucky little company called the Hartford Financial Services Group.

The poor folks at Hartford wanted a few billion dollars from the government. Unfortunately, since they had no banking arm, they weren’t eligible for the bailout. They were sad.

So, they went to find a bank to purchase, and the Federal Trust Bank was available for $10 million. (Ten million, with an “m.”) They purchased it, so now they’ll be eligible for the Capital Purchase Program, and will apply for $3.4 billion (with a “b”) in government funds.

I am not making this up.

Other companies have simply bypassed the requirements by being called Bank Holding Companies; the Treasury granted American Express’ request to be so designated because, you know, they need the money.

Meanwhile, the $300 billion expended so far has done roughly nothing. No one knows what the treasury’s next move is, and people are afraid of continued economic downturns. The slowdown in credit stays right where it was.

Other industries are lining up; the auto industry is next, followed by, presumably, the blog industry. I am hopeful that Patterico sells senior debt to the government for $6 billion, so I don’t have to continue to survive on the paltry $800 per post I’m currently paid.

There’s no indication of what a successful plan will do, no indication that the Treasury has fixed plans, and no indication that anyone should expect consistency from the use of the money. We have no targets which are supposed to be met, and Secretary Paulson’s bald statements that the bailout is working seem uncompelling.

People who bought smaller houses and have 10-year-old cars will continue to pay for their neighbors in the nicer area nearby. That’s the effect of the bailout so far.

I’m not saying the government should do nothing. But this continued throw-money-at-it and find out what works reminds me too much of a fifteen-minute discussion between the pilot of an airliner and ground control some years ago.

The plane’s ability to move vertically had been severely impaired by a mechanical breakdown, so they tried various things that didn’t work. The people on the ground were experts in the field, but once the first few things didn’t work, they had the pilot try something else as an experiment.

“OK,” was the last intelligible word said.

I’d rather do small things that are likely to work rather than socialize the financial sector, which has a serious downside. The total 2008 federal budget originally submitted was $2.9 trillion, and the bailout is now expected to exceed a trillion dollars.

We’re talking about huge numbers here, and I have no confidence that the current plan will result in anything but the eventual governmental takeover of massive portions of the financial industry.

It’s time to regroup, and stop once the first $350 billion is spent. Barack Obama said he’d stop programs that weren’t working; here’s one.

–JRM

46 Responses to “A Trillion-dollar Sandbox”

  1. So, nobody has any idea what’s going on or what’s going to happen?

    I feel reassured already!

    Techie (62bc5d)

  2. I watched Paulson last night on Lehrer, and he gave me absoutely no confidence that he knows what the hell he’s doing at present. There’s been no transparency at all during this process, and that’s just one of the reasons for the continuing panic in the markets. I hate to use memes that are often used inaccurately, but Crony Capitalism sure seems to be in vogue right now, especially after viewing the teams of lobbyists from Detroit currently screeching in the halls of Congress. We have to allow our domestic carmakers to go into bankruptcy if they run out of cash – it’s the only way they’re going to be able to get out of their onerous union contracts, and get management that’s capable of meeting the foreign competition on it’s own terms.

    Dmac (e30284)

  3. “So, nobody has any idea what’s going on or what’s going to happen?”

    Techie – That would seem to be the big problem – Uncertainty.

    But hey, you’ve got friendly Democrats inserting colloquy’s retroactively into the Congressional Record in attempts to make ir seem like the TARP was supposed to apply to the auto industry, so at this point, nothing is off the table.

    I’m not sure I agree with JRM’s take on taking the federal money, though. The strings attached that come with the federal ownership aren’t exactly desirable based on my understanding. If death is the only other option, though, what’s a company going to do?

    daleyrocks (5d22c0)

  4. But, but the UAW President said labor is only 8% of the cost of a car?? Could that be true. I was under the impression that the domestic car companies had huge health and welfare/retired workers’ obligations and hourly cost per employee was close to $90 an hour, while Toyota and Honda were on the hook for much less. But I’m sure the Feds can do a crackjack job running car companies or even Big Oil as competently as they do the Veteran’s Administration. Right.

    madmax333 (0c6cfc)

  5. The last number I saw re cost/car in Detroit was that; a, it cost GM more in health/retirement benefits than what they spent for metal; b, their health/retirement per car was over $1500.
    This was several years ago, I’m sure it’s worse now – and the UAW Pres is throwing around numbers that reflect the new contract that doesn’t go into effect until next year.

    Another Drew (bb1716)

  6. I also viewed Paulson on ‘the News Hour’ and it only served as evidence the situation is getting to him and it is now impossible to put, excuse me, lipstick on this pig.

    He probably longs for the end of his tenure. As for large numbers, were hundreds of billions viewed as any less staggering when they reflected the size and scope of government spending. I think not.

    Stanford Matthews (ef0a87)

  7. When the auto bailout is all said and done, the union workers will get a large pay increase to compensated them for the inflation surge caused by the bailouts.

    The rest of us are screwed.

    Perfect Sense (9d1b08)

  8. It’s not a funny subject but your post was clever and made me laugh. So thanks for that!

    DRJ (a50047)

  9. AD, Detroit is now more of a benefits distributor than actual makers of autos.

    Dmac (e30284)

  10. “AD, Detroit is now more of a benefits distributor than actual makers of autos.”

    Which means that countries with universal health insurance are actually subsidizing their industries against us.

    imdw (cd4b7a)

  11. Big deal. I get $800 per comment.

    Official Internet Data Office (88f993)

  12. they absolutely should have “done nothing”. The uncertainty about bailouts and the huge wealth transfers going on from savers to those who made bad bets is dragging the economy down along with the financial industry. We’ve had bubbles pop before. Treasury should have stood by and let insolvent trading desks go under. Financial companies are the easiest thing in the world to create. Money will slosh around. there is no reason to worry if Goldman Sachs goes bankrupt. A substitute will be ready to fill in.

    And the desire of Paulson and others for more leverage is just insane. Let things DELEVER!

    TCOhebebanned (d46622)

  13. more Detroit…
    I remember back in the 80’s/90’s when charges were brought against foreign producers for “dumping” –
    selling their products in the U.S. for less than they were sold for in their home country.
    I would think that GM & Ford could be charged for “dumping” in that every car they sell in NoAmerica is at a loss. In the last twenty years, how many times have GM or Ford reported a profit on North American operations (vehicle manufacturing and sales – not their finance arms, or industrial production)?
    Damn Few!
    Sounds like dumping to me.

    Another Drew (bb1716)

  14. Comment by imdw — 11/15/2008 @ 4:06 pm

    Exactly, one of the best things you’ve ever said.
    Foreign countries subsidize agriculture, and can’t compete against the U.S. farmer.
    The Euro’s subsidize Air-Bus, and Boeing is still able to put a better plane in the air, for about the same money, or less.

    Another Drew (bb1716)

  15. and another thing…
    Mercedes, BMW and Honda (if not others) build cars/trucks here in the USA and then export them (certain models) to their home countries and elsewhere.

    Here’s a number that is staggering:
    Average earnings of a UAW worker, wages & benifits: $73.20/hr
    Average earnings of a worker in a Toyato/Nissan/Honda/etc plant (non-union), wages & benefits: $48.00/hr
    Avg of U.S. manufacturing: $31.59/hr (w&b)
    H/T Bainbridge
    And, on top of that, a Toyota requires fewer hours of labor to assemble than a GM car – better technology making workers more productive.
    And, anyone who’s ever taken a serious course in Economics knows that the secret to creating wealth is productivity.

    Another Drew (bb1716)

  16. I’m one of those people with the least expensive home in the neighborhood and cars that are used and PAID for, we scrimp and save to try to get ahead, we’ve always put the most money we can into our 401K and I AM PISSED!!!!!!!!!!!

    Karen (c36902)

  17. Wait. I always thought that people who bought canned meat and freeze dried food and stocked up on ammo were nutcases.

    That’s going too far, right?

    Right?

    Hello? (Damn, I think the internet shut down.) Hello?

    Don (9ca635)

  18. It seems odd to me that I now happen to live in a house that has a bomb shelter. (Trap door out through the garage and everything. The kids love it.) I was a real (pardon me) blast from the past.

    Now all of a sudden I’m resonating with those folks who were once-upon-a-time worried about a Really-Big-Problem.

    Don (9ca635)

  19. And, anyone who’s ever taken a serious course in Economics knows that the secret to creating wealth is productivity

    That the Japanese learned their auto manufacturing expertise primarily from an American (Edward Deming) is one of the bigger ironies in the story of how they came to dominate the US marketplace.

    Dmac (e30284)

  20. Comment by Dmac — 11/15/2008 @ 7:35 pm

    Yes!
    Especially after his entreaties to Detroit were snubbed quite harshly.
    So, he went to Japan and taught them everything he had offered to Detroit.
    But, that has been the secret of Japanese success since coming out of the Medieval Ages during the Meiji Restoration; they look at what systems are used around the world, and adopt those that are the most successful.

    Another Drew (bb1716)

  21. Deming actually learned his methods from Walter Shewhart who pioneered statistical controls. Deming actually went to Japan to help them with the census, his area of expertise. He saw that they needed a way to control manufacturing quality. Taiichi Ohno, the production manager of Toyota, and the founder’s son, Kiichiro Toyoda, should receive equal credit. Deming taught them the statistics. The rest they figured out before he showed up after the war..

    It’s a shame that McCain sank his campaign to push for approval of this stinker of a bill. This is the son of the Mexican bailout that Rubin sponsored to bail out his friends on Wall Street. That reenforced the moral hazard and this will confirm it once more. Down that road lies socialism and industrial policy. Fascism will soon follow as free market die hards oppose the policy and are squelched.

    Mike K (2cf494)

  22. Comment by Mike K — 11/15/2008 @ 8:54 pm

    Well, if we’re going to have Fascism,
    at least we’ve got the right crowd in control.

    Another Drew (bb1716)

  23. Bush is an idiot.

    nk (87c95e)

  24. Comment by Another Drew — 11/15/2008 @ 9:19 pm
    …starting 1/20/08.

    Another Drew (bb1716)

  25. …starting 1/20/09!

    Another Drew (bb1716)

  26. Another Drew wrote:

    And, anyone who’s ever taken a serious course in Economics knows that the secret to creating wealth is productivity.

    I’ve used it as a blog tagline before: if liberals really understood economics, they wouldn’t be liberals!

    But supporting productivity is the polar opposite of unionization, the goal of which is to maximize the number of workers employed and the amount they are compensated. It is only if potential sales are unlimited that said union goals can be compatible with increased productivity.

    The Dana in Pennsylvania (556f76)

  27. Yes, sandbox is a great metaphor. The bailout money has been used by the banks to do the following: pay off their bad debt; buy other banks; hold on to the money. Lending, however, has not increased and smaller businesses still don’t have the money to operate effectively. Meanwhile, the big automakers are begging for money despite all of the bad business decisions they’ve made. They could’ve at least walked in with restructuring plans before asking for the money. The big three are like the prodigal sons of America and, unfortunately, the lesson here is to create a business so indispensable to the public that it will be saved by the government no matter how the business is operated. The only way to fix this problem is let the big 3 file for bankruptcy, otherwise we’ll just be adding more sand to the sandbox.

    Paul Hsu (f890a6)

  28. “Foreign countries subsidize agriculture, and can’t compete against the U.S. farmer.”

    We subsidize agriculture quite a bit too. What was the latest ag bill? Billions?

    imdw (b7f555)

  29. We sure do, and to even look at the billions wasted in ethanol subsidies is to look at massive gov’t inefficiency in that marketplace – if we were really serious about helping alternative fuels come into dominance, we’d allow the tariffs on Brazilian ethanol exporters to expire and allow them to compete with the corn farmers here. And guess who’s a big – time beneficiary of the largesse of folks like ADM? Mr. Hopey – Changeytude!

    Dmac (e30284)

  30. Do NOT lower the fed interest rate anymore! What has been done by the fed for the last 5 years has only made this economy worse. Instead, freeze the fed-rate for a quarter and announce increases in the fed overnight rate of .25%, per quarter, until the currency has been “de-commodified” and money becomes “real money” once again. “Liquidity” (I hate that euphemism), will occur in the first quarter with new found confidence in a disciplined approach to this fiscal crises made by fools with OPM.

    As for Paulson and these bailouts, I share the same lack of confidence in Treasury as the rest of the comments. Perhaps Paulson should become Ted’s brain surgeon, with Greenspan assisting, Bernanke on anesthesia and Andrea Mitchell, chief surgical nurse. (end sarcasm).

    C. Norris (f77fbd)

  31. Comment by imdw — 11/16/2008 @ 9:29 am

    Yes, on certain commodities, which places us in violation of the WTO regulations on Ag products.
    But, on those commodities that do not receive subsidies, the American farmer out-produces everyone else in the world, at a lower, fair-market price, with out-standing quality of product.
    Most other countries are barely self-sustaining, we are a net-exporter.
    If you shut down the American farmer/rancher, the World will slowly starve to death.

    Another Drew (e3760b)

  32. “It is only if potential sales are unlimited that said union goals can be compatible with increased productivity”.
    Comment by The Dana in Pennsylvania — 11/16/2008 11/16/2008 @ #26

    However, increased productivity is counter to the agendas of socialism and environmentalism. The Greens want to see the end of the automobile and the Pinks want to “featherbed” auto production. It’s a perfect contradiction in the same party.

    C. Norris (f77fbd)

  33. “But, on those commodities that do not receive subsidies, the American farmer out-produces everyone else in the world, at a lower, fair-market price, with out-standing quality of product.”

    Which agricultural products are you thinking of?

    imdw (7c85b9)

  34. “However, increased productivity is counter to the agendas of socialism and environmentalism.”

    increased productivity makes both of those easier. We have more wealth to spread and can make the same amount of wealth with less resources.

    imdw (d2f168)

  35. Comment by imdw — 11/16/2008 @ 1:54 pm

    imdw…
    you might find this document of interest re ag subsidies
    Some points…2007 #’s
    Total Ag Production…$292B
    Total Ag Exports…… $90B
    Total export subsidies…$250M

    The major effect of ag programs by the U.S. Gov’t is to raise pricies to American consumers through import restrictions (sugar is a classical example).
    Most countries have heavily subsidized the export of their ag commodities to keep payments to farmers high, and allow a low trade cost. As you can see, export subsidies for U.S. ag products amounts to 0.28% of total exports.
    The success of the American farmer in international trade has nothing to do with government subsidies, but on the productivity of the farmers themselves.

    Another Drew (e3760b)


  36. The success of the American farmer in international trade has nothing to do with government subsidies, but on the productivity of the farmers themselves.”

    The 2002 ag bill had 16 billion in subsidies per year. You’re missing a bit by just focusing on 250 million. But you said:

    “But, on those commodities that do not receive subsidies, the American farmer out-produces everyone else in the world, at a lower, fair-market price, with out-standing quality of product.”

    i’m asking again, which products are you talking about?

    imdw (c08e99)

  37. Comment by imdw — 11/16/2008 @ 2:59 pm
    Read the report.
    That $250M is EXPORT subsidies, the rest doesn’t matter if it didn’t effect exports.
    As I said, we are talking about international trade, and the American farmers success in that endeavor.
    Internal subsidies have the effect of raising the prices to the American consumer,
    and have no effect on international trade beyond making it more difficult for foreign producers to sell their product in the USA – see SUGAR!
    Most subsidies/price supports are on commodities that do not particularly export well, such as milk. Price supports pay the farmer the difference between (roughly) the market price of a commodity and the price-support level. It subsidizes the farmer, but does not lower the price of a commodity, which is set in the market place.
    And, if you read the report, you would see that it is not a cheerleader for the agricultural policies of the USA in what manner they may conflict with treaty obligations under the WTO.
    It is, after all, a WTO report!
    The economic ignorance of Liberals is not just painful, but disgusting.
    Thank you, NEA/AFT etc.; you’re doing a wonderful job of bringing education to the masses.

    Another Drew (e3760b)

  38. “That $250M is EXPORT subsidies, the rest doesn’t matter if it didn’t effect exports.”

    If its a commodity, a subsidy for producing that commodity is going to affect the market, whether its export or domestic.

    “Most subsidies/price supports are on commodities that do not particularly export well, such as milk. ”

    In 2004 35% of subsidies, or 2.8 billion, went to feed grains. Cotton, wheat and rice got 14-17% each. Those are all quite exportable. Dairy got 3.7% of subsidies.

    http://en.wikipedia.org/wiki/Farm_Security_and_Rural_Investment_Act_of_2002

    I’m asking again, mr-denouncer-of-ignorance, which commodities are you talking about when you say:

    “But, on those commodities that do not receive subsidies, the American farmer out-produces everyone else in the world, at a lower, fair-market price, with out-standing quality of product.”

    I would love to know which commodities these are.

    imdw (43ea3b)

  39. I gave you figures from a report for 2007, why do you persist in asking me about 2004, and 2002?
    And, if export subsidies are only 0.28% of the total value of exports,
    what is the effect to the price of those commodities?
    And, since the vast majority of subsidies are price-support payments which are determined from the Market Price of a commodity, why would that effect the World Trade Market Price of that commodity?
    Again, most agricultural subsidies are in the form of price-supports that do not depress the market price of a commodity, they increase the income level of farmers.
    The other large area of subsidy is import restrictions and tariffs that increase the price to the American consumer by artificially increasing the market price within the American market (Sugar, Ethanol, and others)
    If we are so heavily subsidizing agriculture in our exports, why is it not mentioned in the WTO report since that would be a direct violation of the terms of WTO?
    Follow the link to the WTO report.

    Another Drew (e3760b)

  40. “Meanwhile, the $300 billion expended so far has done roughly nothing. … The slowdown in credit stays right where it was.” Actually, Libor and commercial paper rates have come down. The TED spread is still abnormally high because treasury yields are so low. I don’t know if the bailout had anything to do with that amelioration or not. Trying to force lenders to lend is like pushing on a string, when folks are fearful to borrow. These bailouts are a disaster, and I’m disgusted with “conservatives” who backed them.

    gp (4db77f)

  41. gp – Everybody scewed up. They listened to Paulson and Bernanke.

    There are close to $500 billion of deposits in excess of normal liquidity requiremements ($8 billion) at the Fed. You are correct. Banks aren’t lending and the government so far hasn’t been able to “encourage” them to put the money to work.

    daleyrocks (5d22c0)

  42. ““But, on those commodities that do not receive subsidies, the American farmer out-produces everyone else in the world, at a lower, fair-market price, with out-standing quality of product.””

    You don’t know, do you?

    imdw (cb7581)

  43. imdw – Did you look at the link or are you just going to keep whining?

    daleyrocks (5d22c0)

  44. Comment by imdw — 11/16/2008 @ 7:28 pm

    It doesn’t matter to me what individual commodities received export subsidies since those subsidies amount to less that 1% of the total value of those exported commodities.
    Less than 1% is not a distorting influence on the market.
    If you can’t deal with that in a logical, empirical manner, you are not interested in the discussion, only in causing disagreement.
    That would make you a troll!

    Another Drew (e3760b)

  45. I doubt that the Hartford deal will go through, unless the supporters of it can provide adequate documentation. You know: proof of sufficient contributions to the Obama campaign.

    Sue Do Nym (677e59)

  46. 45 you’re bad- dissing the messiah like that. And after a GOP Senator suggested that perhaps Hank Paulson was taking care of his own friends, what with the secrets about who is getting what amounts of cash.

    Bush is such a wonderful human being, what with talk of letting Obama decide on where some of the bailout money should go before he actually takes office. I can’t see a demmie doing that.

    madmax333 (0c6cfc)


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