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Technicals and the modern error.

WhiteandKeynes.jpg
Keynes (right) with Harry Dexter White

I was just too stubborn to ever be governed by enforced insanity.

I hope one day to be able to say that truthfully. Because right now the Keynesian economic prescriptions I hear everywhere, since they issue from the fundamental materialism of modern Liberalism, look like a renewed attempt to enforce insanity.

In the Financial Times, though surrounded by some useful advice, we get a restatement of it: “Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge.”

Technical challenge drastically underestimates the character of what we face. It underestimates the character of what is called the economic system. It underestimates the nature of man.

It is a common modern error to assume that the technical characteristics of a thing amount to the whole. But this is obviously wrong.

There is so much more to it than that. The Keynesian may think he has captured “demand” or “consumer confidence” or any other of a thousand elements — captured and bound it to a number in a statistical model. But even he, if pressed, would acknowledge the reality of things like psychology, fear, exuberance, etc — things outside the competence of statistical models, or at least incompletely assayed by models. So there is human psychology, which is not technical.

There is also the spiritual crisis of our age. The crisis of modernity — that same streak of madness which shall insure that my generation is one of whom history will remember it invented the school-shooter, a peculiar and depraved innovation in suicide-murder. Modernity imagined it could dislodge man from the foundations of his moral framework, and go on his technical mastery alone, but it was a terrible error. It is an error many centuries in the making. A colossal and ruinous error.

The spiritual nature of man cannot be apprehended by numbers and technique alone. And the spiritual nature of man affects everything about him, even his economic systems.

But our dear Keynesians, being modern Liberals, have stifled their perception of these things, on the grounds that they are fundamentally unreal. Man does not kill because of his spiritual nature! There is no such thing as his spiritual nature. No, no: it's always the Technicals.

So the school-shooter is fundamentally an irresolvable puzzle to him. And unless we want to hold the view that the economic crisis is quite unrelated to the spiritual crisis, we must say that the economic crisis will be fundamentally a puzzle to him as well. All the technical expertise in the world will not enlighten him.

The causes of this economic crisis lie, at base, in those things this writer has dismissed as a “morality play,” and Keynes is commonly thought to have dismissed with his quip we’re all dead in the long run. The causes cannot be spiritual, for if so then they must be fundamentally unreal in his mind. For him it is always a technical question. The great Technicals will save us, in golly good English fashion.

To hell with that premise. It's part of what got us here in the first place.

Nevertheless, once we acknowledge — even in our assay of economic recessions — that man is a dualistic creature, that his spiritual nature is real despite our general inability to quantify it, we must not instantly rush off in the other direction and seal ourselves up in a classroom of abstract jeremiads against the spiritual crisis.

In others words, modern man has made an idol of his technical capacity, and this is a great error; but this does not mean that we should dismiss the technical facts we have uncovered, as he dismissed the spiritual facts we can’t not know. Economic science is a useful thing indeed once its limits are acknowledged, and I have great suspicion when someone reproaches it tout court with a sneer.

With all that as a preface, I present this article on Dick Fuld, Chairman and CEO of Lehman Brothers from 1993 until its demise in September 2008. My question is this:

Is it in the nature of Capitalism, or in the nature of America, or indeed in the nature of man, to produce tragedies (in the technical sense) like this?

Comments (105)

I keep waiting for Zippy to post something defending his support of the Wall St Bailout and how it was gonna profit we the taxpayers.

America has Paulson bailing out his Goldman buddies and sticking it to Goldman rivals and I am sure there is no connection between Goldman and Madoff.

Well, I won't hold my breath.

Have a Blessed Christmastide

IIRC, Zippy's defense of the bailout wasn't primarily based on a belief that it would work. Rather, faced with a very real crisis, his native authoritarianism required that he get behind the solution offered by those in charge.

I should have said that Zippy's support for the bailout was a combination of thinking the TARP had a decent chance of working and believing that _something_ had to be done and that what Paulson stated would be done should be done because he had stated it, and that would itself bring about investor calm by creating greater predictability in the economy. (One of my problems with this second "famous for being famous" approach is that it seems it would apply equally well to walking backwards twenty times around a tree at the full of the moon so long as investors happened to believe that it would help the market and would calm down if it were done.) But all this is to give Zippy a hard time in what I expect is his absence. The earlier threads speak for themselves, and people can draw their own conclusions as to what his position was, so that we don't misrepresent him.

One thing that occurs to me as I look at the main post is that it may be that ignoring human motivations is itself in an important sense a technical error. That is what those of the anti-Keynesian economic school would say, I think. Free market economics work better than their alternatives _because_ they take into account what people are really likely to do, the problem of perverse incentives, the dangers of expansion based on inflationary monetary policy and the expectation of bailout, and so forth.

I once heard part of the trial of a school shooter in Canada, the prosecutor's summing up. I was horrified to hear her say this: "There's just something in some people that makes them evil." Not horrified at the idea of evil residing in man, but that she was saying that there is evil inherent in *some* people that cause *them* to do evil acts . . . Most of us are fine, in other words, we're all just naturally good, except for those aberrant few that have somehow gone wrong . . . That way lies madness indeed.

So from her perspective, tragedy comes from an aberrant nature, one that could perhaps be fixed by "technical" means -- genetic alteration? getting rid of the aberrant ones (asylums or execution), maybe before they do too much evil? I don't know -- but where does one draw the line? Who is aberrant, and who decides?

From my perspective, of course, we are *all* capable of great evil, and any great tragedy, while it might be helped along by its surroundings, is precipitated by the evil nature inherent in *every one of us*, not just some aberrant few. The miracle, I sometimes think, is that there is as *little* evil as there is, with such fallen creatures as we all are.

One of the greatest lies that exists is that man is basically good, and therefore certain ones of us -- the wise elite -- are capable of seeing exactly how to make the circumstances of life such that they will bring out the goodness of man and solve all our problems. No more tragedies if we just "fix" the economic system, say, so that everyone has "enough," the justice system so that it always works perfectly, etc. . . . Ah, yes, man the great technician . . . and the elite technicians themselves are always all so altruistic and wise, wiser than the rest of us by far . . .

Why are we talking about Zippy, anyway?

Look, as it happens we actually do have an example of what might have happened if the Treasury and the Federal Reserve had just let the banking sector collapse.

Iceland's three main banks collapsed in the fall. It's stock market dropped almost 80%.

Now how much we can extrapolate from Iceland is obviously an open question, but a FT report on that country's misfortunes the other day ended on this alarming note:

Sitting in an old fisherman’s cafe by the port, Orn Svavarsson shakes with rage. He sold his health food business three years ago when he was 54 and, like many of his countrymen, put the money into the stock market. It has been wiped out.

“The Icelandic people are too lazy,” he says. “Why don’t we go to the airport and block it until we get answers?

“For the first time in my life I have sympathy with the Bolsheviks; with the French revolutionaries who put up the guillotine.”

A crisis that turns small business owners into Communists is a pretty durned serious one, and I'm glad avoided it here (if indeed we have avoided it, though I think the evidence so far is that we did: we still have banks, even if they are pretty dysfunctional.)

Lydia: in my view free market economics participates in the modern error almost as thoroughly as Keynesianism. They are both theories constructed on the posited materialism of modernity. They both depend on that reductionism which fails to perceive man as he is.

Well, nothing I'm taking from free market economics, including any predictions, 20-20 hindsight, or prescriptions here, depends on or implies materialism or reductionism. But I certainly do think that continual bailouts arise from failing to perceive man as he is!

And the fisherman is obviously being irrational. So, because people think irrational things, we should do whatever it takes to avoid crises in which they irrationally start thinking positively about Communism? I mean, obviously, he picked up that crazy connection from somewhere, but that doesn't mean the government should borrow from the future, engaging in unsound economic activities, just to placate him. People in Iceland are, according to him, lazy, so now he's sympathetic to the Bolsheviks? It don't even make good nonsense. And if printing more money, building up to the next crash, the next crisis, continuing to let people think we can make something out of nothing, is what's necessary to continue to keep people liable to think that way from thinking that way, then I say the price is too high. That interview should hardly make us think, "Phew! Whatever else, let's have the government do some sort of money magic to stave off a crisis that's going to result in fishermen's thinking like _that_!"

He's not a fisherman. He's a small businessmen who lost everything on the stock market. I think the difference is important. Small businessmen are generally practical, common sense people, the backbone of free market systems. The crisis turned this capitalist into a Communist, and it's a bit frightening, simply as an anecdote. If my uncles, who own a small business in Denver, were preaching Bolshevism to me, I would be really worried.

Of course Communism is irrational. But a 80% collapse in equity wealth will drive people to wild and terrible irrationalisms. So far we're holding steady at half that in equity losses.

Certainly Communism is wildly irrational, to say nothing of its intrinsic wickedness, but so also was the participation of the entirety of Iceland's financial establishment in the global carry trade, itself made possible by an irrational and excessively articulated latticework of speculative wagers, all sustained, ultimately, by irrational monetary policy and irrational and unsustainable inflation in asset values, all predicated upon the irrational belief that such assets would never depreciate. We've already been down the road of attempting to conjure from recalcitrant economic fundamentals, the sort of fundamentals that lie beneath all of the froth of the stock markets and the self-adulation of Richistan, the illusion of limitless, effortless, automatic wealth, and the monetarists, Keynesians, and free-marketeers all trod that path, albeit each with his own peculiar gait.

That fisherman and small businessman is not alone in his irrationalism in this moment. Many of my younger coworkers, of the generational cohort immediately aft of mine in the sequential reckoning, who only a few short years ago were intoning libertarian pieties and shibboleths, now mutter darkly about guillotines and Bolsheviks, and could not be induced to vote Republican by any emolument, however lavish. The lesson, of course, is not that guillotines and Bolshevik revolutions are laudable things, nor that the Democratic party is a worthy repository of hopes for national recovery, but that every irrationalism has the capacity to summon forth an equal and opposite irrationalism - and that the economic mindset which has dominated, lo, these past two decades, now stands exposed as the grotesque irrationalism that it is, irrational because of a surfeit of rationalist faith in the capacity of the great, good, and brilliant to model human behaviour, to isolate unreason in precise but abstruse mathematical constructs, and to generate wealth by sheer dint of cognitive labour, absent the requisite material, productive foundations.

Excellent piece, Paul, BTW.

And wasn't Harry Dexter White a Commie?

I apologize for reading too quickly and misreading regarding the small businessman.

the illusion of limitless, effortless, automatic wealth, and the monetarists, Keynesians, and free-marketeers all trod that path,

I don't know. It's my impression that the monetarists are exactly the guys who have been warning about limitless growth, over-expansion, predicated as it has been upon faulty monetary policy. In fact, it seems to me plausible that there would be an odd coming together of those who talk about the need for austerity and self-limitation and a certain type of free market libertarian, provided we were imagining the "austerity" and "limitation" as coming about by means of a necessary correction in the market after all the past illusion-based expansion rather than by means of further taxation, etc.

Here's one analogy I'd like to make regarding "technical" solutions vs. "spiritual" solutions. Compare "comprehensive" sex education. The moral critique points out that it introduces stuff into children's minds that doesn't belong there, that it encourages immoral behavior, that it puts further pressure on and removes support from young people who intend to be chaste. The practical critique points out that it increases STD's, the very thing it claims to combat. These are not incompatible, and the latter is not a capitulation to materialism. You go ignoring human nature and God's plan for sexuality, you end up with a practical mess.

Similarly, there is nothing materialist about pointing out that Keynesian economics both encourages imprudence, etc., and hence is immoral and also that it only leads to further problems--i.e., that it's technically wrong.

I don't know. It's my impression that the monetarists are exactly the guys who have been warning about limitless growth, over-expansion, predicated as it has been upon faulty monetary policy.

Some of them no doubt have been warning about our cascading follies, but it seems to me that Greenspan was nothing if not a monetarist of a sort, and he was a pimp and pusher throughout all of this.

In fact, it seems to me plausible that there would be an odd coming together of those who talk about the need for austerity and self-limitation and a certain type of free market libertarian, provided we were imagining the "austerity" and "limitation" as coming about by means of a necessary correction in the market after all the past illusion-based expansion rather than by means of further taxation, etc.

Except self-limitation is not sufficient, and never has been sufficient, to avert crises and calamities of the sort we are now confronting, inasmuch as self-limitation, to a certain species of libertarian, really doesn't carry its native meaning, but instead refers to the check that markets place upon individual participants. Markets, such as that in CDSs, will self-regulate, and screen out the bad actors. Except that one of the lessons of the present unpleasantness is that markets do not perform this function reliably; they do not effectively self-regulate, but can be borne aloft for a time by a strange reflexivity that allows irrational exuberance to alter our perceptions of reality. It is no answer to this to state that the inevitable collapse just is the return of self-regulation, for if this regulating function is to have any value at all, it must minimize the calamitous effects of irrationalism and malinvestment before these have the capacity to bring the world to the precipice of depression, harming uncounted millions who never participated in the irrationalism in the first instance. If self-limitation/regulation in the markets really means the bubble-depression cycle, than the Devil can take it. If, on the other hand, it means that the denizens of Richistan will voluntarily acquiesce in the imposition of limitations upon the sorts of practices that proved immensely rewarding to them, yet brought the world to the edge of the abyss, then I'm all for it; for the plain fact of the matter is that many people had been warning of the looming consequences of imprudent policies - bad mandates here, bad deregulation there, an absence of prudent regulation in some other place, Greenspan opening the monetary floodgates like a tanker-truck of beer at a frathouse kegger - all along the path to the present crisis. Systems do not self-correct. People self-correct, both individually and collectively, by deliberating as to the nature of the good, and as to the prudent means of realizing a diversity of goods in specific circumstances, and they do this by limiting their own appetites, and by limiting the collective appetite, by law.

And the win goes to Maximos! White was indeed a Commie.

Greenspan was nothing if not a monetarist of a sort

I'm sure you know as well as I do what the von Miseans had to say about Greenspan. You probably know it better than I do. "Of a sort" there carries a world of meaning, especially when it comes together with your later reference to his inflationary policies. That is hardly monetarist behavior!! Not by a long, long shot.

And again (again) I point out the perverse incentive of the expectation of bailout. I believe this played a crucial role in the encouragement of crazy and irrational behavior. People are unlikely to limit their imprudent policies if they believe someone will shake a money tree when the inevitable crash comes. You are so right that it is people who are self-correcting. And people are bad, too, and will self-correct only if cause and effect is kept continually before their minds and if they do not believe they can get away with stuff that causes crashes and all sorts of pain to other people. There, I expect, we agree more than we disagree. But I say it follows from that that my earlier analogy from another thread was spot-on. To call all of this "capitalism" like calling it "Junior hunting" when somebody else shoots a deer and puts Junior's name on it after Junior has blundered around and shot himself in the foot. Only I put it better the first time.

Is it in the nature of Capitalism, or in the nature of America, or indeed in the nature of man, to produce tragedies (in the technical sense) like this?

Yes. In the case of Capitalism, it suffers from a seriously flawed account of the human person. The Liberal holds capitalism is best-suited for the exercising of man's moral free will. Yet, simultaneously we are told the Market operates according to its own logic and set of laws that render traditional ethics mostly irrelevant, private preoccupations. The Market ensures the self-regulation of supply and demand, just distribution of resources, and equitable rewarding of ingenuity, innovation and risk. Capitalism is saddled then with the tragic contradiction of placing the “free individual” within a deterministic, impersonal system that reduces the moral actor to a superfluous state. We see the consequences of fictional theories, poor anthropology, and operational atheism coming to a head in this crisis. These would be heady days for the Christian iconoclast, if the implosion of myths and destruction of modern icons and idols didn't come as a result of so much human misery.

Kevin, it is clear that you did not read the material presented before that question (or read it and chose to ignore it) -- the Times of London article on Dick Fuld. All this talk of the Market is part of that story, of course, but the article, I think, points to deep things than economics.

As I recall, the vonMiseans do not get along well with the monetarists, regarding the Chicago School as yet another claque of fools adulterating the pure doctrine. Some of them would even argue - the more so the more sympathetic to hard money doctrines they are - that Greenspan's policies are precisely what one should expect, off at the end, from monetarism: It still permits the limitless expansion of the money supply.

Certainly, the prevalence of moral hazard in the system was, and remains, a factor, but it was not, and is not, the only factor back of the crisis. Many people engaged in luridly imprudent behaviours not merely, and sometimes not even, because they had the intuition, off in the back of their minds, that they were Too Big to Fail, but because they believed their own hype. I'm second to no one around here in believing that Too Big to Fail really means Too Big to Justly Exist, and that there is far too much moral hazard in the system, but many people collapsed the distance between their fundamental fantasies and reality, and followed utterly perverse incentive structures: originate more loans/securities/derivatives and earn a fatter bonus, even if the underlying debt is ultimately as bogus as a three-dollar bill. They need to be exposed, not merely to the harsh disciplines of reality, but to the regimens of the law: You will not do these stupid things again.

Paul, actually I did. Any economic or social theory that subordinates the spiritual to its own standards, or acts as a corrosive agent on the soul (and modern economics does both) will produce great tragedy.

It seems to me that strictly speaking, the modern reductionism cannot even manage to produce tragedy. It takes something more than materialism to be tragic. The great-souled man may overreach and fail in any institution. It is not unique to the Market.

Oh, as for Lehman, that firm is not a one-off aberration. The same risk management practices that Fuld condoned, were also in effect at Goldman, Citicorp, AIG, Merril, etc. etc. The differences were in scale, not in kind.

It seems to me that strictly speaking, the modern reductionism cannot even manage to produce tragedy.

O.K., I see your point, we're not even worthy of tragedy. Tough to accept that verdict.

Well, I admit, I'm using the term "monetarist" as I was recently taught it in a high school economics curriculum put out by Bluestocking Press. They equate "monetarist" with, as far as I can tell, absolute commitment to the doctrine of hard money and zero inflation of the money supply.

Paul, actually I did. Any economic or social theory that subordinates the spiritual to its own standards, or acts as a corrosive agent on the soul (and modern economics does both) will produce great tragedy.

The material and spiritual worlds must be in balance for humanity to achieve its highest potential under God's plan. Man was created to be both a material and a spiritual being. The spirit of humanity also fails under a system which goes from restraining to subordinating the material to the spiritual. This is the flip side that many Christians fail to realize.

we're not even worthy of tragedy

Not true, Kevin. We're still men, and man is a creature ever capable of tragedy.

Mike T: That is true, as far as it goes. But the Western world is about as close to that mistake as Communism was to an excess of free enterprise.

Why are we talking about Zippy, indeed.

One of the things people seem to be missing is that the Paulson bailout has worked, despite the many legitimate criticisms which can be leveled against it. People miss that because they simply have no conception of what was coming without it. Imagine that every single dollar in the economy had been in invested with Bernie Madoff, and you might begin to muster the beginning of a clue; and anyone who can say "who cares" in the face of that is incapable of carrying on a rational discussion.

We are all still alive. The major cities have not been burned down by rioters, at least not yet. It worked.

None of that is to support Keynsian bailouts-of-the-economy, which I am against, and which are entirely distinct from stopping the immediate cardiac arrest of the banking system.

Monetarism, as I understand it, aims to achieve 'price stability', and this stability is to be achieved by the management of the money supply, in accordance with leading economic indicators taken to represent demand for money. The emphasis upon price stability obviously entails a focus upon inflation statistics, and hence a target rate of inflation. Paul Volcker is a monetarist, and was manifestly successful in taming the stagflation monster of the seventies and early eighties. Greenspan is also a monetarist, and his tenure raises the questions of whether the data to be employed in managing the money supply are sufficiently reflective of economic reality, and indeed, of whether the data have been structured and interpreted in accordance with certain policy agendas. Certainly there are reasons to be suspicious of the inflation statistics peddled by the government in recent years, including those that influenced Greenspan's decision to keep the dams open as long as he did. And it could be argued that Greenspan was overly concerned with the fundamentals of the financial sector and stock market, which became detached from underlying realities in other sectors of the economy. If that is the case, what it suggests is that economic data can reflect hypertrophy in one sector combined with something more modest in others, and that, in turn, suggests that hitting the targets can be difficult; and if hitting the targets can be difficult, and might require jiggering the data, that strongly suggests that policy frameworks appropriate in one historical situation might not translate well to other situations. There is no black book of answers.

This is the flip side that many Christians fail to realize.

Mike T., the biggest threat to our civilization is the bifurcated state modernity imposes on the person. The spiritual nature of man is lost in a maze of reductionist theories that exult the material and the temporal at the expense of the human and Eternal. There is little reason to fear an extreme swing in the other direction, unless one frets over the power of the Amish, or sees Christians suddenly shaking off the shackles of cultural conformity.

Paul., I guess I miss your point. First you say, It seems to me that strictly speaking, the modern reductionism cannot even manage to produce tragedy. I reply; "I see your point, we're not even worthy of tragedy. Tough to accept that verdict." And now you respond; Not true, Kevin. We're still men,...
Since I can't figure out the source of the disagreement, I'll leave it here and wait for a defense of the corrupt philosophical foundations that have lead to our status as a a debtor nation managed by a menagerie of utopian ideologues, white-collar criminals and professional Yes men.

(One of my problems with this second "famous for being famous" approach is that it seems it would apply equally well to walking backwards twenty times around a tree at the full of the moon so long as investors happened to believe that it would help the market and would calm down if it were done.)
If investors happened to believe it, and would calm down if it were done, then it would work -- precisely and only to the extent that markets are driven by psychology, etc. And markets do happen to be driven to a very significant extent by psychology, etc.

Investors don't believe that kind of thing precisely because it has no connection to fundamental reality as fundamental reality is understood by present day investors, of course. But I would suggest that at least 80% of the battle in the midst of panic is a battle of human nerves and human belief. I would humbly suggest, contra the technical view of things, that in every case of overblown mass panic on the part of human beings what matters is what is causing the panic, not ideologies predicated on certain beliefs about the technical aspects of markets. The population can probably as an objective matter make it through the drought without sacrificing a virgin to the volcano god; but they might not make it through the social upheaval caused by the drought.

I am of course not advocating or excusing sacrificing virgins to volcanos. Rather I am making a point about the basic nature of financial systems: that is, that financial systems are as much a product of culture, psychology, human nature, etc as they are a product of immutable forces acting on inert matter which follows predictable laws which can be fit into technical theories. We don't like that because of all that it implies. But us not liking it doesn't make it untrue.

Until you've carefully thought through a problem of the sort "how do I get all these very well informed and intelligent peasants to put down the pitchforks and torches right now" you won't understand the kind of problem Paulson was dealing with. There was, I think, a reasonable business case for the original and now abandoned TARP, and I'm grouchy that the original plan has been abandoned, or at least shuffled over to the Fed where it can be done with less oversight.

But as long as the peasants are no longer revolting we are just haggling over details.

Excerpt from The New Yorker profile of Naomi Klein: "That moment in Argentina was an incredible time because a vacuum opened up,” she says. “They had thrown out four Presidents in two weeks, and they had no idea what to do. Every institution was in crisis. The politicians were hiding in their homes. When they came out, housewives attacked them with brooms. And, walking around Buenos Aires at night, there were meetings on every other street corner. Every plaza where there was a streetlight, people were meeting under it and talking about what to do about the external debt, I swear to God. Groups of one hundred or five hundred people. And organizing buying groceries together because they could get cheaper prices, setting up barters because the currency was worthless. It was the most inspiring thing I’ve ever seen.”

Well, Zippy, I'm afraid I very much do disagree that so long as the peasants are no longer revolting right now, what Paulson did (which wasn't what he said he was going to do anyway) or has done, or the passing of the bailout bill, or whatever, was justified. The very fact that makes you grumpy, namely, that he hasn't done what he said he would do anyway, has been taken by quite a number of people (not just me) to mean that you can't say the bailout was justified. And the power to do all manner of things, including things I assume you would disapprove of, remains (and that degree of open-ended power was included in the bailout package) even though the TARP has not been carried out.

I certainly _agree_ that economics is a matter of human psychology. Even the factors that might be called "technical"--the laws of supply and demand, for example, or the fact that such-and-such a government intervention will cause shortages--are what they are because of what could fairly be caused psychological facts, facts about human nature and motivation. But I tend to draw very different conclusions than you do from this and in particular to have a very different idea about what actions we are obliged to take in order to tinker with or cater to the more purely epiphenomenal of these psychological facts--e.g., the pure fact of investor "jitteriness" or "confidence." In short, not only would I not sacrifice the virgin to the volcano, I also wouldn't walk around the tree at the full of the moon. Not even to pacify, for the time being, the intelligent peasants with the pitchforks. Especially if walking around the tree at the full of the moon meant vastly increasing the national debt, inflating the money supply, creating further perverse incentives, putting vast government power with debt-raised money into the hands of the few, failing to fix the problems that got us into the mess, and so on and so forth.

Oh, meant to say thanks to Maximos for the info. on the use of "monetarist." That is definitely different from the way I had seen it used by the Bluestocking guys and learned to use it, so I will have to make that correction (pun intended).

The politicians were hiding in their homes. When they came out, housewives attacked them with brooms.

Sounds good...until I wake-up and realize the violence will be real, indiscriminate and only hasten (if he isn't already awaiting his Inauguration) the arrival of the Man on the White Horse. He will be a polished thug from within our ruling class, who appreciates the social utility of Christian rhetoric and forms, but will gladly employ the security tools of the State in order to retain the concentration of power and wealth in the hands of the few. He will, as the energy squeeze spikes up and national prestige declines, lurch from one foreign blunder to another. In short, more of the same, only cruder, harsher and without many Constitutional pretentions.

On the other hand, developments like; "organizing buying groceries together... setting up barters..." are the right steps towards a rediscovery of community and the necessary decentralization of our economic and political structures .

...has been taken by quite a number of people (not just me) to mean that you can't say the bailout was justified.
Well, whatever people may take me to be able to say, what I in fact do say that the TARP was justified, was absolutely necessary, and opposing it in real time then and retroactively now is either ignorance or insanity. The "ignorance" option is clouded with a whole lot of things, as I said then: we had the perfect storm of absolutely justified skepticism and dire need. But nevertheless the entire space of possible opposition to the TARP is completely covered by either ignorance or insanity, in my view.
I also wouldn't walk around the tree at the full of the moon. Not even to pacify, for the time being, the intelligent peasants with the pitchforks.
Would you do that if you knew for a fact that doing so harmed nothing, was not in any way morally wrong, and would, say, stop the mob from murdering your family? Where is your line on this subject?
Mike T., the biggest threat to our civilization is the bifurcated state modernity imposes on the person. The spiritual nature of man is lost in a maze of reductionist theories that exult the material and the temporal at the expense of the human and Eternal. There is little reason to fear an extreme swing in the other direction, unless one frets over the power of the Amish, or sees Christians suddenly shaking off the shackles of cultural conformity.

I don't fear a swing in that direction in general, but bring it up the principle as a warning that the excessive attacks on capitalism and the material world can lead one to forget that the material world itself is not at all to blame for our predicament. It is our own sinful natures which tend to bring us into either a quasi-gnostic rejection of individual (especially economic and productive) liberty or a quasi-atheistic individualism. We tended toward the former in the past, and now have swung into the latter.

Well, whatever people may take me to be able to say, what I in fact do say that the TARP was justified, was absolutely necessary, and opposing it in real time then and retroactively now is either ignorance or insanity. The "ignorance" option is clouded with a whole lot of things, as I said then: we had the perfect storm of absolutely justified skepticism and dire need. But nevertheless the entire space of possible opposition to the TARP is completely covered by either ignorance or insanity, in my view.

I don't suppose there is any room for principle there. At some point, the public is going to have to get used to the idea that it cannot spend its way out of any debt crisis that it had created. Had the economy gone down the toilet, it's likely that the public might have been sober enough after a while to seriously understand and accept the problems facing Social Security and Medicare. That lesson, now lost for the moment, will be reopened when the damage is to be measured in the tens of trillions of dollars and when the workforce is so demographically lopsided that the younger workers will end up being shackled to the burdens created by their predecessors.

Some of us take a long-term view and have realized that the suffering that we would endure for even 10 years or so might be worth it to teach several generations the very real, very dangerous lessons that they need to be taught before they spend themselves into a position worse than Argentina.

Would you do that if you knew for a fact that doing so harmed nothing, was not in any way morally wrong, and would, say, stop the mob from murdering your family? Where is your line on this subject?

I can't speak for Lydia, but being a Southerner, I would have no moral qualms about shooting any member of a mob that came onto my property to hurt me, mine or my neighbor. As they say, "praise God and pass the ammunition."

...but bring it up the principle as a warning that the excessive attacks on capitalism and the material world can lead one to forget that the material world itself is not at all to blame for our predicament.

Does a morally "neutral", deterministic economic system carry within it the seeds of its own destruction? The answer seems to be obviously in the affirmative. The next question is; can it be reconstructed in such a way that it might better contribute to human flourishing? Let us hope the answer is yes, though reflexive reactions by flailing defenders only delay, if not outright deny the possibility of reform. The shelf life of the material world can be best extended by shelving materialism.

I don't suppose there is any room for principle there.
Nope. All the 'principle' attached to economic theory in the world, plus three bucks, will get you a cup of coffee. Screw principle. No, seriously, screw it. An Austrian sitting on the rubble of a former civilization with a smug smile on his face is a moral monster.
I would have no moral qualms about shooting any member of a mob ...
That wasn't one of the choices.

In one of my favorite adventure novels, "King Solomon's Mines," the heroes play a trick on a bunch of savage natives by pretending to be able to bring about an eclipse. In doing so they save themselves and an innocent native girl. I have no problem with that. There are lots of reasons: The group of people they are trying to deceive is a bunch of bad guys, for example and is personally targeting them. The deception really leaves all else equal.

In general I have real hesitations about deceptions of all sorts, but I can imagine strange circumstances in which I would countenance one. When I say I "wouldn't walk backwards around the tree," I was probably a bit unclear, in that part of what I meant is that the bailout _isn't_ just some small benign deception that leaves all else equal. And that for many, many reasons. For one thing, it perpetuates what I consider to be a kind of serious fraud on the entire country, including the innocent, that government can literally make wealth and can by that means stave off economic evil whenever economic evil threatens. It is a dangerous deception and one with many ramifications, including just possibly the present crisis.

When you have such harsh words for economic principle, Zippy, I am led to think that perhaps you don't realize that the principles involved concern the claim that violating them causes enormous harm. And that because there really is such a thing as an underlying truth of the matter about real economic things--about everything from widget factories to snow plowing businesses--and not just a set of facts about what people _think_ about the economy, or what they think about what other people think about...Obviously, and as perhaps you know, the Austrian claim is that the government's continual printing of money is a kind of counterfeiting and involves creating systemic and massive confusion about those facts, which leads to a host of economic ills, over and over and over again.

I will say this: I wonder to what extent the abstraction of our current economic system is the cause of a failure to realize the importance of objective economic realities. If anything could convince me that the abstract instruments Paul has been decrying should be done away with so that we could get back to thinking consistently in terms of real wealth based on the real human production of goods and services, it would be hearing Zippy say "screw [economic] principle."

...perhaps you don't realize that the principles involved concern the claim that violating them causes enormous harm.
Oh, I realize that perfectly well. What is more, I think it is true. And changes nothing. The applicability of economic principles has due limits, and we had gone well past them in September. So screw them. Anyone who is willing to let the patient die because the atropine shot (stabbing the heart with a piece of metal laced with poison) may be harmful to that same patient is living in an alternate reality.

Furthermore, though perhaps beside the point, the TARP didn't involve quantitative easing (printing money). It involved borrowing money the old fashioned way, by issuing bonds to people who were hoarding cash away from use in transactions with private counterparties out of fear but would willingly buy treasuries from the government. Treasuries are the new cash.

Let me put it this way: if someone cannot say under what kinds of conditions he would abandon his economic principles and take the pragmatic step of government intervention, the things he is calling economic principles are not really economic principles; they are more of a religion. Furthermore, those abandon-ship conditions obtained in September of this year, in fact. People disagree with me on both points: on the point that there comes a time when we have to say economic principles be damned, that the consequences of inaction are like the consequences of losing a war to a tyrant who will burn the country down and simply must be prevented by any licit means available; and that September was one of those times. Obviously I think people who disagree with me on either point are wrong.

Nope. All the 'principle' attached to economic theory in the world, plus three bucks, will get you a cup of coffee. Screw principle. No, seriously, screw it. An Austrian sitting on the rubble of a former civilization with a smug smile on his face is a moral monster.

You are precisely the sort of man that Sam Adams was thinking of when he said:

"If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen."

Since you suggested that I am a moral monster, I will suggest that the primary reason for your support for TARP is closer to home: you feared for your wealth and didn't have the foresight to put it in a small or regional bank that didn't make these stupid mistakes.

Let me put it this way: if someone cannot say under what kinds of conditions he would abandon his economic principles and take the pragmatic step of government intervention, the things he is calling economic principles are not really economic principles; they are more of a religion. Furthermore, those abandon-ship conditions obtained in September of this year, in fact. People disagree with me on both points: on the point that there comes a time when we have to say economic principles be damned, that the consequences of inaction are like the consequences of losing a war to a tyrant who will burn the country down and simply must be prevented by any licit means available; and that September was one of those times. Obviously I think people who disagree with me on either point are wrong.

You are wrong and short-sighted on three counts:

1) You have only served to delay the inevitably worse collapse that will come when the public must account for its current liabilities from Social Security and Medicare. Had the public been forced to learn valuable economic lessons now, it might have been more amenable to a rational discussion about scaling back or eliminating these programs before they are forced to consume a level of wealth equal to at least twice the value of all American assets.

2) It would be child's play for the military to put down riots if told to take the kid gloves off. Within hours of successful deployment, most of the trouble areas would be quickly brought back under control.

3) Most parts of the United States wouldn't riot. It's just not in their psychological make up, and the moment that local and state authorities started chambering live rounds in plain sight of white, middle class rioters, they'd panic and go home.

In short, you severely over-estimate how hard it would be to prevent the situation from getting out of hand.

It was pretty obvious that the bailout bill as a whole would result in inflation of the money supply. Certainly inflation is what has happened. But if I understand you correctly, Zippy, you consider that that was worth it, if that was what was necessary for the purpose. since we're all here now.

Here's perhaps a better analogy. (Though I'm not at all sure there are any good analogies here. I'm beginning to think these economic situations are getting near to being sui generis and that this is why analogies keep having problems.) Suppose, Zippy, that there was going to be another Great Depression but that you believed you could stave this off for the immediate future by spending some of your own money to set up printing presses secretly around the country and printing large quantities of counterfeit bills on your own account. Would you do it? Here's another one: Suppose that the whole country were going to go into economic meltdown but that you thought you could prevent it for now by hiring mercenaries and taking over the government and making yourself dictator. Would you do it?

Furthermore, if the specter of US troops killing American citizens who were rioting and rebelling were so offensive to traditional notions of liberty, I seriously doubt that our founding fathers would have empowered the federal government to do so.

The one constant in all of this is the naked will to power exhibited by the G.S.E.'s, Wall Street, Treasury and their paid retainers within the executive and legislative branches.

If things get to the point that the U.S. government violates the 1868 Posse Comitatus Act and deploys federal troops to quell social unrest by killing American citizens, we can drop all pretense to being a nation of laws. As it is now, the facade is barely plausible.

My mind is boggling over the following scenario: Wall Street purchases the most supine government money can buy, and proceeds to cause a global depression through its world-historical avarice and imprudence, while those who possess the temerity to protest against the resultant destruction of their way of life are to be gunned down in American streets as though they were mangy dogs: It is for the powerful to make history, and for you little people to endure the history wrought in your flesh and paved over your bones.

Wow.

while those who possess the temerity to protest against the resultant destruction of their way of life

I'm not really getting involved in the whole "what should the government do if there are riots" sub-thread, but I should say that this seems a pretty tame way of describing _real riots_. I would presume (I would like to presume) that neither Maximos nor anyone else would actually start excusing mobs' burning down cities, looting, and what-not, as a form of legitimate "protest."

No, I wouldn't attempt to legitimate actual riots. But there would be, all the same, something morally perverse in a scenario which witnessed Wall Street burning and looting through the economy like buccaneers, and the common people repressed for drawing attention to the problem. Apparently, the moral atmosphere in such a world would be as I've sketched, namely, that when the powerful destroy entire life-worlds, we're supposed to shrug our shoulders passively and accept the dictates of Fate, or Allah, or whatever, and just focus on the few pitiful lessons for ourselves that can be wrenched from the occurrence. And that is obscene. For while a riot would be an injustice, a world in which the powerful may destroy at will for their own benefit, while the little people must simply endure it all passively, would be a greater injustice yet.

And no, I've not forgotten that many of the "little people" have been complicit in the swindle my virtue of their own improvidence; but this is a question of degrees, and from those to whom much has been committed, much is required. Pity that our society inverts this moral wisdom.

Mike T:

Since you suggested that I am a moral monster, I will suggest that the primary reason for your support for TARP is closer to home: you feared for your wealth and didn't have the foresight to put it in a small or regional bank that didn't make these stupid mistakes.
I didn't suggest that you are a moral monster. I suggested that you are ignorant, and your latest comment certainly provides support for that suggestion.

Lydia:

Suppose, Zippy, that there was going to be another Great Depression but that you believed you could stave this off for the immediate future by spending some of your own money to set up printing presses secretly around the country and printing large quantities of counterfeit bills on your own account. Would you do it? Here's another one: Suppose that the whole country were going to go into economic meltdown but that you thought you could prevent it for now by hiring mercenaries and taking over the government and making yourself dictator. Would you do it?
No to both. I am disanalogous to a legitimately constituted government. I am also not the competent authority for declaring war, imprisoning criminals, nor any number of other things, which does not imply that the government should never do them.

Zippy, my point in the analogies was two-fold: First, I suppose there could be some circumstances in which revolution or major law-breaking was justified. It isn't intrinsically immoral. But "to stave off economic crisis" doesn't seem to be one of them. Second, it seems to me that the giving of vast government power in these bills, the nationalizing of banks (for example), and so forth, was _not_ legitimate to the government and represented an important kind of subversion of the legitimate constitutional order. That is one reason why I made the analogy to revolution or counterfeiting.

Perhaps an even better analogy would be to the continuation of a massive fraud, amounting virtually to the continuation of a kind of present false religion. In other words, I don't think that people opposing the bailout plan(s) were doing so because they have made economics a religion but rather because they think we should stop building our country on a lie. Suppose that U.S. stability had come through some bizarre circumstances to be predicated on the belief that aliens were guiding our footsteps, but that the supposed "messages" from the aliens had gotten scarce lately and that we were on the verge of some economic catastrophe of the sort you feared in September. Suppose that Jack, a talented actor, is approached by the legitimate government--which includes the people who have been pretending to speak for the aliens--and is told that he can save the country for the time being by doing a better job than they have done at continuing the alien farce. He has to do this for the rest of his life and pretend to pass on his powers to someone else before he dies. Otherwise there will be economic meltdown, maybe riots, etc. So he has to perpetuate indefinitely the building of American prosperity and stability not realistically on the actual productivity of America's people but on a house of cards, and he has to deceive a lot of people, including innocent people, indefinitely, because if he lets the mask slip, the danger of collapse will come back in an even more severe form. Does Jack have either a right or, still less, an obligation to go along with the suggestion being made to him by the powers-that-be, rather than letting the truth be known now and taking the consequences? I say no. Not even (temporarily) to stave off the dire scenario in question.

All that increasingly unreal analogies show is the unreality of the analogies. There were no aliens, real or imaginary, and there is no grand deception.

The fact that economics is at least half psychology doesn't mean that economics is half lie or deception or BS. Real people respond with real behaviors to real guarantees and real decisions, etc like the TARP. Real banks would have really failed across the board if something hadn't been done in reality and in a hurry to stop it from happening, and real people would have probably starved to death and rioted in the real aftermath. God only knows what great-depression-like conditions inflicted with the suddenness characteristic of the Internet age on the modern population would look like, but yes, it was worth stopping for a pitiably infinitesimal commitment of $700 billion, which will probably - at least the preferred share investments, and even in this irritating different form from asset purchases - ultimately turn a profit for the taxpayers. It was worth stopping the panic, period. It would have been worth ten times the financial commitment, easily, even at a total actuarial loss. In retrospect, if a $5 trillion commitment could have stopped the rise of Hitler it should have been done, no questions asked and no whining.

Someone who is famous for being famous is in fact famous, it isn't a lie or deception that he is famous. Someone who insists that someone famous for being famous is not really famous, is living in a dream world. It isn't a mask, it is bloody hard pitiless reality which could not care less about our outrage. Maybe it makes idealists cranky that some people are famous for being famous. I don't care. Economic idealism is the mask, the false religion, the unreality.

were doing so because they have made economics a religion but rather because they think we should stop building our country on a lie.

Funny, but some of those same people have helped perpetrate the lies that have done so much damage; markets are self-regulating, growth is unlimited, we can stride across the globe like gentle giant so as to secure cheap energy sources at minimal cost and act as the affable facilitator of globalization without wrecking our own domestic economy. Let us hear their confessions before heeding their advice again.

growth is unlimited

Kevin, you and I are in agreement that "growth is unlimited" is a lie. In fact, even "the current situation is sustainable if only the government does X" is, as far as I can tell, also false.

In retrospect, if a $5 trillion commitment could have stopped the rise of Hitler it should have been done, no questions asked and no whining.

This sounds almost like a model of a situation where somebody has 5 trillion dollars lying about and can choose to spend it (if he's not too stingy) to stop Hitler, or to stop an immediate economic panic, or whatever. But that isn't what we're talking about. And it's all the many ways in which that is not what we are talking about that are my problem. You are so right that there are no aliens. There also is no Money Fairy at Treasury.

Lydia, the current situation is not sustainable. The goal is providing for as soft a landing as possible without accruing greater liabilities and worse deprivations further down the road. Failure likely means enormous social dislocation and unrest now, or the loss of our national sovereignty later. All in all, a tribute to our the vision of our empire-building elites.

without accruing greater liabilities and worse deprivations further down the road.

Aye, there's the rub. If we had some ham, we could have some ham and eggs, if we had some eggs.

There also is no Money Fairy at Treasury.
No, but Treasury is perfectly capable of borrowing trillions of dollars, just as you would be perfectly capable of borrowing, say, $25K if a family member needed an operation to survive. And you'd be grossly, culpably negligent not to do so in certain circumstances.

It's that very strong analogy between the U.S. government and any other ordinary economic actor that is one of the major gaps between us, I'm afraid, Zippy.

Is the problem visualizing the disparity between the subjects in the analogy due to a presumption that all economic actors are created equal? I would sooner think that an adult and a three-year-old were equal players in a game of Candyland, with no difference in their function. But, of course, that's wrong.

Sometimes the government is a more or less ordinary economic actor; sometimes not.

Maybe some people take the position that the government should never borrow money at all, for anything. As a long term objective perhaps that is even wise, though that conclusion is not necessarily obvious. I've suggested myself that it should be unnecessary in principle for a government as old as ours to levy any taxes, and weaning the government from dependence on current revenue through taxes, substituting instead endowment-style revenues produced by a productive portfolio of assets, would be a necessary step in eliminating all government debt financing.

But that hardly has any bearing at all on the actual particulars of the actual real situation we are in, and we shouldn't treat it as if it did. A family with a mortgage and a sudden medical requirement can chat about how they wish they lived, how they wished the world was, until the cows come home; and can even think through ways to get there in due time.

But fantasizing is not exculpatory in the face of current actual obligations.

If we're to make an analogy to a family (which I really question doing), to my mind it's a lot more like this: For some reason that nobody fully understands, a family which does not have the collateral to back up the loan is able to borrow two million dollars. They have no prospect, and they know this, of being able to pay back the two million, nor anything close, during the parents' lifetime, nor by the sale of their assets at their deaths, and the legal set-up in their country is such that the debt will continue to be passed down to their children, grandchildren, and other descendants ad infinitum, who will have their finances burdened with a continual and large drain of paying interest on this loan that they did not consent to and that, in the long run, may have been borrowed generations before they were born. It seems highly unlikely that it will ever be repaid and the burden lifted from the descendents. Let us even suppose that the two million dollars is necessary for an operation the father needs to survive. Is he justified in borrowing it under those conditions?

So we disagree about the facts, not that the facts determine when economic principle should be thrown under a bus.

I think there's a category of things that aren't (or at least seem not to be) intrinsically wrong to do but for which one has difficulty imagining a case in which doing them would be justified. It's kind of an interesting ethical category, actually. The 700B and counting bailout-by-debt bill is that kind of thing, to my own mind.

The 700B [...] bailout-by-debt bill is that kind of thing, to my own mind.
I snipped the comment because my own comments only apply to the $700B TARP.

So in your mind it could never be justified, no matter what horror show it in fact prevented? If a resurgent global Islamic Caliphate were on the verge of invading the United States, would borrowing $700B to finance defensive weapons and armies be justified?

I keep trying to figure out where you get to "can't be justified" rather than "justification depends on what it actually, in fact, accomplished/prevented". And so far I don't see where you get that.

How about if you were convinced that the TARP in fact arrested a panic which would in fact have caused the US to go into a meltdown, and in fact what would have emerged from the meltdown was a US run by Islamic nationalists, Islam having taken over mindshare from all the disillusioned hedonists? If you believed that those were the facts, would you support the TARP? If so, then haven't we agreed that we are not economic idealists and are really just arguing over the consequences of inaction?

How about if you were convinced that the TARP in fact arrested a panic which would in fact have caused the US to go into a meltdown, and in fact what would have emerged from the meltdown was a US run by Islamic nationalists, Islam having taken over mindshare from all the disillusioned hedonists? If you believed that those were the facts, would you support the TARP? If so, then haven't we agreed that we are not economic idealists and are really just arguing over the consequences of inaction?

Zippy, I think you still have a weak grasp as to how easy it would be for the civil and military authorities to restore law and order. For one thing, we did not see massive, society-killing riots during the Great Depression. Second, the federal government and states actually have significantly more soldiers and police at their disposal per capita to unleash upon rioters than they had in the 1930s. I'll grant you that this comment here is probably just being made for the sake of argument here, but I think you really don't realize how weak-willed much of America is, and has been for a long time. At the first sign of their government baring its teeth with intent to injure and kill if pressed, most Americans would shrink back from tearing down their society. Certainly most of them would consider it a necessary evil if they saw the 82nd airborne division mowing down people attempting to do the same to their fellow citizens because at the end of the day, most people realize that the military has a natural--and bloody--law enforcement role when "all hell breaks loose."

For the sake of argument, Islam would not be likely to have much pull among the citizenry, if nothing more than because most people associate Islamic societies with failed societies that are dependent on oil.

So in your mind it could never be justified, no matter what horror show it in fact prevented? If a resurgent global Islamic Caliphate were on the verge of invading the United States, would borrowing $700B to finance defensive weapons and armies be justified?

I keep trying to figure out where you get to "can't be justified" rather than "justification depends on what it actually, in fact, accomplished/prevented". And so far I don't see where you get that.

I think it's pretty clear that Lydia would support borrowing money for military purposes, if needed, because no one in their right mind would argue that military needs aren't intrinsically a function/issue of government. However, it wasn't until recent times that government got in the business of checking and balancing businesses and keeping the economy stable. That is a recent, and left-wing, view of the role of government.

One of the many reasons why you ought to reconsider your opinions here is because principled, capitalist policies would have prevented most of this by preventing the formation of a small cabal of very large, very influential banks in the first place. The largely unregulated marketplace tends to rip apart such behemoths like a pack of piranhas on a cow crossing a river, and the customer ends up benefiting immensely from rarely having to ever deal with the "too big to fail" businesses that end up creating major points of failure in the economy should they fall.

He's making up a hypothetical, Mike. A respectable philosophical thing to do with a long pedigree.

Zippy, I think my trouble lies in expressing the kind of thing that I think the 700b bill was and the sense in which I think it furthers the subversion of (what is left of) our constitutional republican form of government. This is probably because I don't have it fully clear in my own mind. Notice that I said "difficult to imagine a case in which...it would be justified." Let's alter your scenario a bit: Suppose that the 700 B bill were the sort of thing _expressly prohibited_ by the U.S. Constitution. Suppose that, e.g., there were a constitutional limit on the amount of debt the federal government were allowed to take on (or on the percentage of the GDP that the amount of debt could represent, or something like that), and this were over it. Now leave the details of the crisis as in your hypothetical in place, and add further the supposition that we have a Supreme Court that can be counted on to uphold the 700 billion bill even though it is blatantly and obviously unconstitutional, the founders having had a very strong notion that federal debt needs to be kept under severe limitations. Suppose that you, as a Congressman or as President, know perfectly well that the law is unconstitutional and that in signing it or voting for it you are deliberately trying to undermine the constituting order of the country. Then can it be justified merely by ratcheting up the consequences of not doing it? That's where I have to say that I have my doubts.

Where I think we do doubtless disagree about relevant facts concerns things like, say, the way the amount of the debt interacts with the likelihood of its repayment. Obviously I wouldn't be making this much fuss about a dollar. But that is true of a family, too, is it not? And one's stance there can be a matter of principle as well, because principles apply differently to different factual situations. Could we not say that it is in a sense a matter of principle for the family not to borrow that two million dollars that will be passed on to their descendants (principles, for example, having to do with the wrongness of saddling your descendants for the indefinite future with your debts) even though it would obviously be fine for them to borrow a dollar? Principles apply to types of situations, and types of situations can end up having to be described in complicated factual detail. Suppose that as things presently stand the U.S. government had no power to increase the money supply, so that debt could never be monetized. Suppose that the amount being borrowed this fall to stave off the economic crisis were the same as or less than some amount that had been borrowed and paid off previously in a timely fashion and in quite similar circumstances. Suppose that the national debt were not mounting up and up but rather were paid off regularly. Suppose a lot of things were different. Then obviously it might be possible to hold to a particular set of economic principles while countenancing _that_ amount of debt under _those_ very different circumstances.

Let's alter your scenario a bit: Suppose that the 700 B bill were the sort of thing _expressly prohibited_ by the U.S. Constitution.
That would definitely change things, at least to the extent of making the (entailed by the financial meltdown) consequence-bar higher. I don't know that I rule it out categorically any more than I would rule out martial law categorically, but obviously the institution of martial law is a much graver matter than a routine deployment of the Guard, or even an ordinary deployment of the Guard in extraordinary circumstances (say in a forced evacuation).
Where I think we do doubtless disagree about relevant facts concerns things like, say, the way the amount of the debt interacts with the likelihood of its repayment.
That is also true, that is, I think we disagree on scaling. $700B is about 25%-ish of annual federal tax revenues, so borrowing $700B to save the whole system from meltdown is analogous to a family presently earning about $100K/yr borrowing $25K to keep the family from experiencing immediate and total devastation, including substantial loss of that $100K/yr income but with many other terrible, unpredictable, worse-than-merely-economic effects. I chose $25K as my analogical number because it is probably more significant to an average family than $700B is to the government. Personally, if I made $100K a year and had no savings I'd probably be willing to borrow a lot more than $25K - especially at the chump change interest rates the federal government has to pay when it issues T-bills, which means it can borrow two or three times as much as we can and pay the same interest, by the way while getting 5%-to-9% dividends on invested TARP funds, for an immediate net of several percentage points of earned interest on other peoples' money - to stop a real disaster.

Of all of the analogies my last one - where the meltdown leads within a few decades to Islamic rule - starts to enter the realm of real, plausible outcomes from the actual events. Nuclear war with Russia and/or China are also plausible outcomes, though, like the other, not high probability as individual particular possibilities. More likely the outcome would be something I cannot predict; but that is the basic order of things which, taken as a whole range of possibilities, become plausible in the sort of meltdown we were facing. I have to believe that people who object to the panic-stopping TARP simply don't believe that as a factual matter.

$700B is about 25%-ish of annual federal tax revenues

Or, the cost of occupying Iraq for 6-7months. And, as we all know nothing furthers the subversion of (what is left of) our constitutional republican form of government than far-flung military operations in the execution of undeclared wars.

The largely unregulated marketplace tends to rip apart such behemoths like a pack of piranhas on a cow crossing a river, and the customer ends up benefiting immensely from rarely having to ever deal with the "too big to fail" businesses that end up creating major points of failure in the economy should they fall.

So monopolies don't occur in unregulated marketplaces? Any historical evidence or examples you care to offer for the red in tooth and claw rhetoric above? I always thought it was a socialist staple to compare businessmen to violent predators.

I was the one who started this so I'd like to explain why I did. It was because I wanted to read what Zippy had to say after the first 100 days of TARP.

When it was introduced, I was against it and I still am. I admit that right up front I am, in terms of intellect, but a casual water spot on a Par Four Golf Hole whereas Zippy is Lake Okeechobee and that while what I know about economics can be printed on a Golf Course Score Card whereas printing Zippy's knowledge about economics would take the amount of paper that was needed to produce Dom Gueranger's, "The Liturgical Year," still, all of that, it seems to me, is but another argument against the Bailout.

I do not understand it and nobody - nobody, and I do mean nobody - I know, has the first clue about whether or not it was even necessary and in my family are two sisters-in-law with Doctorates (English and Audiology) a Brother-in-law who is President of a Factory which manufactures windshields for auto-makers, and another Bro-in-law who has a Doctorate in English and who, along with my sister-in-law, is a University Professor.

It appears to all of us the Bailout profited those who caused the market malestrom in the first placed and we all basically agree that Paulson is, effectively, an unelected plenipotentiary who can do whatever the hell he wants and can use the money to succor his friends and punish his rivals.

And all of us think the coming Day of Reckoning will be made worse by this bailout. And so claims of trust-us-you-really-do-not-know-how-bad-it-would-have-been-had-we-not-done-that strike our ears as bull-feathers.

Men like Peter Schiff and The Daily Reckoning's, Bill Bonner, (and many others) argued against the Bailout and, it seems to me, their warnings are bearing out.

About a decade ago I worked, for three years, as a Mail Clerk at J.P. Morgan's on Palm Beach in Florida and I watched as the Old Money Crowd was greed-goaded into attending conferences pushing derivative-investing with creatively-leveraged financing etc.

Because I helped with the Conferences (setting-up chairs, tables, buying snacks and beverages etc) I often just stood in the back and listened to the presentations. (We actually, at one time, had a female President show-up at a Company function wearing an "I ain't scairt" T-shirt. She was the one who became almost orgasmic describing the wonders of leveraging.

And these are the know-it-alls.

Later on I would talk with some of our young brilliant analysts and I would ask them what the heck was going on with all of this leverage-this and derivative-that and they admitted they could not account for where the money was going or what tangible, identifiable, asset had been secured. "We are just buying and selling paper"

A few (one who later left and started in his own company in Poland)just frankly told me what Morgan was doing was dangerous as hell and essentially a gamble and that nobody, but nobody, knew the extent of the debt swirling around the world.

To me, the entire move into these numinous financial exotics by staid and stolid Morgan called to mind Raymond Chandler's great line about "a thought trying to form itself on the edge of consciousness."

And I still do not get it when it comes to the Bailout. To me, the day of reckoning has not only just been delayed it has made our economic situation worse and assured the Day of Reckoning will be worse than if we had done nothing.

And the reality the "experts" can not explain to the average American what the hell is going with our economy (and why they did not predict and prevent this collapse) does not mean, to me at least, that we are stupid. It means to me that the B.O. is B.S. and the "experts" STILL do not know what they are doing - other than saving themselves before the final reckoning occurs.

Here is a link to what I fear is headed our way


http://www.doctorhousingbubble.com/nearing-the-first-100-days-of-the-tarp-three-major-trends-that-will-crush-the-2009-marketplace-bank-hoarding-resilient-states-now-being-dragged-down-and-losing-focus/

Keep in mind that being in favor of putting out the fire is not the equivalent of being an arson apologist.

We actually, at one time, had a female President show-up at a Company function wearing an "I ain't scairt" T-shirt.

More Americans should see the well-heeled proletariat that run this country, up close and in action. Summer Tour buses from Wall Street to the Hampton's would allow everyone to experience the moguls and bankstas at the beach. Most would be appalled to the point of despair, or revolution.

That article started out so bad that I stopped reading it. Anyone who puts up the question "How is the TARP doing" and posts a chart of the Dow as a putative answer is just engaging in ignorant demagoguery. I might as well post pictures of the fire before the firemen got started and after: "see, things look worse after the fireman got started than they looked before; therefore the firemen were counterproductive."

Maybe the rest of the article is better, but I'll never know.

I agree that the average person cannot understand the TARP. I don't find that particularly troubling. Maybe the answer is that we need to live in a world where nothing exists that the average person cannot immediately grasp. If so, though, we'd best be prepared to jettison a whole lot more than just preferred stock and option contracts.

In fact, maybe democracy depends on a world where the average uneducated (or non-specifically-educated) person can understand everything that goes on. If so, though, then modernity and democracy are fundamentally incompatible, and raving about the TARP per se is silly.

The reality is that this whole circus is a footnote when it comes to the national debt, if the $50+ trillion entitlement number is to be believed. The TARP is already positive cash flow: dividends paid to the government on the preferred shares purchased exceed interest paid by the government on T-bills issued. The $10-ish trillion actuarial national debt may or may not be unhealthy, may or may not be positive cash flow, depending on balance sheet issues we cannot know since the government doesn't do the kind of accounting that would be required for us to know. Some debt is good, and some debt is bad, as anyone who has read a little essay by Belloc should know. But entitlement obligations are - and were, before any of this happened - enormous in comparison to any of these things, and are most definitely not cash positive. Worrying about the (cash positive and profitable) debt used to finance the TARP is like a stage four cancer patient fretting about a zit.

And by the way, the $50+ trillion entitlement boondoggle has nothing to do with bankers or Wall Street, at all. That falls squarely at the feet of the dysfunctional relationship between everyman and his congresscritters.

Zippy, you and I have found a very important area of agreement about entitlement boondoggles. Which, for that matter, are highly relevant to the year-by-year deficit spending we already are living with, which annoys me no end (to put it mildly).

Well, deficit spending per se isn't bad, just as debt per se isn't bad. Deficits and debt don't kill civilizations, people kill civilizations.

Deficits and debt don't kill civilizations, people kill civilizations.

Expect sales of that bumper-sticker to lag amongst those forced to choose between the disgrace of economic colonization, or the mortal danger posed by debt renunciation.

But nevertheless the entire space of possible opposition to the TARP is completely covered by either ignorance or insanity, in my view

Call me crazy dumb but the idea that Paulson has sufficient knowledge to successfully mange the entire economy from Washington is certifiably insane.

Here is s link to other crazy dumb Americans who opposed the B.O., three of whom are Nobel Laureates;Smith Vernon L.(Chapman University- Nobel Laureate,Lucas Robert (University of Chicago - Nobel Laureate,Heckman James (University of Chicago - Nobel Laureate)

http://www.americanfreepress.net/html/economists_paulson_09_27_08.html

The problem is not that too few Americans grasp TARP. The problem is the same "experts" who created this financial ephemera, and did not anticipate or predict this bubble-bursting crash, are the same ones who are now "fixing" the problem - even though only a FEW months before this crisis, Bernanke and Paulson were whistling an all's-cool tune and now these self-same "experts," who fear-mongered the bailout-or-martial-law scenario, are being trusted to set right what they ruined and those who are following the TARP fallout are still being ignored and dismissed as uncaring, ignorant,lunatics.

Great.

...the idea that Paulson has sufficient knowledge to successfully mange the entire economy from Washington is certifiably insane.
I agree, but I don't know anyone who thinks that.
...dismissed as uncaring, ignorant,lunatics.
Not uncaring or crazy; just wrong. But yes, wrong.

I missed a wonderfully robust and enthusiastic discussion. I'm a bit disappointed to have only caught the tail-end, and seeing as most of the energy has already dissipated, I'll make only a couple remarks as one of the ones who *loudly* argued with Zippy against the wisdom of the bailout, and then let it be.

First, it's evident to me that no one knows whether the original TARP plan worked, because the original TARP plan never happened. My main argument against the original TARP plan was that it would not work as they told us it would if they implemented what they said they would implement. So when Paulson decided not to go through with buying the troubled assets (there was always the hope since the TARP legislation contain a significant fudge-factor), I felt vindicated and relieved, only to be saddened once again when he proceeded to directly inject capital into favored banks.

That's why I don't think TARP "worked." They were wrong as to the economics of the situation and continue to be wrong, only proving by abandoning their original plan that they never knew what they were doing in the first place (unless they were lying to us about their intentions).

It is increasingly clear that the bailout proponents in political office are taking wealth from future generations via national debt in order to shore up and stabilize the current economy. This is, technical variations on the theme notwithstanding, what seems to be going on. Is it working? Of course it's working in a sense. If you take trillions of dollars from future generations and throw it at present companies that are failing, it will "work" to stabilize them. But this was never what was meant when opponents of the bailout like myself said Paulson's original plans would never "work." We meant that it would never work in the way that Paulson said it would: namely that buying bad mortgage-backed securities on credit would be justified on the basis of the wealth being returned to them with interest as soon as the MB securities market regained "rationality." This would not have happened, just like it will never happen that the US will be repaid for bailing out the automakers without union concessions (unless the govt cheats and does some *creative* accounting), because the loss of wealth was real and was and continues to be attributable to real factors, such as the deflation of over-inflated property values.

What bothers me more than the fact that it seems Paulson's not even getting the technical finance/economics right, is that no one in power seems (by their actions) to care what an incredible injustice this is to future generations of Americans who will have the sapping burden of debt just because the current generations in power didn't want to eat the damage they created. The biggest economic and moral concerns have to do with the future consequences of the "save our current economy at all costs" kind of policy-making. Public debt is both a moral and economic entity with which bailout proponents are not grappling hard enough, when they do at all.

That's why I don't think TARP "worked." They were wrong as to the economics of the situation and continue to be wrong, ...
I think, though, that this view commits precisely the error Paul criticizes in this post: the error of thinking of the situation as a merely technical one, not a human and moral and social one. The TARP did work. The banking system is still standing.

And I don't see the TARP preferred share investments as saddling future generations with debt, because that isn't what it is. If the banking system survives, the preferred shares pay more in dividends than the government has to pay in interest; again, it is a net cash positive program out of the gate. If the banking system doesn't survive then the TARP borrowing is just not material, at all. There are plenty of government debt and other obligations which are unjustly saddling future generations with current consumption: see my comments on entitlements. But the TARP - whether the original plan or what Paulson actually did - isn't in that category.

Albert,
You are correct; the original TARP plan never happened in its entirety, but the credit markets at least have a small pocket of air and that is a huge development that is impossible to overstate.
The safest conclusions we can draw are;
1) that final verdicts on TARP at any level - moral, social, political and economic - are likely to be mixed and the source of much debate. Whatever psychological stability the plan brought, a long-term price has been paid in terms of power being usurped by a handful of players acting behind a veil of secrecy.
2) TARP is but a small addition to the monstrous public debt we have accumulated over the last 30 years.
3) The Wall Street-Federal Reserve-Treasury complex has been unimaginative and slow to react at every step of the crisis all 3 bodies created.

* Next phase - Corporate Debt resets in 2009. Come January 850 billion will start to reprice, with 450 billion being of low, speculative-grade quality. Companies in this category will be staring at borrowing rates of 12-18%, meaning many will either divest operations and divisions at ridiculously low prices, declare bankruptcy or simply go out of business. Want more moral hazard in the system? Watch cash-rich companies gobble up their competitors in a feeding frenzy. Think foreign ownership of U.S. companies is a net positive? Anyone who thinks so will be giddy by the time this year is over. Here's hoping we can avoid a replay of what followed when the adjustable mortgage rates reset from also occurring in the corporate sector. An incaluable number of jobs are on the line.

I think, though, that this view commits precisely the error Paul criticizes in this post

Zippy, what's with your and some commentators' quickness to assume the modern error in the writings of others? Neither I nor Lydia are unaware of what Paul is talking about here. If I jumped to conclusions as easily as you, I might assume that you're committing a Gnostic error of ignoring or trivializing economics as merely spiritual/moral/non-technical and disembodied rather than both spiritual and material. That would be as silly as your assumption that my talking about one aspect of economics (the part that does deal with technical aspects) is somehow a denial of the other aspects. Might I point you to this part of Paul's excellent post: "but this does not mean that we should dismiss the technical facts we have uncovered, as he dismissed the spiritual facts we can’t not know. Economic science is a useful thing indeed once its limits are acknowledged, and I have great suspicion when someone reproaches it tout court with a sneer. It remains true that that the technical facts continue not to be grasped by Paulson et al.

As for your substantive point, you (again) ignore the salience of the implications of the fact that Paulson changed his mind regarding the TARP plan. Simply repeating "The TARP did work" does not actually do away with the valid criticisms I made in my comment as to what that could even mean.

And as I implied in my previous comment above, your belief that the investment will actually pay out more than the cost misses the moral question of whether going into debt (your assertion that the TARP funds are not debt is nonsensical. The US govt did not use surplus funds or revenue-neutral budgeting for the TARP funds) is unjust to future generations of Americans in the first place, as well as the technical point of the opportunity cost of such an investment: that is, one isn't simply figuring whether the TARP investments will be net cash positive in the long run, but whether the net value will be greater than the net value of the investments that could have been made by future private/public investors whose resources were instead used to fund TARP.

But in truth, I don't quite understand why you believe the TARP funds are different in kind from other public debt. Is it simply because you believe the future taxpayers will be paid back?

I must say that this "the TARP must have worked, because we're all still here" reminds me in an unpleasantly eerie way of some dialogues I've occasionally had with a relative who believes in "naturopathic remedies." Whenever she doesn't get a cold, she attributes it to the herbs she is taking. When she does it, it's a classic post hoc fallacy.

Lydia:

When she does it, it's a classic post hoc fallacy.
No doubt. Again, as I mentioned above, objections to the TARP at bottom - the charitable person in me simply must assume at bottom - rest on disagreement about the facts, not principle. I say that it is true that the TARP stopped a panic driven complete meltdown of the banking system, and that technical objections of the kind raised by Albert (and by many economists, including the ones I am not Spartacus linked to) commit exactly the fallacy Paul criticizes in this post: the fallacy of viewing the events as things of a technical order, not a fully human order.

Now that is either true or it isn't true; and if it is true, no person who fully grasps the consequences of a complete meltdown of the banking system, and is neither crazy nor a moral monster, can continue to object to the TARP. So objections to the TARP by men of good will rest on, in my understanding, having the facts wrong (or incomplete).

Albert:

...quickness to assume the modern error in the writings of others?
I'm not assuming it. The fixation on Paulson's change of technical implementation is evidence of it.

...your assertion that the TARP funds are not debt is nonsensical.
I didn't say that the TARP wasn't financed through debt. I said that, unlike entitlement obligations (for example), the TARP is a cash-positive application of investment leverage out of the gate. The government is taking in more cash, in the form of dividends on preferred shares, than it is paying in interest on the debt used to buy those shares. That is a fact. It was structured that way on purpose. To my mind - as a technical matter - that structure is not as good as buying illiquid assets outright, which entangles Treasury less directly in the banks. But it is still a whole lot better than a complete meltdown of the banking system with all that that implies.

Here's a sort of mildly interesting question for Zippy: Suppose that Paulson had gotten the 700 billion bill voted for and then said, "I'm not going to do the TARP" and then and gone something *absolutely totally different* with the money. Make up your own example, if you like. You can probably do it better than I can. Spent it on building bridges from nowhere to nowhere in the deserts of Utah to create jobs, purchased a controlling stake in yak-raising in China. I don't know. Something else. Because you keep saying that what is going on now is a "difference of technical implementation." But wouldn't you then have to change your terminology? Wouldn't you have to say something like, "The promise of the TARP worked, because it calmed the people down for a while, even though nothing remotely like the TARP is being done." And wouldn't you have to say that there had been, at a minimum, some kind of deception there? Something morally questionable? A person says he's going to do one thing, then he goes and does something totally different, but he still wants to claim "Hey, I saved the world" because his empty promise calmed the market down for some crucial period of time?

...that the investment will actually pay out more than the cost misses the moral question of whether going into debt...is unjust to future generations of Americans in the first place...

Too bad the debts we've been running up are just now invoking real moral concern. Lets assume we will never recover the 700 billion in TARP funds. Cancel a couple of weapons systems, close out some bases, a Middle Eastern occupation or 2 and eliminate a couple of federal departments you'll easily recoup that sum and much more back. Assuming of course the moral qualms about debt are sincere enough for folks to abandon their preferred part of Leviathan.

The "let the markets sort it out" choir should be able to spell out the level and length of social and economic hardship they are willing to endure in place of government interventions. So far all we've heard is; the US military will crush a domestic revolt (to say nothing of the Constitution) and a vague assertion that the downturn "may last 10 years". 10 years of what -negative growth, massive asset sell-offs to foreign entities, 10-15-20% of "official" unemployment?

Wouldn't you have to say something like, "The promise of the TARP worked, because it calmed the people down for a while, even though nothing remotely like the TARP is being done." And wouldn't you have to say that there had been, at a minimum, some kind of deception there? Something morally questionable?

Zippy has made clear multiple times that he was upset about the deception used, but he also understands that the end result he charitably believes every rational person wants, the stabilization of a banking system on the verge of collapse, was in fact rescued from the jaws of a massively destabilizing panic. If Paulson had used the money on purely nonsensical activity, there is every reason to believe that the panic in the markets would have continued.

Well, I'd rather hear what Zippy says in answer to that question in his own words. As far as I'm concerned, if what is being done is really nothing like the TARP, then no one should say "the TARP worked." It's just a confusing way of speaking. My best guess is that the reason Zippy says so is tied in with what he says about "differences of implementation." Perhaps that also means he doesn't think there was actual deception; I don't know.

Zippy:

To point to my mere discussion of technical points as sufficient evidence of my committing the modern error is inadequate, especially considering the rest of my initial comment. Oh well. Believe what you wish.

As to the technical point - ha ha here I am confirming your theory about me! - am I correct in observing that you believe the interest on the debt is the only relevant cost to the taxpayer in this application of the TARP funds? Secondly, what rate do you think the government is paying on its debt?

Finally, I find it intriguing that while you insist that I am ignoring the "human and moral" aspects of this economic situation, you ignore the moral issues of TARP that I am raising. Those two phenomena would seem to be related.

Was there deception involved? Look who the players were - the clowns who got us here. The agreement was that TARP would buy up the distressed assets and mortgage securities of the major banks most affected, which would free in turn free up the credit markets, while the laborious process of unwinding the tranches unfolded.

Instead it became a massive loan to the entire banking industry. At a cost of 5% to 9% depending on the redemption period, TARP capital is relatively inexpensive compared to a cost of 12% or more for other forms of capital. Banks are fortifying their balance sheets and financial position which allows for liquidity and lending. So the freeing up of the credit markets occurred, but not as promised. Expecting our elites to honor agreements is asking too much at this point.

Zippy has made clear multiple times that he was upset about the deception used, but he also understands that the end result he charitably believes every rational person wants, the stabilization of a banking system on the verge of collapse, was in fact rescued from the jaws of a massively destabilizing panic.

The "end result he charitably believes every rational person wants" being the stabilization of a growth-oriented economy, funding of greed and imprudence on the backs of future generations so that people now don't have to suffer their just deserts, the devaluation of the dollar and US credit standing, and the gradual consolidation of economic power in the political executive?

My fear is that such rational, caring people are simply not looking at consequences beyond that which affects their generation. Avoid "economic catastrophe" now, don't worry about the costs, eh?

And it wasn't a panic... it was a corrected recognition of the previously underestimated riskiness inherent in these securities combined with losses in property values deleveraging through the institutions that chose to risk themselves by investing in related securities. "Panic" is what the Wall Street CEOs call the response to justify their risky decisions. "It wasn't my fault. There was an irrational panic!"

so that people now don't have to suffer their just deserts

Sadly, the people most affected are the least culpable for this debacle. The capos on Wall Street are using the rest of the population as human shields.

...being the stabilization of a growth-oriented economy, funding of greed and imprudence on the backs of future generations so that people now don't have to suffer their just deserts, the devaluation of the dollar and US credit standing, and the gradual consolidation of economic power in the political executive?
No. The end result every rational person wants is to not have starvation, riots, wars, vast social unrest -- the order of things that non-intervention would have permitted to occur.

Lydia:
Step2 said pretty much exactly what I would have said. If fireman promised to use foam and instead used water that is one thing. If a fireman promised to use foam and instead built a bridge to nowhere that is something else entirely. The TARP did, in fact, arrest a panic in process, with all that that implies.

...you ignore the moral issues of TARP that I am raising.
I don't think the putative moral issues you raise with the TARP are at all sound. It isn't the kind of thing you characterize it to be, at all.

Albert,
Okay, I am trying to imagine an economy that is oriented towards stagnation or decline and honestly puzzled why any rational person would want to rescue that. If that is your goal of course you want the system to fail. I don't have any good reasons to believe the TARP money is going to be a burden on the backs of future generations, and if I am completely wrong about that the damage to the economy is so severe the additional damage will be like adding a gallon of water to a flood.

Don't get me started on just deserts, I would like to see the so-called watchdogs of Fannie and Freddie plus the CEO's and CFO's of the rating agencies and investment banks put on trial for this economic sabotage, in both civil and criminal court as a national security issue. It's a little late to complain about the devaluation of the dollar and US credit standing isn't it? I mean we've been off the gold standard and had trade deficits for how many decades?

EVen those initially in favor of the B.O. admit TARP was a failure.

http://robertghansen.blogspot.com/2008/11/bye-bye-tarp.html

This morning I was thinking about the collapse of the global warming crisis bubble and yet we still have some reputable scientists promoting the idea (for many possible reasons, including self-interest).

ONE good thing resulting from this economic disaster is any high-cost-to-combat-global-warming-scheme will have to be shelved.

I wonder if any connection can be made between the belief in global warming means both higher and lower temperatures, more and less rain fall etc, and the belief additional debt and consumption are answers to the problems of debt and consumption rather than the answers being an increase in savings and production?

Yesterday's Bill Bonner's The Daily Reckoning piece made sense to me (whereas Paulson and Bernanke never make sense to me)

+++++++++++++++++++++ begin quotes +++++++++++++++++++

very short reckoning today…

Not that there isn't a lot to reckon with. Never have we seen so many absurdities…such remarkable events…such sublimely moronic thinking - in such a short time! When we want to make fun of something, we're paralyzed…spoiled for choice.

But first, let us look at the basic facts.

Yesterday, the Dow shed another 98 points. The dollar held steady at $1.39 per euro. Gold lost $9, bringing it back to about where it began the year.

It is amazing to us that so many people have so much faith in so much humbug.

We're talking about the bailout…the fix…the save…the plan to revive the world economy by giving it more of what it least needs - more debt. The idea is to make the pain of the correction go away by encouraging people to act as though they had nothing to correct. They've borrowed too much. And they've spent too much. But the feds aim to make them borrow more - by bringing the cost of borrowing down to an all-time low - and make them spend more…by causing prices to rise. (When money loses its value…they'll be glad to get rid of it.)

It's a consumer economy, they say; all we've got to do is to lure people to consume. The simpletons.

Colleague Simone Wapler explains that it doesn't work that way:

"Of course, a consumer economy requires consumption, but that's not all it requires. Imagine an island where a fisherman, a hairdresser, a doctor and a central banker live. The fisherman sells his fish. The hairdresser cuts hair. And the doctor does whatever doctors do. They all live on their services, using shells for money. The population is stable; everybody does what he's supposed to do. Everyone is fed. They all have nice haircuts. And they all get medical treatment. The number of shells is stable too. That's all there is to the story."

Simone gores on to explain that the only way people can get their hair cut two times a day…eat twice as many fish…or get sick more often and expect to get the same treatment they got before is by INCREASING PRODUCTION. And that requires saving…and investment. Otherwise, increasing consumption isn't possible. Even if you add more shells, the productive capacity remains the same.

We don't even know why we are pointing this out. Every fool knows it. But every fool also believes that if you mix in a little macro-economic mumbo jumbo that, somehow, central bankers can increase consumption by discouraging saving…and just getting more shells into consumers' hands.

The whole thing is as preposterous as the bubble that went before it.

But that doesn't make it unpopular!

+++++++++++++++++++++ end quotes ++++++++++++++++++++++++

We're talking about the bailout…the fix…the save…the plan to revive the world economy by giving it more of what it least needs - more debt.

TARP was not attempt to re-inflate the credit bubble, but a bid to provide oxygen to the failing lungs of our economy. There were 80 corporate defaults for 2008 and 125-150 companies will do so in 2009. That is a lot of jobs lost because companies cannot carry their debt, cover the costs of borrowing or find affordable capital. We're seeing a replay of the mortgage crisis across our leveraged corporate marketplace. Lost jobs translate into lost homes, less spending, more corporate defaults and the continuation of the death-spiral.

A deleveraging crisis is unavoidably painful; the question is how much pain we can absorb without a completely tearing apart our social fabric and losing our national sovereignty.

It's a consumer economy, they say ;

Since the 1920's it has been the goal of economic and social engineers like the New Deal's Rexford Tugwell, to make the consumer sovereign. The concept dovetailed with modernity's exultation of the autonomous individual and according to theory, would mitigate the negative consequences of a producer economy “too adept” at making tangible goods of lasting value. A fear shared by the National Association of Manufacturers and left-wing planners alike was that plants and factories would close once demand had been sated. Built–in obsolescence, the stoking of unlimited desire and perpetual disenchantment in pursuit of abundance were seen as solutions.

The consumer accounts for 70% of our GDP. When his wages stagnate, something has to pick-up the slack or the whole artifice comes tumbling down. Credit bubbles work, for awhile.

INCREASING PRODUCTION. And that requires savings and investment.

Can't increase production without; 1) recovering the domestic industries lost to free trade agreements and/or 2) establishing new industries able to operate within the context of global market that feeds off of labor arbitrage and fleeing capital. Until our policy-makers face these obvious, inescapable facts you will see more futile attempts to make the pain of the correction go away by encouraging people to act as though they had nothing to correct.

Even [some people] initially in favor of the B.O. admit TARP was a failure.
There is a shocking revelation. Some people changed their mind from being right to being wrong, or at least gave into the pressure to adopt a fashionable opinion contrary to their prior opinions. That just never happens.

TARP bids fair to become the economic equivalent of Darwinism.

Have a Blessed Christmastide.

Kevin: "Sadly, the people most affected are the least culpable for this debacle. The capos on Wall Street are using the rest of the population as human shields."

This is actually incorrect for the following reason. The "rest of the population" freely chose to trust their money to the managers of 401(k)s and banks. They expected to gain interest/dividends at the cost of temporary illiquidity and risk. Because they trusted their managers, and the managers failed, they deserve to lose the assets. Any other perspective on the matter is simply delusional. It was always a gamble.

Zippy: No. The end result every rational person wants is to not have starvation, riots, wars, vast social unrest -- the order of things that non-intervention would have permitted to occur.

That's exactly the point you miss. Bailouts don't simply prevent starvation, riots, and war. They delay them while magnifying the severity for future generations who will have to absorb it. Debts will be paid. All bailout proponents support is making the debts of social rest greater over time--as long as they don't have to pay it. I don't understand how you could read my initial comment and not understand this.

I don't think the putative moral issues you raise with the TARP are at all sound. It isn't the kind of thing you characterize it to be, at all.

Sure they are. If you had read the reasoning, perhaps you would have more than an baseless assertion to offer.

Step2:
Like I said before, the $700 billion in TARP funds (as well as all the other bailout money) is issued via debt, which is precisely a burden on future generations since the current generation does not have the money. Do you disagree? The spread between positive dividends and negative interest on the debt is tiny and doesn't take into account the cost of risk, which this crisis has shown to be much higher than we had previously thought. As a result of continuing to pump fiat dollars into the economy, the dollar is weakening and the US credit rating is increasingly under suspicion. If the US credit rating weakens and no one lends to the US anymore, heh, if you thought starvation, riots and war would have happened if TARP didn't pass, you have no clue what's coming. There will literally be no outs then. None.

Your position strikes me as someone who says "Well, the train is almost here to crush me; instead of moving, I'll point out that I should have moved a while ago and continue staying here."

Add to this the fundamental injustice of taking trillions from future generations, even if it were true that it would be paid back, and you simply have the moral state of mind of the modern man, willing to sacrifice future generations in unsustainable current practices whose sole purpose is to relieve him of his just deserts.

They delay them while magnifying the severity for future generations ...
No, the TARP doesn't do that. At all. That is like saying that putting a heart stent in just delays and prolongs the inevitable death of the patient, or that preventing a nuclear war right now just delays an inevitable future war which is even worse, so we should not put in the stent or stop the war from happening.

The picture for future generations, to the extent we can have any reasonable expectations about such things, in addition to the current generation, was salvaged - rescued from the consequences of a runaway financial panic - by the TARP. A runaway financial panic is not good for the current generation, and it is also not good for future generations. As I said in other discussions, the choice was between something like the TARP right now or something far worse later. Future generations might not have the same technical debt structure in place living under an Islamic nationalist government or in a post-war-with-Russia world or whatever; but who cares?

Again, at bottom we simply disagree about the facts.

If you believed that the TARP had halted a financial panic which would in turn have ultimately resulted in a nuclear exchange with China, would you still be against it? I don't believe that specific prediction, indeed I think any specific prediction like that is individually very low-probability; but I do believe that that is the order of consequences which the TARP prevented. That is, I believe that consequences of that gravity were quite reasonably likely without the TARP intervention to stop the panic.

If you believed, as I do, that the TARP was necessary in order to prevent that order of consequence, would you still be against it? It would be great if the people who have been disagreeing with me on this would give an unequivocal answer.

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