Tuesday, November 11, 2008

The Crunch in Hungary and Where It's Coming From

The payment on my home loan was up about 35% this month. Kind of.

It's complicated.

The Hungarian currency, the Forint, has been taking a beating lately. Our home loan, however, is calculated in Swiss Francs. So the amount of Forints we were charged this month is up significantly. It is fortunate, therefore, that I landed a job that pays in Euros.

All this leads to the question, 'Why is the loan in Swiss Francs?'

It is that question, and its absurd answer, that has kept me abreast of the global financial meltdown. In an attempt to keep it simple, I'll just say this: Due to a serious deficit, the Hungarian National Bank won't lower interest rates (currently at 11.5%), even if a rate cut would stimulate local lending. For this reason, it is much cheaper for people seeking credit in Hungary to borrow in a foreign currency. But when the Forint lost value last month after the credit markets froze, anyone earning in the local currency got pinched hard on this month's repayments. And it doesn't look like a one-month issue. Recovery is going to take some time.

While I'm normally not the kind of person who pays attention to financial news, having to keep track of currencies and national lending rates has changed the way I read the morning papers a bit.

That being the case, I've recently raised some objections to the way the US dealt with the approaching crisis. I've stayed fairly informed for a layman. My opinions are based on real numbers and actual policy. I don't think the way forward is going to be easy, but I am happy about the Obama camp's take on the issue. The only thing I wasn't too sure about was how the opposition felt about things.

Then last night a good friend sent me an article from The National Review Online. My friend knows I'm not much of an NRO reader, but I send him NPR pieces, so all's fair. Anyway, the article he sent, by Mark Steyn, is titled "The Death of the American Idea." I had to ignore Steyn's bitterness over the sound thumping the GOP received in the election, but the focus of his piece exposed an interesting blind spot in current conservative thinking.

Steyn's complaint is concerned with the ever-expanding Federal Government, a legitimate concern, especially for a fiscal conservative. But what struck me was the evidence Steyn used to put his argument over the top. He described the bailout package as the US Government’s latest step towards the left.

As someone who admires the values of fiscal conservatives, I can understand Steyn's objections to the bailout package. However, it is the policies of 'small-government' conservatives that have been peeling away at government regulatory powers over the past two decades. Those powers had been put in place to keep companies from slipping into an AIG-like situation. The value of such regulation has never been as clear as it is today.

On top of that, Steyn feels comfortable ignoring the fact that the bailout is propping up companies whose failure would wreak havoc on the global economy.

Steyn probably hasn't had to sit across from a Hungarian colleague - a colleague already angry with her own government for botching the local economy - and listen to a diatribe on unchecked American greed. Greed that is, according to my colleague, destroying what little progress the Hungarian economy has made in the past few years. Even with an IMF loan, the EU bailouts, and the US bailout in place, the Hungarian economy is tapping the pocketbooks of its citizens, and American greed has a lot to do with that.

Personally, I will probably weather Hungary's economic downturn, but there are a lot of people earning in Forints right now, and they may have some harsh questions for Mr. Steyn.
"You want to let these companies fail, huh? Then what happens next? You want to let my nation's economy fail?"

It was laissez-faire policies that got us into this situation. Fiscal conservatives may be upset that those same policies can't get us out, but anger or blame pointed at election results is misplaced and ill-spent.

It is very easy to be fiscally conservative when the crisis is under a microscope. But I'm on the wrong end of that microscope. The loan I took out was described as the most economically responsible loan available. When the repayment on such a loan jumps 35% in one month, there is something wrong with the system. If we trace the problem to its roots, we find two things:

A mismanaged Hungarian economy (no big surprise there)


Unregulated US banks and investment firms packaging bad loans and selling them for a profit around the world.

This is not a problem that will go away if we just ignore it. Men like Steyn can moan about how their ideology has been violated, but they ought to look at where their ideology has taken the world economy. Their time is up, and now the governments they scorned are left to clean up the mess. I’m just glad the US has a leader whose approach is about inspiring the best rather than fearing the worst.


chumpo said...

i like your foreign investment(s). i hope to hell shit doesn't get too much more hectic for the good folks of hungary.

Jermo Sapiens said...

Hello there,

I dont know why you would suggest that greed and deregulation caused the financial crisis. It seems to be a widespread assumption on the left, but I never heard convincing arguments to substantiate it.

Dont you think that Jimmy Carter's Community Reinvestment Act (CRA), which mandated banks to take on more bad loans (quite literally) had anything to do with it?

It seems clear to me that this mess could only be created through a distortion of free markets - after all, banks dont like to lend money to people who cant pay it back and only do so if:
a) they are forced to by the government, or
b) they can be insulated from the risk.

In this case, both a) and b) were present as the CRA mandated them to take on more bad loans, and Fannie Mae and Freddie Mac (both government entities which are also insulated from the free market) would buy up these bad loans as a matter of policy.

Hogan said...

I get upset when people try and turn the financial crisis into a black & white issue.
And that is what is happening when anyone tries to pin all this on Fannie & Freddie.
If the government insured lenders were the only institutions to have failed, then there wouldn't be a crisis. It was the private institutions that went into the deep end without floaties, and when the started sinking they grabbed at all the other swimmers in the pool.
We don't live in a world with pure free markets, but the companies that waved off regulation are now hat in hand.
And if we let them fail, they'll drag the rest of us down with them.
No political party get out of this Scott-free, but the executive power to stop or slow this train wreck was in the hand of the conservatives for 8 years. I wish someone from the right would ackowelge that before dusting of Carter references.

Sholto, Sydney said...

Hogs, you and Jermo are both right and wrong. Admittedly, once the bubble burst, factors like greed, over-leveraging and securitisation made a bad situation worse, but the needle that pricked the bubble in the first place was sloppy lending practices, especially by Freddie and Fannie. The Democrats are largely responsible for this. Even Clinton, whose attempts in 1994 to tighten up the lending practices were thwarted by the house Dems, acknowledges this.
It was particularly galling to see Barney Frank (of the Investment Services Committee) blaming the Republicans and their ‘values’ for the crisis, when he more than anyone defended the loose lending practices, even accusing sceptics of racism – the beneficiaries of these practices being mostly minorities. Not to mention that his (male) ‘lover’ was once an executive at Fannie while he was chairman of the committee that was supposed to oversee it – a conflict of interest that would not have escaped the NY Times had Frank been followed by an ‘R’ instead of a ‘D’. Or that Howell Raines, Fannie’s CEO during the heyday of loose lending, and his predecessor, both served on Obama’s election committee. More fool the Republicans for not making more of this.
The fact that the whole world is enmeshed in this is because banks everywhere indulged in the ‘Republican’ vices. Deutsche Bank’s leveraging was 50:1, Barclays was 60:1, whereas Lehman’s was “only” 28:1.
As far as I know, only the US indulged in the ‘Democrat’ vices of politically directed NINJA loans, which is why the crisis started there.

Ted S. said...

Hogan, I hate to disagree with a fellow expat Midwesterner, but comments like "the executive power to stop or slow this train wreck was in the hand of the conservatives for 8 years" make us look a bit ignorant, so I've got to speak up.

Once a law is enacted by presidential signature, as the CRA was by Carter's and again by Clinton's, the executive has no power "to stop or slow" it. So there is no such thing as "executive power to stop or slow" enacted legislation. Only the legislature can do that.

As it happens, when Republicans (not "conservative[s]") had a majority in the legislature, they did in fact try to do exactly this. (No doubt they were just "fearing the worst".) The Dems, led by interest-conflicted grifters such as Barney Frank, foiled Republican attempts to change either the law or the industry oversight. (No doubt Dems were just "inspiring the best".) Well, the worst came to pass, and now the Dems are blaming everyone but themselves.

So yes, to the extent there is a problem, if we "trace the problem to its roots", there are in fact massive and lunatic government programs there: the CRA and government backing of Fannie and Freddie.

Anonymous said...

to hogan,

Uh, the replublicans did try to do something with these bad mortages but it was the democrats that blocked any regulation. Of course the big one was barney frank who said this summer there was nothing wrong with fannie mae. Maxine waters in 2004 as well as another congressmen I do not remmember his name, name compared the hearing of franklin raines to a lynching to make sure to make the hearing a racial issue so nothing would happen. Furthermore, banks were not allowed to do background checks on loan applicants as it could be deemed as racist. So when it comes down to who is to blame for this mess look no further than cristopher dodd, barney frank and lo and behold Obama who was the third highest donnee for fannie mae and blocked any moves for regulation

RkBall said...

We're all better off now that "someone else" will be paying our grocery bills and mortgage payments.

Tom said...

Sorry to pile on here, but maybe you can clarify a bit by expanding on this statement:

"However, it is the policies of 'small-government' conservatives that have been peeling away at government regulatory powers over the past two decades."

Which specific regulatory powers? I hear this all the time but nobody every states exactly which discarded regulations caused the crisis.

I could be wrong but as far as I can tell the thing peeled away was reason and common sense in lending practices (by the CRA).

Denyse said...

Hi, I'm a Canadian living in Toronto. Just wanted to say that we never had anything like a Community Reinvestment Act forcing banks to lend to bad credit.

Also, unlike American banks, Canadian banks will sue people who simply throw their key through the mailbox and walk - for the difference between appraised value and sale value under duress.

A note about "Wall Street greed": I get nervous when I hear that because Wall Street is not more greedy than the people who wanted a mortgage AND high charge card debt. Those people did not know how to make greed pay, so they lost. Wall Street is full of greedy people who do know how to make greed pay. And many salted away millions, I am told.

The big loser is Prudence Scrimp, who worked and saved and paid off her own mortgage but must now, thanks to the bailout, also pay Dollie Spendin's mortgage via her taxes.

One reason that the McCain-Palin ticket lost is that the Republicans were not in any sense behaving like a conservative party. So they must have had a hard time rallying their base - among whom, I gather, were many Prudence Scrimps.

And yes, Dollie is more fun than Prudence, but you do NOT want to be paying Dollie's bills. Better you should agree to share assets with Prudence; you'll soon be rich.

directormovies said...

Exchange your master's degree in creative writing for one in economics and maybe you won't post such asinine statements about political economy.

Economics is the art and science of tracing the effects of an activity -- legislation, for example -- to ALL parts of a society, not just the part that is seen immediately and that gets the most publicity in the newspapers.

Left to itself, the free, unregulated market ticks along like a fine chronometer; each person and firm integrate their decisions into everyone else's decisions by means of the PRICE SYSTEM -- that's why private property, reflecting actual prices (which, in turn, display information about supply and demand) is so essential. Private property causes prices to be real; real prices, in turn, send real information -- meaningful data -- to consumers, investors, buyers, sellers, entrepreneurs, etc. You can see that this is the exact opposite of that spurious "anarchy of production" that socialists are fond of harping on when they speak of capitalism. Whether or not we explain this smooth functioning by reference to Adam Smith's "Invisible Hand" is irrelevant. The free market is smoothly functioning and represents the economic HARMONY OF INTERESTS of its participants.

Conversely, real economic anarchy is caused precisely by propping up sick, uncompetitive industries that make stupid decisions in the market (such as the auto industry and AIG and the big investment banks). For example, the only people hurt by letting the big 3 auto manufacturers suffer the consequences of their own actions would be the union workers who were able to force up their wages to over $80/hour instead of the going market rate -- that is, the real rate, set by the supply of workers and the demand for their labor -- that a company like Toyota pays its workers: about $40/hour. Silly you. The public has been subsidizing the Detroit auto makers for years; the entire U.S. industry has been run like a socialist paradise described in Edward Bellamy's "Looking Backward". This has allowed Detroit to escape having to serve the actual demand of real people buying their products. Start-up companies willing to make rational market-based decisions will be PREVENTED from coming into existence by this bailout and by the continued subsidization of weak industries. Try to think clearly for two seconds: had the U.S. gov't deemed it necessary to "bail out" the typewriter industry in the 1970s, the personal computer could never have developed, except as a rich man's toy; precisely because of big, fat, arrogant private companies like IBM, Microsoft, and Apple, and a free unregulated market where greed was allowed to rule, the quality of personal computers has increased dramatically while the prices have dropped precipitously. Don't an increase in quality and decrease in prices help everyone in an economy? YES. Aren't IBM, Microsoft, and Apple, still healthy companies? YES. Had the gov't "bailed out" the candle industry, there would be no light bulbs. "Bail outs" do nothing but REDIRECT capital that WANTS to flow into something profitable (meaning, something that produces some lower-order economic good that consumers actually want or need) into something that is unprofitable (meaning, an industry that produces a lower-order good that people don't want, or don't want as much as something else).

Capitalism is a "Profit and Loss" system, and the "Loss" side of the accounting ledger is just as important as the "Profit" side. Sick, unproductive, unprofitable industries should be allowed to fail so that its resources -- LAND, LABOR, MONEY, MACHINERY, BRAINPOWER, ETC., ETC. -- can be released to flow into something that produces something that people want.

"Bail outs" are pure socialist redistribution of wealth: they don't work under socialism; they don't work under capitalism; they don't work under a mixed economy (which is the system the U.S. has). If you wish to revive the U.S. economy, stop punishing productivity and success: abolish the capital gains tax; abolish the corporation tax(which does nothing anyway, since the corporation merely raises its prices and passes that extra cost on to the consumer); and abolish or drastically lower the personal income tax. Then, drastically curtail government spending on social programs to fit within the budget.

These moves would send a signal to businessmen and investors: "Hey, everyone! The U.S. is open for business. Open your business HERE and please STAY HERE!"

Since you enjoy thinking so much about economic issues, mull this over: government action (such as (i) warmaking, and (ii)infrastructure building, such as roads, bridges, etc.) is, by nature, CONSUMPTION. Governments are never productive; they never produce wealth, and are incapable of doing so. Wealth is always private and is always private produced. The most governments can do is confiscate private wealth and redistribute it.

As shown by his past voting record, personal writings, live radio interviews, and past associations (like the Marxist "New Party" of Illinois, of which he was a member), Barack Hussein Obama is a far leftist ideologue. He is not interested in reviving the U.S. economy except on socialist terms (which, of course, is a contradiction). He favors the illusion of something called "social justice", a kind of egalitarianism of economic outcome; not "legal justice", the idea that irrespective of economic outcome, we are all equal before the law. It's one or the other. If you favor economic egalitarianism, you cannot have equality before the law. If you favor equality before the law, you will get economic inequality.

I can't think of any great Hungarian economists who were lovers of personal liberty and free markets, but I can recommend some great Austrian economists who were: Carl Menger, Eugen von Bohm-Bawerk, and Ludwig von Mises. For your own economics education (which you badly need) start with the easy-to-read classic "Economics in One Lesson" by Henry Hazlitt. You will also greatly increase your ability to think about the UNSEEN effects of economic intervention and government regulation if you read a short classic from the 18th century - "Economic Sophisms" by the great pamphlateer and popularizer of laissez-faire ideas, Fredric Bastiat. Hazlitt and Bastiat are still in print.

Hogan said...

@ Tom, at the end of his presidency Clinton repealed the regulations that were put in place after the depression in the 30's. It was not a wise move, as banks no longer needed to maintain a set level of capitol. It was around the same time that 'credit default swaps' and sub-prime lending became common practice for the private lending firms like Meral Lynch. In a liquidity crisis, such regulation now look like a good idea.

I believe those regulations were repealed to make way for new, more flexible regulations capable of responding to the modern market, but nothing was set up to take their place. I don't say that to excuse Clinton, I think he is as guilty as any 'small-government' policy maker. Both he and the administration after him increased spending in one area while giving the financial sector free-reign.

@ directormovies, I would be more impressed with the content of your comment if you had a practical grasp on what it means for these companies to fail.

The Japanese and Korean car makers are supporting a bailout for the US automakers. If that doesn't give you a sense of how interconnected the markets have become, then you can take your free-market theories an go live on whatever planet you think is run by those rules. Toyota would not be able to build their cars if the US supply chains got shut down. The resulting panic would set off a chain of events that would take years to correct in a true free market.

Countries have gone bankrupt, my friend. The unemployment rate is climbing. People are losing their homes. You need to take your nose out of the Economics textbook and look at the real world. There is not a true free market. I'm sorry about that, but governments care about citizens, and they use tax payer money to take care of those citizens. Strange as it may sound, a compassionate government cares more about jobs than corporate bottom lines. When factories are shuttered, towns die. Your ideas are real pretty, but they do not work in any kind of practical sense.

directormovies said...

Good grief! For someone with a master's degree in creative writing -- whose imagination should be vivid, if not downright fecund -- you sure are concrete bound!

Your arguments are a less clever version of an Abbot and Costello routine in which Abbott tries to convince Costello to buy a hot dog from a vendor. Costello, however, doesn't want a hot dog. "But," says Abbott, "without your purchase, the hot dog vendor can't continue to rent his cart from the city. If he can't rent his cart from the city, he can't ply his trade. If he can't ply his trade, he'll be fired. If he's fired, he'll be unemployed. If he's unemployed, he won't be able to purchase the uncooked hot dogs, the mustard, and the sauerkraut from the 'US supply chains'. Those mustard and 'kraut supply chains will have less revenue coming in, so they'll have to start laying off workers. If those workers are laid off, they, in turn, will not be able to buy their goods from their 'US supply chains' of things like ice cream for their children, and gas for their cars, or make mortgage payments, or rent payments...SO BUY THAT HOT DOG, COSTELLO!"

To which Milton Friedman, Henry Hazlitt, Frederic Bastiat, Jean-Baptiste Say, James Mill, John Stuart Mill, and an economically literate Lou Costello would say:

"Bullshit. If I do not purchase anything from the hot dog vendor, he is no worse off this afternoon than this morning before he met me. If instead of buying a hot dog -- and supposedly contributing to the well-being of an "interconnected supply chain" -- I decided to buy a bar of chocolate, your same reasoning would apply to THAT supply chain as well: my purchase helps the candy store where I made the purchase; the store's new revenue helps its suppliers such as the wholesaler and the manufacturer; their new revenue helps the cacao growers; their new revenue helps the makers of fertilizers; their new revenue helps the chemical industry; etc. So why is it better to help the hot dog vendor than the candy store? It isn't. In fact, it's worse. It's worse to force me, Lou Costello, to buy a hot dog that I don't want than it is to allow me to keep my dollar in order to purchase a chocolate bar that I do want."

[Just to forestall any comment such as "Gotcha! What if Lou Costello makes NO purchase, but instead puts his money in the bank? That will adversely affect the "supply chains" of both the hot dog vendor and the candy store!" Wrong. If Costello puts his money in the bank, it will be in either a demand deposit (checking) or a time deposit (savings). If he puts it in checking, it's obviously to spend at a later date, so all he's done is delay his purchase by a few weeks or months. Indeed, he might instead immediately decide to write a check to his cable TV provider, which would feed "the supply chain" in that sector. If he puts the money in savings, the bank will lend it out almost immediately at interest. The loan will go to higher orders of the economy: capital goods industries that build factories (instead of private houses); tractors (instead of family cars); etc. So putting it in savings feeds the supply chain "from the top" as it were, instead of from the bottom; it feeds the economy from the capital goods side instead of from the consumer goods side.]

The argument doesn't change at all if Abbott were to say this: "Look, I know you don't really want a hot dog -- in fact, not only do you not like hot dogs, but this vendor has been selling low-quality hot dogs for some time; his assistants are unionized and force him to pay an above-market wage which, in turn, forces him to sell his hot dogs for an above-market price. But look: this vendor is ailing. He's economically sick and his workers depend on him. He's in need of a bail out. He is maxed-out on his credit card; he purchased a house that was too expensive for him and cannot meet his mortgage payments every month. He ran his personal hot dog vending business like a socialist paradise by promising his employees life-time employment, free medical care, a month of paid vacation, and lots of paid sick days and "personal" days. Now that consumers have been warned about the health hazards of eating hot dogs and there has been a severe downturn in the consumption of hot dogs, his business will suffer [HERE WE GO AGAIN!!!] If you don't continue to purchase his hot dogs, he won't be able to pay his workers (or their healthcare, or their paid vacations, or their sick days); he won't make his mortgage payments; he can't pay his credit card company; he can't afford gas;...ad infinitum and ad nauseam.

To which an economically literate Lou Costello would say:

"Bullshit! By not bailing out the hot dog vendor, he will probably go bankrupt. In bankruptcy, his assets will be auctioned off to other vendors, or to other businesses that are NOT ailing and that could use a cart with a well for steaming and boiling things (corn, for example, instead of franks); the umbrella could be bought by a beach-supplies store, etc. The employees would be absorbed into those industries and employers that are also NOT ailing: they would work for the candy store and/or the chocolate manufacturer; they would work for the beach-supplies store selling beach umbrellas, beach towels and suntan oil; and they would work as customer reps for the cable TV company. How do I know this? Because with less hot dog supply on the market (since our unfortunate vendor has gone out of business), there are now more ADDITIONAL dollars floating around -- such as Lou Costello's dollar -- ready to spend on chocolate bars, beach umbrellas, and cable TV.

Of course, this has to be clearly understood: the candy store (and its supply chain); the beach supplies store (and its supply chain); and the cable TV provider (and its supply chain) are probably not unionized like the hot dog vendor's industry was. If these workers want to be absorbed into these other industries, where their labor is certainly needed, they will have to lower their inflated, union wage, and accept a lower, market wage. On the other hand, if a Barack Hussein Obama comes along and demands that all of these other industries unionize as well -- and thus pay their own workers higher-than-market inflated wages -- guess what? The unemployed workers from the hot dog vendor will NOT be absorbed into other industries but will REMAIN UNEMPLOYED. In that situation, they will either have to be put "on the dole", or (if they are young enough) they can be inducted into this quasi-fascistic "Citizens' National Security Force" that Obama mentioned on national television before the election. Aside from the political indoctrination that will no doubt occur in this paramilitary force, it is his version of FDR's "Civilian Conservation Corps"; an institution for creating useless "make-work" for the sake of claiming that his administration is "dealing with the unemployment problem."

"If that doesn't give you a sense of how interconnected the markets have become,..."

You need to get reconnected to economic reality to discuss this issue rationally. When the feudal system of the middle ages was replaced by capitalism, the major change was from FEUDAL SELF-SUFFICIENCY (in which each estate grew its own wheat, baked its own bread, wove its own clothing, etc.) to CAPITALISTIC DIVISION-OF-LABOR. Under division of labor, ALL MARKETS ARE INTERCONNECTED. Not just cars...but everything! There's not a single thing produced anywhere in a division of labor market that is not the result of an almost endless "supply chain" of different markets.


Above is a link to a YouTube clip of Milton Friedman from his old PBS series "Free To Choose." It's a famous bit. He holds up a pencil for the audience and describes the impossibility of manufacturing that pencil by any one single person. The wooden part of the pencil comes from trees in Washington; to cut down the tree, you need a saw; to make the saw; you need steel; to make steel, you need iron ore; to get iron ore, you need mining equipment. The lead in the pencil - graphite - comes from mines in South America. The rubber eraser comes from rubber plants in Malaya. Then there's the brass ferrule holding the eraser to the wood; the yellow paint on the outside of the pencil; the glue holding whole thing together. They all come from different, widely disparate markets, separated geographically and often temporally (e.g., the time lag in growing grees, felling them, and manufacturing the wooden pencil shaft). Keep in mind that there's no "Pencil Czar" or "Department of Pencil Manufacturing" in the U.S. or anywhere else. The smooth manufacturing of pencils from among the many interconnected markets involved in their production is accomplished by means of prices. That's the economic function of prices. Interfere with prices by artificially setting them higher or lower than they would otherwise be, and you interfere with the smooth coordination of a dozen or so markets that depend on price information.

Don't BS us or yourself about the "interconnectedness of today's auto markets"; in a division of labor capitalist economy, EVERYTHING is produced in a matrix of interconnected markets: cars, pencils, computers chips, potato chips, tennis shoes, and tennis balls. You don't know enough economics to understand that THAT is precisely the reason why a sick subsidized part of that market should be allowed to release its productive assets -- LABOR, LAND, MACHINERY, EXECUTIVE KNOW-HOW, R&D, etc. -- to OTHER PARTS OF THOSE INTERCONNECTED MARKETS THAT CAN MAKE BETTER USE OF THEM.

The proof that they are NOT desired in their current niche within the division of labor is precisely the fact that the ultimate end-user -- KING CONSUMER -- will not voluntary purchase enough of the product to sustain their manufacture, but instead must be forced to purchase the product by means of a tax subsidy.

Your "interconnectedness" argument supports my position, not yours. If we did not have division of labor, and instead lived on some self-sufficient island somewhere in a feudal-type economy where we exported nothing nor imported anything, then there's an argument for bailing out an ailing sector of the island. There is zero excuse to do so once markets and "supply chains" become interdependent within division of labor as we have today.

By bailing out a sick section of the economy and therefore not permitting other, healthy sectors of the economy to make use of the sick sector's resources, the outgoing and incoming administrations in Washington D.C. are ENTRENCHING a nasty recession into a full blown depression. A big exec at Goldman Sachs just said the same thing: these bail outs are NOT working, and he predicts a years-long depression similar to the 1930s. Today -- as in the 1930s -- it will be the government's fault for NOT letting the market correct itself.

I don't expect the auto makers in Japan or Korea -- both of which countries have mixed, highly regulated economies -- to understand how capitalism works any more than I expect US auto makers to understand it. As I wrote earlier (and as Friedman, Hazlitt, Bastiat, et al., have written) the issue is between what is immediately seen and apprehended by the senses (viz.: car factories; auto workers; car show rooms) and what is invisible to immediate perception but apprehended by reason alone (viz.: all the millions of alternative uses for the labor, steel, tools, rubber, glass, microprocessors, etc. that currently are wasted on manufacturing cars that people don't want...how do I know people don't want them? Because they won't buy enough of them to support the industry and the rich lifestyle to which its workers have become accustomed). Consumers would prefer to buy other products with the extra dollars they have (saved from NOT having purchased cars); other products such as, for example, more motorcycles; more bicycles; more digital cameras; more air conditioners; more radios. The labor, money, and physical materials that are now being wasted on making cars that the American public doesn't want should be released from that dead-end industry (by NOT bailing the industry out) and thus be allowed to flow into the industries that make products people do want.

It's not that difficult an argument to understand. Either you're extremely dimwitted (unlikely), or you're the kind of person -- the opposite of the "Mark Steyn kind of man" -- who believes that people should NOT ultimately decide for themselves what they want to buy and consume, but should be forced (through taxation) to buy certain products from certain industries whether they want to or not. It's perfectly all right with me if this is the kind of person you are (it might be a very mittel-european mindset for all I know). Just don't ever be hypocritical by claiming to be for the "common man." The economic freedom of choice under capitalism is precisely what gives the "common man" any sort of economic power and leverage.

"but governments care about citizens, and they use tax payer money to take care of those citizens..."

Wrong. Governments by nature are merely a necessary evil and they care about nothing except maintaining power. That's it (and there are NO exceptions to this principle of political science and political economy). Governments don't "use" taxpayer money; governments FORCE (under threat of jail or wage-garnishment or some other form of punishment) citizens to pay taxes and then use those taxes to help SOME of the citizens at the expense of other citizens. The citizens it helps are (i) those with the loudest political-action committees or pressure groups (such as unions), and (ii) those whose situation is such that they can always be counted on to vote you into power and keep you in power as long as you give them free, unearned handouts. It's no secret that the "illegal immigration" problem -- Mexicans waltzing in across the border, making babies that under the law automatically become U.S. citizens and then bringing over entire extended families of uncles, aunts, second cousins once removed, etc., etc., all because of the "Family Reunification Act" devised by Ted Kennedy years ago -- it's no secret that this situation was allowed to fester precisely IN ORDER to create a huge voting block of a specific demographic that has been promised citizenship, driver's licenses, healthcare, education, entitlements, etc., in return for voting Democratic. That's not "taking care of your citizens." That's "cynically growing your power base."

"Strange as it may sound, a compassionate government cares more about jobs than corporate bottom lines."

I guess that's why those countries whose governments are so compassionate that they disallow the existence of such horrible things as "corporate bottom lines" are economic and political hell-holes whose people die trying to escape to those countries with LESS compassionate governments and MORE corporate bottom lines. See Cuba under Fidel Castro, Venezuela under Chavez (an economic hell-hole, though people can still leave), North Korea under Kim Jong-Il. Native Cubans still risk their lives to get the hell away from their compassionate government and to the U.S. whose government is not only NOT compassionate but doesn't interfere and regulate and regiment every single part of their lives. What gives the individual in the U.S. some amount of economic freedom to make his own individual decisions? That awful "corporate bottom line" that you disparage but whose function within a politically free state you clearly don't understand. North Koreans today risk their lives trying to get into China, because today China is more or less a market economy whose government -- intrusive as it is -- is not OPPRESSIVELY TOTALITARIAN is it is in their native country. What gives the average Chinese citizen some modicum of directing economic production in China? The corporate bottom line. If you learned economics 101 instead of thinking, analyzing, speaking, and writing, in tired leftist bromides you would understand the FUNCTION of "the corporate bottom line" within a division of labor system, instead of merely reacting to it in unthinking kneejerk fashion.

"When factories are shuttered, towns die."

And when factories that don't make what people want are subsidized so that people within their towns can fool themselves and hoodwink ex pats in Europe into believing that "our economy is great and our government showed such warm compassion by bailing us out at your expense," it means that OTHER factories and towns (i.e., the ones paying for the subsidized factory and town) are pushed that much closer to their own shuttering; more importantly, NEW TOWNS that MIGHT HAVE COME INTO EXISTENCE had the resources from the unsuccessful factory and town been allowed to flow into it, will simply not appear. Because they won't appear, you don't see them; because you don't see them; you think they are unimportant to an economy or to economic analysis. Wrong.

"You need to take your nose out of the Economics textbook and look at the real world.

Tell you what: I'll take my nose out my economics books if you take your head out of your butt.

Edward Lud said...

Hogan, in your post you wrote:

“It was laissez-faire policies that got us into this situation... If we trace the problem to its roots, we find two things: …Unregulated US banks and investment firms packaging bad loans and selling them for a profit around the world."

In subsequent comments you wrote:

“We don't live in a world with pure free markets, but the companies that waved off regulation are now hat in hand.”

Well, which is it?

Do you, or do you not base your critique on believing there are extant free markets?

Jordan Hare said...

From my perspective (I work for a US investment bank) there are a couple of things that got us here:

[1] Securitization is good, but not *that* good. Ultimately it was a good idea to spread the risk of debt around. And it made sense for banks in Europe and elsewhere to buy US debt given historical patterns on home ownership. Most Americans pay back their mortgages and the idea that you can get a yield off that with minimal risk makes sense.

What happened in this case was that the initiator of the bad loan (regional bank) was divorced from the aggregator of the bad loan (investment bank) as well as the rater of the bad loan (credit rating agency). Securitization is a great mechanism to spread risk across groups. But the way it was implemented ultimately broke the linkage (and the accountability) between these three entities. Ultimately there was no risk control mechanism that could highlight the system-wide problem.

[2] The global pool of money. As heard on This American Life, there was a massive boom in capital early in the decade. That money had to go somewhere and especially in the wake of the dot-com bust securitized mortgage products seemed like a great way to go. There's a related side topic here about the compensation mechanism used in major banks which is also interesting but merits its own discussion.

[3a] Regulatory regimes aren't tracking systemic risk. A big reason we're where we are comes down to how risk gets managed across entities. When Lehman defaulted, this had a massive knock-on effect to counterparties across the spectrum. First, hedge funds who managed their assets at Lehman (or "prime brokered" at Lehman, using industry parlance) essentially lost their shirt or at best had their assets tied up in legal proceedings. Second, interbank lending (which finances the entire investment banking model) had significant two-way exposure to Lehman who both owed and was owed significant sums. Third, credit-default swaps on Lehman's debt (which were a far bigger market than Lehman's actual debt) all kicked in on their collapse which thus caused even more huge cash payments in an environment where lending was essentially not happening. Fourth, everyone started planning for armageddon and all other banks CDS spreads went through the roof.

Clearly, Hank Paulson and Ben Bernanke didn't anticipate that this would happen. And how could they? As they had neither the tools nor the mandate to track system-wide exposures to assets/products/currencies/entities, they were rightly concerned with moral risk, the idea that by propping up Lehman all the other banks would no longer self-regulate.

But while that is a valid concern, the real gap was at a macro regulatory level. There was no risk manager of last resort in the US banking system. An idea that's endorsed by Obama as well as others is to provide "systemic risk" regulatory/management authority to the Fed/Treasury for the US economy.

[3b] Regulatory regimes are not in sync. As you might expect there's no mechanism for interlocking coordination between central banks on system-wide issues that have been highlighted by the current crisis. Hence the to-and-fro within the EU as well as the somewhat discordant notes between the UK and the US in this crisis (although it's worth noting that everyone is following the British recapitalization model now). It's hard to imagine how you could setup an effective global regulatory agency for financial markets but at the very least there should be an escalation path.

Anyone who says that the US government's bailout of AIG and its programs of bank recapitalization constitute a "leftward lurch" fundamentally don't understand the consequences of letting these institutions fail. The chaos caused by an AIG default would have literally taken out the entire global financial system. There's a reason why everyone, EVERYONE was pushing for this bailout. And the same holds true for the bank recapitalization schemes. There's got to be a mechanism to prop banks up so that basic borrowing/lending continues ... or we're going to see some truly hairy times ahead.

It's not particularly constructive to lay blame at the feet of any one party. There were mistakes (in retrospect) made by both parties, and by multiple governments worldwide. From my seat only the Germans and the French can actually say "I told you so" as they did start raising warning flags aheads of the crisis. And looking at this from the perspective of Democrat vs Republican masks the real systemic issues of non-accountable securitization and the huge boost in global capital which provided the matches and the kindling to this particular fire.

Much of the steps necessary to repair the current mess aren't going to be terribly different if the president was Obama or McCain. The key difference will be on tax policy where Obama will essentially raise taxes on the wealthy whereas McCain will take a "cut down the government" approach. For my money, Obama's approach makes more sense as it will stimulate more government spending in a net-deflationary environment. Long term there's definite concerns about its impact on the debt burden and (eventually) inflation but given the current spending trends of the US consumer that seems a ways off for now.


Edward Lud said...

'There's a reason why everyone, EVERYONE was pushing for this bailout'.

'Anyone who says that the US government's bailout of AIG and its programs of bank recapitalization constitute a "leftward lurch" fundamentally don't understand the consequences of letting these institutions fail'.

Apparently, then, not everyone was pushing for this bailout.

Just those, ahem, clever enough to understand it significance

Anonymous said...

First, I got here from the link that Mark Steyn posted on his site. (just wondering how many lefties actually put substantive links to ideological opponents - cue crickets now..)

Ok, credits out of the way: @Directormovies has put the Hayek/Chicago School argument rather neatly. Succinctly, he is correct, you are wrong (although it may take years and piles of bodies, as accompanied the disaster of the CCCP, to fully demonstrate the failure of your model, and you may delude yourself meanwhile with honeyed phrases like 'safety net', 'caring more for people than capital', etc., which serve to improve your self-image (as a helpful, nice, sharing sort of dude) - but mean nothing in the real world.)

Some years ago I was a principal in one of the large US consulting shops focusing on the computer industry. At that time the main players were IBM, DEC, and the so-called 'BUNCH' (Burroughs, Univac, NCR, Control Data and Honeywell.) IBM is still around, but because IBM (and its then-'partner', Microsoft) were able to scoop the pool in IT, the other firms fumbled, bled, and eventually went out. Vestiges of the buggy-whip era remain, of course; the most recognizable is now part of HP (that would be Compaq, which bought a bloodied DEC,) but only as brands. The product lines -- and more significant, the workers on those lines, and there were thousands and thousands of them (I am writing from Boston, where Maynard (DEC's HQ town in 1974 was a rush-hour nightmare.)

I note that this astonishing employment bloodbath did not end up in a mad rush to DC for bailout funds, and in fact, in the 35 years since this happened, US tech employment is actually *up* substantially. Plot a little graph for yourself; two traces - one for the US auto biz employment on the Y-axis and time on the X-axis (heck, you can even toss in the foreign-owned assembly plants like BMW, Honda, Toyota andd Daimler-Benz), and one for tech employment. For an even stiffer wakeup, look at the ROI aggregated for each industry. Again, no contest. The managed, union-driven, dino-school business model of the auto world loses, bigtime. You can try to delude yourself into thinking this is all due to evil republicans gaming the system, but you will not believe it.

My point is that, of course, the US retains the overall world lead in a truly strategic industry. It is not conceivable that a Google (I note you are hosting your free blog on a Google property, Blogger) or an Amazon Cloud or a Twitter (another product of the fertile minds that did Blogger) would have popped up in the sort of managed economy you seem to advocate. Look, I'll be charitable and assume you really aren't Soviet in your intent; as a nice, friendly sort, you probably want something more on the French model. Case made. Ain't no French companies settings standards, pal.

If you attempt to legislate away failure as an option, you will instead legislate away the possibility of success. Or, to paraphrase Churchill, Congress now has a choice between the chaos of regenerative capitalism and expensive, subsidized and long-lasting toxic failure. If they choose the latter, they'll get it, but the market will win in the end anyway.

Anonymous said...

Oops, sorry -- typo in previous post.

Should read:

The product lines are gone-- and more significant, so are the workers on those lines, and there were thousands and thousands of them (I am writing from Boston, where Maynard (DEC's HQ town in 1974 was a rush-hour nightmare.)

Brain freeze.

Jordan Hare said...

Re Edward Lud - meant to say that's why everyone in financial services and top congressional leadership were pushing for the bailout (see "everyone, EVERYONE").

Essentially the consequences are so much worse.

TdotTim said...

Personally, I think blaming American greed for the state of other countries economies seems like the ultimate in trying to make a complicated economic argument into simple black and white. I don't put too much stock in Steyn's "ideology" regarding economics other than agreeing in smaller government (I prefer someone like Paul Pilzer for thoughts on economics), but Steyn's writing on pretty much everything else is so far above his seemingly non-existent competition these days that it's almost unfair.

Writers of Mark Steyn's ilk don't come along very often...and that, as the Red Rose commercial used to say...is a pity.