Bailout BS

Thursday, April 10th, 2008

Mike Flynn of the Reason Foundation kicks some redistributionist hiney on CNBC. The tech bubble analogy is a good one. To bail out bad lenders and irresponsible borrowers in the housing mess makes a bout as much sense as bailing out all the venture capital firms and dot-com orphans who threw their 401(k)s and trust funds into Pets.com. Why didn’t the government save Kozmo, com? In 2000, I too took a job at a dot-com that went bust. I had to wait tables at a St. Louis Houlihan’s for two months until I got back on my feet. Where was my bailout? (I’m kidding. I didn’t deserve one. But neither do other people who make bad career/financial decisions.)

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21 Responses to “Bailout BS”

  1. #1 |  Nando | 

    Radley,

    Correct me if I’m wrong, but I was under the impression that the “bail out” of Bear Stearns was in the form of a low-interest LOAN to JPMorgan in order for them to buy them up and thus keep the NYSE happy (as we all know, the NYSE lives on perception and as soon as they perceive that the market is crashing there will be a sell off that will cause the market to crash, and then even more selling, leaving us in a bad spot, financially). I have no gripes with a low-interest loan, so long as it’s paid back.

    Now, I don’t know of which bail out you speak here, but sometimes the federal government sees a chance to improve the economy for all Americans by throwing a little money around. I’m not in favor of corporate welfare or bailing people out just for the hell of it or because they’re someone’s golfing buddy, especially when they’re using MY money to do it, but if they’re going to help the average American to get back on his feet, and thus help the US economy as a whole, then so be it.

  2. #2 |  chris | 

    dear nando,

    loaning money below market rates is the same as GIVING away money.

    NYSE lives by the formula value of company = price of stock X number of shares. Idiots that “play” the market based on perception deserve to lose.

    Do you know what corporate welfare is? Nope, from your context, you’re not even close. Really, not even the most basic concept. Get a text book, read.

  3. #3 |  CRNewsom | 

    Dear Chris,

    I would like to subscribe to your newsletter.

    Seriously, Nando, low(er than market rate) interest loans are gifts. The person in the video is correct that we survived the dot com bubble, and we are more than capable of surviving this without a government bailout. The only difference here is that the financial sector (Bear Stearns, et al) are closely tied to politicians and their pocketbooks. If these financial “gurus” had thought their cunning plan through, they would have never made such poor investment choices. They all thought that they would get out before the collapse of the industry, and some people timed it wrong. They don’t deserve a bailout for doing their jobs poorly.

  4. #4 |  Nando | 

    Chris,

    I do know what corporate welfare is. I mentioned it in a cursory manner because I wanted to write about government “hand outs” that I’m against. I’m not saying that a bail out is corporate welfare and, if that’s what you understood, then you need to take some reading comprehension classes, or read a text book.

    BTW, corporate welfare is when the government gives monies in the form of grants, tax breaks, subsidies, and other monetary advantages to corporations, at the expense of other tax payers. Ralph Nader coined it to show how the government was giving money to those less needy instead of the poor people, who he believed needed the money the most.

    On the subject of market rates, so long as the loan is repaid in full, with some interest, I don’t see a problem.

    As for those who “play” the market based on perception, we all do. Any and every stock holder in the world owns the stock on his “perception” that it will increase in value.

  5. #5 |  chris | 

    oops silly you, that’s NOT at all what corporate welfare is. Not even close.

    Don’t see the problem? Well, I want free money too, then? I’ll pay back any loan at roughly 0% interest. I’ll take 100 million, please.

    I invest money, on the quality of investment, not on any perception.

    Wanna see the boat?

    BTW, corporate welfare is when a society essentially supports itself through the corporation. Like in the USA, with almost all health care handed out through the corporation. Or as in china, since the elderly almost cannot be fired, they keep jobs that pay their non-retirement retirement.

    That’s the definition of coporate welfare.

  6. #6 |  chris | 

    wow, sorry need a further comment.

    Stock owners own stock in two types of companies (oversimplified). Ones that will increase in value, and ones that earn a profit. The latter don’t go up in value, generally. They pay a dividend. Know what that is?

    So, your basic investing knowledge is typical of the “perception” investor. “Investments” by Gary Smith, get it, read it, then start posting.

    Corporate welfare…. welfare via the corporation.

  7. #7 |  Nando | 

    Chris,

    Silly goose, I googled “Corporate Welfare Definition” and the second link, from CATO.ORG defines it as,

    “Corporate welfare should be carefully defined as any government spending program that provides unique benefits or advantages to specific companies or industries. That includes programs that provide direct grants to businesses, programs that provide research and other services for industries, and programs that provide subsidized loans or insurance to companies.”

    Link here: http://www.cato.org/pubs/handbook/hb105-9.html

    I don’t know where you got your definition of Corporate Welfare, but you couldn’t be any more wrong with it. I don’t even know what to call what you’re describing, other than socialism. I suggest you do a Google search for the term before you make yourself look any more foolish.

    I can agree that loaning money at less than the current market rate is giving money away, but you’re only giving away the difference in the interest rates. The way I see it, the only money that us taxpayers are giving up here is the difference between how much the money would earn just sitting in the treasury and how much it’s earning thru this loan. Now, I don’t know how much it earns sitting in the federal reserve, so I don’t know how much we’re really giving away.

    As for the stock market, there are plenty more calculations that go into assessing a stock other than the market capitalization (outstanding shares x share price), as you describe. You have to look at cash flows, price to future earnings, cash on hand, dividend payments, how it stands in it’s industry, and about a million more items of interest. That’s why trading stocks is a form of gambling and we all trade on the market’s perception of our company.

    Have you ever noticed that some firms will rate a company a “Buy” and others will say it’s a “Hold?” It’s because they all look at different factors and weigh them to their advantage. Just changing the rating on a stock can cause the stock to plummet and lose value. Not that the company did anything different, but the PERCEPTION is that they’re not as good.

  8. #8 |  Nando | 

    Sorry for the second comment.

    Chris, corporate welfare isn’t welfare THRU the corporations, it’s welfare TOWARDS the corporations.

    Here are some more links:

    http://www.thirdworldtraveler.com/Nader/CutCorpWelfare_Nader.html

    http://www.citizen.org/congress/welfare/index.cfm

    http://dictionary.reference.com/browse/corporate%20welfare

    http://www.time.com/time/magazine/article/0,9171,989508,00.html

    Thank you

  9. #9 |  chris | 

    hahahahaha, CATO, ahahahahaha. That’s your source, hahahahaahahahah. How about a published text book, as I suggested.

    Firms rate a company? or analysts rate a company? hmmm, get your facts straight. Do you act on what these analysts say? Would a good analyst give you good information for free?, or would they act on it? Ever think that analysts are trying to influence the market, maybe even they own those funds that they’re rating?

    Market capitalization, a simple formula. Please, no more, my ribs are hurting.

  10. #10 |  keith | 

    Nando,

    It’s hard to evaluate the Federal Reserve’s opportunity cost here because the Treasury doesn’t earn much interest in the traditional sense (though they do earn “seigniorage”, which I leave as an excercise for the interested Google jockey). But, if the Federal Reserve policy means what you could have bought for $1 in December now in April costs $1.03, wouldn’t that suggest all holders of US currency lost 10-12% on an approximate annual basis?

    Plus, there’s the not impossible risk that Bear Stearns is too radioactive for JP Morgan, and we end up with no repaid loans.

  11. #11 |  Nando | 

    Keith,

    You make a good point. The thing is that I don’t know; I’m not an economist. My simplistic way of looking at it seems to be just that, simplistic, but I’m just an average guy, like most Americans. Also, like most people I know, I listen to the arguments on both sides and decide which one makes more sense to me. I’m sure we can find experts on each side of any issue currently debated in our country. It’s a matter of deciding which experts speak more to our reason and senses.

    As for Chris, can someone set this guy straight? I know I’m right when it comes to the definition of corporate welfare.

  12. #12 |  Zeb | 

    Chris, Nando, it may seem amazing, but sometimes the same words can be used to refer to two different things. Maybe Chris’s definition of corporate welfare is valid too, but I have only ever heard it used as Nando suggests, as far as I can recall.

  13. #13 |  matt | 

    the definition of corporate welfare, straight from the horse’s mouth, ralph nader, the man who coined the term (as far as wikipedia’s concerned) …

    http://www.nader.org/releases/63099.html

    see the ‘Defining and Scrutinizing Corporate Welfare’ section.

    chris you are wrong. throw what ever ‘textbook’ you got your definition from out the window, cause its crap.

  14. #14 |  Steve Verdon | 

    Don’t see the problem? Well, I want free money too, then? I’ll pay back any loan at roughly 0% interest. I’ll take 100 million, please.

    Since when did “low interest loans” become “0% interest loans”, nice shifting of the sands there Chris. Sure a 0% interest loan is like giving away money, but so long as the loan rate is at or above the rate of inflation, then no money is being lost other than possibly via opportunity costs.

    Also, the idea of preventing a panic/run on banks has benefits to the wider economy, hence one could characterize it as either an externality or a public good. As such, panics/runs are a market failure and the idea that we should just let the market deal with it when it is the case that the market can’t is somewhat…silly.

    BTW, corporate welfare is when a society essentially supports itself through the corporation. Like in the USA, with almost all health care handed out through the corporation.

    This characterization is misleading. One of the largest funding sources of health care is Medicare. It is a significant portion of the U.S. federal budget and will only get much, much bigger. Like France the U.S. is mixed health care system that relies on both public and private sectors.

    Corporate welfare…. welfare via the corporation.

    Actually, this isn’t the classic definition of corporate welfare. What you appear to be thinking of is something along the lines of corporatism.

    Plus, there’s the not impossible risk that Bear Stearns is too radioactive for JP Morgan, and we end up with no repaid loans.

    This is actually the biggest problem with the Bear Stearns “bail out” (more like fire sale). Since the “bail out” is being gauranteed by the American Taxpayer if things don’t work out we are on the hook. Is that worth the avoidance of a possible panic and its financial repercussions? I don’t know.

    As for the initial post by Radley, the major problem I see is the comparison of firms in two entirely different industries. Sure there was pain when the tech bubble popped, but does that mean that if the financial sector has a similar “popping” that we will see the same fall out? I’m not so sure, and I’ve seen little attempt to argue that we would.

    Oh and Nando, you are right Chris is wrong. Zeb, stop equivocating.

  15. #15 |  Robert | 

    Don’t forget that the Fed took on 30 billion (okay, 29 billion, but who’s counting?) in mortgage debt that JP Morgan wouldn’t touch with a 10 foot pole. So JP gets all of Bear Stearns assets for a bargain basement price, and the Fed (you and me) get all of the liabilities. Regardless of whether that fits into someones definition of corporate welfare, the bottom line is that anyone holding US dollars got screwed on the deal.

    Now those federal reserve notes (also known as dollars) in your pocket are backed in part by high risk mortgages. We are marching blindly down a road that leads to hyperinflation. I’m just glad that I have a wheelbarrow so I’ll be able to cart in enough money to the store to buy a loaf of bread.

  16. #16 |  Bryan | 

    Let me poise a question to you all, because this is an area where I don’t really know what I think as a limited government proponent.

    Let’s say the collapse of Bear Stearns and the Housing market in general would cripple the economy and send it into a depression. Let’s say that it would so cripple the American capital markets that London and Hong Kong would become the new capital centers. Under both of these scenarios, which likely dovetail with each other, a lot of responsible people who never gambled on the housing market and were not being paid millions of dollars to make investment decisions would likely lose their jobs. Again, further spiraling down the economy.

    It seems to me that in such a hypothetical, which is also entirely plausible, the libertarian maxim of government intervention to protect your stuff from others is entirely justified. The ones that really would suffer are the ones that didn’t make the poor investment decisions, but were hurt by a falling economy. Aren’t you protecting Joe American from Bear Stearns executives and Home Speculators?

    I agree there should be a way to do it without rewarding the executives and speculators, but is the overall goal justified from a limited government point of view?

  17. #17 |  Robert | 

    Let’s say the collapse of Bear Stearns and the Housing market in general would cripple the economy and send it into a depression. Let’s say that it would so cripple the American capital markets that London and Hong Kong would become the new capital centers. Under both of these scenarios, which likely dovetail with each other, a lot of responsible people who never gambled on the housing market and were not being paid millions of dollars to make investment decisions would likely lose their jobs. Again, further spiraling down the economy.

    Let’s say that the Fed continues to step in and print 30, 50, 100, 200 billion dollars anytime a bank institution is about to fail and takes on the mortgages as collateral for those dollars. Eventually when Freddie and Fanny fail (or we just bring their liabilities onto the Fed’s balance sheet), we’re looking at TRILLIONS of dollars that will need to be printed out of thin air. Let’s also say that the Fed will continue to cut rates, which also creates more money. This will cause the DOLLAR to crash, which in turn will destroy our economy, and send us into a depression, much worse than one created by allowing banks that SHOULD fail to fail.

    The only difference between your hypothetical and mine is that mine is what is actually being done. The Fed should be cranking up interest rates to protect the value of the dollar, not lowering them to bail out wall street. We’re going to have to take our medicine, the longer we postpone it, the worse it’s going to be.

    It seems to me that in such a hypothetical, which is also entirely plausible, the libertarian maxim of government intervention to protect your stuff from others is entirely justified. The ones that really would suffer are the ones that didn’t make the poor investment decisions, but were hurt by a falling economy. Aren’t you protecting Joe American from Bear Stearns executives and Home Speculators?

    The rub here is that government intervention is what caused this problem in the first place. The way to fix it is to let the market sort it out. All the government can, and will, do is screw it up worse. In the short run, it may look like you and I are being “protected”, but what’s really happening is they’re stealing your money by deflating its value.

  18. #18 |  Thomas Paine's Goiter | 

    The WSJ guy saying “The market didn’t work” because the bubble burst is outlandishly funny.

  19. #19 |  deadcenter | 

    If the government gave (or loaned) money to JP Morgan to purchase Bear Stearns stock, my question is, where are my shares?

  20. #20 |  Steve Verdon | 

    If the government gave (or loaned) money to JP Morgan to purchase Bear Stearns stock, my question is, where are my shares?

    The Fed isn’t the government. The Fed is, like our health care system, a mish-mash of private and public entities. It has a large degree or autonomy.

    The guarantee for the Bear Stearns deal comes from the Dept. of Treasurey. Seriously, if you guys are going to go on about this, get some of the basic facts straight please.

    Let’s say that the Fed continues to step in and print 30, 50, 100, 200 billion dollars anytime a bank institution is about to fail and takes on the mortgages as collateral for those dollars. Eventually when Freddie and Fanny fail (or we just bring their liabilities onto the Fed’s balance sheet), we’re looking at TRILLIONS of dollars that will need to be printed out of thin air. Let’s also say that the Fed will continue to cut rates, which also creates more money. This will cause the DOLLAR to crash, which in turn will destroy our economy, and send us into a depression, much worse than one created by allowing banks that SHOULD fail to fail.

    There are two issues here, the problem of moral hazard, “bailing out” people who did dumb things, and also preventing a wide spread panic. To address one means you have to either ignore the other or even exacerbate the other problem. This was one of the problems during the Great Depression. The government let banks fail and panic spread and sound institutions failed as well.

    The Fed should be cranking up interest rates to protect the value of the dollar, not lowering them to bail out wall street. We’re going to have to take our medicine, the longer we postpone it, the worse it’s going to be.

    Tell us the truth you are acutally a distant relative of Herbert Hoover aren’t you. This is quite similar to what the Fed did during the great depression, let the money supply shrink. That was one reason why the Great Depression became the Great Depression vs. being a recession. And it is also amusing that you advocate against activist policy in one paragraph and then turn around and advocate activist policy in the very next paragraph.

    I think you are simply kornphused.

  21. #21 |  Brian | 

    Bear Stearns is a smaller issue, compared with the size of the new federal interventions (primary dealer credit facility and expanded term securities lending programs). These risky mortgage loans, albeit the top tiers, are being held as collateral for treasury bills. In simple terms: mortgage securities are now being backed by your taxes, and not investment bank (primary dealer) balance sheets.
    Looking at the big picture, I see three options (I’m sure there are myriad combinations) : 1. Bail out lenders (see above, provide liquidity and unload risk) 2. Bail out borrowers (void contracts that banks had with homeowners by altering terms. My opinion: contract enforcement and protections are the bedrock of any free society) 3. Stay out of the mess and let the markets correct.
    I agree with the Bear Stearns move, because there was a real threat of the entire financial markets freezing if they could not meet counterparty claims. It was the better of two awful choices, considering what could have happened had Bear failed so suddenly. I am very worried, however, about the precedent it sets, and the more recent interventions.
    The market is currently working, even though it is falling. It is correcting for previous exuberance.

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