TheAgitator.com
Wall Street’s Meltdown
Tuesday, September 16th, 2008Over the last few days, both major party candidates have said Wall Street is out of control, and needs more and better federal regulation. Barack Obama has mocked the concept of the “ownership society,” which is the sensible idea that people should have control over their own lives. John McCain has promised to rein in the “greed” and “self interest” on Wall Street. Both promise a tighter regulatory structure, as do leaders of both parties in Congress.
Here’s my question: The federal government is currently running a $400 billion deficit. If we never add a new federal government program, taxpayers are still on the hook for $59 trillion in unfunded future Medicaid, Medicare, and Social Security liabilities.
Nevertheless, both McCain and Obama are still making wildly expensive promises, and proposing a wide array of new federal programs. Not exactly the models of fiscal restraint, these two.
Yes, markets can be brutal. And it’s never pleasant to watch a correction unfold in real time. I’m certainly dreading the sight of my next 401(k) statement. But even the shadiest of corporations wouldn’t attempt the the shenanigans the federal government employs to hide its liabilities from taxpayers. When it comes to cooking the books, Congress can throw down with Bobby Flay. When it comes to solvency…well…$59 trillion.
All of which makes it a pretty dubious proposition that we’d be better off today if only we’d given more power to our noble politicians to safeguard the public interest from greedy corporations.
The federal government may be “on the hook” for $59 trillion of unfunded liabilities, but that’s hardly a problem. Just pass a law saying “We’re not going to pay for XXX for people like YYY”. (insert your own XXX and YYY).
No more liability. Isn’t it great to be able to make the laws?
[ The rest of your post, however is spot on ]
“All of which makes it a pretty dubious proposition that we’d be better off today if only we’d given more power to our noble politicians to safeguard the public interest from greedy corporations.”
I’m areligious, but the only word that springs to mind is “Amen.”
Agreed.
And most, if not all, regulations designed to correct some perceived market weakness end up costing more to implemented than the loss they were enacted to avoid. Think Sarbanes Oxley – the lifetime auditor employment act. Funny how even after all the supposed “transparency” that SOX was to bring we still have large corporations like Lehman that fail.
More government meddling in market affairs is not the “change” we need in our country.
The key thing government should promise is to let firms that are inviable go bankrupt rather than implicitly backing them up by bailing them out whenever risks that they’ve taken go south.
Once that rule is in place corporate governance will work itself out because shareholders will have to care about this stuff and the market can weed out the uncompetitive and the overstretched. Businesses that go bankrupt but still have productive opportunities will be taken over and those that are simply dead in the water will disappear to ensure that more competitive firms don’t get mired in a permanent fight against companies that jump in and out of Chapter 11 and government subsidy as the debts mount.
Lehman Brothers is the first firm they’ve allowed to fail in this cycle, and while the fallout will be nasty the recent tendancy to consistently postpone fallout is ultimately screwing up America’s ability to compete on a brutally competitive global stage (because when badly managed firms don’t die well managed firms don’t get the resources they need to expand).
The bailouts + regulation culture is very similar to the nationalised healthcare + nanny state culture in that if the government are the ones who pay for your mistakes they logically have a right to tell you what to do. Getting rid of both would be a huge step toward people paying deciding on the risks for themselves.
[quote]The bailouts + regulation culture is very similar to the nationalised healthcare + nanny state culture in that if the government are the ones who pay for your mistakes they logically have a right to tell you what to do. Getting rid of both would be a huge step toward people paying deciding on the risks for themselves.
[/quote]
The error in your statement is that government is We The People (AKA the taxpayer) and we’re put on the hook by “our politicians” to pay for the mistakes. Therefore We The People have a right to say what happens. The only logical thing that should be allowed to happen is let them fail, no government intervention, and the free market will work itself out.
I keep thinking of that DH Lawrence short story “The Rocking Horse Winner,” where the house becomes a character in the story, continually saying, “There must be more money, there must be more money…” Superimpose that dialog over a shot of the US Capitol, and you’ve got–dare I say it? dare! dare!–the money shot.
I think its misleading to through out the $59 trillion number without sharing the time horizon of the liability. It looks to me like they are using the “infinite time horizon” calculation for SS – $59 trillion paid out over infinity is pretty manageable. We need honest estimates of these numbers, not hysteria.
Lee, I always like errors being pointed out that involve repeating the same thing i’ve said but in slightly different language. Thanks!
Bernard, you clearly state that “if government pays for the mistakes, then they can tell you what to do.” You don’t articulate that government is the people, and have to remember that most people say “government” as if it’s a separate entity from “the people”, and most people fail to understand the simple fact that “government” puts “the people” on the hook for XYZ, albeit 3 generations down the road because we’re already overburdened, all WITHOUT the consent of “the people”.
Most people don’t want to be burdened for entitlements and companies not being allowed to fail, yet it happens year after year after year. I’m being clear on this language, because I don’t know what your level of understanding is, and people that read this web site.
Heaven forbid that the media actually calls out the REAL culprits in this mess. Lou Dobbs and Sean Hannity will never call out the government for its disastrous market interventionism. That means partly blaming the party or the candidate they lean towards, and they can’t have that. They’ll just keep blaming greed or lax regulation or China or whatever manufactured boogy man they can come up with.
Just wait until the government finally become insolvent. What will the excuse be then? “Sorry, we were to busy trying to balance everyone else’s check book we never got around to ours.”
I actually read last night a commentator on Marketwatch.com’s opinion that there should be a federal agency that puts a floor on home prices, coming in and buying up all the houses in an area at a certain price. My head almost exploded.
While the media freaks out about the economy because it hurts me-first baby boomers, they overlook who it helps. Young people have been extremely strained to buy a home for a long time because of the astronomical prices. Now they are coming down. Stocks are looking more affordable and someone is getting rich by buying them now and waiting for a rebound.
What productive work, exactly, did all the employees of Lehman and Merrill Lynch do? Generating new “investment products”? Who needs ‘em.
When I hear McBama talking about how the government needs to take a stronger hand in regulating the greedy and irresponsible corporations behind the housing credit crunch, I just want to spit in their faces. These hypocrites have less than zero moral authority to call anyone else out on this. When they can point to a budget they’ve passed that was fiscally balanced using honest numbers and wholly Constitutional, then maybe I’ll take them seriously when they rail against financially irresponsible private companies who don’t play by the rules.
That is not exactly true. The young couple COULD buy a home, it would just be a sub-prime rates.
Now with tighter lending rules, it will still be hard for the young couple to purchase a home without the required X% down (which to some means if they do not the X%, means they shouldn’t be purchasing the home in the first place).
Well as I remember it, we had about 40 years of financial prosperity and stability following the New Deal. Both my grandfathers retired at 55 years old and never worked another day in their lives. If memory serves, that period was noted for relatively heavy government regulation of the financial sector. Then the Oil Wars started and Reagan came along to point out to us how horrifyingly Stalinist that awful system was because of all that odious Democratic regulation. The industry was deregulated; the rich got richer, the poor got poorer and the Middle Class virtually disappeared.
It seems to me that somewhere along the line John McCain was implicated with the Keating 5 for subverting said financial sector regulations. In the ’00′s the Oil Barons were handed the keys to the entire government and proceeded to drive the f*cker into the ground with their secret little meetings with their corporate masters and their overt agenda to take the world’s oil supply by force if necessary. The Oligarchs running the country let every Tom, Dick and Sheckey hand out ridiculously bad loans, bundle them up into securities and trade ‘em like rubes at a roulette wheel.
“C’mon baby, Daddy needs a new pair of LearJets!” Everybody seemed reasonably content with the situation until the bastids on Wall Street started to suffer from their extraordinarily bad choices, and they say, “somebody ought to do something to protect us from ourselves!” So back we go to re-learn the lessons of the Great Depression. Bring the regulation on. I’ve only got 10 years to 55!-liberal friend
I’m not sure the true answer, but I think there is enough blame to go around to everyone.
@bobzbob: have you ever heard the word “interest”? You know, increasing the dept the more the longer it takes you to pay it?
@Marshall: what are you smoking? Your comment is so idiotic I don’t even know where to start… First, such law would be unconstitutional even in US. Second, the money often comes from aboard, so international treaties matter, not some US-local law [that would be illegal under international law too]. Third, if the government screwed its creditors over this much, who the hell do you think would lend it the *next* time it needs to borrow money to fund its control freak dreams?
@xxx: if the US declares it has 0 debt, then the next time loans are needed, they will be gotten by the point of a gun, just like many things have been done throughout history, such as the dollar being the reserve currency of the world, and the existence of the petro dollar (oil being bought/sold in US dollars).
“You don’t articulate that government is the people, and have to remember that most people say “government” as if it’s a separate entity from “the people”, and most people fail to understand the simple fact that “government” puts “the people” on the hook for XYZ, albeit 3 generations down the road because we’re already overburdened, all WITHOUT the consent of “the people”.”
Lee, read your sentence again. You’ve said that my error is in failing to articulate that government is the people (ie. the two are one and the same) and then go on to point out that the government have overburdened the people without their consent.
That doesn’t really make sense. If government were really the people then it wouldn’t be able to do anything without the consent of the people (it’s like claiming that you did something without your own consent).
The real problem is that whatever the textbook idea of government in practice it really isn’t the people which is why when ‘we’ talk about ‘the government’ and push for less government intervention we’re making a point about them and not about ourselves.
If you read my point with that in mind, you’ll find I say exactly the same thing you do.
“Alexander Hamilton started the U.S. Treasury with nothing — and that was the closest our country has ever been to being even.”
-Will Rogers
“I believe that banking institutions are more dangerous to our liberties than standing armies.”
– Thomas Jefferson
Yes, I know all about interest, but it doesn’t play in here. The $59 trillion is the present value of the unfunded liability calculated over all time. Nothing to do with interest.
“The $59 trillion is the present value of the unfunded liability calculated over all time.”
Huh?
All time = infinity
Infinity x Y = infinity, not $59 trillion
QED
Obviously there is a time frame. I think it is until 2040 or something to do with baby-boomer retirement or covering every American alive today.
But Lee, who pointed out that “credit” can be obtained at the point of a gun, is very astute. And Marshall is quite correct that laws can be changed very easily to suit the preferences of the ruling class, Constitution or no.
Remember, the Constitution is just a “goddamn piece of paper.”
It’s guns and the willingness to use them that is reality.
“Your comment is so idiotic I don’t even know where to start”
@xxx, the commet refers to unfunded Medicare, SS, etc. liability, not actual debt. It’s unconstutional to eliminate medicare? Who’s the idiot?
BoBG: The U.S. has often been a net creditor, with a positive balance. A lot of this was a long time ago when there were strong forces mandating high tariffs, but it is indeed possible to have governments be well run and in the black. It’s just not the way politicians’ incentives usually point.
Thanks Radley …. posts like this are why I continue to come to your site. Both major parties are going to propose something stupid to fix this problem and in the end we all suffer.
And Jerry, talk about revisionist history … are you actually arguing for the merits of the New Deal on a libertarian site?
[...] next and final link is to The Agitator’s Radley Balko. This post calls out two of the main things that get on my nerves (updated to make coherent) 1. the idea that [...]
I think I smell Rome burning again.No matter who the chief fiddler may be.
Cynical in CA-
Take a calculus class and you will learn that some values of “infinity” are greater than others.
We currently have no obligations that will be due past 2128 or so, because there are no people alive now that will be alive then, according to the actuarial tables.
Down with corporate communism
Cynical,
You flunked math? Try this one,
1+(a*)+(a^2*)+(a^3*)+…
where 0 < a < 1. Guess what, that converges to an actual finite number. Shocking I know. Here is how you get the answer:
S = 1+(a*1)+(a2*1)+(a3*1)+…
a*S = (a*1)+(a2*1)+(a3*1)+…
Now, S – a*S = 1 thus, S = 1/(1-a).
Since we can replace the 1 in the above sum with any arbitrary number, i.e.,
S = x+(a*x)+(a2*x)+(a3*x)+…
The new sum is x/(1-a).
See you forgot to factor in the discount rate–i.e. the interest rate.
You flunked economics too.
[...] next and final link is to The Agitator’s Radley Balko. This post calls out two of the main things that get on my nerves (updated to make coherent) 1. the idea that [...]