Tuesday, May 24, 2011
Bailouts in hindsight
So, GM and Chrysler are back in the black, and the government was repaid ahead of schedule and with interest. Many new jobs created/saved (depending on how you keep score). And apparently, the bank bailout/TARP is now more or less paid back, and may even turn a profit.
Both of these policies were fiercely unpopular on the right and are politically "owned" by the Obama administration, to some degree fueling the populist anger which swept the GOP into control of the House. (Though, to give credit where it's due, the Bush administration did initiate them.) Most of the opposition I saw seemed to be reflexive Obama-opposition, but was generally couched along ideological lines: The government should not be picking winners and losers. etc.
So what does this say in retrospect?
I'm not sure I know enough about the bank bailout to really comment intelligently. It saved the financial sector, so from a purely pragmatic standpoint it "worked." But by allowing the banks to not fail, by preserving shareholder value, the "moral hazard" element was by far multiplied, now that bankers know they can continue to take reckless risks knowing that they will not suffer the downside. Seems like I'd grade it a C-, in that it fixed the ad hoc problem while not taking the opportunity to prevent similar future problems. Worked, but could have been done a lot better.
The auto bankruptcies, OTOH, I think are maybe more of a qualified success. They did make the shareholders take a proverbial bath, so the moral hazard element is not there. There's still an element of arbitrariness, in that GM got bailed out while Pan Am (for example) did not.
I vaguely recall that Matt was less positive about the bailouts and I'd be interested to see what his thoughts are in hindsight.
And on a purely fun note, a lot can happen between here and 2012, but ads like this make me smile. What with this and the kill-medicare vote in the House and the anti-labor bills and (hope hope hope) a continuing improvement in the economy, and the clown contest in the GOP primary, this has potential to be a really enjoyable election cycle.
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12 comments:
I don't disagree with your assessment on the immediate solution with the banks. I am terrified of the next crash though, since as you point out, it's going to be worse. I give it an D, but because I don't think the primary problem was the actual crisis in front of us. I don't give it an F because they didn't let us go off the cliff. But the D is all about the fact that they didn't solve the problem even a little bit, and that non-solution made the actual problem worse.
We didn't stop from going over the cliff, we delayed it.
Our current president is no different than our last president. They have the same policies, it's just that one of them does it with a cowboy "Yeehah" and the other one does it with a grimly determined countenance. But ho exactly has he distinguished himself on the two most important problems he faced?
The banks are running amok--we learned nothing from this crisis.
The distinction between Obama and Bush is may not be significant on how much the government should intervene in times of economic crisis. The distinction between the Obama and the Repbulican party seems to be more significant.
What I know is that following the Great Depression, Americans worked collectively to restore the economy through their government. That intervention, in terms of GDP, was massive and the recovery was dramatic. Following the Great Recession, as a result of fearce political opposition to using our collective effort to address the problem, we acted timidly and put in place mild recovery efforts, in terms of percent of GDP. The result has been a long timid recovery.
Matt what cliff are you talking about? How are the banks running amok? And how are either one of these things caused by not letting the American auto industry collapse?
Over unprecedented and unified Republican opposition, Barak Obama saved the American auto industry. I actually think that deserves a higher grade than a C or a D.
I agree no root problems were fixed and I expect the next crash to be worse. Matt, I'm curious, what do you think the primary problem was.
I am curious too. If our concern is that banking is under regulated we surely can't blame that on the President, right?
In 1996, President Clinton signed the Securities Modernization Act. That gave our banks the right to bet against their own investments, and insure themselves against the loss.
Consider that for a moment.
Banks can invest. And they can be insurance companies. And they can insure themselves.
So they invested. And they insured. And they invested like drunken maniacs, and like drunken maniacs they failed. And individually they made fortunes. We were worried to let these banks fail because they were so large and controlled so much wealth on all sides of the equation that it would harm us to let them fail.
The only and obvious reform is to allow the large banks to fail, have smaller banks that aren't insurance companies take their place, put the bankers in jail and make it illegal for banks to bet that they are going to lose money on investments, and don't let them insure themselves. Never let banks become insurance companies and hence too big to fail.
Instead, we bailed the banks out, making it ever less likely that they will worry about making bad bets with their money, we put no one in jail, or even on trial and we didn't even make them leave their posts at the banks, we didn't reform the legislation that allowed banks to get too big, and we are letting the banks get even bigger with less moral hazard than ever.
It was very bad and we made it worse.
And taking over the car industry makes even less sense, since letting bad companies fail is what we *should* do, how you can think otherwise is completely unfathomable to me. There's nothing about GM that's important but jobs. Jobs are important but 100,000 jobs today is not as important as 1,000,000 jobs next generation, and not allowing bad companies to pass away and better companies to come along to replace them is exactly counter to what makes an economy strong in the long term.
Thinking that we should save failing companies as a government action is the same thing as not doing anything about global warming because you won't personally live to deal with the consequences--it's the worst kind of short-term thinking.
I am curious too. If our concern is that banking is under regulated we surely can't blame that on the President, right?
Two presidents ago.
Although the legislation was bad to begin with.
And isn't it wrong that just as 99 of our legislators derive from 5 law schools, all of our fed chairmen come from one corporate board of directors that oversaw one of the biggest crises in financial history? Goldman Sachs gets its way with Clinton, Bush and Obama.
All presidents are exactly the same. Pilosi and Rand Paul are different, but Obama and Bush are identical in every way that matters.
That was actually a slight exaggeration and I should correct it. Socially Obama is nicer to have at the helm. I do think having him in place instead of Bush has emboldened our states to do things like legalize gay marriage. That's very nice and I'm glad for that.
But economically and militarily I don't think you could slip a piece of paper between their policies.
I pretty much agree with Matt on the financial bailout. But on the car bailout, he writes:
And taking over the car industry makes even less sense, since letting bad companies fail is what we *should* do,... There's nothing about GM that's important but jobs. Jobs are important but 100,000 jobs today is not as important as 1,000,000 jobs next generation, and not allowing bad companies to pass away and better companies to come along to replace them is exactly counter to what makes an economy strong in the long term.
And what I would say that that there is no certainty that a better company would have come to replace them, at least not domestically. The barrier to entry to that market is very high indeed. If the US auto industry had failed and liquidated, we would be driving Hyundais, Toyotas and Fiats, and presumably they would have been stronger companies and more efficient in the global economy. Some of those cars might even have been made in the US. But the US would have become entirely dependent on foreign companies for car production, and the slow death of the US manufacturing industry would have been accelerated.
I would contend that what we did actually was more beneficial -- the companies as they were are dead and gone. They got rid of excess capacity and debt and the investors were wiped out (as they should be) but they were not forced into liquidation. So in a way, new companies did emerge from the ashes, the market's demand for efficiency is met, and good domestic manufacturing jobs were preserved, both the 100,000 today and the hypothetical million future jobs.
All presidents are exactly the same. Pilosi and Rand Paul are different, but Obama and Bush are identical in every way that matters.
Hyperbolic but not far off the mark. I would point to the Patriot Act, signing statements, wiretaps and FISA and the state secrets doctrine as supporting examples. All were opposed by progressives and Senator/candidate Obama, but all wound up being useful for the institution of the executive. So they are perhaps reluctantly adopted by President Obama. Perhaps not as abused as they were under Bush, but one the executive has acquired power, it never gives it back. I have no doubt that President Palin or Trump would revive the torture program as well, since it was never definitely declared illegal/prosecuted.
Sigh
I wasn't saying a another car company would necessarily replace it. But something would. And the very next company wouldn't necessarily succeed, but if you let bad companies fail, eventually a good company survives. Better to have good companies survive than bad ones--isn't that axiomatic?! It feels weird to have to assert that.
So they are perhaps reluctantly adopted by President Obama.
Reluctantly?! He using these new privileges with more rapidity than Bush did.
Per the banks, I think we did the worst possible thing. We bailed them out, but didn't fix the problems you note. Next worst would have been simply letting them fail. Best would have been propping them up long enough to fix the big regulatory problems, and start breaking them up into smaller banks.
I agree with you, Josh.
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