Repeating Mistakes Over, and Over, and Over...
I have come to the conclusion that politicians believe Americans all have Alzheimers. And, given the lamentable state of the media, they may be right.
Example 1
We can argue about stimulus and the Depression all we want, but I had, until the last few days, thought the absolute one thing we all 100% agreed on is that the Smoot-Hawley tariffs and the trade war they sparked were one of the leading causes of the worldwide economic death spiral in the late 20's and 30's. Or not:
The stimulus bill passed by the House Wednesday contains a controversial provision that would mostly bar foreign steel and iron from the infrastructure projects laid out by the $819 billion economic package. A Senate version, yet to be acted upon, goes further, requiring, with few exceptions, that all stimulus-funded projects use only American-made equipment and goods.
Here is a nice story of another "Buy American" steel fiasco.
Example 2
Last year -- I am talking about just 3 months ago -- I thought it was fairly clear that the immediate cause for the financial meltdown for which the TARP bailout was being crafted was the systematic relaxation of underwriting standards that led to large numbers of loans (and their lenders, securitizers, etc) going belly-up. Folks could argue whether this was because of deregulation or greed or government distortions and interventions, but I thought there was not doubt that poor credit judgment and excessively free credit were at the heart of the problem. Or not:
House Financial Services Committee Chairman Barney Frank said President Barack Obama will require banks receiving government aid to lend more to businesses and consumers, saying the Bush administration "made a mistake" by not setting stricter rules for institutions getting funds from the $700 billion financial-rescue package.
"I think you're going to see the Obama administration, having learned from that, push for much more lending," Frank said today on ABC's This Week. "There are going to be some real rules in there."
So Frank and Obama are upset that the bailout of banks that were overgenerous on credit did not include provisions to force them to be more generous with credit?
Final thought: At the end of the day, businesses and individuals have a felt need to deleverage. That is going to cause a recession, end of story. The Congress's and Obama Administration's obsession with short-circuiting this sensible desire to reduce debt is not only counter-productive, it is offensive. Banks are sensibly trying to strengthen their balance sheets, but the government wants to stop them. Individuals are trying to cut back on spending, reduce debt, and save more. Again, the government wants to stop them, by going to debt and spending for them if consumers won't do it on their own.
Michael Miller:
"Banks are sensibly trying to strengthen their balance sheets, but the government wants to stop them. Individuals are trying to cut back on spending, reduce debt, and save more. Again, the government wants to stop them, by going to debt and spending for them if consumers won’t do it on their own."
"That is going to cause a recession, end of story. The Congress’s and Obama Administration’s obsession with short-circuiting this sensible desire to reduce debt is not only counter-productive, it is offensive."
-This is all right on target. One way or another recessions always sort themselves out. Attempting to creating a bubble inside a recession will only add to the public debt which is indeed counter-productive. The real mess remains where it all began, in the mortgage markets, and especially with the sub-prime loans that a prior Democratic administration helped create. Unfortunately, the default rate in this area has not yet peaked, as the recession has only really just begun. The banking industry in particular has some very rough days ahead. Obama is right about one thing. This is all going to take a long, long time to work its way through.
February 2, 2009, 5:40 pmMaxedOutMama:
Absolutely right.
It's one thing to put some money into stimulus on things that we would have to do anyway and that can be done more cheaply now, like fixing those obsolete bridges. It is quite another to be blowing hundreds of billions of dollars on speculative stuff that may well never return a dime.
Any time you have a huge bulge in consumer lending, it will be followed by a period of less lending, as most responsible people call a halt, and less responsible people find themselves in such a hole that although they want to borrow, a rational lender will not give them money.
I have been irked beyond belief by this headline. Demand for loans is dropping. That is rational.
February 2, 2009, 7:14 pmDr. T:
"Again, the government wants to stop them, by going to debt and spending for them if consumers won’t do it on their own."
This will be a greater generational payment transfer than Social Security. Two trillion dollars of additional federal debt will be incurred between spring of 2008 (when we started bailing out Freddie Mac and Fannie Mae) and the end of 2009 (when we have dispersed most of the 'stimulus' money). Prior to 2008, GWB and Congress already had cranked up the national debt. Obama and the Democratic Congress will do far more to increase the debt, because they believe bigger government is the answer, instead of the problem.
The piper eventually must be paid, and the government won't be able to borrow for much longer. People who presently are younger than 60 years old will suffer from ever-increasing federal taxes (starting in a few years), because the government will resist any attempts at downsizing. (The downsizing attempts will be wimpy, because most people have been brainwashed into believing that a big, non-federal, nanny-state national government is best.) My two teenagers resent this state of affairs, but the only ways to avoid it are to be poor, be very rich, or emigrate.
February 2, 2009, 7:27 pmLeigh Caldwell:
You might be interested to find out that H.R. 1, the bill passed by the House last week, actually has a get-out clause in its Buy American provision:
http://www.knowingandmaking.com/2009/02/buy-american-get-out-clause.html
Therefore - we can hope - things may not be as bad as they look.
February 2, 2009, 7:49 pmMilena Thomas:
Hate to quote myself, but I just wrote about this on my last blog post, "Another dubious stimulus proposal involves allocating $22.129 billion to fund home loans to low-income section 502 borrowers in the form of subsidized ($4.108 billion) and unsubsidized guaranteed ($18.111 billion) loans. Don't let the word "unsubsidized" fool you. Again, if these low-income borrowers default, the government is promising private entities they'll foot the bill. Does this sound familiar to anyone? My favorite is how the Rural Development Housing and Community website pitches these loans to private lenders as "relatively risk-free way to expand [investment and loan] portfolios." Has the recent mortgage crisis not taught anyone anything?"
February 2, 2009, 9:11 pmBob Sykes:
So far the Bush/Obama administrations have repeated every one of the actions taken by the Hoover/Roosevelt administrations, with the exception of a tax increase. However, the Bush tax reduction is scheduled to lapse, and that will lead to a substantial tax increase for many people.
When do we get WWIII?
February 3, 2009, 6:24 ammorganovich:
so what we learned from the 50% default rates on renegotiated loans so far is that we need to “push for more lending� interesting. I would think that would deter most rational actors from expanding a business line. apparently barney frank disagrees...
if one were actively seeking to immediately bury banks under a crushing new load of bad loans and insure their insolvency for years to come, it would be difficult to come up with a better plan that this one.
i fear what we are really seeing is the thin end of a wedge whereby the government will wind up taking more and more functional control from financial institutions and regulations about everything from bonuses to travel budgets will creep in under the auspices of "needing to be responsible with aid money". but will such controls ever be relinquished. i can tell you that based on my discussions with a number of management teams, financial institutions have swung dramatically from actively chasing TARP $ to trying like hell to avoid them and the capricious (and often post facto) strictures they seem to carry.
one more interesting note:
this is an interesting analysis of the "executives shall earn no more than the president" idea. seems it's pretty easy to get the POTUS's annual comp up to $60 million if you include benefits...
http://dealbreaker.com/2009/01/no-more-than-the-president-of.php
February 3, 2009, 7:54 amboqueronman:
Thanks for your bit of "Final thought" wisdom. I seldom see a recognition of the real issue. Households, businesses (first and foremost financial), and the public sector have NEVER before been so massively, and unsustainably, in debt. The first chicken to come home to roost was the housing sector, but the ripples are now working their way through the economy. But, as you observe, the de-leveraging must be allowed to work itself out. The household and business balance sheets must be put in order before a long-term recovery can be launched. Otherwise we are only postponing the inevitable. Just hold on tight and get the government out of the way. Oh, and speaking of the government and bubbles, have you looked at the local, state and federal government debt and unfunded liability calculations for the future? That hammer will also one day fall. And go BOOM! The question is will P-O-R, or their successors, bring the economy down with them.
February 3, 2009, 2:02 pmTXJim:
Bob S - I agree with your comment re: Bush/Obama = Hoover/Roosevelt.
The text books of the future will give props to the heroic salvation delivered by this crop of tyrants. Hey they've been doing it for Roosevelt for 75 years! If it was stupid, evil and bad, then it was Hoover. If it could be spun into something good, then it was only made possible by Roosevelt. We have a ringside seat to the same MO being applied to Bush and the Big O.
The other thing the bozos in charge have yet to do (give them time) is make a run at stacking the court. At some point after the legislation train runs for a few miles, lawsuits will challenge the constitutionality of some of this junk. Legal opposition will give them a convenient whipping horse to blame any lack of progress. But it may turn out to be unnecessary given this court is capable of decisions like Kelo.
February 3, 2009, 5:55 pmBR♀TH♂R_S♥RR♥WS:
But the problem was never really the "housing" or housing loans and those defaults. Nor the bad housing loans. Nor the mortgage loans to obviously bad and known bad risks. That was something late in the game. The problem was and is the speculation markets and the debt involved. They should have been wiped out but they were not and those credit risks, and defaults, are what is being bailed out. Banks and other financials loaned money and invested in derivatives and pure gambling on the money market and bond market futures and non-physical investments, loans on "investments" based on, for example, the future prices of stocks on the stock market. We are funding the investments in nothings, not bad real-business investments. Gambling is an investment which does not have a physical reality except on the books. It has always gone on and has gone on since there was such a thing as a stock and bond market. That executives want bonuses and other payments is exactly why they went into the speculation "business" in the first place --- to make easy money! And they are being bailed out and thus being paid off! They won! So we can't blame them for paying themselves off. We gave them the bailout money, it being decided that the debt was, by being on the books, legitimate. The gambling paid off. The leeches won. If you don't want to pay someone else's gambling debts off then don't bail the gamblers out: but force them into bankruptcy and cancel the purely paper gambling debts. Oh! But NO! The show must go on! As long as you believe the gambling debt is real, you will pay for it. Once you decide a gambling debt by its very nature is "bad", then you cancel it out and owe nothing. The gamblers and their financiers lose and maybe jump out the windows and end with the fate of their gambling. What if the Asians decide to drop the trust in the dollar, for example? That is not a new idea.
February 4, 2009, 3:14 amLeigh Caldwell:
I was interested in the assertion that it's appropriate for people to reduce total debt and for the government not to intervene, so I built a model to try to work out if that's true. While it might be rational individually, I don't think it is in the aggregate:
http://www.knowingandmaking.com/2009/02/paying-down-debt.html
February 4, 2009, 1:26 pm