Stop The Blame Game. Pass The Bill.

Stop pointing fingers.

A friend of mine asked me tonight: didn’t you tell me you were against a bailout a few weeks ago? 

The reality is: Yes, I was against a bailout of any kind until Congress proved they were capable of coming up with a reasonable compromise in the context of a very dire situation. As discussed, I discussed below, I believe the regulatory process is working. Whether the bill as it currently stands is the best solution is debatable, but that intervention is necessary at this point has become almost certain.

However, unfortunately, as discussed here (Barnum and Bailey Would Be Proud) today’s House vote on the proposed bailout turned into a finger-pointing session with the politics of old ruling the day: Democrats pointed fingers at Republicans and Republicans defiantly stood against supporting Democrats.

All the while, the stability of our economy is suffering. The stock market was down more than it has been in history…and this was not a matter of pointing fingers. It was the market’s reaction to the outlook for the economy if nothing is done.

So why should you care? Shouldn’t we dig our heels in and protect our “free market ideals”?

Why the Bill should pass.

1) Normal people depend on credit in a number of ways in their daily lives. From grocery shopping, to buying a car, to paying for college, the majority of Americans rely on credit to live. Although people have legitimate concerns about an over-reliance on credit over the last half-decade, we are not living in an academic textbook. We should address financial literacy with education, not with a smack to the head.

2) If we do not do something, many more banks will fail, and credit will significantly contract as a result. As you have seen, a number of banks made mistakes and lent too much money to people based on a failed economic models. If we do not do something, many more banks will fail. In fact, even if we do intervene, it is almost certain that there will be continued bank failures as the economy begins to slow and corporate defaults begin. As the credit crisis continues, the reality of credit evaporation will hurt normal people in real ways. We should seek to minimize this unfortunate reality.

3) Our economic theories have been proven wrong…why rely on them now? Those who want to take a hand’s off approach to the current situation don’t have much of a leg to stand on. If you believe in the effectiveness of the free market, how can you explain the excesses that put us where we are today? The market failed. Of course it did. It was based on models built by human beings. We are imperfect, so we built imperfect models. This isn’t rocket science. Continuing to bang our head into the wall based on economic principles that have been disproven is not only illogical, it is dangerous.

4) People are afraid. When I first started learning about economics, I remember thinking the ideas of “consumer confidence” and “economic sentiment” were wishy washy terms. Why would we care about people’s opinions when thinking about economic growth? The reason people’s opinions matter is because people are our economy. The market is comprised of millions of people, and their subjective understanding of the economic outlook can be just as important, perhaps more important, than what that understanding should be. Watching the stock market plummet today and gyrate over the last few months has made everyday Americans wary of our future. We need to rebuild confidence in our economy to keep it from slowing more than it already inevitably will.

Is the Bill perfect? No. Will it create moral hazard issues for future executives? Maybe. Will the economy really suffer if the government does nothing? Almost certainly.

The government needs to put party politics behind us.

Unfortunately, the government is facing a credibility crisis.

Sure the Bush Administration has made mistakes.  It is unfortunate that our confidence in government has sunk to such a low level that people are finding it difficult to believe how bad things will get if we do not intervene. As John Stewart cleverly pointed out in a side by-side view of Iraq and Economy announcments, President Bush’s speech last week was similar to the announcement of the War in Iraq.

However, the fact that you disagree with the President about Iraq should not lead you to stubbornly refuse to recognize how bad things are looking for our economy. No matter what some people might believe, the stock market is not controlled by anyone, and today’s market downturn showed that investors – Democrats, Independents, and Republicans - are worried about our economy. And they should be. We are witnessing an historic failure of our financial institutions the ramifications of which will be felt for years to come no matter what we do.

Now is not the time to put Party before Country.

Remember…at the end of the story of The Boy Who Cried Wolf the wolf comes. He is now standing on our doorstep. The question now is what are we going to do about it?

I remain confident that we will do the right thing.

4 thoughts on “Stop The Blame Game. Pass The Bill.

  1. Beau

    You make good arguments but the structure of our economy is fundamentally flawed and needs to be corrected. For example, Americans have the most debt and one of the lowest personal savings rates in the worlds. Yes credit is good but it is an abused privilege in today’s society. I cant find the exact number but I believe that something like 50% of worlds cars (some 200+mm) are in the United States. The spread of oversized “McMansions” has run rampant in the country. The banks made bad decisions giving credit, the borrowers made bad decisions in accepting it and the educational system failed both by not covering this principle to the extent that it has an effect on an Americans life. Other nations use credit more responsibly, Americans do not NEED credit for their daily lives. It is a privilege, not a right. Banks will fail for their mistakes, and new banks will be founded to replace them. I’m not going to speculate on when, but it will happen.

    Speculation runs rampant in our economy because of the over extension and availability of credit to undeserving individuals. Part of the reason the model failed is the banks knew they had Fannie and Freddie to support them. With this being the case they became overly tolerant to risk and made decisions that a true free market would have prevented.

    Is the economy suffering really so bad? Or are we so spoiled that we think we are invincible?

    Reply
  2. Dave Post author

    Beau, I agree that we have overextended ourselves as a society. I also agree that we need to moderate this credit-dependence as it is unsustainable.

    However, I do not think we should throw the entire economy into a tailspin to get there from here.

    Given the failures of the last two years, lending standards will tighten no matter what we do. The days of CDO^2′s getting AAA ratings are over. For good.

    I agree this is also a failure of our educational system…one of many such failures in our society. Hopefully one of the benefits to take away from this crisis is that people will be more receptive to financial literacy going-forward.

    No matter what happens more banks will fail…but yes, our economy suffering through anything like the great depression due to stubborn insistence on “principle” is *really* bad.

    You and I will hopefully be priveleged enough to avoid the kind of suffering that comes from being unemployed, losing your home, and being unable to afford your child’s healthcare costs. I am unwilling to stand by and let those worse-off than me suffer due to my theories about capitalism if I can do anything about it.

    Thanks for the thoughts.

    Reply
  3. Ron Cytron

    I’ll admit that I’m one of the people who a) doubt any “sky is falling” rhetoric from GW Bush and who b) don’t think a large-scale bailout is the right thing to do.

    But your post makes me think, and I wonder what would happen if the government could use the money in a more direct way to offer credit to people who really need it?

    Instead of putting banks back on their feet who made bad loans, could the government set up a program for offering credit directly, somehow, using a more conservative model of loan risk?

    It does seem strange to me that we’re willing to socialize banking but not health care. Likewise, I find it strange that we’re also bailing out the auto industry — at least those portions that are in trouble because (IMHO) they have not made products of value lately.

    I think the administration could sell the idea of some kind of bailout more convincingly if they could show “simulations” of what the economy will do with and without a bailout. I’d want those simulations backed by the top economic (not political) minds in our country.

    I enjoy your blog Dave, and hope all is well — Ron

    Reply
  4. Dave Post author

    Ron, I understand your concerns. Especially your point about health care (and in my opinion, education)…it seems our priorities are skewed in that we have not made these important issues urgent enough.
    However, I think it would be very difficult for the government to accomplish the lending suggestion you offer: rather than doing the lending ourselves, we are taking an ownership stake in the banks that we save from failure.
    I also think the “simulation” concept is a good idea. Putting the risks we face in concrete terms might help people understand how important saving the financial system is.
    Thanks for the thoughts. Hope all is well back in STL.

    Reply

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