Just Let Them Die

[grunion]

I believed the President and all the politicians when they told us that we just had to prop up the failing financial institutions with billions of taxpayer dollars. It was just too big, and too wide reaching, that all kinds of pandemonium would erupt if we didn't band together behind our poor brothers and sisters in the banking industry.

And then we saw the house of cards that these mighty institutions built themselves on. These ridiculously complex derivatives that were essentially worthless but were fraudulently passed around to each other like a crack pipe, to jack up the paper value of these companies so managers would get their bonuses.

And the insanely leveraged loans they dangled in front of idiotic consumers who thought they deserved their piece of the American Dream without having to work a lifetime to achieve it, just like the people on the teevee shows.

And then he put Geithner and Summers in charge of the bailout who of course had vested interest in keeping the current banking system afloat. And the who-knows-how-many billions they're going to tell us to keep funneling to their buddies because we just can't do without them.

Well I say enough NOW. I can't see what good an additional AIG or Citicorp or any other "financial services" bailout will do for me. Will it extend my unemployment benefits? Will it help me pay my COBRA? Will it help me find a job? I'm OK with the need for economic stimulus. But the bailout is a colossal waste.

Time for our shiny new President to kick Geithner and Summers to the curb. Do it now before they get too comfortable. They are the scoundrels that got us into this mess. They are bankers with a vested interest in keeping their banking cronies happy. Let's put someone in the job that cares more about the electorate than about Wall Street. Let AIG die its long overdue death, and let's see those investment bankers do something useful with their lives. Let the Dow drop another 1000 points, who gives a frig what Wall Street thinks about it anymore.

 

[Francesca R]

Thanks for sharing your woo here

 

[rjh01]

If you owe the bank $2,000 and cannot pay then you are in trouble. If you owe the bank 20% of its worth then the bank is in trouble. If 20% of all [large] companies have debt they cannot repay then the economy is in trouble. That is the current situation.

Adjust figures to suit.

 

[grunion]

Thanks for sharing your woo here

OK, can you tell me what we're getting for our trillion dollars? I haven't heard an answer that makes any sense yet, other than the usual variations on "if we didn't do it then all hell will break loose."

Do you think it makes sense for bankers to be the ones in charge of fixing the banks?

The "bailout" is the woo.

 

[grunion]

If you owe the bank $2,000 and cannot pay then you are in trouble. If you owe the bank 20% of its worth then the bank is in trouble. If 20% of all [large] companies have debt they cannot repay then the economy is in trouble. That is the current situation.

Adjust figures to suit.

That's OK for a summary. What ticks me off the most though is the sense of entitlement. I play poker with a middle manager from AIG that acts like he is entitled to this enormous taxpayer teat, that it is unpatriotic to question the importance of his institution to the strength of the nation. These are the attitudes that Geithner and Summers bring to their task. Bah, they screwed up. At first it was with their own money. Then it was with their customers money. Now it is with my money. I say no more.

 

[not_so_new]

That's OK for a summary. What ticks me off the most though is the sense of entitlement. I play poker with a middle manager from AIG that acts like he is entitled to this enormous taxpayer teat, that it is unpatriotic to question the importance of his institution to the strength of the nation. These are the attitudes that Geithner and Summers bring to their task. Bah, they screwed up. At first it was with their own money. Then it was with their customers money. Now it is with my money. I say no more.

You know... when people talk like this I always want to ask..... what if you are wrong?

Seriously.

Just looking at the intangible side of this for a minute. The Dow is not the economy but precisely because people think it is in many ways it becomes true. A good part of the economy is the mental outlook of the citizens. If AIG were to fail it would send shock-waves through the markets and, even IF it didn't effect many other companies financially (which it would) the damage it would do to the confidence of the markets would be astounding.

Look, I don't like these guys. I want to see them walk the plank as much as anyone else but letting them fail because I am miffed at them is like cutting off my nose to spite my face.

It would be akin to throwing the pilot and the co-pilot out the door because they disregarded the warnings about turbulence and flew the plane into really rough air. Yeah, I get my satisfaction but the end result is going be a bunch of very unhappy passengers right before we all hit the ground.

Does bailing out AIG make me happy? NO.... but the consequences are much much worse for me and everyone else if we don't. Sometimes you have to choose the lesser of multiple evils to cause the least amount of general pain.

 

[grunion]

You have a lot of analogies here but (to use an outdated one) where's the beef? What are the consequences? Do you understand them? Or are you just taking the word of a bunch of bankers with vested interest in the bailout that it would be really, really bad. I did, because so many people that I trust were saying it. But now that I see who's doling out my cash I say enough.

They get the upside, why do we get stuck with the downside? Maybe a good number of insolvent borrowers were able to temporarily reap the benefits from subprime loans. But not me, I have made reasonable decisions with my money. I put 30% down on my house and negotiated a good rate on a 30-year fixed mortgage. Foreclosures and the state of the economy have given my property values a 30% haircut. I have socked away a good portion of my income every month for my kids college funds and for retirement that is now worth less than the cash I put in it.

Well, for many of us it already is really, really bad. I am not looking to bring the rich down with me, no. But it was a scam, and they should not be rewarded for perpetrating it. Not another dime.

Prayer does not heal disease but precisely because people think it does, does that make it true? If there was evidence that it did, you would see me praying night and day. But "what if you're wrong" doesn't work as an argument for me to join a church.

 

[grunion]

And with regards to "letting them fail" - failure is entirely up to them. This is America, let them pull themselves up by their bootstraps.

We are the ones that deregulated them that let them get so big based on pure fantasy. We have already given them, what, a trillion bucks to fix their problems? What a bunch of suckers we are.

 

[drkitten]

You have a lot of analogies here but (to use an outdated one) where's the beef? What are the consequences? Do you understand them?

The possible consequences include a complete financial shutdown of the world.

Money will cease to move, and a return to a cash economy. Your grocer will not be able to buy anything without having the cash on hand to purchase it from the vendor, which means he is going to need to amass massive cash reserves before he can buy any more lettuce to supply to you.

Basically, no business in the world today operates on cash -- they all operate on bank-based credit and rely on the banks to sort where the money goes. Wal-Mart, for example, has managed to cut its prices and margins so low precisely because it "owns" almost none of the merchandise on the shelves and never had to pay for it. Instead, it basically acts as a consignment store; when you buy an item, the money that you spend goes directly (via the banks) to the wholesaler or manufacturer. The wholesalers and manufacturers, in turn, can manage to put their goods on the shelves because the banks have fronted them operating credit, so they can manufacture against expected profits when things are finally sold.

This would stop happening if the banks ceased (a) sorting out the consignments, and (b) fronting the manufacturers credit.

We'd be back in the 17th century where you went to a shoemaker, put down a deposit on the specific pair of shoes you wanted, and came back in two days to pay cash for your shoes.

 

[Francesca R]

And with regards to "letting them fail" - failure is entirely up to them.

If you could lose the need to direct massive amounts of blame around the place for a moment, you might be open enough to appreciate that to a certain extent recessions (collective large voluntary contractions in demand) can be nobody's fault at all, and quite fixable. If that is in any way the case, then to stand back and "let the market sort it out", when it is the market that produced it, is as ludicrous as what you pointed out with bankers fixing banks they broke.

The 30 year old story "Monetary Theory and the Great Capitol Hill Baby-Sitting Co-op Crisis" might help.

 

[not_so_new]

And with regards to "letting them fail" - failure is entirely up to them. This is America, let them pull themselves up by their bootstraps.

We are the ones that deregulated them that let them get so big based on pure fantasy. We have already given them, what, a trillion bucks to fix their problems? What a bunch of suckers we are.

I think you need to read what drkitten said above and then go back and think about what I wrote.

What if, just a hypothetical question here, WHAT IF letting them fail has a severe negative impact on your life and mine, greater than the impact of bailing them out?

Supporting them might feel wrong, it does to me for the same reasons as it does you. My payments are on time, I and fiscally responsible, I didn't cause this mess.

But I recognize that we are in somewhat uncharted waters here. I think no one really knows what is going to happen if they do fail. If we bail them out we have a rough idea on the cost, if we don't bail them out..... .. no one really knows but ALL the projections are that it would be REALLY REALLY bad for everyone.

I think you are making a mistake. Bailing them out isn't FOR THEM, bailing them out is FOR US. I don't want (and can't really take) things to get much worse. I don't know about you but me, I will take the long term debt that we have to pay back over the short term possibility I could lose my job and my house because some people wanted to take a philosophical stand against the bankers.

 

[grunion]

I understand the importance of credit and banks to the economy. I understand, also, how dangerous the merger-mania and aggrandizement of the banking community over the past decade has led to a dangerous amount of this credit being placed in the hands of a very few institutions, with questionable metrics that their management has used to drive its decisions.

I haven't seen any evidence that 1) AIG and Citicorp (private companies, last time I checked) are sufficiently trustworthy stewards of our economy to warrant opening our public coffers to them or that 2) A trillion or five or ten trillion in the hands of these crooks and boobs will do the taxpayers any good.

 

[grunion]

If you could lose the need to direct massive amounts of blame around the place for a moment, you might be open enough to appreciate that to a certain extent recessions (collective large voluntary contractions in demand) can be nobody's fault at all, and quite fixable. If that is in any way the case, then to stand back and "let the market sort it out", when it is the market that produced it, is as ludicrous as what you pointed out with bankers fixing banks they broke.

The 30 year old story "Monetary Theory and the Great Capitol Hill Baby-Sitting Co-op Crisis" might help.

It's not a question of blame. Maybe it is nobody's fault, or everybody's. It's a question of a decision that people are making on my behalf to throw my money at a bunch of financially insolvent blunderers. Yes, I am angry, but that's besides the point.

I am not suggesting to just sit back and let the markets sort it out either. There is a role for government in the solution of the liquidity crisis. Geithner and Summers are absolutely the wrong guys for the job of figuring out what it is.

 

[drkitten]

I understand the importance of credit and banks to the economy.

With respect, you obviously don't.

I haven't seen any evidence that 1) AIG and Citicorp (private companies, last time I checked) are sufficiently trustworthy stewards of our economy to warrant opening our public coffers to them

and this would be relevant if there were in fact viable alternatives to AIG and Citigroup.

The problem is that the world only has one financial system, and it's so tightly interlocked that any major failure is quite likely to bring down the whole system. (We've done that experiment already with Lehman Brothers.) If we had an emergency backup financial system --- a whole bunch of experienced and competent bankers waiting in the wings who for some astonishing reason did not have any financial dealings with any of the players in the primary banking system -- then, yes, we could simply allow AIG and Citigroup to fail.

But as is, we're in the position of a small town with one incompetently-run hospital. And while it's definitely true that the quality of care we're getting is not what we want, we're not going to improve our care by closing the hospital and firing all the doctors. What the town needs, in the long run, is to get rid of the individual incompetent doctors and administrators, but we also need to keep enough medically-trained people in place during the transition to make sure that the immediate needs of the community get met.

or that 2) A trillion or five or ten trillion in the hands of these crooks and boobs will do the taxpayers any good.

See my previous post. I would say that "preventing a total financial collapse of the world" is something that will do the taxpayers good.

 

[drkitten]

Geithner and Summers are absolutely the wrong guys for the job of figuring out what it is.

Who are the right guys, then? Joe the Plumber? Condi Rice? Warren Buffett? Tony Blair? Pope Benedict IX? Stewie Griffin? Burt, my auto mechanic down on Greenfield St.?

 

[Francesca R]

It's not a question of blame.

You could have fooled me, what with the rhetoric in your OP and subsequent posts, right up to "a bunch of financially insolvent blunderers".

I am not suggesting to just sit back and let the markets sort it out either.

Again you could have fooled me, what with: "Let AIG die its long overdue death", "Let the Dow drop another 1000 points, who gives a frig what Wall Street thinks about it anymore" and "This is America, let them pull themselves up by their bootstraps." Now it is easily understandable why you, and a lot of people, might have these views and these recommendations. However, it is economic woo. Misguided, emotionally inspired nonsense. Dangerous nonsense at that, if it prevailed. You have the opportunity to learn more than that should you be interested.

There is a role for government in the solution of the liquidity crisis.

Yes. What?

Geithner and Summers are absolutely the wrong guys for the job of figuring out what it is.

Who is and why? I assume you would write off Paulson, Snow, O'Neill and Rubin as well?

 

[grunion]

and this would be relevant if there were in fact viable alternatives to AIG and Citigroup.

The problem is that the world only has one financial system, and it's so tightly interlocked that any major failure is quite likely to bring down the whole system. (We've done that experiment already with Lehman Brothers.) If we had an emergency backup financial system --- a whole bunch of experienced and competent bankers waiting in the wings who for some astonishing reason did not have any financial dealings with any of the players in the primary banking system -- then, yes, we could simply allow AIG and Citigroup to fail.

But as is, we're in the position of a small town with one incompetently-run hospital. And while it's definitely true that the quality of care we're getting is not what we want, we're not going to improve our care by closing the hospital and firing all the doctors. What the town needs, in the long run, is to get rid of the individual incompetent doctors and administrators, but we also need to keep enough medically-trained people in place during the transition to make sure that the immediate needs of the community get met.

The point is well taken. I don't see any alternatives standing around waving their hands saying "pick me." But even assuming that AIG suddenly gets its house together and liquidity starts flowing again over the next several months (what - 3? 6? 12? Maybe 1 month for each $100 Billion we give them, is that a reasonable expectation? No, we just don't know.) aren't we making the next crisis even worse by institutionalizing our further reliance on them?

At the risk of stretching another analogy, what the town needs is for other hospitals and clinics and small practice doctors to fill the void, not giving money to the HMO administration bureaucrats that ran the big hospital into the ground in the first place. Maybe the competition from others will be just what the community needed to get the big hospital working too.

 

[grunion]

You could have fooled me, what with the rhetoric in your OP and subsequent posts, right up to "a bunch of financially insolvent blunderers".

You accurately gauge my anger, but not my blame. By saying "just let them die" I am not saying "kill them."

However, it is economic woo. Misguided, emotionally inspired nonsense. Dangerous nonsense at that, if it prevailed. You have the opportunity to learn more than that should you be interested.

What is it that you are continually accusing of being "woo"? I have expressed skepticism about the bailout. What are you expressing skepticism about? If by "woo" I am correct in assuming you mean (as I generally understand the use of that word on this forum) "assertions without any evidence," what assertion are you condemning here?

ETA: Oh, and I wouldn't have posted here (or joined at all) had I not been interested in learning more. I do not find condescension and labeling things "woo" as very productive to that mission.

 

[not_so_new]

I understand the importance of credit and banks to the economy. I understand, also, how dangerous the merger-mania and aggrandizement of the banking community over the past decade has led to a dangerous amount of this credit being placed in the hands of a very few institutions, with questionable metrics that their management has used to drive its decisions.

I haven't seen any evidence that 1) AIG and Citicorp (private companies, last time I checked) are sufficiently trustworthy stewards of our economy to warrant opening our public coffers to them or that 2) A trillion or five or ten trillion in the hands of these crooks and boobs will do the taxpayers any good.

Correct me if I am wrong here but you are making multiple arguments. One argument is "we don't need to prop these companies up because it isn't going to do any good for the general citizen." The second argument is "look what they did, how can we trust them again."

The second argument is not the right question to ask right now, we don't really have a choice here. It is extremely important (at least to me) that we start getting some regulations back in place to protect us from this happening again but for now, the cat is out of the bag and we only have the system we have to deal with (see drkitten's excellent post above).

The first argument is wrong in my eyes, it will matter to the general citizen and that is the main and only reason why we can't let financial system fail.

 

[drkitten]

But even assuming that AIG suddenly gets its house together and liquidity starts flowing again over the next several months (what - 3? 6? 12? Maybe 1 month for each $100 Billion we give them, is that a reasonable expectation? No we just don't know.) aren't we making the next crisis even worse by institutionalizing our further reliance on them?

Not necessarily.

What we do now and what we do in the future are two different things --- and once we have the luxury of time, we can look at addressing the long-term sustainability of the system. Beranke has already said that the financial industry needs to be more tightly regulated, and for once the President and Congress appear to be in a position both to take that advice and to act upon it.

At the risk of stretching another analogy, what the town needs is for other hospitals and clinics and small practice doctors to fill the void, not giving money to the HMO administration bureaucrats that ran the hospital into the ground in the first place.

Are they giving it to the HMO administration, though? Or are they giving it to the HMO corporation?

You need to distinguish between the people that ran AIG into the ground and AIG itself. One of the problems, for example, that has been remarked upon for years, but is only being acted upon now, is the problem of executive compensation. Numerous corporate directors and executives appear to have been acting out of their own best interests rather than in the interests of the companies (hence the bonus scandals) -- this can be addressed fairly easily, if bluntly, through legislation. In fact, the new bailout terms already address executive bonuses.

Similarly, if you want to complain that the current crop of CEOs at the major banks are incompetent, then fire them. But there are literally billions of people that depend on Citigroup-the-corporation remaining in business, regardless of who's at the helm. Fire the skipper, but keep the ship afloat. Or, to continue the medical analogy, fire the Director of Oncology, but keep the Oncology Department open. Because otherwise a lot of cancer patients will die through a lack of routine care.

Maybe the competition from others will be just what the community needed to get the big hospital working too.

Doubt it. The small town we're in can't support two hospitals. Dropping the analogy; we literally can't afford to maintain two parallel and independent financial systems; the inefficiencies that it would introduce to keep them apart would be unbelievable. And as soon as they're no longer independent, it's just one big system with the same single-system problems.