Home > Economics, Literature, Politics > Scenario for the President

Scenario for the President

“QUICK!  Mr. President, bad policies for the past 20 years have dug us into a hole….and the brightest minds we have tell us we’re within 48 hours of the financial system freezing.  Make a decision:
1) Inject liquidity AS A LOAN to the system (Like we did for S&L crisis which turned a profit for the US Gov’t.  This was how the TARP plan was sold to the Administration – but it has clearly been hijacked since by Congress, Geithner, others.).
…or….
2)  Stand there and we’ll take a guess about just how far the market can crash.  But we’re being told it is as bad/worse than 1929.
QUICK…”

If you are standing on principles, the speed of the decision doesn’t matter as much.

I think the scenario sort-of makes one point: Government gets involved with “A” in mind (in this case the S&L loans or Financial Bailout.) First blush is positive. But as with most if not all government involvement, it gets hijacked, and turned into something not intended. Go back (choose the years) and we will see the examples. Income tax; FDR’s programs; Welfare; The Great Society programs; etc. etc. I don’t know them all.

My opinion? Given the above scenario, the President should choose 2, and let Lehman Brothers collapse. And he should have pressured the Fed to not get involved in helping bail them out. (Or maybe he didn’t know cuz it was secretive, but he could have found out, and fired the guy for doing it.) Also, allowing the Fed to facilitate JP Morgan Chase’s purchase of Bear Stearns for pennies on the dollar. Yes these banks should have failed. There’s no way that a banking system performing the kinds of stunts that they have been performing should have been bailed out with taxpayers money. You think laissez faire is adversely affected by uncertainty (absence of full information)? Absolutely it is. What about Keynesianism and other interventionist policies? Are they immune to the ails of uncertainty? Absolutely not. And the market forces will correct for any uncertainty a LOT quicker than a poor government policy that has become LAW and may take generations to overcome. We’re still paying for the ones from 60-70 years ago. In fact, the government injects it’s own uncertainty into the system, but more on that below.

We appear to have changed topics from Bush vs. the Constitution, and maybe for good reason after listening to Paul, Jeff and Deon’s points. One of the best conservative minds — possibly ever — was Edmund Burke. I bring him into the Constitution discussion because he advocated gradual change, but at the same time not destroying the pillars of freedom with our experimental Acts. I’m equating his mentioning of Experimental Acts of his time to the Patriot Acts of our time. Yes we have to change with the times as Burke says (e.g. we have to deal with terrorists), but according to him, it’s not worth destroying the pillars of liberty that we have built our society on in order to accomplish that change. If we do so, we are destroying the foundation upon which our nation is built.

In terms of the banking issues, absolutely let Lehman Brothers and Bear Stearns fail. Don’t let the Fed get involved at all. The banks made bad business decisions. There is tons of evidence of corruption. Why inject loans into that? What is the economic principle that that decision is based on? In my opinion the decision was based on fear. Once again, we have a government trying — through their macro economic policies — to right the ship. “We can fix it. We can control the market forces.” And once again, the evidence is that they can’t. It might have stabilized some things for the time being, but anyone watching KNOWS with their gut that this glut of spending is going to have to be paid for at some point, and it’s going to be worse when it’s time to pay the piper. The Fear Move didn’t do anything but delay a market correction. Check out Karl Denninger if you’d like to read more.

AND, there are even some studies, like this one by the Stanford economist John Taylor, which purports to show (pdf) that the credit markets actually did not react all that badly to Lehman going under and that the crisis was really the product of market uncertainty about the effects of government action. So, the “market” reacted not all that badly to a market force of letting a bank go under, but the real market crisis started after the government decided to get involved to try to “control” the natural market forces? Add to this the fact that the bond market says it’s safer to lend to Warren Buffet than to Barak Obama, and I think we see what Keynesian fiscal policies bring to the table in terms of uncertainty.

See, now this makes sense to me.

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  1. March 29, 2010 at 12:36 pm

    Yes. Whether we are talking about economics, the constitution, science..you name it…you can’t get away from natural law. Keynesianism, unlike laissez-faire, is not based on natural law.

  2. March 29, 2010 at 2:21 pm

    1. How do you know Laissez-faire policy doesn’t work in practice?
    2. Have you read Mankiw’s Times article? Poppycock. This is the man who said, “If you are going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics.” Which he of course has done. Hence his own proposals fit with Keynsian ideas: Mankiw proposed the US Federal Reserve should hold the nominal rate at near zero, but also create some ‘significant’ consumer price inflation. This way real interest rates will be way below zero. You know, -4% rates, -6% rates. Nobody could resist borrowing at those rates…great proposal.

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