Monday, September 22, 2008

Toward a Coherant Economic Stance

OK, I'm making a ridiculous number of posts today, especially considering that no one reads this blog.

Here is a good explanation of the subprime crisis:

The more I think about it, the more I get insensed by the idea of bailing this out.

Basically, banks took a risk by lending money to people that didn't have a great chance of paying the money back. But they mitigated the risk by immediately selling the loan for cash. The buyer figured they could resell it too, and they did. But basically, this was a game of musical chairs. Someone was going to end up without a chair at some point.

Any institution that took on this kind of risk is, in my opinion, not very smart. Someone's going to lose, eventually. You want to gamble everything on the idea that it's not going to be you?

Government should regulate this kind of behavior, because it creates a whole pool of house buyers that really can't afford a house. And that drives house prices up. When a bunch of those end up foreclosing, there's a lot of houses on the market that few can afford, especially now that subprime loans are no longer available. That drives house prices down. Then, the foreclosing bank cannot recoup its investment by selling the house. The bank runs out of money, and cannot pay its depositors.

Then what? Do we pay 700 billion dollars to the stupid bank for these undervalued assets?

Or do we let the bank fail, pay the depositors through insurance, and take control of the properties in question?

And then, once we take control of the properties in question, we can renegotiate the terms of the mortgage according to the house's real value, rather than its over-inflated hypothetical value. Net result - same real estate recession, same Government expense, but people get to stay in their homes. Then you create regulations that prevent this from happenning again. That's a winner.

Also, others that might venture into the banking business learn a lesson. Don't do stupid things with other people's money.

The purpose of regulation is not to strangle business, but to control situations where competition forces companies to do destructive things to keep up with the other company. The purpose of regulation is to keep the focus on the long term. As Michael Moore says, to deregulate completely would mean that it would be legal to sell people crack cocaine. This would make a fabulous profit in the short term, and those companies that chose not to sell it would probably go out of business, but eventually the country (and the company) would be awash with non-productive, desperate, sick people.

Which is pretty much what we have now - but the drug is credit, not crack. The net effect of this whole business is that society has been thrown into turmoil, all of which is going to end up being very expensive and difficult to fix. Meanwhile, the executives of these institutions made off with a lot of cash. Now the taxpayers are supposed to fork out $2300 each to keep these institutions going? No way. These executives should be out of a job. In some sense, it's not all their fault - they were competing in the marketplace that existed. But there is so much lobbying going on from these companies, and most of it is focused toward deregulation. Which is also an incredibly stupid, short-sighted thing to do.

We should re-institute regulation for the long-term health of industry. And we should consider a Constitutional Amendment making it highly illegal for a private company to attempt to influence an elected official, or an election. That's really where this mess begins. When you influence elected officials and get them to legislate deregulation, your competitor is deregulated as well. There is no inherent advantage, except perhaps in the short term.

Unless, a Government buyout of the eventual collapse is part of the scheme.

Which is why we shouldn't contribute one thin dime to the survival of these companies. Damn the consequences. We can still grow food, we can still sell goods and services, we can still build and maintain housing. We, as a country, can survive this.

And then we have to do something so that it never happens again. The stupidity and short-sightedness of human beings is a constant. The Constitution is a great document that has saved our society at large from the effects of this stupidity on many occasions. But its flaw is that it was written before the industrial revolution and the rise of capitalist power.

It needs to be amended to protect the citizens from this sort of upheaval. Or, the upheaval itself must be allowed to happen without bailout. Those are, or should be, our two choices.


Blogger Andy said...

Good points, although I don't like Moore's analysis, because drug sales ARE unregulated, and that is exactly because it's outside the scope of the law. It's actually an extreme case of what happens when you have no regulation, and no rules - kids do drugs, crime rates rise and business owners kill other business owners for profit.

10:21 AM  

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