Tuesday, April 14, 2009

There He Goes Again

In his speech on the economy today, Barack Obama was reported on by the AP as follows:

The president also defended the massive and unpopular government programs enacted under the Bush administration and expanded under Obama to bail out banks and other financial institutions. He acknowledged that sending money directly to taxpayers might be more palatable -- but said it wouldn't be as effective.

"The truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth," Obama said.

This snippet crystallizes why so many thinkers and commentators across the political spectrum oppose the Bushbama GeithPaulson bailouts.  EBR pointed out the night that the new President Obama addressed Congress, he focused on the importance of credit rather than savings to the economy, and criticized him for that focus.

First, it's our money.  Why should John Q's money go to bank holding companies so they can take their mark-up by then sending it back to us, creating more economic serfs?  Second, it's really not our money, because we are either borrowing it from foreigners or diluting our current money out by printing more.  Third, in a recession, only credit-worthy borrowers are worth lending to, and those people or businesses for the most part are looking to lend their savings out or at least pay down debt, not take on more debt.  Fourth, the money is not even going to banks, it is going to bank holding companies, mostly to make good on overvalued holdings of overpriced securities they not only peddled to unsuspecting buyers but also kept on their books; but also to pay their gambling debts. And so on.

EBR wants to believe that Mr. Obama, via such things as his career as community organizer, knows how valuable direct grants to municipalities and communities can be, and that involving profit-making banks in assisting the needy is relatively ineffective and in any case involves too much "vigorish" relative to direct Government expenditure.

The bondholders of the troubled financial institutions must take pain, and that some very large banks are troubled enough to warrant receivership of some sort under the post-S&L crisis statutes.  It matters no more which financial companies or even countries comprise this class of bondholders.  Since when did owning the corporate bond of a financial holding company that happens to own an FDIC-insured bank be the same as having a full faith and credit obligation of the Federal Government?

Alternative point of views on what to do involve direct government expenditures to individuals or communities; or the bravest one, which is for government to provide counter-cyclical assistance such as unemployment insurance and useful public works programs, but to respect the economic cycle.  This brave approach serves many a doctor well when even a very sick patient has a viral infection, and thus should not receive an antibiotic.

Copyright (C) Long Lake LLC 2009

No comments:

Post a Comment