We're going to run out of money.
We can't keep GM and AIG and Fannie and Freddie and every insolvent bank and every mortgage afloat. It can't be done. It's not a strategy. It's just desperation to avoid pain.
We're going to have to start letting them fail.
Sooner is better than later. Otherwise, we continue to throw good money after bad.
Let them fail.
When you're in a hole, the first lesson is to stop digging. Let's start by putting down the shovel and admitting we are heading in the wrong direction.
Let's taste some bankruptcy. Let's let some resources and capital get out of the hands of the people who are misusing it and into the hands of people who can use it more productively, wisely, and prudently.
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I agree. It's nice to hear a few sentences of sanity, and it's been disheartening how so many people are still feeding on the "it's different this time" hemlock. Before, it meant prices only go up and bubbles never burst. Now, it means Socialism will be a rousing success if we just give it a chance. Because it's different this time!
So why does Krugman, among others, have such a different point of view? I can't judge either way, but I just want to know why economists have such different opinions?
Oh, Russell.
Aside from moral hazard concerns (face it, that ship has sailed), what is the economic benefit of allowing insolvent banks to fail? Is it just a matter of avoiding future bank runs, or do involvent banks behave in some way that is detrimental to the economy?
WTF,
Krugman and I actually agree that the current strategy is a failure. See his latest piece at the Times on dithering.
@Dave
You ask the wrong question.
It isn't a matter of whether there's a benefit to letting banks fail.
Rather, it's a matter of whether there's any harm to continuing to prop them up. Which there most certainly is.
Under normal circumstances if a firm spends more than it earns, it eventually goes belly up one way or another.
Someone wealthier than the firm can come in and subsidize the losses. But that can only continue so long as the wealth of the subsidizer exceeds the amount of losses accruing.
When the government is the one doing the subsidizing, all of the taxpayers are the ones that are forced to bear the burden of those losses. The greater the losses we subsidize, the more of our wealth we are simply flushing down a toilet.
Moreover, it may be that in the end we cannot save some of these institutions. So we will have destroyed wealth through subsidized losses, and not even succeeded in averting to collapse of the institutions we were supposed to save.
The more of these gigantic institutions we attempt to save, the less likely it is that we will succeed with all of them. As the old saying goes, if you try to save everyone you won't be able to save anyone.
Unfortunately Russ, the economics profession has proven to be full of cowards who do not wish to stand up and proclaim the very words your have just posted. Most of the so called free market economists would prefer to wait and see "if" the stimulus packages and the bailouts return us to our bubble economy. This way, they do not have to take a moral stand and can maintain credibility to the mainstream. Very few have shown the moral courage to go into the public spotlight and stand up for what they know is right. Where are this generations' Milton Friedmans who go on television programs and teach the American people the free market perspective? They are gone. They have conceded the debate to the statists and keynesians.
Aside from the obvious dangers of central planning that we are about to experience, the great tragedy of this whole situation is the damage done to economic knowledge.
Dave
Insolvent banks operate in a way that is detrimental to said insolvent banks.
Or, they're supposed to.
Engineering solvency and success from the top is by definition detrimental because even if these entities were to suddenly thrive, you took money out of one place in the economy where it would have been just as productive, thus accomplishing nothing other than taking away money from those who generated it and likely reducing incentive and widening the risk to reward ratio to boot.
The above paragraph is already too good to be true. What will happen and has ALWAYS happened is that government will misspend based on incentives that are corrupt both economically and ethically. So it will be very very detrimental to the economy.
Russ,
You wrote: "We're going to have to start letting them fail."
The difficulty here is who are "we"?
You and I agree completely that corporate failures would be a highway to future wealth creation as capital flowed from lower to higher valuing users.
But you and I are not the lawmakers. Those who are currently in lawmaking positions may or may not see it in their self interest to eschew bailing out failing firms. It is my hope (and from your post it is yours too) that lawmakers might somehow be persuaded to stop subsidizing failure (and hence stunting wealth enhancing transfers of capital). But the somehow remains an open question. Education of the public and large via your blog and insights may motivate people to "write their Congressman". Public choice theory suggests, for example, that those in Congress who are up for re-election 2010 will be more receptive than others to such a process.
But when you say "we" have to stop the wealth destruction, I think you really mean to say that you hope "they", a sufficient number of lawmakers, can be persuaded that it is in their self-interest to stop it.
I say this not to quibble about word choice, but so that the efforts that you and I and other like minded persons can be more clearly focused upon the most likely targets of our persuasion.
Neither you nor I need be persuaded that bailout after bailout is likely to lead to the "need" for even more bailouts in the future.
Stephen wrote:
"Aside from the obvious dangers of central planning that we are about to experience, the great tragedy of this whole situation is the damage done to economic knowledge."
Yes, I agree. Yesterday in making their pitch for nationalizing health care, Team Obama asserted that a bankruptcy occurs in the US every 30 seconds as a result of health care bills. Christine Romer (Chair of the President's Council of Economic Advisor) was challenged on it. She backed off the number, which apparently is so completely distant from reality as to be laughable (if it weren't so deceitfully evil that it was ever floated by Team Obama at all). But Ms. Romer did not back off the notion that the idea had merit. The point, she explained, was that yes there are cases where health care costs precipitate bankruptcy. As I posted on another line on the Marginal Revolution blog: Apparently Ms. Romer does not understand the important point that a thing can be statistically significant and economically insignificant (this is Deidre McCloskey's point; see for example her article with Ziliak in the 2004 issue of Econ Journal Watch pp. 331-58). Everyone makes mistakes, but if Ms. Romer continues to try to trade on this one (or if she is truly ignorant) she will do the economics profession writ large a big disservice by remaining on the Council and spewing the kind of nonsense that gets economists stereotyped with the direct intellectual descendants those who tried to count the number of angels dancing on the head of a pin.
A while ago Glenn Beck asked Sir Richard Branson why airlines in the U.S. were so bad. Richard: "Because we don't let them fail."
Jim Rogers Interviewed by Maria Bartiromo
(February, 27) Maria Bartiromo interviewed Jim Rogers for Business Week. Here is the full transcript:
What do you think of the government's response to the economic crisis?
JIM ROGERS: Terrible. They're making it worse. It's pretty embarrassing for President Obama, who doesn't seem to have a clue what's going onâwhich would make sense from his background. And he has hired people who are part of the problem. [Treasury Secretary Tim] Geithner was head of the New York Fed, which was supposedly in charge of Wall Street and the banks more than anybody else. And as you remember, [Obama's chief economic adviser, Larry] Summers helped bail out Long-Term Capital Management years ago. These are people who think the only solution is to save their friends on Wall Street rather than to save 300 million Americans.
So what should they be doing?
What would I like to see happen? I'd like to see them let these people go bankrupt, let the bankrupt go bankrupt, stop bailing them out. There are plenty of banks in America that saw this coming, that kept their powder dry and have been waiting for the opportunity to go in and take over the assets of the incompetent. Likewise, many, many homeowners didn't go out and buy five homes with no income. Many homeowners have been waiting for this, and now all of a sudden the government is saying: "Well, too bad for you. We don't care if you did it right or not, we're going to bail out the 100,000 or 200,000 who did it wrong." I mean, this is outrageous economics, and it's terrible morality.
You have said Bear Stearns and Lehman (LEHMQ) would still be around if Greenspan hadn't bailed out Long-Term Capital Management in 1998. Can you explain?
Well, if Long-Term Capital Management had been allowed to fail, Lehman and the rest of them would've lost a huge amount of money, their capital would've been impaired, and it would've put a terrible crimp on Wall Street. It would've slowed them down for years. Instead of losing capital, losing assets, and losing incompetent people, they hired more incompetent people.
Should AIG (AIG) have been allowed to fail, too?
First of all, banks and investment banks and insurance companies have been failing for hundreds of years. Yes, we would've had a terrible two years. But you're dragging out the pain. We had 10 years of the worst credit excesses in world history. You don't wipe out something like that in six months or a year by saying: "Oh, now let's wake up and start over again."
What about Citigroup (C)? What about the car companies?
They should be allowed to go bankrupt. Why should American taxpayers put up billions to save a few car companies? They made the mistakes! We didn't make the mistakes! I'm sure they'll give them the money, but I'm telling you, it's a mistake. It's a horrible mistake.
What happens when there's a permanent majority of economic illiterates?
Will we always have two wolves and one sheep voting on dinner?
Sorry, a closing tag may have been missing above.
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I agree Russ. I may be a little soft in looking to see if there are any modifications to the bankruptcy regulations to make sure that it is as orderly as reasonable. But this seems crazy.
AIG issued bogus insurance. Ex-post it is easy to see AIG under priced the insurance. It is the holders of those insured instruments that are guaranteed payment. Well they just should not be. The counterparty to the risk (AIG) is bankrupt and our propping up of this institution pushes the losses to Taxpayers who were not even a party to the contract. Share and debt holders of AIG need to pay. That is what they have contracted to do.
Bankruptcy would send housing price to a truer value. I cannot think of anything making housing more affordable than lowering the price. Hard working folks with responsible money management skills would be availed of reasonable housing.
And for the bankers who like to paint all mortage defaulters as dead beats, they would have to temper their paint brushes to the reality of the role that they played in entering into these contracts, or the bankers will not have enough customers to sell these reposessed homes.
Russ you have mentioned in your podcast that no one would pay negative interest. I would suggest that the net of -20% ROI if banks forclose versus -5% if they re-negotiate is a net of 15%. It is not the government that needs to make the banks, mortage holders and distressed home owners get down to business on establishing work out agreements. It is letting all of them sit in the stew that the have cooked that will inspire them to negotiate reasonable terms.
Sunk costs are sunk. Let's get on with it!
Liberty and Freedom necessitate the freedom for firms and individuals alike to FAIL!!!
Write your congressman, and stop the bailout madness. Let the firms FAIL!!!
So, end corporate welfare now.
I agree we should let them fail.
But the members of the Obama administration — at least in terms of their economic policies so far — are best described as clowns with wrecking balls.
As there is a compelling case not to rely anymore on some bankers, an orderly and systematic bank run on would-be insolvent banks, seems an appropriate solution to set up parallel new good banks and strengthen also good ones.
…clowns with wrecking balls.
Posted by: Michael Smith | Mar 6, 2009 4:06:07 PM
Clowns is too strong an adjective. It presumes some knowledge of what to do, in order to do the opposite, eliciting a humorous response.
These people are rank amateurs, tossed smack into the middle of trench warfare.
They have no reference frame from which to work, they have multiple faulty economic premises, and they cannot even hire fellow naïve do-gooders who share their utopian views to serve their cause (likely because they know they'll get slaughtered).
And Russ, when economists start saying âWeâre going to run out of money,â I get scared. Outside of the usual Malthusian armageddonists, I believe you are the first to articulate this.
And you are correct, given $50 â 70 trillion in unfunded liabilities staring us in the face next decade.
If we revert to Japan, then this becomes our lost decade, and weâre basically screwed.
Have a wonderful weekend, everyone.
"So why does Krugman, among others, have such a different point of view?"
Because they have the point of view that spending money and wealth creation are one in the same.
Let's all go and spend all of our money on as many copies of "Barry Manilow's Greatest Hits" as our collective dollars will allow, and make ourselves wealthy!
"The average fiscal multiplier across all 43 recession episodes is -1.5."
–p17, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=879624
Krugman is an economic moron, and idiot.
@Mesa Econoguy: I disagree, partially. Krugman is brilliant when he sticks to economics. The instant he gets into politics or any other subject his logic and factual accuracy disappear.
(sarcasm) But that would require that markets be free to do their work! And we can't have that, can we?(/sarcasm)
Mesa Econguy: A friend of mine who is an investor says "We're doomed."
We will never run out of money if we can just make more money.
Inflation is a politically preferable option at this point because America has forgotten what inflation is like.
The fiat money of today is soon to be worthless, as it should be. Its very existence is dangerous and immoral. I only wish I had learned this lesson years earlier so that I could be better prepared now for the imminent collapse of the global economy. Forget gold. The money of the not too distant future is canned goods and ammo.
We can't let them fail now because the taxpayers already own the default risk through the FDIC and ownership of AIG.
It's cheaper to keep them afloat and hope for a recovery.
Christopher writes:
"Krugman is brilliant when he sticks to economics. The instant he gets into politics or any other subject his logic and factual accuracy disappear."
I don't think that it is reasonable to divorce economics from politics nor many other subjects precisely because the economic analysis has usefully been applied to so many aspects of human action, politics not the least of these.
We won't run out of money unless the United States government disintegrates as a monetary authority internally, and this disintegration seems unlikely to me, not least because Uncle Sam can disintegrate New York as easily as it can disintegrate Moscow or Bejing or Tehran.
We could run out of international trading partners, but the current chaos has strengthened the dollar thus far. Apparently, other monetary authorities are no more trustworthy than ours. Apparently, our trading partners have no more attractive option than to sell us goods and then return dollars to our Treasury to spend, even as our central bank manufactures more dollars to buy the Treasury notes back from them. It's a very strange game, and I don't pretend to understand it well.
When you finish digging in, can I have your HD TV?
Like the last decade wasn't lost. The "war on terror" left me feeling sooo much richer.
But can the Obamatrons make things even worse? Sure they can.
I haven't seen the evidence that he's brilliant at anything, besides apologizing for his partisans. A Nobel Prize in Economics is not this evidence.
As another poster noted, we're unlikely to run out of money, but the consequences of always pushing out new capital (unsustained by an increase in the quantity or quality of goods and services), whether through the mechanisms of taxation, borrowing, or deficit spending all have dramatic negative risks. Maybe there's a time when those negative risks should be ignored, but I'm not so sure now is that time.
What I see as more important is that allowing those insolvent institutions to fail, or save them, or put them into conservatorship, or forcing them to sell to solvent institutions, must become the stated policy of the administration. And then that policy must be followed consistently.
Institutional investors have fled stocks and are unlikely to return until they have some measure of assurance that the companies they invest in will be able to profit in the future. Right now, there is no assurance of that. They don't know which company the government will "save" with capital infusion, which they will allow to fail, which they will force to sell to others, or how long they will do any of these things without changing their mind. Nobody can say from one week to the next, or one day to the next, what the government will be doing with GM, AIG, CITI, or dozens of other publicly traded companies. Companies that investors understood explicitly when they were investing that had the risk of failure.
Explicit understandings of the consequences associated with risk should never be shed in favor of implicit misunderstandings of arbitrary official action on a company's, and shareholders, behalf.
I agree with Jake (and Russ Roberts and others) that bailout mania creates incredible confusion as well as moral hazard (more among bondholders than among homeowners), but if we don't confront who is being bailed out, we'll never understand what's happening to us. No one much cares about the three letters "AIG", and term life insurance policy holders can switch providers easily enough. The AIG bailout is about default swaps on bonds and bond derivatives and about annuities. If not, I have no idea what it's about.
So we're bailing out would be retirees, and until we acknowledge this reality, we're only whistling in the wind. My kids may lose college tuition that I bothered to purchase for them nearly two decades ago, just as they reach college age. My kids and I could pay rents that I sacrificed to avoid for them, so we can bail out a lot of employee pension funds, so idle people can consume more longer without producing themselves.
That's all I know about the "crisis" at this point, so I'm wondering if my own waning years might better be spent in retirement or in shooting some statesmen, and I don't much distinguish the statesmen in D.C. from the ones in Manhattan. They're all statesmen to me.
In several comments I sense a confusion between âwealthâ and âmoneyâ.
The original post uses effective rhetoric. Saying âweâre going to run out of moneyâ slams the idea home.
Some, I think, understand the shorthand, while others get lost in the definitions of money. We will not run out of units of account. We will likely see our store of value diminished, and this will alter our means of exchange.
But what really matters is the wealth that money represents. And the current policy is to eat our wealth instead of create more. Eating wealth leaves us collectively poorer, but more equal. Yay for equality.
Bankruptcy can arrest the consumption of wealth, and opens opportunity for wealth creation. Sadly, terrifyingly, at the same time we are eating our wealth, policy is aimed at limiting the creation of new wealth and punishing those who do succeed.
We are aimed and shortage and deprivation. The measure of our starvation in dollars, yen, or troy ounces, matters less to the hungry man than creating a meal.
No we will not run out of money, the Fed will print it as needed. With that said it will debase the value of our currency every time they do it, just as it has since the Federal Reserveâs inception.
At least that is my understanding. Each time we bail these failures out we end up printing more money and eventually our dollar will end up worse than a penny stock… Of course the way the Fed prints we will anyways, it will just be sooner rather than later.
"Krugman is brilliant when he sticks to economics."
He's the one publicly advising Obama to spend much more than he is. If the Federal government printed $10 trillion dollars and used it to buy Jerry Seinfeld's pocket lint, Krugman would count that as $10 trillion of GDP growth, and a job well done.
I just now got done with a conversation with my neighbor – an East European turned American. You'd think he'd have a higher level of suspicion of the government, but the bottom line is, he just trusts the government.
As much reading, and listening as I do, I sometimes forget that most people only catch a few soundbites on television, and that's the extent of their knowledge.
In his view, capitalism and free markets in general have been running rampant for the last 8 years, and it has simply failed. Now it is time to give Obama, and more government regulation a chance. A chance to correct all of that greed and corruption of the last 8 years.
That's all the citizenry sees and hears.
Word to the mother, Russ is right.
Ray G,
Your neighbor, or anyone whose knowledge is limited to just TV sound bites, is at least ignorant and perhaps stupid. I think anyone who bases opinions mrely on TV sound bites is stupid. If your neighbor is not stupid (he gets some information by reading and conversations with people like you who are not limited to TV sound bites), but merely ignorant, then suggest that he start spending his leisure time at Cafe Hayek instead of in front of the TV.
Have you seen this news clip from The Onion:
"Should The Government Stop Dumping Money Into A Giant Hole?"
http://www.theonion.com/content/video/in_the_know_should_the_government
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