Thursday, October 02, 2008

Why We Absolutely MUST Get this Bail-Out

Congress is acting like frightened children, once more worried about public sentiment rather than leading it. Much of the public simply does not understand the magnitude of the economic problem and is calling this plan a bail-out for Wall Street fat cats. In recent days we have heard over and over the meaningless cliche "let's help main street, not wall street". I am here to tell you that there is no difference between the two. This is all a single economic entity, and just like you can't get lung cancer and ignore it because its a localized problem, you can't ignore the this massive economic damage assuming that it is limited to Wall Street. So, let me give you a few of examples to illustrate my point:

Yesterday the Auto manufacturers, including GM, Toyota and Ford announced massive drops in their year over year sales (16%, 32% and 35% respectively). Why is that? Partly because sensible folks who are worried about their jobs don't want to spend large amounts of money in a tough economic environment. Another reason for the decline is that many who wanted to buy a car could not get credit to do so, because our credit markets have ceased to function. Now let me ask you a question: how long do you think that car dealerships without sales remain in business? Are car dealerships main street enough for you?

Let me give you another example. This one comes directly from my own high tech company. We are currently raising another round of venture capital financing to fund our operation. Where do you think venture capital funds get their funding? Much of it comes from financial institutions, who invest in these funds in the hopes of seeing high long term returns on their money. We are also financing some of our operations through bank loans, like many other companies. A company needs to buy raw materials to build its products and it needs to pay for these before it gets paid by its own customers. With no one lending money, how long do you think that companies like ours can survive? We have about 25 employees working in the company. What do you think will happen to them? Main street enough for you?

Not convinced? Here's yet another example. Yesterday, Warren Buffet invested $5 billion dollars in shares of General Electric. Buffet got an great deal for his money. Why is it that titans of industry, such as GE, get pressed into panicked deals of this sort? I mean, this is a company that makes locomotives, wind turbines, light bulbs and yes, it does have some financing activities. Does it get more main street than General Electric? 

So, before you bitch and moan about how we are rescuing fat cats, stop and think for a second. Is your company safe? Is your job safe? How about your 401K, is that safe? Stop listening to the ignoramuses that are stirring public sentiment against this economic rescue package, like the ever shrill and populistic Lou Dobbs of CNN, and start listening to the people who truly understand what is going on in this economy, including Warren Buffet who called our current crisis an economic Pearl Harbor. 

Yes, this economic rescue package is not perfect, and I am not against making some changes to improve it, but not passing the bill is simply not an option. We have been duly warned and we will pay dearly if we don't listen.


ryan said...

I disagree about the bailout. I am thoroughly opposed to using public money to prop up an overinflated market. The market should be allowed to correct, no matter what it takes.

Who cares if companies fail, this happens in a free market. So i wasn't able to do a refi last week, it happens. if i lose my job, that happens too. This move will push our dollar lower and make us more insolvent than we already are.

When foreign companies decide our dollar isn't a good bet anymore, where will we be then? This fearmongering must stop. People and companies who take on bad debt must lose because of it.

We cannot have those who succeed be punished for people who made bad decisions.

This bailout would be good for the short term economy, getting congressmen reelected, but horrible for our country in the long term. We are witnessing the last gasps of a falling empire.

Anonymous said...

"not passing the bill is simply not an option" -- Of *course* it's an option, and quite possibly a better option. Throwing more credit at our debt-riddled economy is like throwing fresh wood on a fire: it may dampen the flames for a little bit, but they will surely burn longer and brighter in the near future.

"we will pay dearly if we don't listen" -- Yes, we will. Just as we will pay dearly if we *do* listen. You can't just magically erase decades of irresponsible lending. Even if you could magically erase all current debts, both public and private, the addiction to borrowing has reached such a fever pitch that we would very quickly be right back in the same boat. It's not just the level of debt that has been increasing, the rate of that increase has also been increasing quickly. Greasing the process will just increase the rate further.

Shadox said...

Sorry guys, it pains me to say so, but you simply don't understand the nature of the problem. There are prefectly viable and credit worthy borrowers out there who simply cannot get a loan these days simply because nobody wants to let go of a Dollar.

There was a report today about the state of California not being able to borrow against short term tax receipts. If the State of California can grind to a halt - i.e. completely stop programs for lack of money - things have really gotten out of control. This makes exactly zero economic sense.

In an environment where everyone is trying to deleverage as fast as possible, government is the only entity with the pockets and the staying power to leverage-up to dampen the worst of the shock. Don't get me wrong, there is no avoiding this shock, but there may be a way to reduce its level of severity. However without this emergency plan or one like it, it is entirely within the realm of possibility that a Great Depression II is around the corner.

When the economy is falling apart, government's job is to stabalize the situation. Not to rescue everyone, but to make sure that a benign and cleansing economic fire does not turn into a cataclysmic all consuming infreno. Yes - let bad banks fail, but make sure that perfectly healthy and sound businesses and institutions don't go bust simply because of panic in the system.

ryan said...


I respect your opinion, but I do understand the problem. What I need to clarify of my opinion is that if other businesses fail because of this current problem, that is ok to me. if my business fails, i lose my job, can't get a loan, because of the current climate, so be it.

Small businesses that survive on credit worked in the previous climate, but may not work from here on out. That is the fluidity of our previously free market economy.

The market should be allowed to correct itself, and yes it might be extremely hard, but they forced this issue to happen by gambling with the credit default swaps. Even if a million people lose their jobs, that is what is supposed to happen.

I see it as better to see a great depression than to put off a disaster and cause an unknown greater disaster in the future.

The NY times has a great article explaining how their gambling brought the whole economy down in a matter of days.

Shadox said...

Yikes! That's a really radical position.

So far this year 600,000 jobs were lost. What if 20,000,000 or 30,000,000 are to be lost in the coming storm? In the Great Depression unemployment reached 25%! What if this economic pain can be avoided or greatly mitigated? Economic suffering is not an act of god. Things can be done to direct, channel and mitigate some of the damage.

There are very few people these days that would be willing to take the stance which you are suggesting which is essentially sit and do nothing.

Some may argue about the efficacy of the proposed solution. Others may argue about the lack of control or supervision. Yet others may argue about who the beneficiaries of the plan should be. BUT there is almost no-one who would be willing to sit around and take no action that could mitigate the damage if one was available.

The notion of completely free, unfettered and unregulated markets as an IDEAL has long since been marginalized in modern economics. Economic pain for economic pain's sake is no noble stance, it is simply misguided.

ryan said...

After reflection you are right, I do sometimes become militant when it comes to government spending.

I am against the bloated bill with all its contingencies. I am for measured attempts to stop the economy from complete failure, but only at the least possible level.

I would like to see this out of control spending reigned in. And i think that this bill is the wrong solution to the problem, as evidenced by statements from economists and many people in congress.

So to amend my previous statements, I am against this bailout, but am for an alternate plan that has not been presented yet. I feel they will force this through in order to get home and campaign, without full research and discussion.

When our nation's top economists and Ron Paul, etc agree that the plan is a good idea, i will be on board.

Thank you for forcing me to think a little broader on this issue.

Avatar said...

Wall Street didn't cause this mess. It was the poor management of Freddie and Fannie. People like Mudd, Gorelick, Franklin Raines, and James A. Johnson pirated Freddie Mae. In the 80's Freddie almost went out of business from investments in mortgage backed securities and investments in real estate.

Shadox said...

Ryan - I enjoyed our discussion. I respect your gut instinct - it is the same as mine - but in this case, I think our conclusions are opposite.

Avatar - sure, there's some fault with Freddie and Fannie, but there is plenty of blame to go around. It's all about the questions of incentives. That merits a post in its own right and it shall indeed get one next week.