Timothy Geithner has done it yet again. First, we found out that he lied about his taxes. That wasn't too bad. It showed he had some character flaws, but it could have been just a really bad mistake. Then, he went in front of Congress and laid out the most vague, idealogical plan for rescue that I have ever heard. In a time where I wanted to hear specific details of how Geithner, entrusted almost soley with hundreds of billions of dollars to give to Wall Street, would boost the economy, we got rhetoric that would have made even Obama blush. But, he was new on the job.
But, I must say, I really think this is the straw the breaks the camel's back.
Yes, that's right folks. Timothy Geithner is the one that fought for AIG to get their bonuses. After days of posturing and rhetoric, Geithner has admitted that he is at fault.
I have been a nay sayer on the bailouts since the very beginning. At every turn, we've seen that giving these companies bailout money cannot and will not work. The banks just kept it without increasing loans. AIG is trying to give it to their executives. 90% of the executives from the bailed out companies are still employed. Yes, 90% of these "captains of sindustry" (did you like what I did there?) are still running their companies.
I've talked about moral hazard incessantly. But this is really taking that concept to the next level.
This is the government saying, directly, "if you run your company into the ground, we will save you. If that wasn't enough, we'll make sure you get a bonus."
Thursday, March 19, 2009
Sunday, March 15, 2009
Results of Government Bailouts
AIG has received $170 billion in bailouts fromt the government (in 3 separate installments). AIG has announced that it will pay $160 million in bonuses to some of its execs. The Government appointed AIG Chairman, Edward Liddy, has said that these things are necessary to keep top talent.
I feel like I don't even really need to say anything to highlight the lunacy. But, this is a part of my grade so.... here goes.
First of all, I'll issue a simple appeal to reason. Should the executives that brought this gigantic corporation to the point of collapse, to the point of needing $170 billion (at least) to stay afloat, be given extra money while millions of Americans have seen their retirement accounts dwindle to 0? These execs were given bonuses so as to keep the "skilled" execs on board. Call me crazy, but I probably wouldn't consider any of the AIG execs remarkably skillful. You are REWARDING people that are the architects of a corporate failure of enormous proportions. Enough said on that front.
Now, let me highlight several economic... short comings (I'll be nice) with this government sanctioned business decision.
First of all, it is necessary to point out that the US government funded these executive bonuses. What I hear, mainly, from democrats I know is that the collapse was caused by greedy businessmen and bankers. I will save my analysis on that point for another post. However, here is an example of the government providing incentives for businessmen. The government is telling us that, no matter what the execs do, no matter if they succeed or fail miserably, they will be rewarded with millions of dollars.
This is an egregious example of an extremely important concept: moral hazard. Moral hazard was implicit in the security packaging of Fannie and Freddi; moral hazard resulted from the government bailouts of companies like AIG, the banks, the Big Three, telling us that, if you're big enough, we won't let you fail no matter how many poor decisions you make. Essentially, the government has rewarded both individuals and companies that make poor decisions. This sends the message that the government will fund you if you take horrible risks. This is moral hazard.
Secondly, these exec bonuses will keep these people at AIG. If they are truly talented, their expertise could be bought by successful firms on the cheap after the failure of AIG. But, instead, they are tied up managing a "zombie company" (credit to Tom Woods for the apt nick name; READ MELTDOWN). Peter Schiff's earlier video, on the downfalls of TARP, adresses this issue nicely. These talented execs could be bought by emerging firms. But, the government is picking winners, investing in AIG. Behind the rhetoric that this is good for the American people lies the truth: people are hurt by these actions, and not even just the taxpayers. Companies, competitors of AIG, could be benefitting from AIG's downfall. But, because the gov't essentially owns AIG, they really don't have a choice but to support them. This means that the government has a vested interest in the success of AIG. The success of AIG means the loss of benefits (cheap execs, new customers) for competing companies. This, ergo, means that the government has a vested interest in hurting AIG's competitors. This is corporate cronyism at its worst...
I feel like I don't even really need to say anything to highlight the lunacy. But, this is a part of my grade so.... here goes.
First of all, I'll issue a simple appeal to reason. Should the executives that brought this gigantic corporation to the point of collapse, to the point of needing $170 billion (at least) to stay afloat, be given extra money while millions of Americans have seen their retirement accounts dwindle to 0? These execs were given bonuses so as to keep the "skilled" execs on board. Call me crazy, but I probably wouldn't consider any of the AIG execs remarkably skillful. You are REWARDING people that are the architects of a corporate failure of enormous proportions. Enough said on that front.
Now, let me highlight several economic... short comings (I'll be nice) with this government sanctioned business decision.
First of all, it is necessary to point out that the US government funded these executive bonuses. What I hear, mainly, from democrats I know is that the collapse was caused by greedy businessmen and bankers. I will save my analysis on that point for another post. However, here is an example of the government providing incentives for businessmen. The government is telling us that, no matter what the execs do, no matter if they succeed or fail miserably, they will be rewarded with millions of dollars.
This is an egregious example of an extremely important concept: moral hazard. Moral hazard was implicit in the security packaging of Fannie and Freddi; moral hazard resulted from the government bailouts of companies like AIG, the banks, the Big Three, telling us that, if you're big enough, we won't let you fail no matter how many poor decisions you make. Essentially, the government has rewarded both individuals and companies that make poor decisions. This sends the message that the government will fund you if you take horrible risks. This is moral hazard.
Secondly, these exec bonuses will keep these people at AIG. If they are truly talented, their expertise could be bought by successful firms on the cheap after the failure of AIG. But, instead, they are tied up managing a "zombie company" (credit to Tom Woods for the apt nick name; READ MELTDOWN). Peter Schiff's earlier video, on the downfalls of TARP, adresses this issue nicely. These talented execs could be bought by emerging firms. But, the government is picking winners, investing in AIG. Behind the rhetoric that this is good for the American people lies the truth: people are hurt by these actions, and not even just the taxpayers. Companies, competitors of AIG, could be benefitting from AIG's downfall. But, because the gov't essentially owns AIG, they really don't have a choice but to support them. This means that the government has a vested interest in the success of AIG. The success of AIG means the loss of benefits (cheap execs, new customers) for competing companies. This, ergo, means that the government has a vested interest in hurting AIG's competitors. This is corporate cronyism at its worst...
Thursday, March 5, 2009
Economy worsening, Obama policies are detrimental
The Dow dropped another couple hundred points today. I'm not surprised. Judging the market's wellbeing by the Dow alone, however, is rather foolish. Aditionally, a record number of Americans are behind or in foreclosure on their mortgages (including 48% of subprime mortgages). January unemployment was at 7.6% from 7.2% previously (with February's stat coming soon, likely to be higher). Inflation rose 4 times as much as the Fed predicted it would (surprise, surprise) and the banks still won't bump up the loans.
On a side note, I think it's hilarious that the government criticized the banks for being too lenient in their lending policies, when the government used GSE's, the Community Reinvestment Act, lower interest rates, and etc. to encourage more lending. And now, after too much lending exploded in their faces, the government is now criticizing the banks for not lending enough. It makes sense to not lend when the prospects or quick recovery are increasingly bleak. The government is, again, trying to push banks into extending their lending practices to people that they wouldn't otherwise give loans to. This caused the problem. Doing it again will not fix the problem. Banks are naturally tight in their lending policies because they judge the economic landscape as being very troublesome. It isn't because they're run by horrible rich people who hate the economy... they just don't think that it's a good time to be lending. This is natural. This is what we want as an economy. Too much credit, encouraged by artificially low interest rates, leads to the boom and bust cycle (as argued by Hayek and the Austrian School).
But, back to the whole idea of government intervention. I direct your attention to the oft-forgotten recession of 1920-21.
This is a topic covered at length in Tom Woods' book Meltdown, about which I wrote a review for the YAR. I encourage you all to buy the book (it's fantastic) and check out the review in the next issue of YAR.
This recession is often overlooked by economists. Why? The answer is quite simple... it's because it undermines the policies they are employing.
In this recession, price levels fell far more sharply than in the Great Depression. Prices of retail goods declined by 36.8 percent for 1920-21, which was the the largest one-year decline on record. By many estimates, the economy suffered a decline significantly worse than it suffered at the start of the Great Depression. Why, might you ask, did the economy recover completely only 22 months after the recession's bottom?
In this recession, the government's response was extremely minimal. Unemployment rose from 2.3% in 1919 to 11.9% in 1921. However, government rescue procedures were not enacted, other than marginally increased support for the unemployed.
There are several reasons for this, as explained by Woods and the Austrian School. Firstly, when the government intervenes minimally in the economy, it allows the economy to follow its natural recovery mechanism. Wages are allowed to fall, bad assets are purged, and unproductive business ventures are slashed.
However, in the current crisis, the Obama Administration is doing all that it can to keep these bad assets on the books. This slows the recovery process down to a crawl. Instead of letting bad companies go bankrupt (e.g. Chrysler, GM, AIG, etc.) the government keeps these unprofitable companies afloat. What's wrong with that? Well, isn't it obvious? The government has paid out billions to all of these companies. Did that work???? Absolutely not. Within only a few months, each of them came back to the government to ask for even more money, on occasions even more than the initial recovery. Bad companies, bad assets, bad business procedures (i.e. loose lending, malinvestment) need to be purged. This can only happen if the government lets it happen.
Every single action that the government has enacted has failed. I have illustrated TARP's failures below. I illustrate the failure of the big three bailouts above in extremely small detail (though this failure was already evident). The jury is still out on the bailouts, the new $200 billion consumer credit plan (...yeah), and the continually changing effort to make the banks lend again (buying bad assets, making a government-run bad bank, etc.).
The government has already committed ~$2 TRILLION dollars of taxpayer money to combat these problems. People deserve to know that it's not just the strategies are failing, it's that these strategies are actually slowing down the recovery process.
NOTE: The 1920-1921 recession economy had much more wage flexibility than is present in our economy. This is one of the reasons for the quick recovery. However, we don't have this wage flexibility by government design.
On a side note, I think it's hilarious that the government criticized the banks for being too lenient in their lending policies, when the government used GSE's, the Community Reinvestment Act, lower interest rates, and etc. to encourage more lending. And now, after too much lending exploded in their faces, the government is now criticizing the banks for not lending enough. It makes sense to not lend when the prospects or quick recovery are increasingly bleak. The government is, again, trying to push banks into extending their lending practices to people that they wouldn't otherwise give loans to. This caused the problem. Doing it again will not fix the problem. Banks are naturally tight in their lending policies because they judge the economic landscape as being very troublesome. It isn't because they're run by horrible rich people who hate the economy... they just don't think that it's a good time to be lending. This is natural. This is what we want as an economy. Too much credit, encouraged by artificially low interest rates, leads to the boom and bust cycle (as argued by Hayek and the Austrian School).
But, back to the whole idea of government intervention. I direct your attention to the oft-forgotten recession of 1920-21.
This is a topic covered at length in Tom Woods' book Meltdown, about which I wrote a review for the YAR. I encourage you all to buy the book (it's fantastic) and check out the review in the next issue of YAR.
This recession is often overlooked by economists. Why? The answer is quite simple... it's because it undermines the policies they are employing.
In this recession, price levels fell far more sharply than in the Great Depression. Prices of retail goods declined by 36.8 percent for 1920-21, which was the the largest one-year decline on record. By many estimates, the economy suffered a decline significantly worse than it suffered at the start of the Great Depression. Why, might you ask, did the economy recover completely only 22 months after the recession's bottom?
In this recession, the government's response was extremely minimal. Unemployment rose from 2.3% in 1919 to 11.9% in 1921. However, government rescue procedures were not enacted, other than marginally increased support for the unemployed.
There are several reasons for this, as explained by Woods and the Austrian School. Firstly, when the government intervenes minimally in the economy, it allows the economy to follow its natural recovery mechanism. Wages are allowed to fall, bad assets are purged, and unproductive business ventures are slashed.
However, in the current crisis, the Obama Administration is doing all that it can to keep these bad assets on the books. This slows the recovery process down to a crawl. Instead of letting bad companies go bankrupt (e.g. Chrysler, GM, AIG, etc.) the government keeps these unprofitable companies afloat. What's wrong with that? Well, isn't it obvious? The government has paid out billions to all of these companies. Did that work???? Absolutely not. Within only a few months, each of them came back to the government to ask for even more money, on occasions even more than the initial recovery. Bad companies, bad assets, bad business procedures (i.e. loose lending, malinvestment) need to be purged. This can only happen if the government lets it happen.
Every single action that the government has enacted has failed. I have illustrated TARP's failures below. I illustrate the failure of the big three bailouts above in extremely small detail (though this failure was already evident). The jury is still out on the bailouts, the new $200 billion consumer credit plan (...yeah), and the continually changing effort to make the banks lend again (buying bad assets, making a government-run bad bank, etc.).
The government has already committed ~$2 TRILLION dollars of taxpayer money to combat these problems. People deserve to know that it's not just the strategies are failing, it's that these strategies are actually slowing down the recovery process.
NOTE: The 1920-1921 recession economy had much more wage flexibility than is present in our economy. This is one of the reasons for the quick recovery. However, we don't have this wage flexibility by government design.
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