A Step in the Wrong Direction

Submitted by Rich Toscano on October 7, 2008 - 10:22am

In response to the prior column on the latest bailout, some people asked for more specific thoughts on the Paulson Plan and what would have happened if it hadn’t been passed.

In truth, I don’t actually know what would have happened had the plan not gone through. Most of the people offering predictions on the topic don’t know either; I’m just admitting it.

I do know this. Our economy has become far too dependent on finance and debt-fueled consumption. We need to return to our economic roots of production and saving. This shift will be painful, and one could make a case for some sort of government intervention to ease the transition.

But the Paulson Plan, the central focus of which is to prop up the prices of financial assets that no private buyer wants to touch, is not intended to ease the transition. It is intended to prevent it.

The plan is thus a giant step in the wrong direction. But this is exactly what you’d expect given that it was developed by the same group of people, using the same flawed analytical framework, that has misdiagnosed the problems all along.

(written for VoiceofSanDiego.org)

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Submitted by urbanrealtor on October 7, 2008 - 11:23pm.

I usually reserve private commentary for Rich's columns to more private communications. However, I think this column is a step in the right direction. Specifically, I think that this is more thoughtful and constructive than last weeks.

I agreed with everything in last week's column (with the exception of the distracting hyperbole) but felt that it suffered from the weakness of being purely critical in its analysis.

This is the kind of constructive (as well as critical) analysis that I came to enjoy from Rich's columns. Well done.

Submitted by SD Realtor on October 7, 2008 - 11:53pm.

I think the key to the analysis you presented Rich lies in the authors of the plan. The plan is miserable and is authored by someone who has been employed by Wall Street and will be employed by Wall Street when he leaves. The plan then gets endorsed by those who have been party to the problem over the past decade.

What really irks me is that there was a clear opportunity here for those in power to seek out opinions from more respectable and knowledgeable folks out there to construct a plan that could indeed have pointed us in the right direction. Surely a panel of experts with thoughts ranging from Roubini types to Buffet types, could have been summoned to really come up with an analysis that would have served this country well. Instead all we have done is... well... basically nothing in my eyes. Come on, it is not like the Fed hasn't been pumping billions into the system the past year right? What did that do? Nothing. Okay so let's just directly intervene and help the books of companies hand picked by Paulsons buddy. Yeah that's great. 700B here... 1T there... A little pork for selected congressmen to sway the votes...

Oh well... again, there really was a chance here to do something that would have helped. Unfortunately the government f'd it all up... again.

Submitted by urbanrealtor on October 8, 2008 - 7:45am.

SD Realtor wrote:

Oh well... again, there really was a chance here to do something that would have helped. Unfortunately the government f'd it all up... again.

I am not generally as anti govt as most here. However, SD's observation has become something I have started muttering to myself a lot lately.

Submitted by cr on October 8, 2008 - 10:11am.

I think further evidence of the ignorance of the powers that be is the Fed slashing rates further.

Too much debt got us here, as Rich said. Encouraging households and businesses to take on more debt to get us out simply won't work.

Submitted by Liz357 on October 8, 2008 - 1:15pm.

Live below your means

I agree that there could be a painful shift from living above our means to living below our means.

I disagree that Paulson's plan is a step in the wrong direction. I think it's akin to a DIP Facility (debtor in possession) which is used in Chapter 11 proceedings. It's the attempt at an orderly liquidation as opposed to everyone running for the exits in the theater.

Paulson did not have time to come up with a well vetted plan. I think you guys who are writing have no freakin' clue how bad the markets are.

Please come up with solutions and stop patting eachother on the back at how right you are.

Submitted by Rich Toscano on October 8, 2008 - 2:29pm.

> I think you guys who are writing have no freakin' clue how bad the markets are.

Well that's a first... for years we were chicken littles who couldn't realize how good things were. Now we have no "freakin' clue" how bad things are. You just can't win with this blogging thing.

Anyway, I guess you missed it but the "solution" I offered in the first article was to address and correct the flawed analytical framework that A) got us here and B) continues to be employed in trying to get us out.

That would do a lot more long-term good than propping up MBS prices.

Rich

Submitted by cr on October 8, 2008 - 3:28pm.

Liz357 wrote:
Paulson did not have time to come up with a well vetted plan. I think you guys who are writing have no freakin' clue how bad the markets are.

Please come up with solutions and stop patting eachother on the back at how right you are.

So we should just all jump on board with the only one they can come up with?

Plenty of solutions have been mentioned but here goes: let home prices correct, stop encouraging debt, don't guarantee the value of used toilet paper, and for crying out loud stop spending taxpayer money we don't have.

Instead, balance the budget while lowering taxes. If you're going to spend any money, use it to create jobs. Reward saving and frugality, not reckless risk taking and lying. Incentivize manufacturing and energy independence. Get rid of the unofficial two party system. Require finance 101 in High School and start by sending every politican back to learn it on their own dime. That's our money too.

That's a start.

Submitted by teatsonabull on October 8, 2008 - 3:47pm.

Liz357-

Many of us here KNEW how bad the markets were going to get. So did Paulson (and every single other fat-cat on Wall Street and in Washington) There was plenty of time to come up with a "well vetted plan" and apparently this is their version.

Now, back to our regularly scheduled schadenfreude....

Submitted by DWCAP on October 8, 2008 - 4:50pm.

Liz357 wrote:

Paulson did not have time to come up with a well vetted plan. I think you guys who are writing have no freakin' clue how bad the markets are.

When I hear statements like this I always think of Animal house. First there is the scene where they decide what they need is a totally pointless and senseless act in this time of adversity. SNL should parady this current crisis with that one. (I know another pig already brought this up.)
Also, they should include the scene where Flounder is told "You fucked up. You trusted us." Cept Flounder could be a J6pk and otter could be played by any of the "leaders" in this mess. (Bush/Ben/Paulson/CEO cronies on Wall street.) It would be especially poinent with a trashed American car in the backround.

Liz357 wrote:
Please come up with solutions and stop patting eachother on the back at how right you are.

Uhh, if you read just about ANY of the threads or Rich's articles youll find all kinds of other ideas.

Submitted by patientlywaiting on October 8, 2008 - 7:48pm.

I believe one of the problems is that we let institutions get too big to fail.

Any company that is too big to fail should be broken up.

BofA and JP Morgan are becoming too big to fail. They will take risks for private profits and when things don't work out, they'll blackmail us for a bailout.

Submitted by Arraya on October 8, 2008 - 8:43pm.

cooprider wrote:
I think further evidence of the ignorance of the powers that be is the Fed slashing rates further.

Too much debt got us here, as Rich said. Encouraging households and businesses to take on more debt to get us out simply won't work.

Ignorance or plan? It makes us all feel better that we understand this better than TPTB, but really are we that naive. I think were you are confused is you think the Fed has the American peoples best interest at heart. If you think of them as a private international entity that tries to maximize profits, then pushing their debt out there makes sense. The funny part is the debt that is defaulting en masse was money that was created out of thin air. What a gig that is, huh? Tell people that your digital money is worth something then when they can't pay it back, partially due to faulty economic policy, you get their property. So why again do we let this private institution set our monetary policy that is clearly a failure?

Submitted by urbanrealtor on October 9, 2008 - 9:08am.

Rich Toscano wrote:
> I think you guys who are writing have no freakin' clue how bad the markets are.

Well that's a first... for years we were chicken littles who couldn't realize how good things were. Now we have no "freakin' clue" how bad things are. You just can't win with this blogging thing.

Anyway, I guess you missed it but the "solution" I offered in the first article was to address and correct the flawed analytical framework that A) got us here and B) continues to be employed in trying to get us out.

That would do a lot more long-term good than propping up MBS prices.

Rich


Rich, she has a point or two.
The change in analytical framework is a lifestyle change not a defibrillator. It makes lots of sense but does not address much in the way of short term back stop or liquidity remediation. To use another hackneyed expression, its strategic but not tactical. I guess the real concern is whether or not the immediate issues should be dealt with at all. If some believe that they will just cut their personal spending and weather the storm thats fine. But most of the US (and world) does not subscribe to this sort of rugged individualist view that the markets need to just be allowed to drop and rebuild. Thats why most countries built central banks to begin with. (How many global powers can you think of without central banks?)
Incidentally, this is aside from whether there will actually BE financial band-aids from global central banks. The funny corollary of global liberalism is that in most countries, massive economic downturn leads to instability in the ruling regime. This is why Hoover and Weimar both went away in 1932. Regimes need to minimize downturn and challengers will (and need to) exploit it. Any regime (elected with ballots or guns) needs to tend to its people's needs.

Submitted by Rich Toscano on October 9, 2008 - 10:12am.

That is a good distinction Dan. However, I clearly stated in the original article that I am not interested in playing the "here's MY fantasy short term tactical bailout" game. Everyone in the world is doing it and meanwhile there's this other issue (the strategic element) that, while even more important than the long term, nobody at all was talking about. So I thought it was a better use of time and more interesting to write about that second thing.

Then everyone asked about the Paulson plan in specific so I provided my thoughts such as they are. But as I said in this article, I am not against easing the transition to where we need to be... I am against fighting it.

Rich

Submitted by cr on October 9, 2008 - 10:17am.

Arraya, If you've read anything else I've said about Bernanke you know I think they couldn't care less about the public. Where they are ignorant is where you said "The funny part is the debt that is defaulting en masse was money that was created out of thin air."

Too much debt got us into this mess. By slashing rates all the Fed is doing is encouraging more borrowing. That's the entire problem to begin with.

I don't believe they fully understand that, or if they do, they choose not to operate in a manner to remedy it. They've centered our economy and now the world's around debt, with no regard to the ability to pay it back.

Call it what you will, but adding more debt to a debt fueled fire, planned or not is short-sighted, impulsive, and, well... stupid.

Submitted by CA renter on October 9, 2008 - 7:20pm.

Call it what you will, but adding more debt to a debt fueled fire, planned or not is short-sighted, impulsive, and, well... stupid.
----------------

Exactly. Have you also noticed how the media are cyring about all the retirees (current and future) who have lost so much money in the stock market? Correct me if I'm wrong, but shouldn't they be in fixed income, largely Treasuries and CDs?

Herein lies the problem. Nobody could have lived off the interest rates of recent years, so they were FORCED to get into more risky investments -- dividend-producing stocks, corporate debt, mortgage paper (my mom had TONS of it before she passed away), etc.

This is the problem with artificially low interest rates, it pushes money further out on the risk curve...at exactly the wrong time.

Rich is 100% correct! We need to solve the problem of **too much debt** across the entire spectrum. Counterintuitive as it may seem, we need to allow the market to determine interest rates (which would show double-digits in many cases right now), and allow debt to be destroyed via foreclosures and bankruptcies.

BTW, Liz...not sure where you've been all these years, but Rich was one of the first bloggers trying to get the word out. We knew full-well what the problems were...years ago, thanks to Rich.

Thank you, Rich, for your most excellent site!!! Your hard work and insights are much appreciated.

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