The Soviet-trained economist Vassley Lientoff uses the analogy of when the farm economy was moving inexorably from draft horses to tractors. “It did no good for the horses, if they could talk,” Lientoff wrote, “to plead that they would work twice as long for half as many oats—the farmers were going to convert anyway.”

Sure. And we can’t cut those guys out while we depend on foreign oil.

The obvious solution to my mind is for our rich people to convert their money to euros, move to monaco or wherever, and then invest in the USA when they see investments that are worth making. The more they do that the less our wealth inequality gets. Is there something I’m missing here? Do they think it’s the US military that keeps monaco from getting invaded?

So the US government solution is to give away a large fraction of a trillion dollars to the people who got caught with the mortgages when foreigners stopped buying them. That’s fine for the institutions that get the money. What about the trade balance etc? Is it too late to get foreigners to go back to giving us their money in the hope that someday they might get even more back? What should we do instead about that?

“Give everybody a raise and then give them something to buy with their money..” That was Henry Ford’s MO after all, wasn’t it? The problem with China, however, is that their agriculture sector is so huge, population-wise, yet so inefficient, that it would be touch and go if their infra-structure could accommodate them fast enough to forestall general unrest. Besides, China has a rapidly shrinking ground water supply which will impose constraints the US never faced at a similar stage in it’s development. China is also now a net importer of grains and foodstuffs for the first time in it’s history, not a pleasant prospect going forward. They are going to have some real problems.

As far as the “dead” housing market goes, it could easily revert to the old days when Banks and S&Ls held and serviced them in their own accounts. Underwriting standards would be higher, but failure rates lower. The problem now is that even formerly “credit-worthy” businesses and individuals are being frozen out of access to credit.
This “running scared” credit squeeze problem is sparate from, but connected to, the long-term mortgage problem which, after all, only affects less than 6% of all mortgages extant. We won’t have a “big recession”/depression if access to credit is re-established. The link I provide@88 provides much insight, but besides the fact that even more houses will be foreclosed and businesses fail in a credit squeeze, there are other factors at work as well. This “crisis of confidence” has as it’s backdrop the failure of Congress to pass a meaningful energy bill and meaningful trade agreements on a number of fronts. This also unsettles markets in general, but more importantly has real negative economic consequences for our basic main street economy.

The ultimate long-term quandry for our economy is that as long as there is a Bolivian tin miner still alive willing to double his salary
from fifty-cents/day to a dollar/day assembling washing machines for Whirlpool, no one’s job in America is safe. The answer is a better educated populace and more highly trained and skilled laborers, but at present even that is no panacea as PhD’s in India are perfectly willing to write computer programs at a third the salary of their American counterparts. I have further thoughts but not the time…..

Suppose that we collapsed and china kept right on producing the things they made for our market, only instead of shipping them to us they piled them up in the gobi desert. What would they lose? Only some depreciating dollars that they have no particular use for.

Suppose that instead of piling it in the desert they sold it to their own people. Would that increase discontent? Give everybody a raise and then give them stuff to buy with the money….

Seriously though, the reason most of the world will continue to buy our debt (T-Bills, CMOs, whatever) is that our economy is still stronger and far larger than theirs and, with the exception of China and India, growing faster to boot.

I’m an amateur at this stuff. Suppose you were to measure US economic growth deflated against our depreciated dollar instead of against our bureaucrat-measured CPI. When I look at currencies that are not pegged against the dollar—the hungarian forint, the euro, the philippine peso, etc—they generally show about a 1/3 reduction in value for the US dollar between around 2004 and 2008. Though the dollar has gotten more valuable during 9 months of 2008, maybe out of hope that something will change? Again, as an amateur I wouldn’t definitively say that the value of the dollar is a good measure for relative inflation. But it suggests that our economy hasn’t grown all that fast.

Let’s look at that argument again. There are places in the world where people are making lots of money, but they can’t re-invest their money where they’re making it because their economies are too small to absorb it. So they have to invest in the USA. And they have to believe their money is safe here. So we need the bailout to persuade them that the USA isn’t a giant ponzi scheme? And we hope that will be enough to reassure them?

I would again redirect you to my comments on the other post about the problems engendered by the mark to the market rule. Change that back to the pre-Enron rules and the problems of insurance and raising capital will largely go away.

Would they really? If we have a big recession a lot of people will be laid off. The older ones will never get jobs as good as the ones they lost, even after the recession. Every reason to think that lots of houses will be foreclosed. Will foreign investors keep buying US housing debt on the assumption that we won’t have a recession? I guess if the US government guarantees the debts then it would be like buying T-bonds, huh?

No, wait, the US housing market is dead for the moment, isn’t it? Again I’m an amateur and I tend to assume logical things that I don’t know how to look up. There aren’t a lot of new house-buyers taking out new loans? There aren’t a lot of foreigners buying up US mortgage tranches? There are a bunch of US sales companies holding existing mortgages they can’t sell to anybody?

It looks to me like that train has left the station. We can no longer finance our increasing foreign debt with housing loans. We have to find some other way.

Zamfir,

You should know by now that, historically, the distinctive feature of left-wing socialism is the production and equal distribution of poverty. Whereas fascism is characterized by the production and redistribution of wealth to the top. You tell me which one fits “right wing socialism.” But this is a pointless distinction. If by “liberal socialism,” you mean things like the democratic party and paved highways, then that’s just “right wing socialism lite.” Actually, liberal socialism is the production of wealth phase, which prepares for the right wing redistribution to the top phase.

Never trust a man with a pan flute.

China’s leaders are perfectly capable of sacrificing the living standards
of hundreds of millions of it’s people if they thought it would eliminate the U.S. as a superpower. I say this with some confidence as the leadership for the Peoples Army is already on record within the last year as stating that it would be worth losing over 600 million people if they could kill 300 million Americans in turn in a nuclear exchange and remove us permanently as a “threat.” Having said that, short of a nuclear exchange, China has to decide if the job layoffs and high rates of unemployment that would come with wrecking the U.S. economy are worth the risk of widespread discontent with attendant risks to their own power structure. There are already two China’s: the thriving coastal manufacturing areas and the poverty of almost 700 million peasants in the interior. Already there are daily widespread peasant confrontations with the authorities over practically everything—schools, healthcare, you name it—the reporting of which is as widely suppressed as are the protests themselves. Would the leadership of the PRC risk the chance that growing discontent would topple them before the U.S. buckled? Only the Shadow knows, but it would be a big risk and the leadership is nothing if not cautious even if iron-fisted. (Btw, speaking of shadows, one of the best works ever done in understanding the nature of the Chinese regime is an insightful 1977 book [forgotten now but widely hailed at the time and still valid] entitled “Chinese Shadows” by Belgique journalist Simon Leys)

As to the question you posed in your first para., I would again redirect you to my comments on the other post about the problems engendered by the mark to the market rule. Change that back to the pre-Enron rules and the problems of insurance and raising capital will largely go away.

Virgil, I reread your post. It made some sense. But I haven’t seen a response from you to the various objections people made. Like, why is it that if most of the banks etc are actually solvent, if most of the mortgages are sound, that they can’t get insurance or other traditional methods to handle the problem?

Here’s my first guess why the properties are worthless—it’s very hard to find out how many of them will default, and which ones. Also, if we do get a deep depression then probably 25+% of them will default. Maybe 90%. Buying mortgages these days means betting we won’t have much of a recession. Maybe there are some institutions that can tell which of the mortgage papers are worth what. But those aren’t the institutions that would be buying, and the ones who buy can’t trust the ones who know.

Here’s a guess at deeper reasons. The USA has had a negative balance of payments for some time. In the old days, we’d be selling gold to pay for it, but we mostly ran out of gold a long time ago. We’re selling US home mortgages to foreigners because that’s what we have available to sell. We convinced them there was very little risk. That’s why the mortgage stuff is so important—it’s financing our balance of payments deficit. And the mortgage papers that are held by US institutions are held by US institutions primarily because they are the ones that haven’t been sold to foreigners yet. But foreigners no longer believe that the risk is small, and they have stopped buying, and the US institutions that planned to sell to them have the paper stuck to their own hands.

Here’s a deeper reason still. Suppose that china is waging economic warfare against the USA. (The difference between economic warfare and them acting more or less at random is only that if we assume intention then the actions get clearer.) They pegged the renminbi to the dollar at a low rate, so they could sell to us and we couldn’t sell to them, and they collected dollars. They were essentially giving away material stuff to us—they gave us stuff and we gave them dollars they had no immediate use for. They had the low-paying jobs, we had the products those jobs created. We had a lot of structural unemployment etc. Lots of unproductive employment—we built and staffed prisons, we put people in the prisons for the guards to guard, we got lots of real estate agents and stockbrokers etc. Lots of people on disability, lots of people in drug abuse programs, you name it.

Their physical economy grew fast, ours stagnated. Our growth was in sales of financial instruments. In 2005 we put five aircraft carrier groups off the chinese coast as a sort of general warning they better not mess with us. Would we do that today? They are winning the economic war. In 2005 we thought we were a superpower. Will we think that in 2010?

One of the reasons the money is not there to bail out our banks etc is that the big money is now foreign money. Why should they do it? It would be investing in the losing side of a war.

When the dollar depreciates, the price of oil goes up—for americans. So the price of our exported corn, wheat, wood products, etc go up somewhat. But not our financial instruments. The salesmen might use some oil driving to work, that’s all. If we can’t sell those to foreigners our foreign exchange problem gets a lot worse.

So, if china depends on our liabilities for security to run their economy, they ought to prop us up. But if they think of our debt to them as a weapon in their war against us, then they can expend it however their strategy works. If they can drive us into hyperinflation their dollars become worthless—but we are no longer a superpower. If they give us one financial crisis after another, whenever we get too uppity, they might figure they’re getting value for their ordnance. And really their economy doesn’t depend on ours. They can buy oil, and make things, and sell them on credit to whoever they want. They can even sell stuff to their own people—why not? They want the oil we import, and the worse we do the more of it they can afford. If we were to become a net oil exporter and our navy stays at dock at home, why would they complain?

Now suppose that nobody’s waging economic warfare against us. Say we’re doing it to ourselves. How does that change things? Why should the rest of the world keep subsidising us, when there’s no sign that we’ll ever produce enough to pay off our debts?

When there’s a famine people buy food with money, while they have it. Then they sell their gold and jewelry. Eventually it reaches the point they’re selling their spare clothes. We still have plenty of food—it gets expensive because wheat is fungible, the more the dollar depreciates the more we sell on the world market. We’ve reached the point we’re selling our houses. It hasn’t reached the point we sell our used computers etc to algeria etc. But it could.

The root cause of the crisis is that we have no better way to plug our negative trade balance than to sell our houses. And the foreigners have just now noticed that they don’t want them.

Why all in now with the current proposal? In the immortal words of John Mitchel: “If you’ve got to eat shit, do it all in one gulp, don’t eat it piecemeal in small bights with a spoon.” Same reason one rips off
adhesive tape in one fell swoop, rather than slowly peeling it from the skin. Besides, giving power and money to the FED and Treasury now rather than piecemeal authorization is the difference between deterrence and defense. Defense is what you do after deterrence fails.
Power and money upfront will serve to deter the panicked and the crazies from all running for the exits at once secure in the knowledge that a backstop is in place. If the reinforcements are fed into the battle on a piecemeal basis, they will be overwhelmed and defeated in turn by the sure-to-grow-larger size of the problem.

Should executives have their golden parachutes eliminated and their salaries cut as part of the bargain? Hell yes, they’re all rich anyway-make them take their salaries in stock options tied to the performance of the reformulated commercial/financial institutions they will head. This plan will help EVERYONE—both the big kids
and the little people alike. Are some going to unfairly benefit and some be unfairly punished? Yes, but not by as much as any alternative one can think of that can be formulated in time to head off panic. Patton said it best: “A good plan, executed today with great speed and violence is better than the perfect plan executed six months from now.” We don’t have six months. Can’t fiddle while Rome burns, etc.
Congress has a vital role to play in designing a long-term regulatory structure, but not in acting as a fireman. Do firemen “deliberate”
while the building burns? You know what they say about the definition of a camel: “A race-horse designed by a committee.”

When you think about it, the solution HAS to come out of a financial committee. Does one consult submarine commanders for instructions on flying fighter jets? Florists on Battle Tank design and construction?
To even ask the question is to answer it.