Friday, September 19, 2008

Painful Choices Versus Bad Choices

The destruction of a nation of The People has likely begun. The Bush Administration has begun the Bailout of all Bailouts, as Robert Reich has commented on. What is surprising is the lack of deliberation or even debate. People seem to want the government to "do something NOW". This is a bad idea to give into the panic. This crisis started back in the late 1990s when Clinton and Congress repealed the Glass-Steagall Act. The four speculative bubbles in the last 30 years, 1987 Savings and Loan Crisis, the 1990-92 Biotech Bubble, the bubble of 1992-2001, and now the Housing Bubble of 2003-2008 are due to the gaming of the financial system by S&Ls, banks and wealthy investors, a lack of investor research, and a complete lack of regulatory oversight by the Fed, the SEC, and other federal and state agencies. It took over five years to destroy one hundred year old institutions. The survivors are looking to the government to bail them out of this mess. The "government" needs to think this through and see if it's such a good idea for taxpayers to assume all of this risk. That debt is going nowhere fast and why should the taxpayer pay for all of those bad pieces of paper? In the end, we are likely to be throwing all of that money away any way and those firms will fail regardless due to lack of investor trust and confidence, so why go down this path?

There may be no "good" solution here. We may have to choose the least painful remedy. I was looking at my retirement funds. All of them have lost 13-15% this year. The ten year yield will likely be around 2-3%, which means that I'll have lost money when inflation has been taken into account. I'd have done better to put the money in a CD or money market account the last ten years rather than mutual funds indexed to the stock market. But if I go broke, the government will not buy my bad debt or bail me out, so why bail out Wall Street? I think Reich has an interesting idea that should be pursued. Stiglitz has other ideas, but both come down on more regulation. Almost all economists are beginning to agree that the investment banking community will have to be regulated and their dealings made more transparent. Too little, too late, I'd say. We'll be repairing the last disaster, waiting for the next one to strike as time passes and people forget the bad days and believe them past, so they weaken regulations and oversight leading to the next speculative bubble and financial market failure. It's also quite possible that we will no longer be a superpower after this mess is over. The geopolitical ramifications of that are yet to be known or felt.


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