This is a simple point.
Suppose the government is going to give away money to fix the economy. Yes, yes, I know. They are making "investments" and guaranteeing "undervalued" assets and all of that. But let's cut the crap. They are giving away money on a vast scale. Even the Obamawonks estimate a net loss of 33% for every dollar "invested".
So, the government is going to give money away to fix the economy. Consider three options: It can give money to the people who are owed money by troubled banks, for example by guaranteeing bank debt. That makes the creditors whole, but leaves banks and the debtors dangling on a fish-hook. We can keep giving money to banks, who will eventually find themselves reasonably capitalized (as long as the rate at which taxpayers supply net wealth is greater than the rate at which insiders steal or gamble it away). But that still leaves the people who owe the banks money high and dry, teetering between insolvency and personal bankruptcy.
Finally, we can give money to the individuals and firms that are in debt, so that they can repay the banks, which then become solvent as their toxic assets are made "money good", which enables them to payoff their creditors.
We're talking about the same amount of money in all three cases. But giving money to the ultimate debtors bails out three parties for the price of one.
Paul Krugman has speculated that one reason why World War II seemed to absolve the United States of its depression is that wartime austerity and inflation had cleansed the balance sheets of households and businesses. If we are bailing out various groups in order to jump start the economy, wouldn't we want to repair as many broken balance sheets as possible on a per-dollar basis? Call it balance sheet bang for the bailout buck.
And don't go all Rick Santelli on me about the injustice of paying for your asshole neighbor's granite countertop. We are bailing out a banking system that served as a vast criminal conspiracy built around plausible deniability and limited liability. We are bailing out "savers", who not only demand to be made whole by the government on risky loans they chose to make to banks for profit, but are smugly self-righteous about it, like it's their "right" because after all they were the "prudent ones". Of the three groups we might bail out, these crybabies and criminals are no more deserving than some nearly-broke bastard who believed his financial adviser, his banker, his mortgage broker, and the Wall Street Journal op-ed page when they told him that a cash-out refi was as good as money earned, and that granite countertops were a luxury that would pay for themselves. Don't get me wrong — I'd rather we could bail out no one, just do a rip-off-the-band-aid kind of reset and let everybody take their lumps. But households and firms in debt are by far the most sympathetic villain in this horror show we wake up to every day.
In the end, it is households and firms that drive the economy, not financial intermediaries, and most households are not large net savers. If we're going to spend large sums of money on bailouts, and we want an economy in which people have confidence enough to work and spend, and businesses the have ability to invest, why would we not give the same bail-out money to end-debtors, and let it trickle up to banks and their creditors, repairing broken balance sheets at every step along the way?
|Steve Randy Waldman — Wednesday March 11, 2009 at 3:45pm||permalink|