Monday, October 27, 2008

There is no tooth fairy...

We've watched the arguments both for and against the bailout of Wall Street discussed on a variety of blogs. When I came across this piece from the Wall Street Journal, Age of Prosperity is Over I wanted to point it out for those of you who do not read RealClear Politics on a regular basis. Part of the piece by Arthur Laffer that I found especially noteworthy:
No one likes to see people lose their homes when housing prices fall and they can't afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house's value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.

But here's the rub. Now enter the government and the prospects of a kinder and gentler economy. To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy. And the government doesn't create anything; it just redistributes. Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.

If you don't believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they'll do with Wall Street.

Some 14 months ago, the projected deficit for the 2008 fiscal year was about 0.6% of GDP. With the $170 billion stimulus package last March, the add-ons to housing and agriculture bills, and the slowdown in tax receipts, the deficit for 2008 actually came in at 3.2% of GDP, with the 2009 deficit projected at 3.8% of GDP. And this is just the beginning.

For those of you really into the financial aspect of the Federal Government, I also recommend this piece. Something that is pointed out that few seem to be talking about:
I had a call from a reporter this week asking me to explain why the Fed raised the interest rate paid on reserves. I think she was expecting a 30-second sound bite, but instead we went back and forth for about 15 minutes and I'm not sure even then that I succeeded in getting the basic idea across. At that point she asked me, "Do you see it as an encouraging development that the Fed has taken this step to address the credit crunch?" My immediate answer was no. It's not an encouraging development because it means that the heroic efforts that the Fed has taken previously weren't enough. The Fed's first $100 billion didn't do it. The Fed's first $1 trillion didn't do it. Having the Treasury take over the $5 trillion in debts and guarantees of Fannie and Freddie didn't do it. The Treasury's $3/4 trillion rescue/bailout package didn't do it. And another quarter trillion will?

1 comment:

Jason R. said...

One of the all too unfortunate revelations in all of this is seeing how Barney Frank and Chris Dodd aren't getting the credit that they so deserve for failing to regulate these banks.