I was going to post on the money we are pouring into this bailout compared to what we get for green investment. But John McGrath said it for me:
...The very first things Barack Obama should do when inaugurated is 1) propose legislation to the U.S. Congress creating single-payer healthcare in America, and 2) initiate a massive program to get America off coal, oil, and natural gas. Expensive, you say? Big government, you say? Bite me. If the U.S. taxpayer can be put on the hook for billions to no purpose at all, while the arsonists responsible for this mess escape without so much as a night in prison, then we can afford pretty much any amount of big-government project you can name. (And, btw, Iraq is still slated to cost $3 trillion plus...)
The justification here, it seems, is that Wall Street needs to be "recapitalized," which in plain English means the treasury is going to give banks hundreds of billions of dollars for chunks of big shitpile. Fuck me, if you want to give somebody billions of dollars for nothing I could probably set up a solvent, competent banking system too. The difference is I haven't just spend the last decade running businesses into the ground, which apparently disqualifies me from running a Fortune 500 company, or a Republican presidential campaign.
When I say this is money being thrown down a hole, somebody is sure to object that this is, in fact, a necessary rescue. The equivalent of calling in the fire department. No, it's not. This is the equivalent of spending years building shitty matchstick homes. Made of paper, plywood, and frayed wiring. On the side of a volcano. And then calling the fire department to rescue the poor, innocent people who could never possibly have predicted they were heading towards disaster.
Here's my alternate bailout proposal: Instead of the trillion dollars that it's now estimated the U.S. is going to spend getting out of this mess, how about we let Wall Street burn and spend that money rebuilding the actual economy? On today of all days, don't tell me the U.S. can't afford high-speed rail or solar power. The government can charter what ever GSEs it needs to get through the immediate crisis, and in the meantime if Wall Street collapses entirely they'll deserve every bit of it and the supply of donations to the Republican party will dry up appreciably. I call it win-win.
Top 25 reasons to give a damn about climate change
Cash for Clunkers brought us ... more clunkers!
A $4 billion push to make affordable housing green
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Jon Rynn Posted 12:41 am
22 Sep 2008
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Sean Casten Posted 1:04 am
22 Sep 2008
Don't get me wrong: we've had lousy government regs that led to the financial meltdown, and I certainly don't support all of our actions to respond. And yes, I'd rather see government dollars going towards pro-active solutions to the public good than reactive solutions to the crisis du jour.
That said, the whole money-for-corporate-fatcats-screwing-the-little-guy is nonsense. The government is not bailing out banks so that they can boost bank CEO bonuses. They're bailing out banks because our entire economy depends upon solvent banks for growth. This means that your job, your raise, your ability to buy a home are all put a risk when the banking industry comes down. Or, more broadly, your business plan to build a greener world is at risk if it can't get capital.
There is much to criticize in the tactics that Washington is using, and it's failure to honestly assess it's own complicity in getting us to this point. But let's not oversimplify this as sugar-coated populism. It's a much richer story than that, as we all stand to lose if the banking industry collapses.
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stevenearlsalmony Posted 1:08 am
22 Sep 2008
Somehow the family of humanity has got to find more effective ways of communicating about global threats to environmental health and impending dangers to human wellbeing that are being perpetrated before our eyes by the self-proclaimed "Masters of the Universe" among us. Good people are not saying loudly, clearly and often enough what they know to be true....not speaking truth to power.
Politicians are posing for the public and pandering to those with great wealth; investment brokers are devising pyramid schemes, skimming millions for themselves and "breaking" the central banking system; and the mass media is turning a blind eye to the entire mess.
Such woefully inadequate leadership needs to be named, shamed and replaced.
The family of humanity could soon, very soon, be confronted with an economic and/or ecological wreckage of an unimaginable kind; but, because good people are not reasonably and sensibly communicating with one another, the chances for taking the measure of certain ominously looming global challenges and finding adequate solutions to them are diminishing day by day.
Steven Earl Salmony
AWAREness Campaign on The Human Population,
established 2001
http://sustainabilitysoutheast.org/index.php
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Jon Rynn Posted 1:11 am
22 Sep 2008
Can't the government be the "lender of last resort" in the case of short and medium-term loans, and let the banks/institutions that are in trouble go under? And if it's some banks, that's what bankruptcy courts are for, you reorganize them without the sludge, meanwhile the investors lose all their money.
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gmobus Posted 1:20 am
22 Sep 2008
They're bailing out banks because our entire economy depends upon solvent banks for growth.
Probably not thinking of it this way, but this is the real core of our problem - growth.
The world is full. We are using up natural resources at an unsustainable rate. It cannot go on.
The answer requires a larger perspective, a bigger view of how the world works (or doesn't in this case).
I recommend: Costanza, R. et al., An Introduction to Ecological Economics, ISBN: 1-884015-72-7. Classical economics cannot answer the problems.
Question Everything
George
George Mobus,
Associate Professor, Institute of Technology,
University of Washington Tacoma,
and Professional Student for Life
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Jon Rynn Posted 1:29 am
22 Sep 2008
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Pangolin Posted 2:46 am
22 Sep 2008
The economic model based upon infinite exponential growth has come to the end of it's leash. A nation with a surplus of empty housing and homeless people, with quad-cab pick-ups and five dollar diesel isn't thinking straight.
Giving this crew another trillion dollars with the same rules won't solve anything because they can't see the problem. Like my kid, who can't see the chip bag she left on the couch they are literally blind to the message their eyes are receiving.
They aren't going to take the money and find financial vehicles for solar panels and geo-exchange heating systems. They are going to try and finance another round of pastel mini-malls filled with chain taco shops and tea-themed Starbucks clones.
Consumer culture is about to take a huge whack upside the head as energy costs eat everybody's walking around money. Bank managers with nine-digit incomes simply don't get it; they can't.
Put the Carbon Back
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Bob Wallace Posted 3:30 am
22 Sep 2008
It's not going to be as easy to score a new house loan. Real estate values are going to rise slowly during the next few years. (Historically it takes about a decade for a new housing market bubble to inflate.)
It's not going to be a seller's market for a long time, investment money is not headed toward real estate for a long time.
Excess money is going to look for a new game, just as it did following the tech bubble pop a few years ago.
Where to go with ones more speculative investments?
Wind looks promising.
Wind is producing electricity at a very competitive price. Building a track record. Fossil fuel electricity is continuing to rise in price, and will take a quick jump up if the dollar falls in value.
Want to be even more speculative with a bit of your investment money?
Thin-film solar. There seems to be pretty much universal agreement that prices are going to drop to a level that solar will compete head on with other generation schemes.
Electric cars/batteries. Almost everyone is saying that this is where transportation is headed.
The end result of the banking crisis is that we could see more investment money flowing into 21st Century products.
Direct investment is much more valuable than loaned money. You don't have to pay interest while you wait for your product to become profitable.
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Sean Casten Posted 4:12 am
22 Sep 2008
So if you have a good business that is doing good things, has never missed a loan payment but is not a Fortune 500 company, you can't get money to fund your expansion plans. Say, for example, that you're an entrepreneur who's doing a green business startup but you need money to build a plant, hire people, etc. You will face really high debt costs right now that will essentially convince you to sit on the sidelines and wait for markets to settle down.
On the other side, suppose you're looking at all the incentives out there for clean energy right now - tax credits, 2007 EISA Section 451 grants, renewable credits, etc - and you come up with a great way to finance green projects that no one has thought of before. If they haven't thought of it before, that means the banks don't have a structure for it. And the banks - having learned recently not to trust the really creative guy in the corner who's assuring the shareholders that this crazy creative structure is a good thing - are not currently in a mood to loan money for things that are creative.
This pendulum will swing back. But the two forces conspire to mean that a whole host of businesses that are (a) small and (b) creative are putting off their investment plans right now. And - headlines notwithstanding - it is these small creative businesses that are the engine of economic growth. That's a two-year seize up in job growth, investment, etc. that virtually ensures that the next President is presiding over economic malaise for the first half of their first term at a minimum.
Hope that helps. Bottom line is that while we have certainly made a lot of wrong turns to get to this point, we still have to get back on the right route.
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Jon Rynn Posted 4:31 am
22 Sep 2008
I agree with you that small businesses are generally more important than big ones, but it's the small ones that get stepped on. I keep thinking about the 15% or so returns you said need to be proposed -- I hope that the fall of the real estate/financial bubble will bring those unrealistic levels down, which will help small businesses in the long-run.
But you have to survive in the short-run before you get to the long-run. I keep coming back to things like Berkeley providing financing. I think a big shift needs to happen where governments somehow encourage direct investment, as Bob mentions, instead of all kinds of creative indirect investments. Those indirect mechanisms have also been hurting small businesses, I assume, because you need a certain size in order to even put those things together -- and then they still didn't seem to quite understand what they were doing.
So I hope that the creativity runs to creative public-private financial relationships that involve actually investing in things as opposed to derivations of derivations.
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Sean Casten Posted 4:41 am
22 Sep 2008
In the short-run, of course, bankers make mistakes, and they are human just like the rest of us. (Warren Buffet has made a fortune by noting that long-term market rationality is not the same as short-term rationality, so buy & sell when short-term irrationatlity prevails.) So I don't think it's a good idea - nor possible, for that matter - to reinvent the financial industry.
That said, there are good questions to be asked about how we let businesses get to the point where they were "too big to fail", and I hope we see some gov't checks & balances come in to correct. Ultimately, it is human nature to get too gloomy when things are heading south and too rosy when things are looking up. Neither regulations nor changes to the financial sector nor blog-posts will change that human nature. But all ought to understand that human nature is prone to boom/bust cycles in the economy and elsewhere. We're not going to eliminate these, but we can at least take enough of a historical view to know that they will always be with us.
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Jon Rynn Posted 5:22 am
22 Sep 2008
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Sean Casten Posted 5:36 am
22 Sep 2008
But look at the broader sweep. Suppose you want to build a business and can't do so without selling all your assets, curtailing your caloric intake and putting up your uncle for prostitution. Banks provide a way for you not to take on those risks. Suppose you are a farmer trying to figure out whether or not to plant crop X when you don't know what the price will be come harvest time. The banking industry provides products to take off that risk. Suppose you want to separate the high-risk/high-return end of your business from the low-risk/low-return end. Banks provide a panoply of debt and equity instruments that allow you to slice up and give away only that portion of your hard-earned gain that you must.
And so on, and so on. My point is simply that they play a critical role in a functioning economy to get money where it needs to be. One of my favorite definitions of an entrepreneur is someone who moves money from an unproductive area to a productive one. That is as much about capital availability as risk mitigation, and banks play a role in both.
(Indeed, per The Black Swan, the biggest losers when banks mis-price risk tends to be bank shareholders, not their customers. Witness all those folks who currently have 5% interest mortgages that are not in default, but wouldn't have had those but for the fact that banks deluded themselves into thinking that their overall mortgage portfolio wasn't nearly risky enough to raise everyone's rates.)
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Tom Philpott Posted 5:59 am
22 Sep 2008
Meanwhile, it's a bitter irony that the same guys who booked billions in real cash profits on the way up are now, evidently, going to get the contracts to manage the bailout's trillion-plus in "toxic" assets. Are you kidding me? These guys don't stop. This is like sending my cats in to clean up a cat-food spill -- that they caused by ripping open the bag.
Also, it it impolite to note that Paulson finally stepped in with his comprehensive plan just as short sellers were zooming in for the kill against Goldman Sachs?
I can't see the case for a comprehensive public bailout of this industry without a legal reckoning for the folks who caused it.
Victual Reality
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Gar Lipow Posted 5:59 am
22 Sep 2008
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Jon Rynn Posted 6:19 am
22 Sep 2008
What I think is shaping up, both from the article and what I read today, is that they can't do this bailout unless the government gets part of the company (equity), which is not how it's set up now. The Democrats -- and many Republicans -- might stand up and demand that, at least.
And by the way, the stock market went down almost 400 points and oil went up $16/barrel, which means, perhaps, that people don't think this bailout will go the way it's being proposed.
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Pangolin Posted 6:27 am
22 Sep 2008
The realization that you're going to have to clean up the mess with an empty stomach....
Priceless.
How many times are we going to play this sucker's game before we realize that it's rigged against us? The economic model they use is flat wrong; useless.
Put the Carbon Back
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Sean Casten Posted 7:00 am
22 Sep 2008
Where I disagree is that the state would do a better job. Employees of the state are no less fallible than employees of the private sector. Witness Fannie Mae, or the coke-addicted sex-addicts at the Department of the Interior. Moreover, I wouldn't even say that they wouldn't do a worse job since a private business - at least one that isn't too big to fail - does have the risk of failure, where civil servants have the benefit of perpetual employment.
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Jon Rynn Posted 7:13 am
22 Sep 2008
Anyway, instead of flailing about big words like "government" and "private", let's take it one piece at a time. It seems to me that, if history is any guide, the government is going to own a big piece of the US financial sector for a while, and it will eventually go back to the private sector.
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Gar Lipow Posted 7:16 am
22 Sep 2008
As to the sex for deregulation scandal - I would say that in this matter the public department has a lot more accountability than the private. It seems like the DMM girls are facing a lot more consequences than the banking and investment CEOs who are walking away with generous compensation packages. It is not that the public sector can't screw up big time. It is just that in this area the public sector is more accountable, and more self-correcting that the private sector. As weak a check as democracy is, because of certain self-reinforcing bad tendencies in finance, it is a better check than the relation between finance CEOs and the stock market.
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Tom Philpott Posted 7:19 am
22 Sep 2008
If we can agree that the death of Glass-Steagall helped create the crisis, how is pissing on its grave supposed to solve it?
Victual Reality
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Sean Casten Posted 7:20 am
22 Sep 2008
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Sean Casten Posted 7:29 am
22 Sep 2008
And that's precisely why it's an example of the weakness of the state. With implicit federal guarantees, they got really cheap money that gave them an incentive to take risks that they would not have taken had they been public. (Not least because their access to cheap debt allowed them to leverage their business to levels that no private company ever could have accomplished.) Now I will grant you that their incentive to take risks was caused by their for-profit nature. But the fact that they didn't take reasonable risks was because they were only half-private.
As always, we are simply going to have to agree to disagree on public vs. private businesses, but I would point out that private companies face two massive incentives for performance: (1) that they can reap great profits if they succeed and (2) that they can bear great costs if they fail. The media always focuses on the latter, creating the perception that all CEOs are raping their shareholders and all bailouts are unwarranted. The reality is different - and in my own experience both succeeding and failing from the corner office, I will confess that the fear of failure can often be a greater motivator than the chance of success.
The problem with government takeovers is that it takes away both. You can't make $100 million bonus packages, but you also don't have to stand in front of your employees to announce layoffs and take out second mortgages on your home to keep the skeleton crew you've got. Absent carrots and sticks, you simply don't get the same level of mental focus that you do in the private sector.
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Jon Rynn Posted 7:48 am
22 Sep 2008
The vaunted benefit of the private sector is supposed to be that you have the potential whip of failing. That's what people are going to be arguing about for the next few weeks -- how to punish the failures without pulling down the whole economy. And the government will have to sit there and figure out how to do it, unless you want the whole thing to just fail, which I don't think you do.
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Gar Lipow Posted 7:50 am
22 Sep 2008
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Pangolin Posted 7:56 am
22 Sep 2008
In California this summer thousands of public employees worked day after day in choking smoke to put out wildfires. Some days with no visible hope of making headway without a stroke of luck.
All any of those people has to do was fake a coughing fit and they could go home with pay. Not just the fire crews but state, county and city employees worked round the clock without Wall Street luxuries.
Sorry Sean but the facts are that there are several fields where public sector simply does a better job. Health care is one; utilities are another. SMUD does a better job than PG&E for less cost to consumers.
Maybe banking is another.
Put the Carbon Back
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