Posted by
Andrews on Monday, March 23, 2009 10:53:05 AM
So, some businesses have been so damaged by the bad assets in our financial markets that they are in danger of failing.
My instinct would be to say "let them fail, and then allow stronger, undamaged firms take up the slack", as that would keep us from throwing good money after bad trying to shore up companies whose assets have been badly misallocated due to "toxic assets" (as well as the
general distortions caused by our constant inflationary environment). But the government seems set on keeping these troubled firms afloat. So, if that is our goal, how best can we do that?
It seems the easiest solution would be
to indemnify them against these "toxic assets", to
buy them back at some fixed rate, or at least to leave the
buy back option open, so that the
assets regain their market value, allowing firms to use them as liquid assets. That should put the economy back in the situation it was prior to the collapse, or mostly so. The real estate market would still be somewhat depressed from its absurdly overpriced highs of 2006-2007, but that is a good thing. Of course, it would mean some ARMs and mortgages are collateralized with insufficient assets, but that is always true of some loans, and I doubt it would be enough to undermine the market.
However, the government seems set on doing that only after taking more interventionist first steps. Instead of simply restoring the value of assets, the government wants to intervene first, giving huge bailouts to troubled firms. I think it a bad idea, as first of all it gives a
competitive advantage to firms which made bad decisions, farther distorting the market in directions ti should not have taken int he first place. Second, by keeping troubled firms afloat it ties up assets in those firms which could be more efficiently used by other firms. Finally, by taxing individuals and firms to support these failing enterprises, it places a drain on the system to benefit firms which are less efficient. (If it is
funded by inflation it still creates a drain, simply one not evenly or predictably distributed. Do not confuse
the frenzied activity of early inflation with beneficial economic activity. It is more like the "rosy glow" of a low level fever.)
But the government solution is still worse, as they not only throw money at these failing firms, but
impose restrictions sure
to make the firms noncompetitive. From
CEO pay caps to restrictions on promotional activities and travel, to the recent uproar over bonuses, the government is trying to ensure that firms taking money are unable to compete int he marketplace, unable to hire any but the worst employees, and find it impossible to engage in any of the promotion or customer management activities normally required for success.
That would be bad enough if it was applied only to failed firms. In that case it would simply amount to allowing those firms to fail, albeit after dousing them with massive sums of cash. But the government has forced other firms to accept bailout money, even when they are not failing, making it possible for the government to impose restrictions on the operations of firms which were otherwise functioning normally. And so the government is not only crippling these damaged firms but is also imposing absurd restrictions on many healthy firms.
So,
what should we do? I have said it
many, many times before.
Stop getting involved. Let the sick firms fail, and the healthy pick up the slack. Beyond that, get rid of Fannie and Freddie and eliminate the
Community Reinvestment Act. (We may also want to redefine the EHOC rules to prevent
a backdoor effort to force lax lending practices through that law) Ideally we would also return to
a free monetary system, based on gold, but I don't see anyone agreeing to that with
today's beliefs about managed currencies. So, I suppose the best I can hope to see is an end to attempts to keep interest rates artificially depressed while inflation is kept to small, fixed percentages of the money supply, rather than the rather rapid, politically motivated expansion of the money supply.
And finally, we should
remove needless restrictions on the financial sector which
do nothing but
increase operating costs and restrict competition while
making us no safer. As we should have learned
from this whole fiasco, all those
burdensome rules which were supposed to protect us did nothing but
make work for regulators and keep new firms form entering the market, while insulating older firms who knew how to work the system. Regulation may play well for
populist demagogues and it may sound sensible on paper, but in reality it rarely, if ever, provides any increase
in real security.
POSTSCRIPT
This whole situation s just a specific instance of the general rule I proposed "
The Endless Cycle of Intervention", that one bad government action tends to
inspire a series of even more damaging interventions to
remedy the short comings. A series of posts related to this topic can also be found in the postscript to "
Revisiting Gay Marriage", though the article itself is not exactly related.