Bailing Who? Why? How Much?
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Copyright © 2005, 2006, 2007 and 2008 by Jay B. Gaskill
The US GNP for 2007 was about 13.8 trillion dollars and the current national debt is about 9.7 trillion. For the first half of this year, the federal deficit was reported by the Treasury Department at about .311 trillion.
→ The Out-Lawyer’s Blog: http://www.jaygaskill.com/blog1
And
The Policy Think Site: http://www.jaygaskill.com
All contents, unless otherwise indicated are
Copyright © 2005, 2006, 2007 and 2008 by Jay B. Gaskill
Permission to publish, distribute or print all or part of this article (except for personal use) is needed. [Permission for use in group discussions is almost always routinely given.]
Please contact Jay B. Gaskill, attorney at law, via e mail at law@jaygaskill.com
Please contact Jay B. Gaskill, attorney at law, via e mail at law@jaygaskill.com
POPULIST ECONOMICS 101- The Reckoning Has Arrived
As I write this, the federal establishment is trying to contain the economic spillover damage from the collapse of a huge real estate pyramid scheme that has entangled itself with the banking and credit systems such that many large scale lending institutions must either be allowed to fail or somehow must be “rescued” by a massive infusion of public funds on the order of a trillion dollars (all told).
How Big is Big?
First let’s get a handle on the scale.
The US GNP for 2007 was about 13.8 trillion dollars and the current national debt is about 9.7 trillion. For the first half of this year, the federal deficit was reported by the Treasury Department at about .311 trillion.
News flash: Our debt/deficit was growing before the proposed bailout but that was nothing compared to what we are about to see…
For comparison purposes, as recently as 2000, our GNP was only 10.5 trillion, compared with Japan’s 4.8, Germany’s 2.2, Britain’s 1.5 France’s 1.5, and China’s 1.3 (all approximate numbers). In 2004, China’s GNP (an unreliable number) was about 1.67 trillion. [Accurate later numbers for China are even harder to come by.]
I’m employing some rough and ready arithmetic and just to arrive at an appreciation of the scale of the current bailout proposal. Here are some scale elements to ponder:
- The total national debt is about 70% of the Gross National Product.
- The current federal deficit (if below .4 trillion as reported) is still less than 3% of the GNP.
- To retire only 50% of the current debt over the next 10 years would require a budget surplus of about .7 trillion dollars every year and – obviously – a complete halt to deficit spending.
- The Chinese and other foreign interests own an embarrassingly large percentage of the national debt.
- The pending .7 trillion bailout is about twice the size of the current deficit and about 5% of the entire national debt. It would have been almost 10% of our country’s gross national product in the year 2000.
Political and Economic Toxicity
The leaders who are attempting to sell the federal bailout are describing it as a purchase of “toxic” assets. This is an adroit way of distracting us from the fact that the real estate bubble was a giant pyramid scheme. As you can see from the scale discussion above, it was a very large scam in which the “assets” to be purchased – mortgages secured by hugely overvalued real estate – are the “bag” that pyramid scheme dupes are left holding when the entire investment house of cards falls down on them. But the “dupes” to be rescued in this catastrophe are not the home buyers-in-default. No, we are to rescue the allegedly hapless lenders who should have known better and probably did. The parties to be rescued are the very architects of the scheme.
So why should we support this particular bailout? The case is being presented that the damage to the ready flow of money in the form of credit lending capability in the US will be so impaired that consumer spending and business investment will wither, driving the country into recession. This an argument based on scale, one that could (but will not) be restated thus – “This was such a huge crime that we have little choice but to hire the same criminals to repair the damage”.
I believe that the claim that we cannot rescue the flow of credit in the US economy without buying up the bad mortgages for the institutions foolish enough to have acquired them is just not true. The impact on credit liquidity could be redressed in other ways, using second tier lenders, for example, that are not tainted by participation in the “toxic” scheme.
Underwriting a Pyramid Scheme
This whole mess began two decades ago when federal policy makers decided to promote home ownership with an enthusiasm that violated the rules of common sense. In effect federal policy underwrote and promoted a massive pyramid scheme based on a mythical, never-ending real estate boom, supported by the myth of forever secure jobs and endlessly rising incomes.
When the government effectively forces lenders to provide purchase money for poorly qualified buyers under conditions and circumstances so unrealistic that a brutal correction is inevitable, there really will be a correction and it really will be brutal. Overvalued assets are still subject to the laws of supply and demand because demand is always constrained by income. A postponed reckoning for short term profit taking defines a pyramid scheme. The reckoning has arrived.
Populist Rules
Here are three populist rules that any elected public official ignores at great peril:
- The political elites who appropriate the money of the people to bail out miscreant / negligent elites are accessories to the original crime.
- The experts who couldn’t see the train wreck coming until too late who promise, “Trust me this time, I really know how to fix this,” cannot be trusted.
- Those who advocate throwing good money after bad are almost always fools. If it doesn’t work in the slot machines and gaming tables, why will it work better when you start adding the zeroes?
JBG
