Let ’em Fail

Time Magazine comes out against the bailout, for the most part:

Do not be fooled. The $700 billion (ultimately $1 trillion or more) bailout is not predominantly for mortgages and homeowners. Instead, the bailout is for mortgage-backed securities. In fact, some versions of these instruments are imaginary derivatives. These claims overlap on the same types of mortgages. Many financial institutions wrote claims over the same mortgages, and these are the majority of claims that have “gone bad.”

At this point, such claims have no bearing on the mortgage or housing crisis; they have bearing only on the holders of these securities themselves. […]

Follow the money. Average Joes and Janes are not the holders of the other side of complicated, over-the-counter derivatives contracts. Rather, hedge funds are the main holders. The bailout will involve a transfer of wealth — from the American people to financial institutions engaging in reckless speculation — that will be the greatest in history.

I am wholly unqualified to make a judgment on the bailout, but I’ll take the editors of Time opinion of these authors over politicians any day. As noted in the comments to an earlier post, the bailout is nothing more than the opening of the world’s largest hedge fund.

Update: Sorry. I thought this was an editorial. The article was actually written by Ari J. Officer, who has a master of science degree in financial mathematics from Stanford University and by Lawrence H. Officer, a professor of economics at the University of Illinois at Chicago.

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88 replies
  1. 1
    gopher2b says:

    I’ve been saying this for weeks (with some waffling when I start to FREAK OUT!). It’s always been clear to me, however, that there are enough entities out there with cash who are positioned to fill the credit void as banks collapse (e.g. Wells Fargo, Chase, Bank of America, Warren Buffet and Berkshire).

    This is what bankruptcy is for. Let them fail.

  2. 2
    gocart mozart says:

    “They bought the tickets, they knew what they were getting into, I say let’em die”

    Airplane

  3. 3
    D. Mason says:

    After reading about the details of a treasury conference call I am even more against the bailout and hope the spineless house dems get burned as hard as is humanly possible for having presented the bill in the first place. If the degenerate gamblers who caused this mess are gung-ho about the details of the proposed bailout then I’m against the thing completely.

  4. 4
    Charity says:

    I checked in with my husband, who is an economist. While he can’t stand the current administration, I hesitate to call him a Democrat.

    Last night he was truly frightened that if credit really contracts, companies won’t be able to borrow cash to do the normal things they do, like pay workers and pay for operations. If they can’t pay people, people will get laid off, and THAT would be bad.

    He says the bill was not perfect, but it was certainly better than Paulson’s initial “Gimme $700B and no one gets hurt” idea. There was some oversight, and an equity stake in the companies that would be bailed out, and other good things.

    He’s convinced me that this is important and we need it NOW. Maybe in an Obama presidency (please Jesus), we can refine and retool it and add other things. Like helping people renegotiate their mortgages, so that it’s more likely they CAN pay back their mortgages, and thus all these mortgage-backed securities would actually be worth something again.

  5. 5
    Comrade Jake says:

    Follow the money? Uh-huh.

    The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers’ Association said. The euro interbank offered rate, or Euribor, for one-month loans climbed to record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, advanced to a record.

  6. 6
    Kamishna ya Watu Xenos says:

    We need a functioning credit market, and soon. If socializing the banks, as the insurgent republicans call it, is not done, then they need to come up with an alternate solution (other than ‘insuring’ the doomed securities, which was what AIG had been doing). There were plenty of problems with the Pelosi/Boener kludge, but at least it was an attempt to do something responsible in the face of a crisis.

  7. 7
    John S. says:

    Live by the Glibertarian, die by the Glibertarian.

    Too bad that in an economic meltdown there are no Glibertaians in foxholes.

  8. 8
    S says:

    I don’t believe that the issue is this cut and dry. I think a lot of people have been against the bail out because they believe it a) will be against the libertarian concept of the free market b) will be a transfer of money from normal people to the rich or c) will waste taxpayer money without helping anyone. These opinions cover the libertarians, the progressive class warfare types, and the social conservatives.

    These political opinions have to be balanced against the major consequence above described by Charity.

  9. 9
    ricky says:

    Yesterday I did not get a single offer of a new pre-approved credit card from a bank in my mail box.
    I am scared. I’ll post again if mail delivery has not been suspended today.

  10. 10
    Ned Raggett says:

    Charity’s post gets to the nub of something I’ve started to wonder more about, though — how and when exactly did borrowing money to cover payroll (and operations, for that matter) be seen as ‘normal’? Credit for developing new projects and work, that makes sense to me. But I would have thought that any business with relative sense would ensure that its basic workers compensation funds were essentially in-house. Since it seems I’m wrong to think this, and since I won’t pretend to be an economic expert, I’d like to know more about how this situation came about, because that doesn’t strike me as a good idea in the slightest.

  11. 11
    gbear says:

    Ben Smith at Politico:

    The Republican National Committee’s new advertisement critical of the the Wall Street “bailout” was produced and sent to television stations in key states before the package failed, officials at two stations said.

    “Wall Street Squanders our money. And Washington is forced to bail them out with — you guessed it — our money. Can it get any worse?” asks the ad’s narrator, as the words “BAILOUT WITH OUR MONEY” cross the screen. (The answer: Obama’s plans would make it worse.)

    The ad, however, seems to assume that it can safely attack a successful plan. And the reason may be the timing: Though it started airing this morning, the spot was released to stations yesterday morning, ad executives at stations in Michigan and Pennsylvania said.

    The republicans already had their attack in the can before Pelosi’s speech.

  12. 12
    Bill H says:

    When told by Paulson that Armageddon was pending, Congress:
    1. believed it totally
    2. announced to the public, “We are all going to die.”
    3. asked Paulson for the remedy
    4. asked no one else for any alternate remedies
    5. waited for King George to tell them what to do
    6. started the process of doing what King George told them to do until
    7. King Voter told them 500:1 not to do it
    8. put lipstick and makeup on King George’s pig
    9. sent King Goerge’s pig to the slaughterhouse
    10. resumed screaming, “We’re all going to die.”

  13. 13
    ricky says:

    gbear seems to think there is little truth to the charge that a dozen Republican Congressmen were so hurt by Pelosi’s remark that they were merely acting out instead of affixing blame. What a cynic.

  14. 14
    ricky says:

    John S. If there were Gilbertarians in my foxhole it would be an insult to the institutionalization that is my marriage and a detriment to my fighting morale.

  15. 15

    Theoreticians. I would not listen to theoreticians from academia as they were the same ones selling their risk models that predicted the current events were once in a century….

    The breezy hand waving in the article borders on insanity. Imaginary derivatives…. there are nothing but. Multiple cross claims are still contracts, and payouts on positions still need to be made.

    The pain bearing of course is absolutely right, and as such sloppiness and rewarding of excess risk taking has to be avoided. However, anyone in the financial sector now can see that the money markets are locking up, and spreads on US debt are widening to historic levels. The solution these theoreticians is to jump off a cliff and see if one really needs fucking wings?

    The second order effects of one major money centre bank going down after another – and make no mistake, Wachovia would have been a WaMu in a matter of weeks if not days – is starting to criple interbank liquidity, which will (there is no doubt, one needs to simply look at similar all bank sector crises in other markets) cause a lock up of all lending with banks hoarding cash and desperately trying to stay above the vicious circle.

  16. 16
    ricky says:

    I am soory, John S. Glibertarians, not Gilbertarians. Typing agitates my war wounds and is difficult when my thirteen cars are in motion.

  17. 17
    gbear says:

    What a cynic.

    I’m shocked! Shocked, I say!

  18. 18
    r€nato says:

    Charity’s post gets to the nub of something I’ve started to wonder more about, though—how and when exactly did borrowing money to cover payroll (and operations, for that matter) be seen as ‘normal’?

    If you’ve operated a business – even as a small proprietor, like me – you know that cash on hand ebbs and flows, it’s just part of the way business operates. For instance, you’re working on a large project, you get your initial payment and then no more money comes in until the project is complete. In the meantime, utilities have to be paid, employees have to be paid, etc. They don’t like to wait until you get that big fat check in the mail.

    Now, there’s two ways to deal with this: you can just make sure to always keep a lot of cash in the bank, but that’s rather inefficient, economically speaking, to just keep that money sitting around doing nothing except earning a small amount of interest.

    The other way to deal with it is a short-term loan which covers your expenses until you get that big fat payment. That’s what this kind of borrowing is for, and the other side of it is that when your company is flush with cash because you just got paid for some big projects, you can put that money to work by loaning it out to other companies which are in between collecting accounts receivable.

    But when credit markets seize up as they are doing now, we revert back to a more cash-based economy, which is rather inefficient economically speaking. And it would definitely affect the larger economy, for one thing companies would only keep as many people on payroll as they know they can pay for out of cash-on-hand. Every company is going to have to hoard cash so that they know they can pay expenses when accounts receivable are low.

    If you had to pay for everything in cash – your car, your house – what kind of economy do you think we would have? It sure would not look like a modern 21st century economy.

  19. 19
    bootlegger says:

    when exactly did borrowing money to cover payroll (and operations, for that matter) be seen as ‘normal’?

    I thought of this as well, and there was something in Bush’s speech that also made my wife and I go “huh?” (I realize with W this is de rigeur) He said something about “the markets are not functioning normally”, which made us both wonder what, exactly, “normal” was suppose to look like. It seems to the dame and I that this “crisis” is how markets normally function when the sellers are peddling crap.

    I’m absolutely serious when I say fuck the consequences, no goddam bailout plan. Let’s see what happens, its the only way we’ll get to the heart of the problem and come up with some real solutions. This “plan” is just a band-aid that is going to hurt even more when we pull it off to treat the infection that seeps in later. I say we take our medicine now so my kids don’t have to amputate later on.

  20. 20
    Mar says:

    Always remember that Wall Street and the real economy are not the same thing.

    That may be true, but they’re closely related. It’s true that we’re bailing out gambling scumbags that don’t deserve to be bailed out, but b/c such a gigantic corporation of gambling scumbags failed, a whole lot of people pulled their money out from American Corporations. Which is what most economists believe caused the Great Depression. The main issue here is that Congress wants to bailout mortgage backed securities to prevent Wall Street from crashing into a Great Depression while at the same time turning the whole company from gambling scumbags to honest businessmen. Which is why there are these checks/balances that everyone’s demanding.

    The only reason we’re doing this is b/c most economists agree that consumer confidence creates depressions, not how well businesses are actually doing.

  21. 21
    Maggie says:

    Charity’s post gets to the nub of something I’ve started to wonder more about, though—how and when exactly did borrowing money to cover payroll (and operations, for that matter) be seen as ‘normal’? Credit for developing new projects and work, that makes sense to me. But I would have thought that any business with relative sense would ensure that its basic workers compensation funds were essentially in-house. Since it seems I’m wrong to think this, and since I won’t pretend to be an economic expert, I’d like to know more about how this situation came about, because that doesn’t strike me as a good idea in the slightest.

    Actually, when capitalism first started developing this was the primary use of ‘capital’. You sell goods after you produce them, which means you need money to float the production until you can earn the money back. Granted once the enterprise is up and running you can use the receipts from sales to pay the cost of further production. But there’s nothing intrinsically unreasonable about borrowing money to finance production this way. More importantly this is not the only way a freezing up of credit would strangle the economy. Investment in the sense of borrowing to expand production capacity is one of the engines of growth, and if that gets squeezed you don’t get those expansions or the job creation that goes with them. Many industries sell to consumers who need to borrow to purchase the goods in question (notably autos, but many others as well). I could go on. Borrowing and lending is a way of trading across time, and it’s extremely valuable to the production process to make such transactions possible.

    I’m relying on the reports of others for the claim that the credit markets really are in danger of seizing up. But if those reports are right, then it is foolish in the extreme to oppose a measure, however flawed and outrageous, that would prevent the collapse of the financial markets. As for the reports themselves, people I trust both personally and professionally all say it’s so. It is a measure of how damaged our political system is that there is such widespread distrust on this subject. (And I can’t say that distrust is unreasonable — just that I suspect it’s wrong in this case and if the resulting public opposition to the bill kills it, we could all be in a world of massive hurt).

  22. 22
    Zifnab says:

    It’ll take a while for everyone to get resorted though, Mike. If you’ve got a contract with Washington Mutual to borrow $10 million a day to be repaid in some short timeframe and WaMu evaporates, you need to trundle over to JP Morgan or BoA or whomever and cut a new deal. That deal could be worse – costing your firm more money – or it could be on a smaller credit line – crimping your business. Or it could just never come if the new firm doesn’t like you.

    Either way, for every day you’re out of your $10 million / day walking-around money, your business suffers greatly. A business that goes stagnant for 3 days in a row has a 40% chance of failure within the next three years. Even a short term break in the credit flow can be a death blow to a company that relies heavily on working from credit.

  23. 23
    r€nato says:

    I am soory, John S. Glibertarians, not Gilbertarians.

    LOL! I wouldn’t want to be mistaken for someone who lives in Gilbert, AZ either….

  24. 24
    bootlegger says:

    The other way to deal with it is a short-term loan which covers your expenses until you get that big fat payment.

    So you’re saying the choices are 1) save money at low interest, or 2) borrow money at higher interest? How in the hell is that more “efficient”?

  25. 25
    Kamishna ya Watu Xenos says:

    how and when exactly did borrowing money to cover payroll (and operations, for that matter) be seen as ‘normal’? Credit for developing new projects and work, that makes sense to me.

    I am not an entreprenuer, but this sort of thing is common and long established. If you make widgets, and your customers running retail sores don’t pay you until after they sell them, or after 90 days, or whatever, you have to keep a line of credit, probably by pledging you accounts receivable. This is how I can order heating oil, have it delivered, and then get a bill in the mail a week later, with no interest accruing for the first 15 days. If a bank does not extend credit to my supplier, I have to pay in full before delivery… which would suck.

    A perfectly solvent business may not have the cash it needs for making payroll when it comes due. Failing to make payroll is a crime in Massachusetts – you can spend time for it, no fooling. So that if a business has problems, say its top two clients enter bankruptcy and may discharge the accounts receivable, that business will shut its doors and fire its employees if their bank shuts down the credit line as a result of the loss of security.

    The risk of a major credit crisis is that the banks, which float on a sea of 15-45 day paper that would become completely illiquid, will be forced to cut off the credit lines of businesses that are perfectly sound credit risks. Those business will shut down in very short order, causing a cascading effect. We could go from a functioning economy to serious unemployment and recession in a matter of weeks.

  26. 26
    Comrade Scrutinizer says:

    Ned @ 10:

    It’s not that simple. It’s a cash flow problem. Many businesses don’t get paid until after they deliver their widgets, but it can take more than one payroll cycle to get it done. You have to pay for inventory before you sell stuff, and that means short-term borrowing—the company I used to work for had a $250K open line of credit just for financing inventory, and if we were short on cash, we had a thirty day open credit line with the bank for up to $75K. If you work on certain types of contracts you don’t get paid a cent until the work is completed.

    The cost of completely capitalizing a business so that you always have enough cash on hand for working capital is immense, and it can actually cripple a company’s ability to be competitive. Access to credit allows you to leverage the financial activity of your firm so that you can get more done with less cash on hand.

  27. 27
    Zifnab says:

    So you’re saying the choices are 1) save money at low interest, or 2) borrow money at higher interest? How in the hell is that more “efficient”?

    I can put $100 into my bank account at 3% interest. Or I can invest it in tomatoes seeds that will – upon ripening – give me a 40% return. For my troubles, I will take out a $100 loan at 10% APY that I intend to pay back in the six months it takes me to grow my tomatoes. In the meantime, I’ll live on my $100. If my crop fails, I’m $100 in debt. If it succeeds, I’m up $40 rather than $3.

  28. 28
    Comrade The Moar You Know says:

    Charity’s post gets to the nub of something I’ve started to wonder more about, though—how and when exactly did borrowing money to cover payroll (and operations, for that matter) be seen as ‘normal’?

    There are two scenarios:

    1. You’re in a “feast or famine” business like contracting/construction, where you’re either swimming in money or not. This one is fairly simple.

    2. This one’s a bit more complicated, and another way the rich get richer. Worked for a guy, a real asshole. Pulled at least 100k a month out of a reasonably small company, never put it back in. We borrowed for everything; payroll, inventory, all of it.

    Turns out that between the low cost of borrowing and some tax write-offs, it made far more sense for him to just borrow all the operating revenue and take all the receipts and invest them. His cost of borrowing was about 5 percent as I recall, and he was making 12 on the markets. Seven percent for doing nothing, and if shit hit the fan the bank was left holding the bag and not him.

    Big companies do this all the time as a matter of course.

  29. 29
    dslak says:

    The interesting thing about the process Maggie described is that, if you were to do that kind of thing as a private person (i.e., write checks for money you don’t have yet, but are gauranteed to have in the near future), it would be considered fraud.

  30. 30
    bootlegger says:

    Actually, when capitalism first started developing this was the primary use of ‘capital’.

    “Actually”, when capitalism first started production was financed with the earned savings of the producer (read Max Weber’s “Protestant Ethic and the Spirit of Capitalism”). The fact that this is not how we currently operate is the result of investors seeking big payoffs for financing the expansion of production.

    Also, I am not at all convinced that the credit markets will freeze. There are literally dozens of economists not named Paulson who are trying to get anyone to listen that the sky is not actually falling.

  31. 31
    clussman says:

    The officers, Ari and Lawrence, aren’t the only ones against the bailout.

    Charity wrote:

    He says the bill was not perfect, but it was certainly better than Paulson’s initial “Gimme $700B and no one gets hurt” idea. There was some oversight, and an equity stake in the companies that would be bailed out, and other good things.

    Not exactly:

    If the bill is passed in this form, the Democrats will claim a victory through these executive and corporate governance provisions as well as the warrant provisions. But Mr. Paulson can decide how much of these warrants to take, and the executive compensation and corporate governance provisions are unlikely to be implemented for any companies. The bill is not much different than the original proposal — just 107 pages longer.

  32. 32
    Doctor Jay says:

    The London Interbank Overnight Rate was 5.825% this morning, an all-time record. And there’s no volume. No takers at a record return. Meaning, there is no short-term credit any more between banks. Meaning money-market funds are threatened, and ordinary business’ ability to meet payroll and pay bills are threatened.

    Everything is connected.

  33. 33
  34. 34
    jenniebee says:

    Charity’s post gets to the nub of something I’ve started to wonder more about, though—how and when exactly did borrowing money to cover payroll (and operations, for that matter) be seen as ‘normal’?

    Having a line of credit to keep things running whether your clients/customers pay their bills on time has been normal for a long, long time. I don’t know how large corporations work, but small businesses have been doing that just about since industrialization got started.

    Michael, I don’t think anybody’s been arguing since this started that the people on Wall Street who got us into this mess are great people who have done wonderful things and deserve a $700B gift. They’re a bunch of assholes who have fucked us all over – but the thing to realize is that this isn’t just going to be their pain if they fail. The shock to the economy if paychecks don’t materialize tomorrow (or Friday, or next Friday…) is going to cost a lot more than $5K per taxpayer.

    So I know that cutting off your nose to spite your face is the Glibertarian M.O., but let’s try to take a few deep breaths and think about this before we grab the knife this time, hmmm?

  35. 35
    Zifnab says:

    The interesting thing about the process Maggie described is that, if you were to do that kind of thing as a private person (i.e., write checks for money you don’t have yet, but are gauranteed to have in the near future), it would be considered fraud.

    Firstly, people do this all the time. Then the post-date their checks and ask you not to cash them until they’ve got money in the bank.

    Alternately, you get a little thing called a credit card.
    – I get paid on Monday.
    – I need groceries on Sunday.
    – I buy groceries, get paid, and pay off my credit card the following week.

  36. 36
    Kamishna ya Watu Xenos says:

    if you were to do that kind of thing as a private person (i.e., write checks for money you don’t have yet, but are gauranteed to have in the near future), it would be considered fraud.

    You have never floated a check?

  37. 37
    jrg says:

    When I worked for MCI (later Worldcom), the company collapsed and no one bailed us out.

    The shareholders and bond holders in these institutions need to lose all of their money before a bailout is even considered, IMO. They put money on the table, the taxpayer did not.

    We need a bailout to prevent the credit markets from seizing up, but it’s insane to allow the shareholders in these institutions to keep any value at all.

    Let the lenders go bankrupt, then re-issue stocks for the government and other investors to raise enough money from the “IPO”. Use the money raised to bail out the bad mortgages. Anything less is class warfare.

  38. 38
    ricky says:

    I, for one, am sorry that every time someone gets in the business of affixing blame they drag out the damn widget maker analogy. Widget making was outsourced to Canada in return for credit macrame debinture futures and the manufacturers have long since golden parachuted into the hedges. Palin can see this from her yard in Alaska when she comes out to check on the Snowmachine races.

  39. 39
    Comrade Scrutinizer says:

    So you’re saying the choices are 1) save money at low interest, or 2) borrow money at higher interest? How in the hell is that more “efficient”?

    It’s more efficient in term of the amount of capital you have invested. If I have $10k on hand and get a 2% return in a month, I’ve made $200. If I can take that same $10k, borrow $40k, and earn $55k, then I’ve made $5K on that same amount of capital. That’s called leverage.

  40. 40

    An expansion on the VERY important note supra on LIBOR. Libor is typically a base rate, we are now in uncharted territory, but a great deal of lending is done on a LIBOR plus basis, say LIBOR plus 400 bp for a small firm line of credit – to cover exactly the liquidity needed for payroll, etc (the ebbs and flows of payments, cash management as its called). That means LIBOR plus 4%. With LIBOR at 6.88, our SME making widgets, who is using his line to smooth while awaiting payment for his last delivery cycle of say treads (and he’s facing slow downs in the payment cycle as firms are starting to hoard cash, so prob. getting in 60-90 rather than the 10-30 he was used to), sees his line shoot from costing him 6-7% to 11+% and climbing. And he suddenly has to worry that the bank, just when his cash management needs are rising due to everyone slowing their payments to hoard cash, walk-back his line or bump the spread.

    That is the real and actual current feedback mechanism into the market. And these two academics say “Let it go”? Bloody hell, at least ECB, UK and Ireland know a Depression level crisis when they see it.

  41. 41
    bootlegger says:

    I’m $100 in debt. If it succeeds, I’m up $40 rather than $3.

    Minus the interest you paid on the loan. But my argument isn’t that the system of “capitalizing” can’t work, obviously it can. But as someone else noted it is a disincentive to keep cash on hand that, you know, might come in handy when markets take their normal dip.

    Buy the seeds, live off the rest, then when you make the $40, put some of it back to live on after you buy the seeds.

  42. 42
    Comrade Scrutinizer says:

    I, for one, am sorry that every time someone gets in the business of affixing blame they drag out the damn widget maker analogy.

    Why do you hate America?

  43. 43

    Sorry last item, again from the LIBOR link above, for those “doubting” a freeze in the credit markets, well here it is:
    “This is unheard of, the money markets should be the engine driving the financial system but they have broken down,” said Kornelius Purps, a fixed-income strategist in Munich for UniCredit Markets and Investment Banking, a unit of Italy’s largest lender. ``Any institution that hasn’t completed its 2008 funding needs by now is going to be in very serious trouble. More banks are going to need to be bailed out.”

    The seizure in the credit markets is tipping lenders toward insolvency, forcing U.S. and European governments to rescue five banks in the past two days, including Dexia SA, the world’s biggest provider of loans to local governments, and Wachovia Corp. Money-market rates climbed even after the Federal Reserve yesterday more than doubled the size of its dollar-swap line with foreign central banks to $620 billion. In Europe, banks borrowed dollars from the ECB at almost six times the Fed’s benchmark interest rate today.

    This is what the beginning of an actual, real live non-theoretical, not for academics financial sector-to-real sector collapse looks like. Textbook.

  44. 44
    bootlegger says:

    Firstly, people do this all the time. Then the post-date their checks and ask you not to cash them until they’ve got money in the bank.

    People may do it all the time, but it is technically illegal to write a check without funds to cover it.

    Alternately, you get a little thing called a credit card. – I get paid on Monday. – I need groceries on Sunday. – I buy groceries, get paid, and pay off my credit card the following week.

    Maybe you should manage your money better so you don’t have to rely on that credit card.

    Credit is a fine tool, but we are seriously abusing the concept and now you and I are going to pay for it.

  45. 45
    Zifnab says:

    Minus the interest you paid on the loan. But my argument isn’t that the system of “capitalizing” can’t work, obviously it can. But as someone else noted it is a disincentive to keep cash on hand that, you know, might come in handy when markets take their normal dip.

    Buy the seeds, live off the rest, then when you make the $40, put some of it back to live on after you buy the seeds.

    :-p You’re right. You’d only make $35. A piddly 12 times what you’d make on bank interest.
    And while it is certainly more prudent to stuff your money in the bank – or, for a slightly lower interest rate with slightly less risk, your mattress – it also isn’t much of a way to grow your assets or your business.

    And while it would probably be more economically stable for everyone to live with a giant cash cushion at their backs, that’s just not how the modern economy operates. So you can pooh-pooh it all you want today, but if the credit markets do freeze up, you’ll be doing your pooh-poohing from the unemployment line tomorrow. That’s why some form of government intervention is necessary.

  46. 46
    ricky says:

    Zinfab and bootlegger have very short memories. John McCain told us Americans won’t pick lettuce in the hot sun for even $100 per hour. So borrow the $40, hire some labor from south of the border,
    harvest your damn tomatoes and develop a taste for salsa picante. Otherwise somebody, maybe Nancy Pelosi, will say something that makes you feel real bad about yourself while you lie about thinking of the missed opportunity to buy widgets with the lettuce you let wilt in the hot sun.

  47. 47
    Comrade Scrutinizer says:

    But as someone else noted it is a disincentive to keep cash on hand that, you know, might come in handy when markets take their normal dip.

    Too much cash on hand is wasteful. Cash and credit are important tools in business, just as important as the tools people used to make or fix widgets. Cash squirreled away isn’t doing you any good, and, if you’re a big company, makes you the target of a takeover.

    A good financial manager plans for normal market fluctuations. A bad financial manager gets fired. What’s going on in the markets has nothing to do with normal flutcuations.

  48. 48
    CIRCVS MAXIMVS MMVIII says:

    Credit for developing new projects and work, that makes sense to me. But I would have thought that any business with relative sense would ensure that its basic workers compensation funds were essentially in-house. Since it seems I’m wrong to think this, and since I won’t pretend to be an economic expert, I’d like to know more about how this situation came about, because that doesn’t strike me as a good idea in the slightest.

    Since sometime in the 1990’s when companies starting popping up that perform basic payroll and HR functions. In recent jobs I’ve held, I’ve seen this happen in various companies I’ve worked for.

    One of the biggest that I discovered (and which was the first company I was exposed to in a job situation is called Gevity).

  49. 49
    Ned Raggett says:

    Everyone — thanks for all your answers, even though I see there’s been some further argument as a result! But that does make it clearer to me — I admit to having some questions still but they’re more esoteric and that can wait for another time.

  50. 50
    bootlegger says:

    And while it would probably be more economically stable for everyone to live with a giant cash cushion at their backs, that’s just not how the modern economy operates. So you can pooh-pooh it all you want today, but if the credit markets do freeze up, you’ll be doing your pooh-poohing from the unemployment line tomorrow. That’s why some form of government intervention is necessary.

    Yes, by all means, let’s keep poo-pooing it until the next time you and I have to do this all over again! How fucking stupid!

    And there are economists not named Paulson crawling out of the woodwork who are insisting that credit will not “freeze”. Slow down, tighten up, maybe, but its about time someone took a hose to the credit orgy.

  51. 51
    ricky says:

    Comrade Scrutinizer. I, for one, have never professed any hatred for America. I have, however, recognized the futility of crying over outsourced widgetry and have devoted my lack of a career to belittling those who would subsitutue breast milk for cows milk in Ben and Jerry’s Chunky Monkey.
    (I will concede it would lessen bovine suffering without detracting from the tart pleasure of Cherry Garcia.)

  52. 52
    Martin says:

    Charity’s post gets to the nub of something I’ve started to wonder more about, though—how and when exactly did borrowing money to cover payroll (and operations, for that matter) be seen as ‘normal’? Credit for developing new projects and work, that makes sense to me. But I would have thought that any business with relative sense would ensure that its basic workers compensation funds were essentially in-house. Since it seems I’m wrong to think this, and since I won’t pretend to be an economic expert, I’d like to know more about how this situation came about, because that doesn’t strike me as a good idea in the slightest.

    It’s always been normal in the quarter going into Christmas. Lots of businesses basically cover their total annual operating costs in the next 3 months. Think about it – many retailers will double their staff, bring in a shitload of inventory, expand advertising, and so on. They borrow to do this. Hell, there are a lot of retailers that only exist during the next 3 months. Go check out the malls – they usually fill all their empty space with these half-assed stores that sell games and calendars and gift stuff, and then they close up Jan 15 or so.

    Businesses that make this stuff go through the same cycle because they need to have produced items to sell. Think toy companies. They have their holiday toy line up designed and approved almost a year ahead of time and spend the next year getting it into production and basically warehousing it. They’re not making a dime, but have to keep factories in operation. When credit is cheap – as it has been the last 5 years, you borrow. But nobody expected rates to spike *this* much, so anyone borrowing now is screwed. And if they miss the holiday profits because of it, they’re probably screwed for next year as well. A lot of individuals rely on part-time holiday jobs to cover their holiday buying, and if those jobs aren’t there, they don’t buy, and if nobody is buying, well, you can see the cycle it sets up.

    Plus there are all kinds of other cyclical businesses that depend on credit because they don’t have steady cash-flow. Home oil delivery. Ski resorts. You name it. And they use credit because there is no place that you can reliably put your money these days that will keep you ahead of inflation. So banking your profits still costs you money. At some point it gets cheaper to borrow for 3 months than to save for 9. And that’s a big part of what’s fucked up here. If I could put money in a nice insured bank account and get 3% above inflation – say 7% or 8%, I’d pull 50% of what I have in the market out. But putting money in savings today is just like spending it, just very slowly.

  53. 53
    bootlegger says:

    Cash squirreled away isn’t doing you any good

    Hmmm, seems like it would be the perfect solution right about now. If only someone had squirreld away some cash….nah, the taxpayer’s got it right?

  54. 54
    ricky says:

    Comrade S says:

    A good financial manager plans for normal market fluctuations. A bad financial manager gets fired. What’s going on in the markets has nothing to do with normal flutcuations.

    You forget the best part. A bad oil man drills dry holes and gets elected President. That is why I love America.

  55. 55
    Martin says:

    Zinfab and bootlegger have very short memories. John McCain told us Americans won’t pick lettuce in the hot sun for even $100 per hour. So borrow the $40, hire some labor from south of the border,

    It was $50/hr ($100K per year if you have steady work).

    As someone who makes much less than that and isn’t opposed to physical labor, that statement by McCain really pissed me off. I hope Obama brings it up in a debate. If Obama doesn’t have the labor vote now, he will after that reminder.

  56. 56
    ricky says:

    Cash squirreled away isn’t doing you any good

    On the other hand, Mike Huckabee found that good fried squirrel can earn you cash in the dorm.

  57. 57
    bootlegger says:

    At some point it gets cheaper to borrow for 3 months than to save for 9.

    But either way your business needs the money for that 3 or 9 month period. I’m not talking about saving every penny, I’m talking about having enough cash on hand to pay for production. Then when you sell you calculate how much you need to produce again, take the rest and reinvest in your business (or buy a Hummer, whatever). My mom does a seasonal business and she has always lost money by buying inventory on credit. She readily admits that if she reinvested her profits in next year’s stock she could take delivery in 9 months and enjoy the profits rather than paying it out as interest. Credit has put her “behind” her production instead of in front of it.

    And before someone gets condescending and says I don’t “understand”, I understand just fine the importance of credit in our current economy. But our reliance on credit is what makes these small failures into major crises for everyone. We need to find a way to capitalize in a more secure way and if that means an implosion right now then my little farm is ready to go into production (I have heirloom tomato seeds if anyone wants some).

  58. 58
    Comrade Scrutinizer says:

    And there are economists not named Paulson crawling out of the woodwork who are insisting that credit will not “freeze”. Slow down, tighten up, maybe, but its about time someone took a hose to the credit orgy.

    Tell you what. Take a look at LIBOR rates today, look at the amount of money out there for loan, (practically none), and then tell those economists crawling out of holes to crawl back in. Many more days of this will start to kill existing businesses, and that means thousands out of work.

    This problem wasn’t caused by a “credit orgy”, at least not in the sense of what businesses do every day to continue operations. It was caused by the tech bubble which morphed into the real estate bubble, predatory lending, “voluntary” regulation, and a host of other things. Those problems need to be fixed. Crashing the economy will not fix them, it will make bad things disastrously worse.

  59. 59
    jake says:

    Saying we should let it fail implies anyone has control over the situation. Maybe this wasn’t supposed to come crashing down until Feb 1, 2009. We won’t know until after the hearings and the trials (if there are any). For now I’m just glad this big pile of shit is landing hard while Chimpy McFlightsuit is still in office and the less-insane bits of the GOP are reduced to screaming about Nancy Pelosi being a meanie to Dubya and the more-insane bits are blaming the brown folks.

    [Slightly stale] Popcorn?

  60. 60
    Zifnab says:

    Hmmm, seems like it would be the perfect solution right about now.

    Except that it wouldn’t. If everyone was socking money away at the rates necessary to hedge against a nationwide recession, we’d be living in a 19th century economy because no one would spend a dime. Just because a handful of Mega-Wall Street Firms decided to over-leverage to the absolute extreme doesn’t mean all money borrowing is bad. You’re like a man drowning in the ocean, contemplating a move to the Sahara. Don’t become the victim of reverse exaggeration.

  61. 61
    CIRCVS MAXIMVS MMVIII says:

    I gotta tell ya, even if the problem isn’t so bad that we need an actual bailout, I do get a bit of satisfaction watching Bush go on television to inform the public that “Congress must act” because his administration fucked things up so royally.

  62. 62
    dslak says:

    Those problems need to be fixed. Crashing the economy will not fix them, it will make bad things disastrously worse.

    I could see some incentive for full-bore socialists to want the economy to crash, as it would justify even more serious government intervention. I expect however that the socialist tendencies of most here are rather mild. Reality can’t be expected to heed ideology.

  63. 63
    Comrade Jake says:

    Sorry last item, again from the LIBOR link above, for those “doubting” a freeze in the credit markets, well here it is:

    Thank you for noticing my original post. You appear to be the only one who recognizes the significance.

  64. 64
    dslak says:

    Here in the UK, the Tory leadership scrambled to show that they weren’t as boneheaded as their American counterparts, and were willing to work with the (unpopular) governing party’s proposed solutions to the crisis. At least somebody has learned an important lesson from Boehner.

  65. 65
    wingnuts to iraq says:

    hey guess what… maybe all this growth is going to come to an end. Who said “growth” is inherently good? It’s not.

    We’re destroying the planet, there’s 6.5 Billion of us motherfuckers here.

    Maybe we NEED to stop consuming so damn much and having so many damn babies!

    //burn it all

  66. 66
    CIRCVS MAXIMVS MMVIII says:

    You appear to be the only one who recognizes the significance

    Geez Jake, you think you’re the only one who recognizes a credit freeze is going on? It’s all over the television too.

  67. 67
    Scrutinizer says:

    I expect however that the socialist tendencies of most here are rather mild.

    Speak for yourself, sonny-boy. But even some of us wild-eyed radicals have more sense than to want to see the devastation that would result from an economic collapse.

  68. 68

    Tell you what. Take a look at LIBOR rates today, look at the amount of money out there for loan, (practically none), and then tell those economists crawling out of holes to crawl back in. Many more days of this will start to kill existing businesses, and that means thousands out of work.

    Precisely, we’re already seeing it. Punitive lending rates pass quite quickly through the system. What is more bizarre is there is a bloody 50 year history of solid numbers in economic scholarship showing the “fuck em” approach to bank crises makes everyone worse off. Nevermind the daft suggestions that we revert to 19th century cash management practices, in one instance, due someone’s mum being bad at cash management with credit lines.

  69. 69
    Scrutinizer says:

    dslak @ 64 says

    Here in the UK

    Ah. Well. That explains it. :)

  70. 70
    Scrutinizer says:

    Nevermind the daft suggestions that we revert to 19th century cash management practices, in one instance, due someone’s mum being bad at cash management with credit lines.

    FTW!

  71. 71

    Thank you for noticing my original post. You appear to be the only one who recognizes the significance.

    No problem mate, my pleasure. I am in business, so I know that number. I can only imagine another week and revolving lines will be mid double digits, like a fucking replay of the early 1970s.

  72. 72

    Buy the ticket take the Ride – Hunter S. Thompson

    Let them fail.

  73. 73
    Comrade Jake says:

    Geez Jake, you think you’re the only one who recognizes a credit freeze is going on? It’s all over the television too.

    I was simply referring to the significance of the LIBOR post buddy. Still, there do appear to be several folks in this thread who aren’t aware of the credit freeze.

  74. 74

    Precisely. Nor what that really means in modern business. Although many do seem to be pining for the days of buggy whips and mass cholera outbreaks.

    Well, I do hope your bloody government starts to wake up, meanwhile I go off to wonder if the major Euro counterparty for some of my projects is actually going to be solvent tomorrow. Charming, really. Had only heard about this stomach churning sensation from old men who had gone through the 1930s.

  75. 75
    dslak says:

    Although many do seem to be pining for the days of buggy whips and mass cholera outbreaks.

    Well, Love in the Time of Cholera was an alright film.

  76. 76
    wasabi gasp says:

    This “let ’em fail” bullshit is getting really tedious.

    To think Wall Street should be punished for not having been more scrupulous about controlling its greed is ridiculous. Wall Street is greedy. That’s its job: maximum profits.

    This whole fiasco is a failure of regulation.

    Wall Street was let free to fail. And it did.

    Ta-dah.

  77. 77
    Scrutinizer says:

    I can only imagine another week and revolving lines will be mid double digits, like a fucking replay of the early 1970s.

    Yeah, and I did that once, and have no desire to go back. Double-digit inflation with no economic growth is a bitch. I guess the fixed income people should start laying up dog food again.

  78. 78
    Scrutinizer says:

    Let them fail.

    Kiss my ass.

  79. 79
    Zifnab says:

    This “let ‘em fail” bullshit is getting really tedious.

    To think Wall Street should be punished for not having been more scrupulous about controlling its greed is ridiculous. Wall Street is greedy. That’s its job: maximum profits.

    Right, but its like taking the speed limiter off a sports car, then watching a driver plow the thing into a wall. Do you clean up the wreck? Sure. Do you put the speed limiter back on the next one you get? Absolutely. Do you hand the driver a check for $700 billion and a new set of keys? Fuck, no. Especially when there are millions of passengers who are being called whiners and told to suck it up.

    People want to see the big Wall Street Titans fail. They don’t want to see the economy go down with it. Unfortunately, the Wall Street Titans control the US Congress, and for the time being they’d rather watch the economy burn than be left holding the bag. Better to leave the taxpayer with the devil’s choice.

  80. 80
    clone12 says:

    I must have missed the part where Charlie Brown kicks Lucy in the rear before she could pull the football.

    Since when has the Dems strategically owned the GOP?

  81. 81

    Scrutinizer Says:
    September 30th, 2008 at 12:12 pm

    Let them fail.

    Kiss my ass.

    Give me 700 billion and I might even buy you dinner while doing it. It makes no sense to trust the people that screwed the pooch to deliver a solution that isn’t more of the same BS. A plan in the works for months at the same time we’re told things are not that dire and then the bomb is dropped with a demand that it be approved immediately (with a little time out for the Jewish New Year) or the world comes to an end.

    Work is for those who don’t know how to plunder – Savannah pirate t-shirt

  82. 82
    ThymeZone says:

    but at least it was an attempt to do something responsible in the face of a crisis.

    Uh, sorry, doing something responsible is never supported here over the opportunity to snark and gin up fauxtrage with a lefty twist.

    Just keep yesterday’s threads as a souvenir. “Fuck everybody, burn down Wall Street, serves ’em right.”

    That’s the crowd you are talking to here these days.

    Absolute complete fucking idiots. You have people here who think “bailout” means fat cats bailing out on the rest of us, when in fact it means rescuing a failing system from liquidity collapse, and thereby, rescuing everybody from the hideous effects of such a collapse. It’s not about a few well earned bankruptcies at a high level, it’s about millions of little bankruptcies for people like …. us. We are saving ourselves. But that’s not the sense of this noise machine.

    When they look back and wonder how the promise of the blogosphere got pissed away, they will need look no further than this maildrop right here. This is what happens when the desire to grab a pitchfork overcomes good sense.

  83. 83
    Steve S. says:

    I am wholly unqualified to make a judgment on the bailout, but I’ll take the opinion of these authors over politicians any day.

    Take a close look at what they are really suggesting. Let institutions fail and be taken over by other enormous institutions. So down the road there will be fewer but huger financial institutions. They even suggest this is good and systemically inevitable.

    So what we have now is, say, twenty superbanks that own our politicians and run our world, and their answer is to have ten superduperbanks.

    This is an answer? Even huger financial institutions buying and selling our representatives like the derivatives that caused all this? This doesn’t strike you as somewhat addlepated, like the House Republican proposal of tax cuts and deregulation? Look, John, I assume you watch CNBC every now and then. You’ve seen how they put eight different eggheads with degrees on the screen at the same time, all of them saying completely different things about what is happening and what should be done. What does that tell you about economics? The two goobers in this article aren’t any more qualified to tell you what to think than anybody else.

    What I think should happen has no earthly chance of happening, so I won’t bore you with it. All I can really hope for is that whatever is least destructive to my interests and those of the larger society ends up happening. With that in mind I think the best we can hope for is that some sort of package is passed, that it have some sort of limitations on the transfer of wealth from us to them (the transfer of wealth has been going on for decades, the best we can hope for, given the faux democracy we live in, is that it be slowed down a bit), that it have at least pro forma punishment for the Wall Street execs, and that it will be followed by a serious push for regulation of these effers and their shenanigans.

    What I’m NOT hoping for is even fewer ginormous institutions in charge of things.

  84. 84
    curtadams says:

    The real problem with the Paulson plan is that it *will not help* businesses having trouble getting credit. Seriously, how is the government overpaying for toxic mortgage debt going to help Widgets-R-Us borrow for payroll? Any money the banks get by stiffing the taxpayer is going to be spent chasing down more toxic waste to gyp the government with.

    In terms of LIBOR, there is a staggering amount of overnight credit around. The commercial paper market has literally never had so much overnight paper issued. The reason banks won’t loans to banks is not that they don’t have money – they do – it’s that they know the many other banks’ books are full of trash and won’t lend to them because they’re bad credit risks. The solution is not to pour money down the rathole of giveaway to broke banks. The Japanese did that and it earned them a 15 year recession. The solution is to audit the banks’ books, force honest accounting, and close down the bankrupt ones. Then, and only then, will LIBOR return to normal*

    *Although some of it is end-of-quarter book prettifying. This part will go away tomorrow until and come back in December.

  85. 85
    Comrade Colonel Ivan Ivanovich Renko, Komitet Gosudarstvennoy Bezopasnosti (ret.) says:

    If it’s too goddamn big to fail, then it’s too goddamn big to exist.

    A little old-skool Teddy Roosevelt trust-busting, anyone?

  86. 86
    liberal says:

    While we need to take measures to prevent the credit system from collapsing, I haven’t seen anyone put forth a good argument why the government shouldn’t be allowed (and, in contrast to the most recent bill, required) to receive equity.

  87. 87
    Comrade grumpy realist says:

    Credit comes from the Latin “credere”, meaning “to believe.” Banks aren’t lending to each other, even at the obscenely high rates of LIBOR, because they don’t trust the counterparty to a) pay back, b) stay around. My main grouch about the bailout package is that as far as I could tell, Paulson’s idea of creating the necessary trust is to scoop up a huge load of money and throw it at the situation, hoping that the Magical Trust Fairy will spontaneously appear, wave her wand, and Things Will Be All Right.

    Why doesn’t the Fed simply take a slice of the $750B and use it as capital for a bank, if lending is such a problem? My fear is that what the government is trying to do is take a whole bunch of dud securities and back them up by a large bailout package in an attempt to keep the whole balloon inflated. From that point, I can see why so many people are so pissed off. You can’t continue the game forever–at some point, the prices are going to have to come down to a reasonable level, the toxic waste is going to have to be drained from the system; the people who invested in them are going to have to take a bath, and quite a few hedge funds and banks will have to go under. The only good reason for the bailout package is to keep the system more or less in equilibrium and shielding against panic while those that need to go under….go under.

  88. 88
    Lesley says:

    That anyone has to point this out to Congress is unbelievable. Seriously, has it gotten this bad that we have to tell those managing gov’t how to differentiate between bullshit and reality?

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