Thought Exercise: If You Were In Charge…
OK, folks. We all have bailout fatigue. Some of us are bothered more by irresponsible borrowers and others are angry at the banks. We’re sick and tired of being asked to bail out those who have failed.
So let’s do a thought experiment here.
What happens if the US government literally does nothing more to stem the losses.
AIG’s recent request for money? Denied.
Citigroup’s plea for a capital injection? Nope. Maybe nationalization – add Bank of America too.
General Motors and Chrysler want another loan? Fugetaboudit. Liquidate yourself.
Homeowners underwater on their mortgages? Sorry, take your lumps.
So, what will happen if we give in to bailout fatigue and tell all of these supplicants “No.”
Would the economy rebound anyway?
Would capitalism as we know it die?
Would the markets tank and tailspin and descend into a slow depression?
Use comments to offer your prognoses.
11 Responses to “Thought Exercise: If You Were In Charge…”
The choice is analogous to pulling your band-aid off fast and getting it over with or pulling it off slowly, lessening the short term pain but making the process longer. Like the band-aid there is not a right/wrong answer as it depends on preferences developed before the decision is made.
To answer your questions – yes the economy would rebound anyway and capitalism would not die. The markets would crash as they are already doing.
As I've said in other posts my problem is not with the concept of bailouts and stimulus packages, it's with the rewarding of poor business practices, broken contracts, predatory lenders and greedy home buyers. Their actions should have consequences, and not positive ones. Rewarding negative behavior only encourages more negative behavior. Any help to them should come with major strings attached and that's what I'm not seeing in these packages.
If we let things go, the unemployment rate goes trough the roof, at least 30%. Millions of people become homeless as millions of houses stand empty.
This will like lead to one of three scenarios in order of likelyness:
1) A Communist Revolution, factories are nationalized, people are drafted to work in them.
2) An authoritarian government restarts the economy by building weapons and finding some defenseless country to invade so that we can build more weapons, good old fashion fascism.
3) The country breaks up into ethnic enclaves in which people take care of each other, call it the Lebanonization of America.
Obviously the fearmongering is working well when you read comments like Don Quijote's. No credible forecaster is predicting anything like 30% unemployment, but the cries of “We have to act swiftly to avoid a complete meltdown” have apparently left him with that impression.
Considering that the U6 unemployment is already at 13.9%, 30% is far from impossible.
The question, Stanley is “what would happen if we did nothing?”.
GM & Chrysler would go belly up, how many other companies would they take down with them? Quite a few I am sure, and how many companies would the suppliers take down with them? It's likely that the entire automotive eco-system would go down, how many jobs is that? Not counting third or fourth level effects, Auto-workers unemployed, not paying their mortgages driving the institutions that hold their mortgages into bankruptcy which in turn lay-off a bunch of people who in turn stop paying their mortgages, car payments, etc… which drives more financial institutions into bankruptcy, and on and on it goes, a vicious circle.
DQ- I realize this post was meant to be an expression of personal opinion and you've stated yours. I simply disagree and I feel it's based more on an atmosphere of overwhelming fear rather than rational analysis, because I haven't seen anyone project unemployment levels at that rate.
Perhaps you're right in a worst case scenario of doing nothing- but I don't think so. For instance, you're sort of including bankruptcy of financial institutions as a downstream effect, but we're already dealing with insolvent banks so this additional stressor wouldn't 'cause' that to happen. And even if we do nothing, we already have some safety nets in place.
Things are dire, there's no doubt, and could get worse. I just think that there's been too much fearmongering about things getting so much worse if we don't take any action, which has been used to justify some actions that are very questionable.
If the government did absolutely nothing then 25-30% unemployment is very realistic in my opinion. If Citi, BoA and AIG all failed catastrophically, at least Wells Fargo (and perhaps JP Morgan) would go down to, not to mention most of Europe. There would be no credit available and without credit there is no commercial paper. Without commercial paper many major corporations can't pay their payrolls and would have to declare bankruptcy. In fact I'll go out on a limb and say that the Fed buying up hundreds of billions of commercial paper was actually the most critical bailout that has happened so far because if they hadn't done that then the S&P 500 would have become the S&P 400 or S&P 350 last fall.
But I think it's a false dichotomy. There are proposals to take on AIG's CDS liabilities and then invalidate all the ones that don't have an underlying bond represented (while that would reduce risk for the US housing market a lot I'm not sure how it deals with the bigger problem of the European banking system though) and break apart the rest of the company to sell it. There are several proposals of how to nationalize the banks without causing severe systemic disruption. GM and Chrysler can be given prepackaged bankruptcies that they will most likely emerge from — although there is some risk they won't, but I've read arguments that the number of people affected by that is highly exaggerated.
The choice isn't between “bailout” and doing nothing as opposed to managed bankruptcy that will accelerate loss recognition but backstop vital areas and extending the pain out for a lot longer and a lot more expensively; I've read estimates it is 2-3x more expensive to drag it out.
Fair enough, mikkel.
They need to bring back the U-7 unemployment measurement and use it for the sake of an honest assessment of where we stand. I think that since U-6 is already almost 14% that number is quite possible just short of 20%, certainly no lower than 17%. That number would easily hit 25% if we did nothing as Elrod proposed for this thought experiment. Recovery as measured by employment could take as long as a decade, IMO.
What is U-7? I thought U-6 covered pretty much everything
I think this is what Jim's referring to
But what do we compare that to? For a long period of time, women were not part of the workforce, so presumably that percentage would have looked 'scarier' than what they're now reporting (47% of the population doing the labor to support the entire population.)
That's the problem with all of these changing metrics. Even the U6- if you're going to use that, fine, but tell us what full employment would look like. Otherwise it comes across like you're just trying to use a bigger, scarier number.
Actually, U-7 was tracked until 1994. The big difference between it and U-6 is that U-7 also tracked “discouraged workers”. If you find documents from the government that were from before 1994 you'll see it cited. If you look at the definitions from the BLS you'll notice that although U-4 and U-5 includes discouraged workers when they add the underemployed to the numbers to come up with U-6 they drop the discouraged workers back out. U-7 puts them back in.