We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people.
Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]
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Samizdata quote of the day “I think we should not have put off shrinking our financial sector. The result of the bailouts is that we are maintaining credit markets based on false information and artificial prices. You may have pulled the airplane out of the dive, but you are flying with faulty instruments, and I don’t think you are going to be happy about where you wind up.”
Arnold Kling, reflecting on the financial turmoil and the missteps of policymakers. It is quite a shock to realise that the demise of Lehman etc happened almost a year ago. The ensuing 12 months have gone past very quickly.
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” The ensuing 12 months have gone past very quickly.”
Well you know what they say; “Time flies when you’re having fun.” /snark
Seriously though, I work in the financial services sector arranging credit and I can’t believe the number of people I deal with who want to act as if nothing has happened and we should just carry on as before. I suppose it is just a case of collective denial.
Who cares if we are living a lie if everyone is happy! (In case it’s not clear, that would be sarcasm)
I can’t remember where I read it, but I noticed an article discussing whether the recession would be U shaped, V shaped or W shaped, and which came to the conclusion it would be VW shaped*, as each attempt to ‘fix’ things caused more problems down the line.
* Or maybe that should be Vw shaped.
You saw it in Forbes, Kevin.
Arnold Kling is correct in what he says here – perhaps more correct than he knows.
Having read the article:
Arnold Kling lists not bailing out the bankrupt enterprises as “kill them all, and let God sort them out”.
I would prefer an accurate statement which would be “no government bailouts and allow markets to clear”.
If the clearing of markets proved to be very painful it would simply prove that the misallocation of resources (the distortion of the capital structure of the economy) had been very great indeed.
Efforts to avoid such a painful liquidation simply make this worse.
As for the legal side – only with Fannie Mae and Freddie Mac (not with AIG) can there even be argued to have been a legal agreement for the government to back them (and that is actually a rather weak legal case).
However, if it was the legal position that Fannie Mae and Freddie Mac had to be bailed out – they then should have been SHUT DOWN (after their debts had been paid – in line with this interpreation of the law).
As it is the policy of the American government is to make the concentration of the financial industry WORSE (to make it MORE concentrated) – this policy takes “to big to fail” to its final, insane, conclusion.
Lastly on the “freezing of credit markets” – we were told (endlessly) that credit markets were so frozen that compaines (in all sectors of the economy) could not even “borrow money to make payroll”.
If it is really the case that many companies now borrow money even to make oridinary payments (such as payroll) then the economy is doomed – no policy could save such an absurd situation. And, therefore, we must just start again. Mass bankruptcy and use the physical capital (which would still exist) under companies and individuals that did not think that such things as “borrowing to make payroll” were a normal way to proceed.
Borrowing must be a rare thing (for special investments that existing profits can not finance) not for the ordinary day to day expenses of running a business. And all borrowing must be 100% financed from real savings – not funny money and book keeping tricks.
Paul Marks writes: “Borrowing must be a rare thing (for special investments that existing profits can not finance) not for the ordinary day to day expenses of running a business.”
Paul, that is an unnecessarily tough standard – most growing businesses go through stages where the right amount of borrowing takes them to the next stage. Borrowing can create perverse incentives, and can be abused, for sure, but that’s not a reason to dismiss it any more than any tool that you can cut yourself with. It is the government’s involvement in credit markets that creates and perpetuates problems that can blow up the system, not credit per se.
I do suspect that you kind of meant that, actually, by contrasting “special investments” with “ordinary day to day expenses of running a business”, so the distinction is mostly (but not entirely) semantic. And yet, a pharmaceutical start-up is not intrinsically a bad business idea, just a risky one. Still, it needs plenty of debt (and equity) financing – simply because of the huge upfront costs.
Agreed on your other points, especially the “too big to fail” folly, since those “too big” get merged/bought by other, “now-even-bigger-so-sure-as-hell-not-to-be-allowed-to-fail” ones.
The “lender of last resort” is the problem, when it is something other than the market, and a central bank is definitely not the market.
I suspect the “bailouts”. There had to be companies that didn’t “loose” billions. The bailout could’ve been
to them; to take control of the losers. This would’ve allowed the firing of losers’ management/boards, with
their later investigations and criminal/ civil proceedings.
Sorry, Johnathan, you are just suffering from old age. Elderly people always wonder where the time went Have fun in the nursing home!
There is more than a semantic difference between “Shrinking,” and “allowing to shrink.”
“Mezanine financing” came almost to a standstill.
Perhaps some redirection of credit facilities by major capital bodies would reinforce the functional viability of the area Kling refers to.
Paul Marks: your point of view would make many perfectly normal businesses impossible. Take an example close to home: my father, who was a farmer, got paid for the sale of his crops at certain points of the year, such as during the winter once the harvest/sowing season was over. Other businesses have lumpy income streams but a steady and predictable need for funding to cover some costs. This sort of mismatch explains how banks and other financial institutions arise in the first place.
My father was “asset rich but cash-poor”, as they say. So he had a big bank overdraft facility, which he used if need be to pay specific bills. The bank was happy to do this because the loan was backed by the collateral of a 310 acre farm.
Even under 100-per cent reserve banking, rather than fractional banking, there is no reason to suppose that this sort of borrowing for firms and individuals would not continue.
Why should there be any regulation to insist on 100% reserve banking?
Leave it to the free market. There will be people who would want a better return on their money in exchange for higher risk – they would put their money into banks operating on fractional reserve, and borrowers can get their loans from these banks.
There will also be people for which the risk is unacceptable, and they would put their money in 100% reserve banks.
And I suspect the human pursuit of more money will encourage more people to use fractional reserve banks than we think. And then we’ll get a full spectrum of banks operating from 100% reserves to high-risk 5% reserves offering high interest rates.
J.P. is making the cash flow point – which has always been more strong for farmers (with their harvest based business). Although even with farmers it used to be the case that they put their profits (from the sale of the crops) in the bank – and then drew them down over the year to meet expenses. After all the industrial revolution of the 18th and early 19th century was financed by bank lending from FARMING PROFITS.
In short farming used to be a net LENDer not a net BORROWER. The farmers were the rich men who put their money in the bank – and the would be industrialists borrowed the money in order to pay for the building of their factories. That is why the “agricultural revolution” (the improvment in farming) came before the “industrial revolution” (it could not have been the other way round).
I understand that things have changed – but your father did not still owe the bank money AFTER HE SOLD HIS HARVEST did he J.P.?
If he did still owe the bank money even after he sold his harvest – there was something wrong with his business (no matter how rich he was). If you doubt that – think how an economy would work if everyone still owned the bank money even after they had got paid for their goods and services for the year.
If everyone still ownes the bank money even after they have got their years income – where on Earth does the bank get its money from?
Plamus is dealing with business expansion – or with an invent business getting off the ground.
I was writing about something quite different – and I apologize if my writing was unclear.
We were told (repeatedly) that the “freezing of the credit markets” (which was a lie anyway – as people could still borrow money it they were prepared to agree to higher interest rates and had real assets) meant that “most ordinary companies could not get money even to meet payroll”.
I refuse to believe that even farmers (let alone most business enterprises) go along to the bank every week (or even every month) and say “well Jethro’s pay needs to be met – lend us the cash Mr Banker”.
J.P. mentioned a formal overdraft – not a desperate scrabble to meet payroll every week or month.
If what we were told is true and “most companies” rush off to the banks every time pay falls due screaming “lend us the cash to meet payroll” then this “modern economy” is so utterly doomed that no policy whatever could save it.
But if what we told is NOT true – then the whole of the “we must bailout everyone NOW – otherwise most companies will collapse as they will not be able to meet payroll” was a “big lie”.
I can’t speak for the mega-companies (the ones which receive government bailouts), but I can tell you from personal experience, Paul, that the credit markets are indeed substantially tighter than they were a year ago. And it has nothing to do with being willing to pay higher interest rates.
My business has very regular and predictable expenses (mostly payroll) but our revenues are quite “lumpy”. So I have a line of credit which I draw upon when cash is low and pay off when the revenues come in. I suspect that most small businesses are very similar. Until now that line has been unsecured, but now my bank (which has had all of my business for many years) has implemented a new policy of no unsecured lines; I have to give them a lien on my house (in addition to my personal guarantee) as collateral. That’s a pain in the butt, and adds costs besides, but at least I have the equity to offer them. Someone without substantial personal equity couldn’t get a line, and thus could not remain in business, even though the business is perfectly viable.
I apologize for any error here, but it appears to me that you have never run a small business. It’s not entirely the theoretical exercise you seem to think.
Paul, my dad’s credit facility was rather like a 365-day revolving credit facility that a lot of small firms use. After harvest time, my father was in the black and of course set aside some of that money to provide for expected bills. Even so, some unexpected costs had to be provided for, and also, the farmland itself was valuable enough to stand as collateral for such credit.