"The ultimate result of shielding men from the effects of folly is to fill the world with fools.”
Every business failure has harmful effects but it also has good effects. Every failure frees up resources that can be used by a succesful business. Investor’s money, employees’ time and talents are all freed up to be used in ways that are more beneficial to society. Unfortunately the adjustment is not instantaneous and some resources may be idled while the adjustment takes place. Politicians can get votes by making sure the painful adjustments do not have to take place on their watch. For example, if two farms both grow wheat and one farm harvests with a combine and the other uses men with scythes. It is in society’s interest for the farm with manual harvesting to go out of business and a farm using combines to replace it. However, the scythe workers and the farm owner would vote for any politician promising to bail them out using tax money from the other farmer.
Or not. If the collapse is big enough it tends to economically paralyze society instead; a depression in other words. And from most people’s perspective, human suffering especially their own is more important than some striving for pure economic efficiency anyway; if the economy is more efficient but people are more miserable then that’s a net loss.
From what little I know of the Great Depression, the economic slump was because of the result of the lack of economic activity, not a problem of resources, labor, or production.
People lost faith in the system. It took some time to get that faith back.
Or am I wrong about that?
If life gives you lemon socialism, make lemonade!
[sub]Of course, it’s going to be pretty crappy lemonade unless life also gives you water socialism and sugar socialism[/sub]
Even before the bailouts, if the banks were too big to fail, they should have been socialized. That’s what government is for: To do the things that are too big to fail.
Over what time horizon? A less efficient economy hurts everyone in society for the rest of their lives. If the US economy over the last 100 years grew 1% less than it did each year, the US would currently have the same standard of living as Mexico. Small changes in efficiency over long periods of time add up to huge changes. Unemployment hurts some people alot for as long as it lasts
The great depression was caused by a severe monetary contraction. The amount of money in circulation declined by nearly a third.
To see a lecture about it go here http://vimeo.com/11700175
To read about it go here: http://www.themoneyillusion.com/?p=4161
I read the second link.
You seem to support what I said: The economic activity (money in circulation) contracted sharply. Many banks in the US failed, causing folks in other banks to literally pull out their funds and stuff their matresses. A loss of faith in the banking/investment system.
In post #41 you state that weak (or inefficient) buisnesses failing is good, because it makes way for other more efficient buisnesses to take over the void.
The problem is, neither the Great Depression, nor our current recession, is based on a problem of supply (resources), availability of labor, or production potential.
It seems as if people (both consumers and corporations) are “saving” more money as a shield against potential bad times in the near future, and not spending or investing as much as they did during the years when they “ran with the bull”.
This is a perception issue. People won’t loosen the money belt unless they feel confident that good times are just ahead. Allowing buisnesses “too big to fail” to fail does not inspire this confidence. So while I thought that TARP was a turd sandwich, it was better than economic panic.
That’s a much more clear and succinct way to sum up my thoughts on the matter. Thanks!
It’s not really a novel idea. Take the words of this raving socialist:
The socialist in question? Adam Smith. Modern Western nations are not capitalist. They’re corporatist. True capitalist governments would be much more aggressive in identifying and splitting up banks and other companies that are “too big to fail”.
As far as I can tell, Chrysler was the only privately held company that got a bailout. The others were all publicly traded companies, which means the benefits are not exclusive. If you want, you can share in their profits. Sign up for a discount brokerage, deposit some money, and then buy some shares. When the company gets those wild profits, your stock will go up and you’ll get dividends:
Wells Fargo at 1.91%
JP Morgan Chase at 2.96%
Bank of NY Mellon at 2.45%
US Bank Corp at 2.08%
And once you do go and buy some stock, you’ll realize what happens when the banks don’t make wild profits, and you may find you change your tune.
Some data I’d love to see would be how many 401(k)s contained at least one of the companies on the TARP list. I think what you’ll find is that what you call “private shareholders” were actually a large chunk of the population who happily watched their retirement funds go up as a result of those “wild” profits, and were less happy to see their retirement funds go down during the crash.
It should also be pointed out that nearly all of the “too big to fail” companies that received TARP funds have paid it back. GM still owes some, as does GMAC and Regions Financial.
Are you suggesting that the government should be the one to issue mortgages, insurance, and managed financial investments?
Why not skip that step and just have the government own all the property, seems a lot less messy.
The percentage was certainly helped by nudging companies to accept TARP funds even if they didn’t think they needed them. Those companies for obvious reasons paid them back as soon as possible.
The rest of your post is a pretty ridiculous intentional misreading of “public” versus “private”. If the government bails the banks out due to their poor decision-making, we shouldn’t prop them up with our government’s money – funds that American taxpayers do not even have a choice to refuse paying, unlike your thought experiment.
Of course, it’s a sliding scale. I’m not really outraged at the auto bailout because it was not the car makers’ fault, and the US made money on it. But we should have either let many more financial institutions fail or require much more onerous restrictions for our help, rather than throwing money at them so their execs can get billions in bonuses.
Or by not allowing fractional-reserve banking and/or fiat currency to exist, at all.
I would make the argument that by merely allowing those institutions to exist without the explicit consent of the customers and/or insisting that fiat currency be legal tender, already constitutes an overreach of government.
I’m not familiar with the Smith passage you quoted…which was nice, by the way. But it also seems to suggest that Smith was OK with those ideas as a default state of affairs.
We shouldn’t. The stupid ineptly run banks should be allowed to go bust. Other more competently run banks will flourish where the useless ones goes bankrupt. And if a bank is really so big that its collapse would be a danger for the whole economy, then it should be nationalized rather than bailed out. After nationalization if can be cut into pieces and the healthy parts sold off. Stockowners and bondholders should lose their investments. Directors and board members that have behaved grossly incompetently should be prosecuted, convicted and thrown in jail. Bonuses should be confiscated up to a period of years into the past.
Do we ever have a say in how the government spends money? What makes TARP so unique? So we propped up a couple of banks, as opposed to a couple of dictators. We took over some companies instead of some countries. And like I said, those companies the government saved were partly owned by American taxpayers (except Chrysler, but you’re okay with Chrysler).
How exactly wasn’t it the car markers’ fault? And do you happen to know how much money they made on that as opposed to the financial institutions? If it turns out the US lost oh let’s say $11billion on GM, and just for fun let’s say the government lost another $3billion on Chrysler, but made oh I don’t know 8.2% on the financials will you change your tune? Or dig your heals in further?
You support propping up dictators? Interesting!
“That which doesn’t kill you makes you stronger.”
On the other hand, if it does kill you, you don’t get any stronger because you’re dead. You want to stay in the middle area between coddling society to the point where it doesn’t go anywhere and allowing society to die for a lack of assistance.
Dig in your heals, squat your ass down, and say ‘hee-haw’
Still support propping up GM and Chrysler?
The only alternative to fiat currency is barter, and that’s extremely inefficient. Yes, I know, you’re about to protest that we could use gold instead. But gold is also a fiat currency, and not even a very stable one. It is, in fact, a pretty lousy fiat currency.
Gold is backed by nothing. Dollars are backed by everything.