Thursday, January 29, 2009

To Support the Stimulus Plan or Not?

To support the stimulus plan or not, that this the question. In deciding whether to support the stimulus plan, it is worth remembering what Friedrich Hayek, the Nobel Prize-winning economist, once said:

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."from The Fatal Conceit

Adam Smith also said something worth considering:

"The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder." from The Theory of Moral Sentiments

But under the circumstances, the question should not be support the plan or not, something must be done. The question should be: Got any better ideas?

And of course, in deciding the solution, it helps to understand the problem. Read The New York Times, Six Errors on the Path to the Financial Crisis. According the writer, the six error, in chronologically order, omitting mistakes that became clear only in hindsight, and limiting to those where prominent voices advocated a different course at the time, were:

"WILD DERIVATIVES In 1998, when Brooksley E. Born, then chairwoman of the Commodity Futures Trading Commission, sought to extend its regulatory reach into the derivatives world, top officials of the Treasury Department, the Federal Reserve and the Securities and Exchange Commission squelched the idea. While her specific plan may not have been ideal, does anyone doubt that the financial turmoil would have been less severe if derivatives trading had acquired a zookeeper a decade ago?

SKY-HIGH LEVERAGE The second error came in 2004, when the S.E.C. let securities firms raise their leverage sharply. Before then, leverage of 12 to 1 was typical; afterward, it shot up to more like 33 to 1. What were the S.E.C. and the heads of the firms thinking? Remember, under 33-to-1 leverage, a mere 3 percent decline in asset values wipes out a company. Had leverage stayed at 12 to 1, these firms wouldn’t have grown as big or been as fragile.

A SUBPRIME SURGE The next error came in stages, from 2004 to 2007, as subprime lending grew from a small corner of the mortgage market into a large, dangerous one. Lending standards fell disgracefully, and dubious transactions became common. Why wasn’t this insanity stopped? There are two answers, and each holds a lesson. One is that bank regulators were asleep at the switch. Entranced by laissez faire-y tales, they ignored warnings from those like Edward M. Gramlich, then a Fed governor, who saw the problem brewing years before the fall. The other answer is that many of the worst subprime mortgages originated outside the banking system, beyond the reach of any federal regulator. That regulatory hole needs to be plugged.

FIDDLING ON FORECLOSURES The government’s continuing failure to do anything large and serious to limit foreclosures is tragic. The broad contours of the foreclosure tsunami were clear more than a year ago — and people like Representative Barney Frank, Democrat of Massachusetts, and Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, were sounding alarms. Yet the Treasury and Congress fiddled while homes burned. Why? Free-market ideology, denial and an unwillingness to commit taxpayer funds all played roles. Sadly, the problem should now be much smaller than it is.

LETTING LEHMAN GO The next whopper came in September, when Lehman Brothers, unlike Bear Stearns before it, was allowed to fail. Perhaps it was a case of misjudgment by officials who deemed Lehman neither too big nor too entangled — with other financial institutions — to fail. Or perhaps they wanted to make an offering to the moral-hazard gods. Regardless, everything fell apart after Lehman. People in the market often say they can make money under any set of rules, as long as they know what they are. Coming just six months after Bear’s rescue, the Lehman decision tossed the presumed rule book out the window. If Bear was too big to fail, how could Lehman, at twice its size, not be? If Bear was too entangled to fail, why was Lehman not? After Lehman went over the cliff, no financial institution seemed safe. So lending froze, and the economy sank like a stone. It was a colossal error, and many people said so at the time.

TARP’S DETOUR The final major error is mismanagement of the Troubled Asset Relief Program, the $700 billion bailout fund. As I wrote here last month, decisions of Henry M. Paulson Jr., the former Treasury secretary, about using the TARP’s first $350 billion were an inconsistent mess. Instead of pursuing the TARP’s intended purposes, he used most of the funds to inject capital into banks — which he did poorly."

Note that with the exception of the first error, they all occurred under Bush. Senior "Clinton administration officials, including Treasury Secretary Lawrence H. Summers, joined by the Federal Reserve chairman, Alan Greenspan, and Arthur Levitt Jr., the head of the Securities and Exchange Commission, issued a report that instead recommended legislation exempting many kinds of derivatives from federal oversight." Republi-con Senator Phil Gramm was only too happy to help pass, in the Republi-con-controlled Senate and House, the Commodity Futures Modernization Act, which deregulated credit default swaps, the real cause of this economic collapse.

And a historical not-so footnote, the Commodity Futures Modernization Act included the so-called "Enron loophole," which exempts most over-the-counter energy trades and trading on electronic energy commodity markets. The "loophole" was drafted by lobbyists for Enron working with Gramm to create a deregulated atmosphere for their new experiment, "Enron On-line." You might also recall that Gramm's wife, Wendy Lee Gramm, was on the board of directors of Enron when it collapsed.

So remember this as you listen to the newly self-righteous Republi-cons praise the false gods of less taxes and less government, they are largely responsible for the mess, they have no, zero, zilch, nadda credibility with me, and I haven't heard a better idea from them yet. Have you?

UPDATE: Here's a hint for the clueless Republi-cons, how about a stimulus plan that is timely, targeted, and temporary. Read The New York Times, Cleaner and Faster. The writer makes a good argument that the Naive-crats have created a stimulus package that is a sprawling, undisciplined smorgasbord. (What else would you expect from Naive-ocrats?) By trying to do everything all it once, the bill does nothing well. "This recession is scary and complicated. It’s insane to try to tackle it and dozens of other complicated problems, all in one piece of legislation. Leadership involves prioritizing. Those who try to do everything at once will end up with a sprawling, lobbyist-driven mess that does nothing well."

Bravo, bravo, if this man paid his taxes correctly, make him co-Treasury Secretary.

So repeat after me:

The stimulus package should be timely, targeted, and temporary. Instead, it is a sprawling, undisciplined smorgasbord of pent-up partisan fantasies, therefore I will not support it.

Simple, not too many words for the Republi-con faithful. It would be a winner in today's attention challenged world don't ya think.

P.S. Somebody should pay me for this, I prefer gold until further notice.