Friday, September 7, 2012

Saving the Economy Through Bailouts? Only in Wonderland!

I guess it is good that the Democratic National Convention is over if for no other reason than Paul Krugman can get some sleep, given his heart was pounding with joy and admiration over the brilliance of the speakers. No doubt, all this fall he will coordinate his columns and blog posts with talking points from the Obama campaign and the DNC, and I am sure that some real howlers are in store for us lucky readers.

His latest column of gratitude and worship comes in the form of praising Barack Obama for his Wondrous Works in Giving the Economy Life Eternal, or at least a small recovery. He writes:
On Inauguration Day 2009, the U.S. economy faced three main problems. First, and most pressing, there was a crisis in the financial system, with many of the crucial channels of credit frozen; we were, in effect, suffering the 21st-century version of the bank runs that brought on the Great Depression. Second, the economy was taking a major hit from the collapse of a gigantic housing bubble. Third, consumer spending was being held down by high levels of household debt, much of which had been run up during the Bush-era bubble. 

The first of these problems was resolved quite quickly, thanks both to lots of emergency lending by the Federal Reserve and, yes, the much maligned bank bailouts. By late 2009, measures of financial stress were more or less back to normal. 

This return to financial normalcy did not, however, produce a robust recovery. Fast recoveries are almost always led by a housing boom — and given the excess home construction that took place during the bubble, that just wasn’t going to happen. Meanwhile, households were trying (or being forced by creditors) to pay down debt, which meant depressed demand. So the economy’s free fall ended, but recovery remained sluggish. 
 What Krugman wants us to believe is that by bailing out the banks and financial houses (which was pushed by the Bush administration and continued by Obama's presidency), the economy was saved. No, what happened was that the original downturn was not as great as it would have been had some other Kool-Aide-drinking banks also were forced to face the music -- complete with some executives losing their Connecticut mansions -- and the public find out very quickly which financial institutions were zombies and which were not.

Now, Krugman would argue that had the bailouts not occurred, the entire financial system would have collapsed. Granted, if the best thing the financial system could do was to engineer a housing bubble with more liabilities than the entire wealth of the world, maybe it needed the exit door. However, I suspect that we would have seen something quite less than the Apocalypse as Wall Street figures would have seen it in their interest to find a way out of the mess they had helped to create.

But there is more. Economist Mario Rizzo had a most interesting and insightful post this morning on Facebook, writing:
The Democrats say that we cannot go back to the policies that caused the financial crisis and recession. Ok. So what were those policies: The irresponsible expansion of Fannie and Freddie? The excessively easy monetary policy of the Fed? Inadequate regulation of securities? I do not remember a single Democrat objecting to these policies during the period before the crisis. I do remember Barney Frank pushing more and more expansion of Freddie and Fannie, though. Oh, the Bush tax cuts. No economist I have heard of says that the tax cuts caused the crisis and recession. So what are they talking about? 
In fact, what do we have today? For one, it is a financial system full of zombie institutions with the bailouts obscuring which institutions are healthy and which are not. Furthermore, we have the clashing policies of easy money and picky regulations. Yes, the Obama administration is demanding that banks lend money out the wazoo, but the regulators don't want anyone to get those loans. One might want to try a policy in which the banks actually have to bear the consequences of bad and even reckless loans without having the Federal Reserve and the taxpayers standing behind to clean up the mess. I suspect that we would see some civilized behavior on Wall Street; instead, we see what, frankly, is a rigged game in which the government pushes down interest rates, limits the loan choices for banks via strict regulation, and then holds out the prospect of small-but-near-guaranteed returns from federal paper. Gee, I wonder where the banks will send their money.

And then there is the GM bailout. Krugman writes:
But, that said, Mr. Obama did push through policies — the auto bailout and the Recovery Act — that made the slump a lot less awful than it might have been.
 There is a bit of a problem here; the General Motors and Chrysler bailouts did not help the economy; they hurt it. Yes, they kept the United Auto Workers in cash, which was the real purpose, anyway. (More on this below.) However, they also diverted huge amounts of capital away from more productive sectors in order to fund a venture in Crony Capitalism or maybe even Crony Socialism.

I doubt that Krugman is familiar with Frederic Bastiat, and reasonably so, since Bastiat really emphasized opportunity cost and Krugman really seems to believe that by printing money, government can do away with that pesky little economic law. The GM and Chrysler bailouts not only were politically-motivated, but also were carried out with a political calculus, all the way down to determining which dealerships would be closed and which would stay open. (It seems that campaign contributions had something to do with the calculus of decision making.)

Bastiat was a master of understanding the larger picture, something that Keynesians are not able to comprehend. (Sorry, folks, the use of aggregates does not constitute a view of a "big picture" of economics.) Instead of looking to the UAW members who kept their jobs, Bastiat would have looked at the opportunities that were lost and the entrepreneurs who could not see their own ideas fulfilled because the UAW needed a bailout.

I notice another trend in Krugman, writings, and that is a very sneaky theme that goes something like this: The economy is going to recover very well, anyway, so we should re-elect Obama to "validate his record." Furthermore, Krugman wants us to believe that if Mitt Romney were elected and the recovery occurred, that would be very bad because he would wrongly get the credit for recovery. (Actually, I think it will be bad if either man wins the election, but that is another story.)

If Obama is re-elected and the economy slides down, then I am sure that Krugman simply will blame the Goldstein Republicans or even George W. Bush. Of that we can be sure.

While I did not watch the DNC (or RNC) conventions, I did see a hilarious Youtube of former Michigan Governor Jennifer Granholm claiming that Obama's auto bailout saved the entire U.S. manufacturing sector and with it, the whole economy. Not only is she completely unhinged, but the notion that forcing taxpayers to underwrite a horribly-unproductive industry is not the way to save anyone except for those who were politically-connected. Furthermore, her claim that the "entire auto industry" would have collapsed without the bailout is simply false.

I do find it instructive that Krugman never mentioned this mangling of the facts, but as I have said before, the guy is a political operative, not an economist. A real economist would not claim that throwing money into a political rathole constitutes a stimulus that leads to recovery.


Anonymous said...

As a resident of the State of Michigan I feel compelled to state that your description of Ms Granholm as “completely unhinged” is most polite and generous description you could offer someone that deserves much less. Having followed her “political” career from being nothing other than a political hack in Wayne County to Attorney General to being Governor, and knowing people connected, I can assure you she is devoid of any substance. There is no “there, there” As a young adult, she had a failed attempt to be an actress but that experience served her well in politics.

Her tenure as Governor epitomizes the progressive neo-Keynesian philosophy that helped produce a near third world standing for the State. Don’t misunderstand this as a partisan thing, the third term of John Engler (R) before her was a complete waste of time and space.

Her tenure as Governor was so bad the State revolted and elected a Republican Governor, Senate, House, AG and Secretary of State. It would appear that even some Progressives will change horses when economics get bad enough.

She is one reason why the Founding Fathers wanted government predominately at a local level. The damage is minimized and contained and we residents know her better than anyone. The national audience and that crowd don’t know the details of her history of failure. If they did, they would be less enthusiastic about her “off Broadway performance.”

Pulverized Concepts said...

with many of the crucial channels of credit frozen; we were, in effect, suffering the 21st-century version of the bank runs that brought on the Great Depression.

Those two phenomena are somehow similar?

Bob Roddis said...

Lucky for us that Ms. Granholm was born in Canada and moved to California when she was 4. Otherwise, they would have had her running for president or VP by now.

Anonymous said...

"Furthermore, her claim that the 'entire auto industry' would have collapsed without the bailout is simply false."

The auto industry was concerned about the sudden collapse of the supply chain. All of the auto manufacturers, e.g. Japanese, German, etc., supported the GM/Chrysler bailout. Therefore, is your statement just opinion/ideology or do you have some data to back it up? Before you respond, my son was involved in coordinating the auto industry response to the proposed bailout.

Finally, GM wanted to close many of the dealerships prior to the bailout. However, state franchise laws prevent auto companies from closing dealerships. Wonder why you can't buy cars directly on the Internet? GM used the bailout to close dealerships that should have been closed years ago.

Larry said...

Krugman on yesterday's horrible jobs report, states "nothing to see here", Really, "nothing to see here," Krugman completely ignores the fact people have dropped out of the job market, they have stopped looking. They are now running to file for Social Security Disability, because they're unemployment has ran out. Working as an entitlement eligibility worker, I see this on a daily basis. Krugman in wonderland once again!

TheRightRadical said...

The auto industry was concerned about the sudden collapse of the supply chain.”

What thousands of small manufacturers of car parts are going to disappear overnight? That sounds outlandish. Do you have any facts to prove that?
The production of new cars is never going to drop to zero, unless we wake up tomorrow and find out. We are now living in Zimbabwe. And there will always be someone to supply them whatever part they need if there is a profit in it. I have been to many parts suppliers to the auto companies over the years, some of the have in fact closed. Should they have been bailed out too?

All of the auto manufacturers, e.g. Japanese, German, etc., supported the GM/Chrysler bailout."

I didn’t know that it was the responsibility of the American taxpayer to subsidize Mercedes-Benz, and BMW, because they have a faulty supply chain. What’s next Rolls-Royce, and Bentley? Are they gonna offer us all huge discounts, since we scratched their backs? I doubt it.

Finally, GM wanted to close many of the dealerships prior to the bailout.However, state franchise laws prevent auto companies from closing dealerships."

They could have done this without becoming Welfare Queens. A reorganization under federal bankruptcy laws, would have over-wrote state laws, and da judge would have closed them. They probably would have got concessions on their burdensome union contracts too. Had they gone through a legit bankruptcy, but when you take “the Kings schilling you do the Kings bidding”

Wonder why you can't buy cars directly on the Internet?"

Let me guess. It’s against the Law? Which is why we should be good and pissed off about bailing out three car companies, and really, really pissed because we are talking about only three car companies, and not 30, 300 or even the 3000 car companies. All the ones we don’t have, because of the LAW!

Therefore, is your statement just opinion/ideology or do you have some data to back it up?"

Now you might call me ideological, but I call this the facts:

Before you respond, my son was involved in coordinating the auto industry response to the proposed bailout.
So what?
I am supposed to be impressed that your son's ideology is international socialism, as opposed to national socialism?