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A Simple Argument Against the Bailout:

Economist Steven Landsburg, writing for the Atlantic, presents what seems to me a simple, but powerful argument against the bailout. I don't know enough about finance economics to be sure whether it's right. But I thought that it's at least worth passing along to our readers. Even if it doesn't succeed in proving that no bailout at all was necessary, it at least casts doubt on the need for a plan as massive as the $700 billion monstrosity that the administration is trying to ram through Congress:

What's clear is that a bunch of financial institutions have made mistakes and lost money. What's unclear is why anyone (other than the owners and managers) should care. People make mistakes and lose money all the time. Restaurants fail, grocery stores fail, gas stations fail. People pick the wrong stocks, they buy the wrong cars, and they marry the wrong spouses without turning to the Treasury for bailouts.

So what's special about banks? According to what I keep reading, it's that without banks, nobody can borrow, and the economy grinds to a halt.

Well, let's think about that. Banks don't lend their own money; they lend other people's (their depositors' and their stockholders'). Just because the banks disappear doesn't mean the lenders will. Borrowers will still want to borrow and lenders will still want to lend. The only question is whether they'll be able to find each other.

That's one reason I feel squeamish about the official pronouncements we've been getting. They tell us bank failures will make it hard to borrow but never that bank failures will make it hard to lend. But every borrower is paired with a lender, so it's odd to state the problem so asymmetrically. This makes me suspect that the official pronouncers have not entirely thought this thing through.

In the 1930s, a wave of bank failures did make it hard for borrowers and lenders to find each other, and the consequences were drastic. But times have changed in at least two relevant ways. First, the disaster of the 1930s was caused not just by bank failures, but by a 30% contraction of the money supply, which is something today's Fed can easily prevent. Second, as any user of match.com can tell you, the technology for finding partners has improved since then. When a firm wants to raise capital, why can't it just sell bonds over the web? Or issue new stock? Or approach one of the hedge funds that seem to be swimming in cash? Or borrow abroad?

Ultimately the key question is this: why shouldn't these banks be treated like any other business whose management has displayed bad judgment and lost a great deal of money as a result? Capitalism works because we insist that businesses bear the cost of their own losses, a process that gives them strong incentives to make good decisions and transfers their wealth to others with better judgment if they persist in screwing up anyway (as the big banks have done in this case). Perhaps really big banks are somehow special and deserve bailouts that we would deny to other businesses. But there is a heavy burden of proof on those who claim that this alleged specialness really exists and that it justifies hundreds of billions of dollars in public expenditures, unchecked executive power, and unprecedented control of the economy by the federal government. Like Landsburg, I am skeptical that the burden has been met.

Tony Tutins (mail):
Excellent points. Note that in this sort of Market Darwinism, all the banks failed at once -- it wasn't as if smarter banks survived while stupid ones failed. Because they were unable to adapt to the changing environment, investment banks are akin to dinosaurs, and any attempt to keep them alive is therefore doomed.

Wave good bye to T-Rex and Apatosaurus.
9.23.2008 2:14am
Ricardo (mail):
Landsburg misses a critical point in his mention of the Great Depression. Yes, the money supply contracted but the reason it contracted by the amount it did was because people initiated bank runs which, through the money multiplier, magnified the tight money policy of the Fed. Landsburg seems to be assuming that the Fed has complete control over the money supply which is only true for currency in circulation. It's not true for M1 or M2 and the experience of central banks' attempts to target monetary aggregates bears this out.

He is greatly oversimplifying things by saying it's "easy" to prevent a 30% contraction in the money supply during a financial crisis. In fact, the history of the Great Depression shows that a Fed behaving as he seems to want it to behave would be more, rather than less, likely to preside over such a contraction.
9.23.2008 2:34am
Curt Fischer:
I was looking up what exactly M1 and M2 were in this Wikipedia article when I found this curious sentence:



Current Chairman of the U.S. Federal Reserve, Ben Bernanke, has suggested that over the last 10 to 15 years, many modern central banks have become relatively adept at manipulation of the money supply, leading to a smoother business cycle, with recessions tending to be smaller and less frequent than in earlier decades, a phenomenon he terms "The Great Moderation" [24].

9.23.2008 3:04am
trad and anon:
People are talking about another Great Depression. Perhaps Landsburg is right, but do you want to bet the world economy on it?
9.23.2008 3:04am
Visitor Again:
Capitalism works

Does it? Heh, heh, heh. I don't think so. Marx was right about greed; he just didn't envision the precise way in which capitalism would fall. There sit the Chinese Commies, with their vast reserves and their even vaster economic potential, all ready to pounce on what's left of any worth in the U.S.A.
9.23.2008 3:04am
Robert S. Porter (mail) (www):
Except that China is currently still a very poor country.
9.23.2008 3:55am
Kazinski:
Curt Fischer,
Why is the sentence curious? Anybody over 50 will tell you that recessions have become shallower and less frequent over the last few decades. Most adults that remember the 73-75 and the 80-82 recession will tell you that they were a lot worse than the 92-93 or the 2001-02 recessions. What makes the difference even larger is that the economy never really got going between 75-80 so they had to coin a new term for it: stagflation.
9.23.2008 3:56am
Kazinski:
VA,
While China still has a communist government, its pretty hard to call its economy "communist". You've got the authoritarian hand of government enabling the predatory capitalists of the entire world to exploit the Chinese worker to the fullest extent possible.

Workers owning the means of production, hah! May God have mercy on the worker that tries to organize a labor action because the Communist party and government won't.

But that is the way the people and the Communist party wants it because capitalism does work. And China proves it in spades.
9.23.2008 4:06am
EH (mail):
Here's something fun:
With our economy in crisis, the US Government is scrambling to rescue our banks by purchasing their "distressed assets", i.e., assets that no one else wants to buy from them. We figured that instead of protesting this plan, we'd give regular Americans the same opportunity to sell their bad assets to the government. We need your help and you need the Government's help!

Use the form below to submit bad assets you'd like the government to take off your hands. And remember, when estimating the value of your 1997 limited edition Hanson single CD "MMMbop", it's not what you can sell these items for that matters, it's what you think they are worth. The fact that you think they are worth more than anyone will buy them for is what makes them bad assets.
9.23.2008 4:06am
Bill Adams (mail):
I'm being lazy and not looking up the original Landsburg article, which may address this point, but --

as much as I agree with the quoted material so far as it goes, isn't it also true that savings are wiped out when banks fail? Like most Americans I personally don't have much in savings (in my case, nothing to speak of) but that doesn't keep me from respecting those who have been more prudent and thrifty than I and seeing the monstrous injustice in their savings being wiped out. That the Raineses and Johnsons of the world got tens of billions in bonuses due to cooked books before anyone decided all bets are off, let 'em fail, just makes it more unjust.

Of course, a bailout run by Rainses and Johnsons that looks after Rainses and Johnsons first will be the worst of both worlds.
9.23.2008 4:08am
Bill Adams (mail):
Oops. Correction to my last post: tens of millions (literally correct) was what I meant, not tens of billions.
9.23.2008 4:10am
Mark Rockwell (mail):
Good points, generally. And those are definitely worth considering when it comes time to redraft the regulatory framework. But I'm not sure that the Darwinist approach is the best in cases like AIG where the tentacles run far and deep--beyond your average super-genius investor's ability to detect and hedge against.

With that said, a government bailout of AIG should, effectively, be considered an AIG failure. The investors should probably feel it as such. The point of the bailout wasn't to save the hide of those who invested in/made bad business decisions, but to save the hide of those several iterations out who weren't in as good of a position to properly assess the risk.

The most important thing: There must be a lesson to learn here. And it might just have something to do with all those iterations....
9.23.2008 4:15am
Cornellian (mail):
as much as I agree with the quoted material so far as it goes, isn't it also true that savings are wiped out when banks fail?

No, most bank deposits are covered by Federal Deposit Insurance, which pays the depositor if the bank fails.
9.23.2008 4:16am
Mark Rockwell (mail):
Bill

as much as I agree with the quoted material so far as it goes, isn't it also true that savings are wiped out when banks fail?


I believe most deposit savings would be covered by FDIC. For people with over $100,000 in savings, they probably (hopefully) don't have it all in one bank.

For those with money in non-insured vehicles (like mutual funds), your raise a good point. I have no idea what happens to a standard fund when the company crashes down around it. Does anyone have the answer to this? Shouldn't the fund retain it's value (whatever the managers could eek out in this economy) and be un-pillageable by the owners, since it isn't technically their asset at all?
9.23.2008 4:23am
Malvolio:
as much as I agree with the quoted material so far as it goes, isn't it also true that savings are wiped out when banks fail?
No, most bank deposits are covered by Federal Deposit Insurance, which pays the depositor if the bank fails.
The "banks" in question are not commercial banks, but investment banks.

Investment banks don't have deposits, any more than they have tellers, ATMs, giveaway calendars, or pens on little chains. Investment banks market securities (equities and bonds) and they advise on mergers and acquisitions.

Or rather, they did. They're all gone now, vanished giants of a lost age. The last two, Goldman Sachs and Morgan Stanley, sank into the tar pits of ordinary universal banking only this Friday. I'm getting all misty now...
9.23.2008 4:36am
D.R.M.:
Um, no. The fundamental mistake here is the claim that "lenders will still want to lend". When a bunch of lending institutions go bankrupt, lenders panic and start sitting on their cash rather than daring to loan it to anyone.

On Wednesday, we saw the lenders declare their unwillingness to lend. It is impractical for a financial institution to withdraw all its money in cash and place the cash under its mattress. The closest equivalent to putting the money in cash is buying short-term Treasuries, since they're perceived as having about the same risk as currency. On last Wednesday, September 17th, the three-month T-bill was in such demand as a place to park money that its yield was bid down to 0.01%. Lenders were willing to get no return at all in order to avoid having their money at any risk.

And that's when the latest interventions started; Thursday, after it was clear that lenders were unwilling to lend. If that panic had been allowed to take root, you'd have seen a bunch failures over the last week . . . which would have fed the cycle of panic, causing another series of failures, as everybody yanked their money out to sleep on it rather than risk losing it by lending it.
9.23.2008 5:26am
Bill Adams (mail):
I appreciate the civil and thoughtful replies to my not-very-knowledgeable comment. I was assuming that once bank failures really cascade the government might not find it so easy to meet its FDIC obligations, but perhaps that is too pessimistic.
9.23.2008 5:32am
Jerome Cole (mail) (www):

Does it? Heh, heh, heh. I don't think so. Marx was right about greed; he just didn't envision the precise way in which capitalism would fall. There sit the Chinese Commies, with their vast reserves and their even vaster economic potential, all ready to pounce on what's left of any worth in the U.S.A.


Are you on crack?

China does have large reserves of cash. It also has a banking system that is insolvent. The Chinese government has assumed trillions of dollars in bad loans in order to keep their banks running. The problem is that the banks are still lending huge amounts of money to borrowers that have either no intention or no ability to repay. There are only three possible endings:

1. The People's Bank of China will engineer inflation in order to allow for easier repayment of debts using devalued RMB.

2. The central government will be forced to stop bailing out banks and let them fail. This in turn could lead to deflation.

3. The government could privatize solvent banks, nationalize insolvent banks and shut them down, rehabilitate assumed debt by pursuing deadbeat borrowers, and allow uncensored financial news so that investors and depositors can make well-informed decisions.

The third option is the best, but also the most unlikely because most of the defaulted loans were taken out by SOEs and other politically powerful folks. The first two options speak for themselves.

China is not the economic dragon that you think it is.
9.23.2008 5:48am
D.R.M.:
By the way, in most cases of economic analysis, it is entirely justified to assume that suppliers will still want to supply. Accordingly, that assumption is built into most models that a professor of economics will deal with. What we have here is Professor Landsburg misapplying a usually-sound economic axiom to what more closely resembles a problem of psychology.
9.23.2008 5:50am
MattGuest (mail):
If we are talking about banks then you need to seperate real banks from investment banks. Its the investment banks that are going under, they were over leveraged, using debt to purchase anything they could get their hands on. This area of banking needs to be heavily overhauled and the debt ratios of these companies more heavily scrutinised. If it was guaranteed that people pensions were not under threat I'd happily see these investment banks go under.

Conventional banks hold the savings of the US people, clearly these going under is not desirable, that would lead to one hell of a bail out package.
9.23.2008 6:07am
Jerome Cole (mail) (www):

Workers owning the means of production, hah! May God have mercy on the worker that tries to organize a labor action because the Communist party and government won't.


You are wrong on all points.

A very, very large percentage of the Chinese population have their own businesses. Contrary to popular belief, very few people are employed in factories making crap for Wal-Mart, etc.

Organized labor is the 800-pound gorilla in Chinese politics. Labor has been successfully agitating for laws making it easier to unionize businesses, raise the minimum wage, improve working conditions, etc. at the local level. At the national level labor has just bullied the government into implementing a new labor law that treats workers much more favorably than employers.

Labor leaders are persecuted now and then, but the government more often than not takes the easy road of placating them. The CCP has neither the strength nor will to oppress any large group of people in the way you seem to imagine it can.
9.23.2008 6:09am
TruePath (mail) (www):
For starters I'm skeptical of objections to an expert backed solution to a complex issue based on vague principles like "the way capitalism works is X".

However, on the particular point it is wrong for two reasons.

1) Banks and other lending institutions have the institutional expertise to analyze the risk of various loans and choose appropriate interest rates. The housing crisis is not evidence for the contrary, it was just a situation where the banks making the lending decisions actually had an incentive to falsely estimate the risk.

I mean ultimately the issue is if I need a loan to buy a new car do you have any idea how much interest to charge me? Do you know that new businesses in field X generally have such and such risk? Do you know a good way to get such information? I don't but I do know that if I go deposit my money at my local bank I get a reasonable interest rate and that lets the people who do know lend it out.

In short the market isn't perfectly liquid. You can't hope to restructure it in the massive way you imagine in a matter of days or months. Eventually we might develop the right institutions to let individuals do this but not immediately.

2) The big issue is the collapse of confidence in the financial sector. Depressions and recessions aren't caused because we somehow lack the manpower to produce stuff or the like. They happen because people en mass begin to believe their investments won't pay off so keep their capital under their mattresses instead of lending it out to enable future economic development.

Turning to some other lending model won't undo the effect on investor confidence of letting so many large financial institutions fail. Sure the federal reserve can avoid depression by substantially increase inflation but that's not a desirable outcome either.
9.23.2008 6:43am
A. Zarkov (mail):
The bailout won't work because you can't correct a basic insolvency by printing money. This is the Great Depression all over again, but with a twist: inflation instead of deflation. Until 1933 the dollar was backed by gold, which stopped the government from printing money to correct for falling asset values. In 1933, through executive order, the federal government confiscated all domestic privately owned gold. But we remained on a quasi gold standard until 1971 when we adopted pure fiat money.

Here is what could happen under the bailout. Most everything you buy will go up in price, food, energy, transportation, durable goods and pretty much anything imported. Financial assets, stocks, bonds, etc will fall in price. Real estate will fall in price. Loans will carry a high interest rate but T-Bill will have a low interest rate. That's the good news. The bad news is hyperinflation Wiemar style.

In 1989 Japan faced a similar crisis, but one one important difference. They had a strong manufacturing base, and a high savings rate. They reduced interest rates to zero, but that did not stimulate demand, the price of real estate and stocks fell for over 15 years. They entered what economists call "the liquidity trap."

The bailout is an attempt to buy time and hold back panic. When the public finally realizes what's happening, they will be panic by hording cash and gold. Cash and gold together function as a hedge against inflation and deflation.

I really hope, I'm wrong, but I've been saying that for three years.
9.23.2008 7:28am
dearieme:
His points are interesting. If the key is "matching" then that implies that all that is worth saving in existing institutions are probably their computers and software, and the geeks who serve them. Nearly all the bankers, lawyers, accountants and so forth can be fired with little loss.
9.23.2008 7:28am
BC (mail):
What the government should be doing is allowing the bad businesses to fail but instituting rules and procedures to make their unwinding controlled and systematic. These institutions have numerous open trades and positions with good companies that need to be settled and/or unwound. That should be the goal. Everyone is afraid to trade with these institutions at the moment because of the risk of becoming an unsecured creditor in a bankruptcy proceeding.

The investment banks have huge positions on their books that need to be introduced into the market slowly or they will cause a cascading effect with over-supply pushing prices lower, causing more collateral calls, forcing more sales, etc.
9.23.2008 7:55am
smitty1e:
So what's special about banks?
They own more politicians than you.
9.23.2008 8:04am
SJE:
I think the moral hazard problem is very serious here. Perhaps BECAUSE the most recent recessions have been so mild, risk takers are unfamiliar with losing their shirt: you would need to be over 50 to have much personal experience. I regularly talk to people in SE Asia, who experienced the massive currency crisis in the 90s. Although they love to invest and take risks, they like to have savings and safe investments as back up. I wonder if this is why they have all that $$$ now, while we are floundering in debt?
9.23.2008 8:55am
wm13:
Right. Banks are unnecessary. People will just borrow and lend on the internet.
9.23.2008 9:50am
byomtov (mail):
Typical Landsburg silliness. If banks aren't doing anything useful, why do they exist? Surely in Landsburg's fairyland the market would have put them out of business a long time ago. But they do exist. So what do they do?

Well, they are intermediaries. They aggregate investors' funds, making it easier to convert savings to investments. They make diversification possible- a relatively small investor can participate in a number of loans. They administer loans - handling paperwork, collection, etc. They (presumably) peform due diligence on borrowers to determine creditworthiness, set appropriate risk-related interest rates, etc. They assume certain risks - duration mismatches, etc.

They probably do some things I'm overlooking. But not as many as Landsburg forgets about.
9.23.2008 10:25am
The Nigerian:
Dear American:

I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.

I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.

I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.

This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.

Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.

Yours Faithfully,
Minister of Treasury Paulson
9.23.2008 10:33am
runape (mail):
Landsburg is dramatically understating the transaction costs associated with rebuilding the banking industry. The solution is just use the interwebs? The demand for new capital is incessant, and even short-term bank failures can have profound effects. Lenders just don't move around that quickly - nor can new, more successful banks be created overnight.
9.23.2008 10:39am
Henry679 (mail):
OK, the Nigerian post is priceless.
9.23.2008 10:45am
SP:
"OK, the Nigerian post is priceless."

It's also completely wrong about Gramm. The GBL law did NOT cause this. In fact, it's keeping the situation from getting worse.
9.23.2008 10:48am
Henry679 (mail):
SP, you are not nearly as funny, so who cares what you have to say? We have enough earnest but tiresome dweebs advising us "what caused" this. Unfortunately, none of the agree with each other.

You want to help mankind? Tell funnier jokes.
9.23.2008 10:53am
SeaDrive:

Why shouldn't these banks be treated like any other business whose management has displayed bad judgment and lost a great deal of money as a result?


The economy is made up of interdependent enterprises. If one enterprise fails, it may not matter, but if all the enterprises in a particular niche fail, it may matter a lot. Suppose for example, all the oil companies failed, and fuel was unavailable, or all the airline companies failed and travel/shipping became impossible. Most cities can't tolerate the failure of even one of the major modes of transportation: car, rail, subway, bus.

Free markets work best for the single case and the short time frame. Regulation is needed for the complex society and the long time frame. There can be failures either way.
9.23.2008 10:55am
wfjag:
Very good points Jerome. However, you failed to mention that the largest business (in revenues, production, ownership of resources and manpower) in the PRC is the People's Liberation Army. If the Party leaders and bueaucrats screw up China's economy, they will learn the literal meaning of "Political power grows out of . . ."

Marx was an idiot. He wrote pretty, but meaningless, rhetoric, and had no experience actually accomplishing anything or managing others.
9.23.2008 10:56am
Bart (mail):
The Paulson and Dodd plans seek a middle ground between failure and bailout. This new entity will be buying these assets at a severe discount of around 65 cents on the dollar, which automatically has the banks eating a 35% loss. The Dodd variation would impose further losses on the banks through a contingent equity share system if the new entity cannot sell the assets for as much as they paid for them. Under both plans, if the government sells the assets for more than they purchased them for, the feds keep the money and the banks have essentially absorbed the losses and paid a premium to have the government dispose of them.
9.23.2008 10:57am
Gabriel McCall (mail):
If the problem were simply one of matching an existing supply of capital to an existing demand for investment, then everyone could just go to prosper.com and things would work fine. Things are more complicated than that, though.

The author supposes that there's a one to one relationship between wealth in dollars lent and wealth in dollars borrowed. Under fractional reserve banking, that's not the case: When you deposit your paycheck in the bank, the bank lends out that same money ten times. That's why cutting out the middleman won't work to maintain our financial system in its current form: because as things stand today, the amount of money being borrowed is much, much greater than the amount of wealth being made available for capital investment.

The system the author describes would work well and be very stable. Getting from our current predicament to an economically sound capital model will be painful, though.
9.23.2008 10:59am
SeaDrive:

Capitalism works because we insist that businesses bear the cost of their own losses,...


I'd be interested in having a real academic economist's opinion about the choice of words here. It's my understanding that "capitalism" really stand for a system of analysis based on the opportunity cost of financial resources (capital), in contrast with communism which took a point of view that all value was based in labor.

I suspect that the "capitalism" mentioned in the quoted sentence is really referring to a political ideas about private property and individual economic freedom that should given a different name.
9.23.2008 11:03am
byomtov (mail):
This new entity will be buying these assets at a severe discount of around 65 cents on the dollar, which automatically has the banks eating a 35% loss.

How do you know this? Even if they buy the assets at 65% (or 35%, for that matter) of face value that is no guarantee the price is a fair one. It may easily represent an accounting loss to the banks, but not a real one, depending on the actual value of the assets. That is why the Dodd plan, or something like it, that provides equity-based guarantees, is essential.
9.23.2008 11:06am
wm13:
"The system the author describes would work well and be very stable."

Yes, for medieval peasants. It would have to be buttressed by a massive state enforcement effort to prohibit the evil moneylenders from restarting fractional reserve banking. Many libertarians seem to find this idea attractive, but I am not that kind of libertarian.
9.23.2008 11:19am
srg:
D,R.M.,
Thank you for your excellent posts. byomtov too.
9.23.2008 11:24am
Jerome Cole (mail) (www):

Very good points Jerome. However, you failed to mention that the largest business (in revenues, production, ownership of resources and manpower) in the PRC is the People's Liberation Army. If the Party leaders and bueaucrats screw up China's economy, they will learn the literal meaning of "Political power grows out of . . ."

Marx was an idiot. He wrote pretty, but meaningless, rhetoric, and had no experience actually accomplishing anything or managing others.


Agreed. You make an excellent point. In fact, the CCP seems to agree with you. A very large percentage of the seats in the National People's Congress are reserved for the military. In fact, soldiers are the only group in China who cast direct votes for delegates to the NPC. My guess is that sharing power with the PLA seemed like a better deal for the CHICOMs than getting shot.
9.23.2008 11:50am
Jerome Cole (mail) (www):

Very good points Jerome. However, you failed to mention that the largest business (in revenues, production, ownership of resources and manpower) in the PRC is the People's Liberation Army. If the Party leaders and bueaucrats screw up China's economy, they will learn the literal meaning of "Political power grows out of . . ."

Marx was an idiot. He wrote pretty, but meaningless, rhetoric, and had no experience actually accomplishing anything or managing others.


Agreed. You make an excellent point. In fact, the CCP seems to agree with you. A very large percentage of the seats in the National People's Congress are reserved for the military. In fact, soldiers are the only group in China who cast direct votes for delegates to the NPC. My guess is that sharing power with the PLA seemed like a better deal for the CHICOMs than getting shot.
9.23.2008 11:50am
Jerome Cole (mail) (www):
Why do I always end up with these damn double posts?
9.23.2008 11:53am
Elliot123 (mail):
Of course borrowers and lenders will find each other. But how long will it take them to find each other? And what will happen while they are searching. How long? One week? One month? One year? Ten years? Can anyone tell us?

Some will find each other immediately, but most wlll not. And what do we get when they eventually do find each other? It will be a completely unregulated, anything goes credit market. Each loan will be a one-off deal. We won't know who is lending the money, where it somes from, what the interest rate is, etc. It can work as a classroom exercise, but real life isn't a classroom.
9.23.2008 11:54am
MarkField (mail):

D,R.M.,
Thank you for your excellent posts. byomtov too.


Agreed. I'd add TruePath to that list as well.
9.23.2008 12:01pm
Gabriel McCall (mail):
Each loan will be a one-off deal. We won't know who is lending the money, where it somes from, what the interest rate is, etc.

Why would "we" need to know this? Assuming the borrower and the lender both know who the other party is and what terms they've agreed to, who else needs to know and why?

Standardizing the capital markets has made it very easy and convenient to business... in ways that go disastrously wrong sooner or later. Buying and selling debt as a commodity is a charming notion but the real world hasn't borne it out. If you don't know the intimate details about the situations you're throwing your money into, you're eventually going to lose it. All loans ARE "one-offs", each borrower is unique, and failing to treat them as such leads to, well, what we have now.
9.23.2008 12:02pm
KWC (mail):
Shouldn't libertarians be categorically against the bail-out?

Doesn't the crash of the markets show the flaw in core libertarian theories (i.e., to the extent that deregulation is to blame for this catastrophe)?

This is the problem. Libertarianism (much like true Communism) has never been put to the test. If its principles can't survive this, I think its weaknesses will be revealed.

But, alas, we'll never know because the government will step in and bail everyone out, allowing us to continue living in the intellectual bubble that allows us to continue with the illusion that libertarianism is actually a sound theory.
9.23.2008 12:28pm
loki13 (mail):
I would like to say- BRAVO to the Nigerian post. Best laugh I've had today.
9.23.2008 12:49pm
Floridan:
e-Bay may be great for selling and buying baseball cards and beanie babies, but I'm not sure that it is a good vehicle for the American financial system.

The one bright side of this mess is that we won't be hearing about privatizing Social Security again for a while.
9.23.2008 1:03pm
Tony Tutins (mail):

The economy is made up of interdependent enterprises. If one enterprise fails, it may not matter, but if all the enterprises in a particular niche fail, it may matter a lot.

Here might lie the key to the solution. All the major enterprises in my first industry, consumer electronics, did fail. They were replaced with first Japanese, and later Korean enterprises. Why not invite more successful banks from other countries to take over the market niche here?
9.23.2008 1:25pm
SG:
The one bright side of this mess is that we won't be hearing about privatizing Social Security again for a while.

Just wait till the entitlements bill comes due; an $88.2 trillion dollar (and growing) unfunded liability. It's gonna make this current crisis look like good times.
9.23.2008 1:55pm
The Unbeliever:
e-Bay may be great for selling and buying baseball cards and beanie babies, but I'm not sure that it is a good vehicle for the American financial system.
Do I detect a market for Beanie Baby backed Securities?

And will our new best friend Secretary Paulson buy our BBBS when the market plummets after someone discovers an attic full of rare plush animals?
9.23.2008 2:10pm
Elliot123 (mail):
"Here might lie the key to the solution. All the major enterprises in my first industry, consumer electronics, did fail. They were replaced with first Japanese, and later Korean enterprises. Why not invite more successful banks from other countries to take over the market niche here?"

Because in the long term Americans will be less well off, and will lose the ability to compete.
9.23.2008 9:16pm
Stacy (mail) (www):
"Right. Banks are unnecessary. People will just borrow and lend on the internet."

Exactly. I have cash to lend out (deposit in a bank) but neither the time nor the expertise to manage lending it out to others. And as much as I live on the innerwebs, a URL is not an acceptable substitute for a reputable financial institution as an intermediary to conduct my lending for me. So at a minimum, Landsburg didn't learn the basic lesson of the .com crash: if you think you're living in a new world, you are almost certainly wrong; god help you if you base important decisions on that notion.
9.24.2008 4:59pm