Friday, January 30, 2009

What's Really Going On With These Trillions in Bailouts? Or, In Other Words, How Do You Go About "Stimulating" a Dead Parrot?

Randall Hoven's wry commentary on our economic confusion ("Bailouts, Relativity and Dead Parrots") is not to be missed.

You'll find the entire piece over at American Thinker. But since I know a lot of you read through whatever is on the opening Vital Signs Blog page but rarely use the links to check out the original articles, here is a good chunk of Hoven's excellent article.

I'm still trying to grasp the concept of a trillion dollar bailout. Einstein thought about riding a beam of light. I think he had the easier time.

Think about this bailout thing for a moment. We are told that the problem is a credit crunch -- a lack of lendable funds, or a lack of willingness to lend them. The solution would therefore seem to lie in coaxing money from the relatively asset-rich to the relatively asset-poor.

How would you do that? Our government is doing it with huge bailouts, an $850 billion bailout under President Bush and an $825 billion or so stimulus under President Obama, on top of all the other bailouts for AIG, Fannie Mae, Freddie Mac, etc. Multiple trillions of dollars.

Where does the government get this money? It doesn't have it on hand, not by a long shot; it already owed the public over $5 trillion before this all started. Answer: it borrows it.

That's right. When the problem is lack of borrowable money, the federal government steps in and borrows a few trillion more. Let's be clear: the government said the problem was lack of supply, so it increases the demand by trillions?

This makes zero sense to me. The government will be borrowing from lender A to give to lender B. It would be better if we could simply get A to lend to B directly and therefore avoid the middleman. This also makes me wonder if we'd be better off having lender A provide a loan to himself. (I'm not so sure that's not happening.)

But not all the bailout money is even going to lenders. That "stimulus" money will therefore do nothing for a credit crunch, but will simply dish out money to Americans that was borrowed from other Americans, to be paid back by future Americans. Are we supposed to thank the government for forcing us to borrow money from ourselves? Doesn't the idea that this will benefit us defy some law of thermodynamics?

How does borrowing by the government help other borrowers, the supposed intent of fixing a credit crunch? Talk about "crowding out." This is Godzilla "crowding out" Bambi.

I must be wrong about something, because geniuses from Henry Paulson to Timothy Geithner seem to disagree with me. (Maybe it has to do with curved space-time. If the government's debt has a large enough mass, it bends the whole geometry of the universe to its will. Or something. Think of banks as balls on a rubber sheet ...)...

In my advanced age I've come to believe that if something does not make any sense, it's because it does not make any sense.

I have many opinions about Henry Paulson, Ben Bernanke and even Barack Obama, but I don't think they are all stupid, in any normal sense of the word "stupid." I can't believe that they believe these bailouts will really help the real economy. How can anyone think that massive borrowing is the way to fix a lack of borrowable funds?

I think they are motivated by two things. First is a version of CYA. Imagine yourself as Treasury Secretary or head of the Fed or even President. You are perceived to be in charge of the economy (even though no one really is, except maybe George Soros).

* Your analysis tells you the economy is going south.

* You know there is nothing you can do about it.

* But you can't be perceived as doing nothing about it or else you will lose your phony-baloney job.

So what do you do? You do what governments throughout history have always done in such situations: spend massive amounts of other people's money. When all is said and done you can say, "Well at least I did everything in my power to avert this crisis." In a world where intentions trump results, it's the smartest thing you can do.

President Obama and his capo, Rahm Emanuel, also have another motivation: a crisis is a terrible thing to waste. The outgoing Republicans could have left Obama no better gift than the notion that the government must spend trillions of dollars more than it's ever spent before, immediately, or we will all die. The Democrats were handed both the money and the permission. (Here, son, take the car and this fifth of whiskey.)...

Didn't you ever wonder if the witch doctors themselves thought dropping a virgin in the volcano would really bring good crops? I'm thinking they didn't. But it kept them in their witch-doctor jobs and gave them a few final moments in private with the virgins.

And that, boys and girls, is how government works.

Oh, by the way, if you don't get the "Dead Parrot" reference in the title of
Randall Hoven's article, you can always watch the 6-minute sketch from the old Monty Python TV show to figure it out. You can see it on You Tube right here.