Neigh, I Say... Neigh

I am, by nature a contrarian horse. I am a naysayer. Find me a problem, and I'll find out why your solution is probably not the right idea.

People point this out to me as if I didn't know it about myself. I do, and I try to fight it. But... partly, I'm often right about the stuff I'm saying nay to.

I have to say about the new version of the bank bailout - this is the one where, now, we solve everything by having governments pour money directly into the banks and guarantee interbank loans - that I'm really in unfamiliar territory. Mostly I don't know what to think. But one thing came to mind over the weekend. You guessed it... nay.

From the beginning - and it's worth remembering, the "beginning" of these problems was more than a year ago - people have been trying to identify just what we're dealing with. It's a mortgage crisis. It's a credit crisis. It's a banking crisis. It's a liquidity crisis. All this labeling theory is interesting, but it seems to me... we have a financial crisis, an enormous one, and not one that's easily solved, whatever we wind up doing.

I'd be more persuaded about this "solution" that's been offered if it didn't come accompanied by the same rhetoric we've been getting, week after week, from politicians. At the European Union announcement, we were told, yet again, that this is the solution to all solutions. That the worst is over. That we have finally found the magic key. We were told this when Fannie Mae and Freddie Mac were bought up. We were told it when AIG got the first $87 billion. We were told it when Paulson proposed the $700 billion bailout, when Ireland extended deposit protection to every bank customer, when the Dutch took over Fortis, when the British bailed out bank after bank after bank.

Now we are told that thanks to Gordon Brown, there's a clear answer - fnd the banks and guarantee their loans. Gordon Brown. In case you haven't been following British politics, Gordon Brown helped create this mess, much as Greenspan did here back in the nineties, when Brown was Chancellor of the Exchequer under Tony Blair. Now he's Prime Minister (and a disastrous one for the Labor Party... but never mind)... and he's got our bank solution.

Sorry,... I'm still skeptical.

I'm not some prize winning economist, so really, what do I know? All I can say is, I think all of these plans have suffered most from being concocted on the fly, as hasty reations to constantly shifting realities, and not fully thought through. We were told that if we bought bad debt off of the banks, they could become solvent and get back to work. Now we're told that if governments buy into the banks, let the banks fancifully re-price the value of the bad debt on their books, and that governments guarantee banks lending to each other... then all will be well. Three things come to mind:

• We're in this mess because banks weren't honest about the falling value of mortgage debt, most fundamentally. Loosening "mark to market" rules at this moment seems especially foolish
• When the British Government invests in Royal Bank of Scotland, it will become the largest issuer of credit cards, the largest issuer of mortgages, etc. across England. I'm not saying this is good or bad, but it seems to me there's major implications here that no one has stopped to contemplate.
• No one, actually, can say with any certainty that banks will lend to each other, even with guarantees, while they can't be sure of ever being paid back. That's not over cautious, either; it mostly seems prudent.

In all of this, I'm kind of heartened by the cautiousness of Hank Paulson, such as it is; yes, he was a terrible salesman for the bailout, and yes, he has his own issues as an honest broker. But those who would oppose and criticize him often have little better to offer, and it seems telling to me that while Europeans fall over each other to bail out their own countries banks (few, it seems want to mention the fact that the Euro countries nixed plans for an international fund to support one another), none want to get into, as the Americans have, buying the commercial paper that businesses use to solve short term funding problems, paper that, with all its issues, still has more substance behind it then, well, mortgage-backed bonds.

And the bigger problem in all of this, I think, is not seeing the longer picture: the "worst is behind us" logic tends to neglect the fact that, next year, things get a lot, lot worse; next year is when retailers won't sell things, when retail and small town establishments will fail in larger numbers, when greater job losses and further economic contraction push people with perfectly good mortgages closer to foreclosure simply because they can't pay their bills. If we bail out banks, if they could restart lending, it is reasoned, then all is okay. It's not.

Being a contrarian horse, of course, I could be entirely wrong. It could be that I'm just not wise enough to see all this bailing out for the success it actually is. I was never so much a student of economics as I am a guy, like my dad, who just finds the numbers interesting, and who finds that a lot of people - especially writers, and even more pointedly, most political writers - don't. I still think it's entirely possible that countries will spend... $300 billion, $500 billion, $700 billion... and at the end have little to show for it, except failed banks, struggling markets, and no more money to throw at the problem.

As we (finally) look back at The Great Depression to find some sort of guidance, the general consensus has glommed onto the latest fashomnable theory - that if nations had worked together, instead of alone, the Depression could have been avoided. Well, yeah, it's better than blaming Roosevelt... but It is, at best, an educated guess. We don't, really, know how to avoid a Depression, and we shouldn't pretend that we do. And if the alternative is pretending to know what's best... Nay, I say. Nay.

Comments

[Redstar]

"I'm not some prize winning economist, so really, what do I know?"

My issue with all your naysaying is that it is rarely accompanied by alternative solutions. As someone who knows how unwelcome critique and criticism is, the naysaying would be much easier to swallow if it had some alternative options to go along with it.

Suggests the Virgo helpfully....

:)