Paying for our economic sins

PHOTO: Man sleeping on some barrels

Andrew Sullivan fears that our leader’s attempts to fix the economy will do us more harm than good.

… the radicalism of the current policies pioneered by Paulson and Brown and now getting even more outlandish seems to me to have two potentials: to somehow drag us out of this without an almighty crash now but make the recovery from debt even more arduous, or to add unimaginable mountains of debt to our current plight and still not manage to avoid the crash, thereby making it all much worse.

Maybe I’m just being pessimistic, but I think it’s highly probable that many of the measures (bailouts, buyouts, etc.) being taken by Paulson & Co. are going to fail and we’ll probably pay a stiff price for that down the road. Steering an economy this complex is probably too tough a job for anyone – isn’t that, after all, why we believe in market economics rather than planned? – but to make matters worse, they are having to steer the economy through minefield, at night, without radar or sonar while surrounded by icebergs.

Sullivan seems to come to the conclusion that we should stop flailing about trying to fix the problem:

Why does the world owe us a soft landing after the insanity of the last decade? Haven’t the excesses of the past shown that it is only through such market discipline that we will ever avoid the easy path of borrowing out of greed? Yes, innocents will suffer terribly, and many of the guilty will escape. But that is life: we can and should try to help the poorest, but avoiding our collective responsibility for this insanity seems a very bad signal to send to ourselves.

The truth is: we had this coming. We deserve it. And we deserve leaders who are able to tell us that.

I think Andrew is very wrong here. It goes without saying that another Great Depression would be a disaster. Millions will be without work, they’ll starve, they’ll go without necessary healthcare and on and on. And yet this entire fiasco wasn’t the fault of the people who will end up suffering the greatest. I wouldn’t even want to make the claim that Republicans who voted for Bush and a Republican Congress had any clue what these guys would unleash because of deregulation. The same goes for Democratic voters and their leaders’ complicity in this mess.

This crisis was generated in the boardrooms of giant banks and in the halls of Washington DC, primarily away from public view. That’s where the blame lies, and if the world were fair that’s where the consequences would stay. But just because that’s impossible, because the problems are too widespread, it doesn’t mean we should just sit back and let economic devastation engulf all of us in some sort of masochistic cleansing.

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Meanwhile, it’s tough to support any type of economic stabilization and recovery program that d*cks-over taxpayers at the expense of corporate execs and wealthy shareholders.

3 Comments

  1. Andrea

    Regarding Yglesias’s article, I think it is important for people to understand how Stockholder’s Equity (knowns as SE) is used on the balance sheet. For instance, Citigroup receives cash for their initial public offerings of stock and bonds (common, preferred, warrents, etc.) These instruments carry the Fair Market Value on the balance sheet according to international accounting regulations. So if they originally received $100mm for 100K shs of stock and the price dropped to $500 per shs, the loss in assets and SE is $50mm (price dropped by half). If SE drops, assets drop (Assets = Liabilities + Retained Earnings and SE is part of retained earnings, known as RE). Typically, firms should have less SE so that if the market drops, it won’t effect the balance sheet too much, meaning they carry a higher debt to RE ratio. What has happened is that the drop in the stock market has made their stock virtually worthless, which in turn means their company is worthless (on paper). This is not the case. Additionally, b/c firms are leveraged (carry more debt to assets), they are unable to pay their debts when the stock prices fall. There are some companies unable to pay their employees and the utilities. So what the Fed is proposing with Citigroup is to (artifically) increase their stock price to make the company more liquid. The bad loans will still stay on Citi’s books and Citi will have to manage/dispose of those. The alternative that the Fed was proposing was to buy out right the bad debts. That would decrease their debts but it would leave SE the same and thus potentially lowering their assets even more ( $100 assets = $75 liabilities + $25 SE goes to $74 assets = $50 liabilities + $25 SE —> doesn’t change SE). It’s unfortunate that companies can now be effected so dramatically by the whims of the stock market. Although market and economic conditions are horrible, I think it’s important for people to understand the mechanics behind what our leaders are attempting to do.

  2. Chris

    Thanks for the technical details, I think I almost understood them. 🙂

    However, I’m not sure how that addresses Yglesias’s point about stockholders and management. Why should Citi’s stockholders be left with any money anymore, and why shouldn’t we require a change in management with no golden parachutes?

  3. Andrea

    OMG, I can’t belive you put that as your tag line?!?! I don’t think I can Handel it…