You Can't Inflate A Burst Bubble

Government Bailouts and Attempts to Prop Up Economy Will Worsen The Recession, Writes Declan McCullagh

(CBS)  It's reasonable to yearn for the boom days of yore, when the Dow Jones industrial average was topping 14,000, housing prices were stratospheric and Bernie Madoff was not gracing our evening news broadcasts.

Alas, those days aren't returning anytime soon. That economy collapsed because it was erected on a rickety foundation of debt, leverage, speculation and interest rates held unreasonably low by the Federal Reserve.

Which brings us to our representatives in Washington, D.C., who are intent on trying to pump air into deflating bubbles that comprised far too large a portion of the U.S. and the world economy.

On Tuesday, House Speaker Nancy Pelosi raised the possibility of a second stimulus bill - even though the first one hasn't had a chance to work.

Meanwhile, both the Obama and Bush administrations seem to believe that no large bank or automaker may be permitted to file for bankruptcy protection. All have become too big to fail, even if it means a constant flow of taxpayer dollars is needed to keep them in business.

American International Group has already put more than $173 billion in taxpayer funds at risk, with zero disclosure about the ultimate beneficiaries, and with no end in sight. General Motors has received $13.4 billion from the Feds so far, and plans to ask for another $16.6 billion.

An article in the Washington Post Tuesday described a confidential presentation that AIG representatives showed to the Feds when asking for bailout dollars. It used phrases like "potentially catastrophic unforeseen consequences," "retirement savings significantly at risk" and "a loss of confidence in the private pension system in the U.S." The high-pressure tactics worked. Or perhaps the good folks at the U.S. Treasury have forgotten how to say "no."

(By the way, given the revolving door between government agencies and Wall Street, shouldn't regulators involved in bailout decisions be barred from taking jobs at bailed-out firms? Otherwise you have the unsavory possibility of the treasury being looted by someone who - coincidentally - takes a seven-figure job at that same firm.)

Housing prices are being propped up through the program that President Obama announced last month. It uses taxpayer dollars to bail out a subset of homeowners - including many who signed up for a risky mortgage they couldn't afford unless home prices continued to rise and future refinancing was possible.

Money market funds have been propped up. Prices of mortgage backed securities have been propped up.

Even if market conditions suggest higher risks of defaults and thus higher interest rates, cheap loans are being propped up, thanks to the new Term Asset-Backed Securities Loan Facility program.

Perhaps some of these steps were necessary. But taken as a whole, these extraordinary measures point to a bipartisan Washington culture that's unwilling to let go of the past.

Peter Schiff of Euro Pacific Capital put it well last Friday: "Jobs must be lost in the service sector so that labor can be reallocated towards goods production. Asset prices, for both stocks and real estate, must decline to levels appropriate for current circumstances ... By postponing these adjustments we merely assure an even more painful transition in the future."

Now that the housing bubble, stock market bubble and commodities bubble have popped, the market is trying to adjust to non-bubbly conditions. Laws and regulations that interfere with that process can delay that adjustment and prolong the recession. (If a failing business is artificially propped up, valuable resources are being wasted rather than being used for productive purposes.)

Plus, the money for these bailouts has to come from somewhere. Last month Bloomberg News put the tab so far at $9.7 trillion, enough to hand each U.S. household a check for around $92,000, or pay off 90 percent of home mortgages in the country.

That money, of course, will come from taxes. We'll borrow some from China, the largest foreign holder of Treasury debt, with the promise of paying it back with interest. Some will come from the Federal Reserve printing it, a move that devalues the greenback and leads to taxation through inflation.

At some point, though, the bailout costs will simply become too immense. George Mason University economics professor Russ Roberts wrote this week: "We can't keep GM and AIG and Fannie and Freddie and every insolvent bank and every mortgage afloat. It can't be done. It's not a strategy. It's just desperation to avoid pain. We're going to have to start letting them fail. Sooner is better than later. Otherwise, we continue to throw good money after bad."

We can't bring back the bubble economy. But until our esteemed elected representatives in Washington figure that out, don't expect an end to this downturn anytime soon.

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Feel free to bookmark the home page for this column, titled Other People's Money. An RSS feed is available too.

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Declan McCullagh is the chief political correspondent for CNET. Previously, he was Wired's Washington bureau chief and a reporter for Time.com and Time magazine in Washington, D.C. He has taught journalism, public policy, and First Amendment law. He is an occasional programmer, avid analog and digital photographer, and lives in the San Francisco Bay area. His e-mail address is [e-mail]

[ioweign]

Is it Bush's fault that the Russian stock market is down 70%, that Iceland's banks have collapsed, that the UK nationalized their banks, that China has to spend $500 billion on stimulus
Posted by rcglad at 5:49 PM : Mar 11, 2009
-------------------------------------

In a word, YES!
Posted by omnibus66 at 5:52 AM : Mar 13, 2009

You are a complete IDIOT, I heard an economist say tonight that this all started about two years ago, guess who was in charge of the House and Senate and had the responsibility for oversight of these Banks.
Posted by dmw1167 at 6:38 PM : Mar 15, 2009



And you know at that time it was not a VETO PROOF Congress...

[his160]

We must stop A.I.G. They as out of control greedy animals . Not only are they losing retirements as fast as possilble, they are set to give over 100 million in bonus"s. there 4 bailouts? The government need to take control of company. ASAP

[debinok1]

Everything has to find the natural bottom, all the money that is being used to fix this mess is only prolonging the inevitable. Better to let it do so now instead of propping up the economy on credit.

[limaurs]

Declan,

I noticed that you blame the Federal Reserve for creating the bubble and you quickly switch to Washington D.C. to assign blame to the politicians who are seemingly doing everything wrong to get us out of this mess. The fiction that the Fed.Res. is an independent policy-making body should be obvious by now, yet you and the rest of the media keep insisting on it.
The economic and financial dislocation that led us to the present state has been going on for nearly thirty years during which time the people of the U.S.,its government and business leaders and the media were quite happy, if not smug, about blaring the greatness of free markets without any thought as to what was really going on.
The litany of articles from you and many,many others about how horrid everything is and how much worse things are going to get if we keep doing this and not doing that is getting to be sickening. Sickening not because we are not in deep trouble but because the purpose seems to create a red-herring to confuse rather than clarify .When the U.S. was being looted, no one even raised a red flag and everyone was content to let themselves gobble up the soothing propaganda emanating from the powers that be.
I am so angry that I am going to stop now. But before I go, I would like to remind you that you are being paid to write this rubbish, and he who pays the piper calls the tune.

[rcglad]

omnibus66, I've given you some facts. Maybe you could come up with some of your own, rather than a glib comment. Or maybe you just can't.

[govwatch2]

Oh yes, you can make it worst, you can turn it into inflation.

[sjc_1]

Congress passes laws and allocates funds. The executive branch enforces laws and spends the money allocated as defined. It is the responsibility of the executive branch to enforce the laws and if they need changes, request to Congress that the changes be made. It is NOT the right of the president to ignore the laws and enforce only the ones he happens to like with executive orders.

[omnibus66]

Is it Bush's fault that the Russian stock market is down 70%, that Iceland's banks have collapsed, that the UK nationalized their banks, that China has to spend $500 billion on stimulus
Posted by rcglad at 5:49 PM : Mar 11, 2009
-------------------------------------

In a word, YES!

[whitemale08]

The 'real-estate bubble' was the last worthless derivatives bubble that could be levereaged trillions in worthless credit-default swaps.

The only "bubble" left is the 'green bubble' which is why the British wants to hurry up and use 'global warming'.

The problem with the 'green bubble' is that it is fatal and reduce the human population to less then a few 100 million.

That's because the 'incentive' is: "The less you consume, deficate, eat, drink, breathe, have children, the more money you make to survive.

You earn the 'new money' or 'carbon credits' which nothing more then another Ponzi scheme of absolutely worthless derivatives and credit-default swaps that are to be traded on a new 'carbon index' designed by the British.

Now the British are disgusting for what they are plotting to do against mankind, either we stop them or we die.

It's that simple.

The British do not care about the environment; they want us all DEAD!

[TheBiggestMistakeAmerica]

"We can't bring back the bubble economy. But until our esteemed elected representatives in Washington figure that out, don't expect an end to this downturn anytime soon. "

Yup, that's exactly what 500 economists said when they wrote Comrade Obama a letter and told him to stop the TRAIN WRECK to be created by the economic insanity package...

Did he listen? Nope.

He just trotted out his paid staff economists who did just exactly what he told them to do....screech WE'VE GOT TO HAVE THIS ECONOMIC INSANITY PLAN!

[noloyalisti]

Yeas losers. You righties can make it up by becoming patriots and uniting to drive out the fascists. We have a rotten, greedy bunch of corporate crooks controlling the people's health care system and sending us off to fight in their greedy immoral wars for oil. Time to rise up!

[jsachse]

If Bush had just watched the banks and stopped them from making the CDO/CDS mess,

Posted by sjc_1 at 5:33 PM : Mar 11, 2009

What?? So...explain to me what these guys are supposed to be doing:

the House Financial Services Committee (The Committee oversees all components of the nation's housing and financial services sectors including banking, insurance, real estate, public and assisted housing, and securities. The Committee continually reviews the laws and programs relating to the U.S. Department of Housing and Urban Development, the Federal Reserve Bank, the Federal Deposit Insurance Corporation, Fannie Mae and Freddie Mac, and international development and finance agencies such as the World Bank and the International Monetary Fund. The Committee also ensures enforcement of housing and consumer protection laws such as the U.S. Housing Act, the Truth In Lending Act, the Housing and Community Development Act, the Fair Credit Reporting Act, the Real Estate Settlement Procedures Act, the Community Reinvestment Act, and financial privacy laws.)

the Senate Banking Committee (areas of jurisdiction include, but are not limited to: banking, insurance, financial markets, securities, housing, urban development and mass transit, international trade and finance, and economic policy )

[creeper00]

Here is how we recover from our economic free-fall:

"Peter Schiff of Euro Pacific Capital put it well last Friday: 'Jobs must be lost in the service sector so that labor can be reallocated towards goods production.'"

We don't make anything any more. We don't create any wealth. We just sling burgers and sell each other stuff made in some other country with a robust base of production.

No country can survive based entirely on a "service economy". Until we revitalize our manufacturing sector the news will only get worse.

[RipVanJones]

Tell me about it, someone has to do something FAST!

RT
www.privacy.at.tc

[rcglad]

I'm really tired of the I hate Bush robots. The global glut of money 1990's when Japan went to quantitative easing. Institutions began borrowing in Japan at 0% and investing all around the world. You could earn double digits in Russia, Brazil, Vietnam, China. I earned 27% on my entire portfolio by 2006. The world was awash in money...too much money chasing too few goods and it resulted in $150 a barrel oil and then the collapse. It's global. Is it Bush's fault that the Russian stock market is down 70%, that Iceland's banks have collapsed, that the UK nationalized their banks, that China has to spend $500 billion on stimulus. As voters, you numbnuts are sending the signals to our leaders what they should do and they're getting it wildly wrong. Who will you blame in two years when it hasn't gotten better? I'll tell you who should blame, yourself.

[ubrew12]

Declan: "An article in the Washington Post Tuesday described a confidential presentation that AIG representatives showed to the Feds when asking for bailout dollars. It used phrases like 'potentially catastrophic unforeseen consequences,' 'retirement savings significantly at risk" and "a loss of confidence in the private pension system in the U.S.' The high-pressure tactics worked. Or perhaps the good folks at the U.S. Treasury have forgotten how to say 'no.' "

I guess this means McCullagh would have the fortitude to go where the Treasury cannot. Just in passing, Declan, what level of unemployment are you willing to put up with? 20%? 30%? Damn the torpedos??

For myself: when the 100 year storm hits, you don't argue about who deserves to drown. You do what you can to rescue all parties, knowing some will drown anyway. MuCullagh seems to indicate he'd let AIG go the way of Lehman Bros. All I can say is, those are some cojones...

[sjc_1]

If Bush had just watched the banks and stopped them from making the CDO/CDS mess, we would not have these problems now. He ordered the ban on betting on assets to be lifted after 9/11 and signed a bill lowering the margin and reserves for banks in 2004. All this was suppose to create the illusion of prosperity and did, until it didn't. You want sustainable policies that will lead to reasonable profits for value added and not inflate a bubble.

[tibu987]

I agree with McCullagh that no amount of "bailouts" will heal the economic mess we inherited from Bush.

On the other side of the coin is that socialism is not the answer either. Socialism lets the elite survive and prosper while the poor and middle class suffer. Look at Russia, North Korea, Cuba, India, Mexico, et al, the rich get richer, the rest have trouble simply surviving.

[g-gfather]

The threat of the to big to fall ,will topple this nation as surely as they have corrupted

the integrity and courage of the American people. WE are shackled by our fear. WE

have toppled the to big to fall before and become a more just and free nation for our

courage to do so. The to big to fall are not our nation. WE the people are our nation.

Our love of freedom and courage as Americans is to be tested again. Will WE
prevail?? YOU BET YOUR SWEET BIPPY !!!

Great-Grandfather






to do so

[rational_1]

declan mccullogh is a fool! he should be ignored and will be!
Posted by suzyku at 12:30 PM : Mar 11, 2009

You're more likely to be taken seriously if you state the reasons for your opinions. What exactly did he write that you believe is wrong, and why? So far you're the only person whose opinion I'm ignoring.