Why Conservatives don't care if the bailout was a success
One of the best things I've written in the last year (if I may say so) is this post on John Haidt's Five Moral Dimensions. I keep coming back to that post, mentally at least, because it explains why people have such a hard time seeing eye to eye politically.
Take the TARP "bailout", often inaccurately characterized as a $700 billion giveway to ( Read more... )
Take the TARP "bailout", often inaccurately characterized as a $700 billion giveway to ( Read more... )
Only you can know for sure what you meant about such an absurd example, but "a lawn care company, Merry Maids and Terminix" have nothing to do with the internet or sending cake anywhere. Lawn care, maid service, and pest control are basic traditional service-oriented companies. The ones directly impacted by commercial paper markets freezing.
And regardless of the financials of that particular company you're not seeing the forest for the tress. Servicemaster and every other company in the world couldn't use the commercial paper market, because trading had stopped. The most liquid part of the market stopped being liquid. Everything was on hold.
the WSJ has it here that commercial paper was available but had gone to 8% at one point
Your WSJ article has it that commercial paper soared to 8% when it was available, which it wasn't when commercial paper froze. Lenders "[would] not lend to the banks". That's why the Fed had to step in and buy commercial paper on October 7 - because nobody else would. Period. Not at 8%, not at 80%. Nothing.
The article you cite says that withdrawals from money funds "generated by far the highest redemptions on record", and "subsequently created huge problems for the $1.7 trillion commercial-paper market", because "money funds weren't buying the paper anymore". They weren't holding out for better rates like the laws of supply and demand would dictate, they "were dumping it to cash out fleeing investors", which "[cut] off a vital funding source for U.S. business". If what you imagine was actually true - if commercial paper continued to be purchased at 8% - why would the author have written the very next sentence? Why would there be "the possibility of businesses shutting down for want of funding"? Couldn't those businesses have just borrowed the funding at 8%? No. Because the commercial paper market was frozen. If all that reading is too much for you, did you see the infographic at the bottom? "Investors flee, funds freeze. Outflows stopped the funds from buying commercial paper, leaving companies struggling to finance their daily operations." I don't see how your own article could be more clear about how wrong you are.
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Is your "everything's on hold" link humor, or poor sourcing?
You are reading part of the WSJ article I linked to. Money market funds weren't buying, but someone was (and they made 6% off IBM - probably a good deal). Nothing you link to shows that the buying of commercial paper literally stopped.
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So you're saying that "Loans are ... not for companies whose revenue barely covers the interest Servicemaster." You're wrong. That's exactly what commercial paper is. A short term unsecured loan to cover shortfalls in the day to day operating costs of regular companies like Servicemaster - "actual businesses that do things". That was the point of the NPR story about Servicemaster, who were selling commercial paper because that's what companies like Servicemaster do. That was the whole point about the WSJ article that you cited. Without commercial paper, "short-term IOUs that companies issue to pay for operations". Actual businesses that do things "struggle to finance their daily operations".
You are reading part of the WSJ article I linked to. Money market funds weren't buying, but someone was
I should clarify what I mean by "frozen markets". The North Pole is a "frozen continent", even if you can find a dixie cup of liquid water there. Somalia is still a failed state, even if you can find a single working police station there. Having a serial killer in a high school is still a disaster if you can find one or two students who have not been murdered. You're still starving even if I give you a tic tac.
Everything I've read says that lending among banks came to a virtual standstill starting Wednesday, September 17. "The river of capital narrowed to a trickle. Banks were forced to start paying usury rates to get money, and even when they were paying usury rates, even if they could get money, they could get only $50 [million] or $100 million." $50-$100 million is very small in the commercial paper market. There were over a trillion dollars in need - because nobody would buy that much paper at any price.
Finding one - or even a few - transactions in the "trickle" that happened during that time period is an exception that prove the rule. The fact that even Big, safe, respected companies far away from all the subprime lending problems had trouble getting the short-term loans they needed to pay their bills - the polar opposite of "companies who have discovered how to send chocolate cake over the internet" - is evidence that we were in the midst of a systemic collapse. You might as well say that there's no such thing as a run on a bank as long as you can find a depositor who *didn't* try to withdraw their money.
I would have loved debating this if we had suffered what anyone else would recognize as a systemic collapse. "We didn't suffer a complete systemic collapse - one bank in my town is still solvent! A guy on my block still has a job! I still have my gold fillings!"
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I think it is time for me to ask if there is a situation where you _wouldn't_ see the immediate necessity for the seizure of hundreds of billions of taxpayer dollars. Would you ever find a certain percentage dip in commercial paper volume acceptable, or should corporations always be able to borrow money, no matter what?
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Now we know that the facts are very slightly different. I said "Nobody else would." The reality is that almost nobody would. A ridiculously small number of businesses were able to sell very small amounts of paper at usurious rates 8x higher than normal. Whether commercial paper was 100% frozen or 99.9% frozen doesn't change any part of the big picture. You might as well say climate change scientists are wrong because the temperature has risen .72 degrees instead of the .74 degrees claimed.
Remember, the whole reason why we're discussing this is not the problem of the commercial paper market freezing, but with that event being evidence that banking institutions were undercapitalized - mortally undercapitalized - and that systemic failure was imminent. The TED spread is similar evidence. So is the string of previous large failures due to the same undercapitalization that existed in very large banks that had not yet failed.
And that's where your position continues to elude me. You've been trying to poke holes in my argument but what exactly do you believe? That there was never any risk of systemic failure? That systemic failure, if it had happened, would have been less costly to the innocent taxpayer than the bailout was? That the systemic failure *would* have been more expensive, but that's OK because without failure we create moral hazard? I realize you think I'm wrong but I have no idea what you actually think beyond that. Again, I get the feeling that you don't actually have an argument of your own - you're just shifting the burden of proof, waiting for me to say something, and then trying to pretend that whatever minor semantic flaws you've found somehow invalidate the big picture without actually presenting an idea that you think is correct.
I think it is time for me to ask if there is a situation where you _wouldn't_ see the immediate necessity for the seizure of hundreds of billions of taxpayer dollars. Would you ever find a certain percentage dip in commercial paper volume acceptable, or should corporations always be able to borrow money, no matter what?
Of course not. If commercial paper dropped to zero tomorrow but TED didn't increase that would be fine. It would indicate that businesses had all the short-term money they needed. If TED skyrocketed but commercial paper continued to flow (as it did until September 17) that would be fine as well. It would indicate that there was substantial investor nervousness, but that business was continuing as usual. It's the combination of those two - TED going to almost double its previous record along with credit drying up - that raises serious alarm bells because it means that regular businesses were unable to continue to do business even at ridiculous interest rates, but that alone would still not a valid reason for the government to do anything.
The problem wasn't TED and it wasn't commercial paper. It was systemic failure. TED, frozen commercial paper, and the catastrophic consequences of the already-failed banks are evidence. Not losing "a couple" of banks, but most of them. Not losing just the bad banks, but the good banks connected with the bad banks. Not just careless investors losing their life savings, but almost everyone losing almost all of their life savings invested anywhere outside their mattress.
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So I was thinking about this on the way home.
Let's say you thought your laptop was totally dead and you were planning to buy a new one. An extensive examination determines that while the logic board and screen were dead, the CD-ROM drive actually made a clicking sound. Would you change your beliefs about replacing the computer? Would you need to change "your valuation of the relevance of the facts"? No. The clicking is irrelevant. The computer's still 99% dead instead of 100% dead. Replacing the laptop is still a good idea in retrospect.
Let's say you're stuck in a crashed plane in the Andes. You assume there's no food on board and you've decided to eat dead soccer players to survive. An extensive FAA investigation later reveals that there was actually one tic tac on board. Would you change your beliefs about the necessity of cannibalism? Would you "change your valuation of the relevance of the facts"? No. The tic tac is irrelevant. Cannibalism is still a good idea in retrospect.
Let's say you decide to divorce your wife because she's been cheating on you with an entire football team. An extensive NCAA investigation later reveals that she screwed everyone except the halfback. Would you change your beliefs about the necessity of cannibalism? Would you "change your valuation of the relevance of the facts"? No. The halfback is irrelevant. Divorcing her is still a good idea in retrospect.
And if anyone questioned your judgment on this - asked you to completely revise everything that you knew was not wrong but very slightly different - you'd probably think they, not you, were the ones vastly overvaluing these meaningless corrections to try to prove something that's still clearly not true.
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The paper market might well have been frozen for investment banks with possible exposure to toxic loans, but for the Caterpillars and even the Servicemasters of the world, it was just expensive.
So, TARP is more like eating dead soccer players while in an overpriced restaurant. Say, Applebee's. I'm saying they should have sucked it up and ordered the Wonton Tacos.
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[citation needed]
The paper market might well have been frozen for investment banks with possible exposure to toxic loans, but for the Caterpillars and even the Servicemasters of the world, it was just expensive.
First, a quibble. Caterpillar wasn't selling commercial paper, which usually has a term of 30-60 days. They were issuing 5 and 10 year bonds. The bond market is a completely different market, and bonds hadn't frozen yet. Commercial paper, being the most liquid market, froze first.
But you're otherwise correct. "Companies with few or no ties to subprime home debt, such as Caterpillar Inc. and General Electric Co., [had] less trouble selling commercial paper." Those companies could get less money than they needed at usurious rates only. It's a nonsequitur, though, because there was not general concern that the earthmoving vehicle industry was at risk of systemic collapse and needed to be recapitalized. The credit and banking industry was considered at risk of systemic collapse undercapitalized. Not just the toxic ones, all of them, and to a proportionate extent every other company that had financials as any part of its business plan. There was a real actual in-the-process large-scale run on the financial industry as a whole, not just the undercapitalized ones, by fund investors.
Take a look at this list. Find the biggest, strongest, most confidence-inspiring financial institutions with the least toxic assets. Schwab, Morgan Stanley, Scottrade. Did they have trouble selling commercial paper? I'll bet you they did, because at that time nobody trusted even the good smart responsible banks, because they were part of a system that was about to collapse.
The paper market might well have been frozen for investment banks with possible exposure to toxic loans
No. The paper market was effectively frozen for the entire financial sector - investment banks and regular banks alike, because after the Bear/Fannie/Freddie/Lehman collapses people started realizing how difficult it was to determine who was holding them, or a counterparty to someone holding them, or invested with an institution holding them.
So, TARP is more like eating dead soccer players while in an overpriced restaurant. Say, Applebee's. I'm saying they should have sucked it up and ordered the Wonton Tacos.
No. At Applebee's there's ample supply. A kitchen full of food waiting to be bought. In September '08 according to your article the money supply in the commercial paper market was extremely limited. There was very little money on the table to lend, and the people lending it had lost confidence in a broad category of people in that crowd. A crowd bearing IOUs at a taco shop with two tacos left. Taco brokers could pick the two people in the crowd who they thought were most likely to pay back, but the entire rest of the crowd was at risk of systemic starvation because nobody trusted any of them, including the ones who really did have money.
Again, the problem isn't starvation. It's fine if a few people ran up their credit cards too high and the taco broker doesn't think they're good for it. That's what should happen. The problem was that even the good financial companies were starving, drawn into a cycle of guilt by association that they should have never been in to begin with.
Again, What exactly do you believe? That there was never any risk of systemic failure? That systemic failure, if it had happened, would have been less costly to the innocent taxpayer than the bailout was? That the systemic failure *would* have been more expensive, but that's OK because without failure we create moral hazard? Something else? I realize you think my view is provably incorrect to an inconsequentially minor degree and actually incorrect to a completely speculative degree but I have no idea what you actually think beyond that.
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You have to click through a couple of menus. Volumes dip as much as 83% for one of the maturities at the nadir - so, still shy of "two tacos for a crowd". More like two tacos for someone who usually gets a super burrito and a plate of nachos.
What do I believe? I believe that someone who tells you that you have to spend $700b, RIGHT NOW, is not to be trusted. If he said everything was fine last week, that just makes his perspective less valuable. And when his peers work for some of the recipients of that cash, that should only heighten suspicion.
I also believe that too much debt can get a nation in deep souvlaki.
Against that, I find the evidence for possible collapse (precedented TED, not-frozen commercial paper) unpersuasive.
I notice that you've scaled back from total economic collapse to total financial sector collapse. I would further hope to convince you that the Schwabs of the world would have been fine without TARP. Per this, they didn't take TARP funds at least. I don't know of a way to look up who was issuing/buying what in September and October '08, so I don't know how much more evidence I could give.
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First, you're starting this analogy from a false point. Nobody but a complete glutton eats "a super burrito and a plate of nachos" for dinner. You're making the unfounded assumption that banks and businesses were writing commercial paper wastefully, which you're welcome to prove, but haven't. On its face this doesn't fit the facts though. Commercial paper is very liquid, very short-term. If you need to pig out on a ton of credit you go to bonds not paper. That's not what paper is for.
Second, if you take the FDA's recommendation of a 2000 calorie/day diet, an 83% dip would leave you with 340 calories. One can of Coke and one taco. Not to go Godwin, but that's half as many calories as the Jews got during the Holocaust. So assuming that your 83% figure is true, that level of decrease from normal is quite substantial.
What do I believe? I believe that someone who tells you that you have to spend $700b, RIGHT NOW, is not to be trusted.
What, *always*? No matter what the circumstances? Regardless of evidence? If so, there's our problem. You're immune to reason and evidence.
Does this apply in any other situation? If someone tells you that your house is on fire and you need 700 gallons of water RIGHT NOW do you tell him "but my house was perfectly fine last week"? If your dad's heart stops beating and someone tells you that they need to jolt him with 700 volts of electricity do you tell him "his heart was perfectly fine last week"? If someone tells you the Gulf Coast suddenly needs 700 miles of oil barrier do you say "the derrick was perfectly fine last week?" You can try an argument from incredulity but it's not very persuasive.
If I told you that your house was on fire and you said there was no smoke you'd have a point. Maybe there's no fire. If I said your dad was having a heart attack and his heart was beating normally, you'd have a point. Maybe there's no heart attack. If I said there was an oil spill and no oil was coming out of the derrick you'd have a point. Maybe I'm just making it up. What evidence is missing? What do you imagine that systemic failure looks like? What would you have to see that you don't already see in order to start taking this thing seriously?
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In fact, my position came from using reason and evidence. Yours, to judge by your links, came from listening to a very simplified version of things on NPR and then assuming you knew everything about it.
I think we're done here.
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Absolutely correct. I listened to very simplified versions of things on NPR and I assumed that I understood them. You've offered minor factual corrections, which has improved my undestanding, and for that I am thankful, but it doesn't change anything of significance.
For example I was 17% wrong about commercial paper volume. I thought it dropped 100%, but it only dropped 83%. That doesn't exactly change the overall picture. If this page was 17% wrong and the Jews actually received 702 calories per day would they not have been starving anymore? If the figures on Deepwater Horizon were 17% wrong and it only spilled 58000 barrels of oil instead of 70000 barrels would that mean it was no longer a disaster? Of course not.
My mistake about TED is also unfortunate ... for you. I admit I was totally wrong when I said that "the biggest spike ever" was on September 15 2008. There had been big spikes for months. Which completely torpeodes your point - that everything was fine, or that "the man" was saying everything was fine. The "biggest spike ever" actually happened non on the 15th but two days later on the 17th, three days before "the man" started talking about anything. How exactly does this prove that you're right about anything?
So far you've been wrong about confusing the stimulus bill and TARP, you've been wrong about the timeline of causality between TARP discussion and market panics, you've been wrong about "money holes" being de facto failures, you've been wrong about everything being "fine", you've been wrong about the Bernanke or Paulson claiming "everything's fine", you've been wrong about bankruptcy proceedings making debt "go away", you've been wrong about CAT's 10 year bonds being commercial paper, you've been wrong about proving that banks were robust by showing that CAT was, you've been wrong about commercial paper loans not being for companies like Servicemaster.
On the other hand you *haven't* been wrong about capitalization, or the potential of systemic risk, or the actuality of systemic failure, or whether the consequences of that failure were worse than what we suffered, because you won't actually take a stand on any of it to risk being wrong about it. We might be done, but only because you refuse to answer my question: What do you imagine that systemic failure looks like? What evidence is missing? What would you have to see that you don't already see in order to start taking this thing seriously? This isn't an argument with two sides, this is fact vs. FUD.
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And you're 0 for 0, because you've provided 0 actual positions to defend.
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First, your position didn't come from anywhere because you don't have a position. You're not actually saying that there was or wasn't underlying systemic risk, that the risk was or wasn't in the process of collapsing, to what extent the collapse would have occurred, and how damaging those consequences would have been.
The only meta-position you could be said to have - that I'm wrong about something - came from starting with that conclusion and working backward to see whether you could find anything to correct me on. And you've succeeded admirably by correcting a bunch of things that I got wrong. Which still doesn't bring support to your position, which you don't have.
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