[Rhodes22-list] Bailouts

Wed Dec 17 07:01:09 EST 2008

When this whole bailout mania started, it made some sense to me.
Capital lending markets were screeching to a halt because
mark-to-market accounting rules made viable assets go to zero on the
books.  The 'gubmint' was going to buy "toxic assets" and create a
market for them.  Now we have one long hog trough with an endless
supply of slop and no end in sight to little piggies (the ski-industry
wants a bailout for example). Bush 43 says he needs to deviate from
free market rules to save the free market.  Huh?  I bet he didn't
learn that at Harvard Business School.  President-Elect Obama (PEBO)
wants to run the bailout to a trillion+ dollars, all borrowed of
course.  To quote Cheech & Chong from that great 70's skit from a
Japanese aircraft carrier commander's address to kamikaze pilots, one
pilot screams  "have you lost your f*#king mind?"

Brad

------------------

December 17, 2008
Postponing Reality
By Thomas Sowell

Some of us were raised to believe that reality is inescapable. But
that just shows how far behind the times we are. Today, reality is
optional. At the very least, it can be postponed.

Kids in school are not learning? Not a problem. Just promote them on
to the next grade anyway. Call it "compassion," so as not to hurt
their "self-esteem."

Can't meet college admissions standards after they graduate from high
school? Denounce those standards as just arbitrary barriers to favor
the privileged, and demand that exceptions be made.

Can't do math or science after they are in college? Denounce those
courses for their rigidity and insensitivity, and create softer
courses that the students can pass to get their degrees.

Once they are out in the real world, people with diplomas and
degrees-- but with no real education-- can hit a wall. But by then the
day of reckoning has been postponed for 15 or more years. Of course,
the reckoning itself can last the rest of their lives.

The current bailout extravaganza is applying the postponement of
reality democratically-- to the rich as well as the poor, to the
irresponsible as well as to the responsible, to the inefficient as
well as to the efficient. It is a triumph of the non-judgmental
philosophy that we have heard so much about in high-toned circles.

We are told that the collapse of the Big Three automakers in Detroit
would have repercussions across the country, causing mass layoffs
among firms that supply the automobile makers with parts, and shutting
down automobile dealerships from coast to coast.

A renowned economist of the past, J.A. Schumpeter, used to refer to
progress under capitalism as "creative destruction"-- the replacement
of businesses that have outlived their usefulness with businesses that
carry technological and organizational creativity forward, raising
standards of living in the process.

Indeed, this is very much like what happened a hundred years ago, when
that new technological wonder, the automobile, wreaked havoc on all
the forms of transportation built up around horses.

For thousands of years, horses had been the way to go, whether in
buggies or royal coaches, whether pulling trolleys in the cities or
plows on the farms. People had bet their futures on something with a
track record of reliable success going back many centuries.

Were all these people to be left high and dry? What about all the
other people who supplied the things used with horses-- oats, saddles,
horse shoes and buggies? Wouldn't they all go falling like dominoes
when horses were replaced by cars?

Unfortunately for all the good people who had in good faith gone into
all the various lines of work revolving around horses, there was no
compassionate government to step in with a bailout or a stimulus
package.

They had to face reality, right then and right there, without even a
postponement.

Who would have thought that those who displaced them would find
themselves in a similar situation a hundred years later?

Actually the automobile industry is not nearly in as bad a situation
now as the horse-based industries were then. There is no replacement
for the automobile anywhere on the horizon. Nor has the public decided
to do without cars indefinitely.

While Detroit's Big Three are laying off thousands of workers, Toyota
is hiring thousands of workers right here in America, where a
substantial share of all our Toyotas are manufactured.

Will this save Detroit or Michigan? No.

Detroit and Michigan have followed classic liberal policies of
treating businesses as prey, rather than as assets. They have helped
kill the goose that lays the golden eggs. So have the unions. So have
managements that have gone along to get along.

Toyota, Honda and other foreign automakers are not heading for
Detroit, even though there are lots of experienced automobile workers
there. They are avoiding the rust belts and the policies that have
made those places rust belts.

A bailout of Detroit's Big Three would be only the latest in the
postponements of reality. As for automobile dealers, they can probably
sell Toyotas just as easily as they sold Chevvies. And Toyotas will
require just as many tires per car, as well as other parts from
automobile parts suppliers.

--------------------------

from the WSJ

 DECEMBER 16, 2008

Barack Obama-san

As January 20 nears, Barack Obama's ambitions for spending on the
likes of roads, bridges and jobless benefits keep growing. The latest
leak puts the "stimulus" at $1 trillion over a couple of years, and
the political class is embracing it as a miracle cure.
[Review & Outlook] AP

Not to spoil the party, but this is not a new idea. Keynesian
"pump-priming" in a recession has often been tried, and as an economic
stimulus it is overrated. The money that the government spends has to
come from somewhere, which means from the private economy in higher
taxes or borrowing. The public works are usually less productive than
the foregone private investment.

In the Age of Obama, we seem fated to re-explain these eternal
lessons. So for today we thought we'd recount the history of the last
major country that tried to spend its way to "stimulus" -- Japan
during its "lost decade" of the 1990s. In 1992, Japanese Prime
Minister Kiichi Miyazawa faced falling property prices and a stock
market that had sunk 60% in three years. Mr. Miyazawa's Liberal
Democratic Party won re-election promising that Japan would spend its
way to becoming a "lifestyle superpower." The country embarked on a
great Keynesian experiment:

August 1992: 10.7 trillion yen ($85 billion). Japan passed its
largest-ever stimulus package to that time, with 8.6 trillion yen
earmarked for public works, 1.2 trillion to expand loan quotas for
small- and medium-sized businesses and 900 billion for the Japan
Development Bank. The package passed in December, but investment kept
falling and unemployment rose. By the end of the year, Japan's
debt-to-GDP ratio was 68.6%.
[Review & Outlook]

April 1993: 13.2 trillion yen. At exchange rates of the day, this was
a whopping $117 billion giveaway, again mostly for public works and
small businesses. Tokyo erupted into domestic politicking over
election practices, the economy went sideways, and the government
fell. New Prime Minister Morihiro Hosokawa floated tax cuts,
deregulation and decentralization to spur growth. But as the economy
worsened -- inflation-adjusted GNP shrank 0.5% in the April to June
quarter -- the political drumbeat for handouts increased.

September 1993: 6.2 trillion yen. Mr. Hosokawa announced a compromise
"smaller" stimulus of $59 billion, along with minor deregulation. He
dropped plans for an income-tax cut. The stimulus included 2.9
trillion yen in low-interest home financing, one trillion yen for
"social infrastructure," and another trillion for business. The
economy didn't respond. By the end of the year, Japan's debt-to-GDP
reached 74.7%.

Is any of this beginning to sound familiar? There's more.

February 1994: 15.3 trillion yen. This stimulus included 5.8 trillion
in income-tax cuts, 7.2 trillion in public investment, 1.5 trillion
for small business and employment-support, 500 billion for land
purchases and 230 billion for agricultural modernization. The income
tax cut was temporary, effective only for 1994. The economy stagnated
and Prime Minister Hosokawa resigned amid a corruption scandal. By the
end of the year, debt-to-GDP was 80.2%.

September 1995: 14.2 trillion yen. The Socialist government of
Tomiichi Murayama, with a wobbly coalition, rolled out a $137 billion
whopper, with 4.6 trillion in public works, 3.2 trillion for
government land purchases, 1.3 trillion in business loans, and more.
Mr. Murayama resigned in early 1996, and in June Prime Minister
Ryutaro Hashimoto agreed to raise consumption taxes to 5% from 3%,
starting in April 1997, to reduce the fiscal deficit.

In 1994 and 1995, Japan spent 3.1% and 2.9% of its annual GDP, and
(helped by central bank easing) the economy did respond with modest
growth for about two years. Debt-to-GDP hit 87.6%.

April 1998: 16.7 trillion yen. When growth starting slowing again, the
re-elected LDP turned to old medicine: 7.7 trillion yen for public
works. The $128 billion grab-bag also included 2.3 trillion for the
disposal of bad loans. The government announced four trillion yen in
(again) temporary income-tax cuts, spread over two years. Mr.
Hashimoto resigned in July after voters registered their discontent at
the polls.

November 1998: 23.9 trillion yen. Desperate to get the economy moving,
Prime Minister Keizo Obuchi rolled out the country's largest-ever
stimulus, valued at $195 billion. The giveaway included 8.1 trillion
yen in social public works, 5.9 trillion for business loans, one
trillion for job-creation programs, 700 billion in cash handouts to 35
million households, and more. By the end of the year, debt-to-GDP hit
114.3%.

November 1999: 18 trillion yen. In a "last push," Mr. Obuchi's
government spent 7.4 trillion yen to prop up businesses, 6.8 trillion
yen for social infrastructure projects like telecommunications and
environmental projects, and two trillion yen for housing loans, among
other things. Debt-to-GDP reached 128.3%.

Japan's economy grow anemically over that decade, but as the nearby
chart shows, its national debt exploded. Only in this decade, with a
monetary reflation and Prime Minister Junichiro Koizumi's decision to
privatize state assets and force banks to acknowledge their bad debts,
did the economy recover. Yet recent governments have rolled back Mr.
Koizumi's reforms and returned to their spending habits. But Japan
does have better roads.

Now we're told that a similar spending program -- a new New Deal --
will revive the U.S. economy. How do you say "good luck" in Japanese?