Monday, September 08, 2008

Heads we win, tails you bail us ...

Whether it's the environment or the economy, we've been heavily discounting the future and storing up trouble for ourselves. In the world of finance, we currently have close to $600 trillion of forward contracts (an agreed transaction at some point in the future), weak reserves and a mountain of debt.

The future just doesn't look friendly.

So what is the hapless banking community which is mainly responsible for this travesty going to do about it? Beyond paying PR firms and lobbyists to blame the government, it seems as if the plan is to wait until the taxpayer bails them out.

The great bailout has already started in the U.S. with the billions (some estimates are as high as $100bn) that has been piled into Fannie Mae and Freddie Mac. Unfortunately this is not just about the use of taxpayers' money to prop up financial institutions but also the exposure of the U.S. taxpayer to a further $5.5 trillion of mortgage debts. Let's not be coy about this, the U.S. has just shelled out a huge wad of cash and exposed every U.S. citizen to a further $20,000 of debt in order to underwrite some of the excesses of the financial community.

In simple monetary terms, the average U.S. taxpayer has just been done over. No wonder the financial markets are happy, who wouldn't be.

Whilst over the next few years the market will go down, it will also recover at a later date. I fully expect that at such point in time there will be all sorts of pressure to put Mae and Mac back into private hands; market knows best and all that. It would be good to see governments takes a VC like approach to their acquisitions (such as Northern Rock in the U.K.) and look for a good 10x return on investment.

If we're going to be exposed to the risk in the downturn, then when the recovery happens we should be looking to take as much of the profits as possible.


Composing said...

Even The Economist called this "Capitalism at its worst" (the Fannie and Freddie bail-out)

Of course, government can't simultaneously be a rational profit seeking agent *within* the market *and* the external foundation of stability on which the market depends during these crises.

I just wish the "free market" fundamentalist would actually pay attention to the real world and figure out that markets don't *work* without governments regularly cleaning up their mistakes.

swardley said...

"figure out that markets don't *work* without governments regularly cleaning up their mistakes." - that's a very Keynes / Adam Smith point of view.

"fundamentalist" - that's the problem with the Chicago School of thought, it's all about dogma and faith in a model whose assumptions are flawed rather than a practical approach of treating the free market as a tool for society and not a replacement to it.

A return to a more mixed economy (i.e. an Adam Smith / Keynesian viewpoint) of a free market tempered by strong government regulation would be welcome as opposed to either extreme of free market radicalism (Chicago / Friedman) or centrally planned everything.