The Fallacy of ‘Bailing Out’ U.S. Cities and States

Amazing how far a really stupid idea can travel. Warren Buffett helped spread and legitimize one a couple of months ago, and now the Wall Street Journal has pitched in on the same topic with an op-ed piece written by one Eden Martin, a lawyer and Chicago muckety-muck.  Here is what Mr. Martin wrote:  “The next big issue on the national political horizon may be whether the federal government should bail out the many budget-strapped states and municipalities across the country, especially their overly generous and badly underfunded pension plans.”  And here’s Mr. Buffett on the same topic, testifying before Congress in June on the role the credit rating agencies played in nearly bringing the banking system down: “I mean, if the federal government will step in to help [states and major municipalities], they’re Triple-A. If the federal government won’t step in to help them, who knows what they are.” Buffett himself should know the answer to the question he has implicitly raised, since, no matter who is doing the bailing out, or what is used to pay for it, we – and not some entity called “the Government” — will all pay heavily for it in one way or another.

Enough, perhaps, to rescue one neighborhood in Illinois?

We’ll explain in a moment. But first, let us be clear that we are not holding our breath waiting for the Journal’s editors to provide responsible counterpoint to all of this bailout claptrap. Unfortunately, the business community’s newspaper of record has always played an aggressive role in telling its readers not what is, but what they presumably want to hear. How else to explain why the Journal would continue to devote hundreds of column inches lately to the possibility that the economy just might be facing a double-dip recession? In plain fact, and as any of the paper’s two million readers could attest, the nation’s economy never even emerged from the first Mindanao-deep dip (except in Washington, D.C. and Georgetown, but that’s another matter).

The Unspoken Truth

As to Eden Martin’s plea for help on behalf of his beloved Illinois, how on earth can the federal government afford to bail out the states and municipalities if they themselves cannot extract from their own taxpayers the sums necessary to pay their bills and future obligations ? The idea that the U.S. Government can somehow afford things for us that we cannot ourselves afford is absurd on the face of it.  Here is the unspoken truth behind all of the talk: Whenever anyone proposes a federal bailout of a bank, or a pension fund, or a city, or a state these days, he is implicitly suggesting that the bailout be accomplished not with real money, but with those magical dollars that the U.S. is able to conjure up in virtually unlimited quantities. At this point, however, two years into the Great Recession, and having observed a so-far multi-trillion dollar bailout effort fall flat on its face, the thoughtful observer might be tempted to think only a few benighted Keynesians still believe that creating money out of thin air – which is to say, borrowing it against future production – can cure an ailing economy.

Economically speaking, nothing could be more absurd than the idea that the federal government can somehow “rescue” the cities and states. And heaven help us if they should do the unthinkable and try it with real money – i.e., hard dollars raised by taxation – for then we will discover in an instant how broke we really are. It will be an epiphany for many who have remained skeptical that the Social Security system is indeed headed for bankruptcy, or that the unfunded liabilities of all levels of government do in fact tally into the hundreds of trillions of dollars. Alternatively, if “The Government” should actually attempt to bail out the cities and states with printing-press money, as they well may, we’ll let the Keynesians (those unmitigated, leftist quacks!), Buffett, and the Wall Street Journal make fools of themselves trying to explain how such a featherbrained scheme can possibly put the economy back on track.  For if they truly believe that open-ended federal bailouts hold the key to recovery, then let the Guvmint bail all of us out by –say, by Thanksgiving — mailing out million-dollar checks to each and every household in America. Surely that would be cheaper than taking on all of the liabilities — past, present and future – of the cities and states?

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  • mario cavolo August 28, 2010, 6:38 am

    …from a MarketWatch bond article…..this is pretty hilarious.

    “The second point bond bubble advocates make is that interest rates have fallen so far and so fast that they have to go up at some point and this will hurt bond investors. ”
    Guys and Gals, where I may be missing something here, please share your view, for I take what seems to me the most obvious of observations that if interest rates go up, hurting bond investors will be the least of our troubles.

    In the new mega-debt reality of today, interest rates CAN”T go up. They MUST stay down and all other parameters follow that “Star Trek” prime directive.

    As many of you are aware I often argue against doomsday scenarios; that excesses will be absorbed and wound down over time rather than a D-day. However, rising interest rates is the fire that will light the fuse to global economic hell when sovereign debt has hit multi-trillion multiples of global GDP’s. Everything else follows this core top priority. In the absence of rising interest rates, the elitists and governments have many other chains they can yank on and indeed, they will continue to do so.

    Stated another way, maintaining low interest rates allows even just the possibility of a “sustainable” nightmare :), while many here even disagree with that. While a rising interest rate environment is in every way, shape and form unsustainable.

    If printing billions out of thin air is the response chosen, as it is, then the cost factor to release those into the economy must remain low. Its a matter of scale right?; like big grocery stores who average a 1% mark-up. Its a tiny mark-up compared to the mark-up needed by smaller stores to generate a profit.

    Of course we can argue the other side; the damage being done to the economy by flooding the market with these out of thin air billions, not to mention that the banks receiving it are hoarding it. I just read somewhere that banks are holding onto three trillion cash; not to mention corporations are also hanging on their cash, etc. They’re going to bankrupt the system, etc. dozens of such legitimate observations but all observation of the secondary after the fact reality.

    Cheers, Mario

    • Benjamin August 28, 2010, 11:00 am

      Hi Mario. Actually, I’ve read that it’s not high or low interest that matters (though the lower side is preferable). It’s the stability of a rate over time. But I see you put “sustainable” in quotes when talking of the lowering trend, also. And you’re right about a high rate trend… It’s like saying a lowering trend is building beyond what the founddation can support; a very tall building, sagging and swaying under it’s own weight. Rising trend is a wrecking ball put to the instability of the structure!

      This is one reason that I doubt that corporations with lots and lots of cash are going to ultimately matter. They do have it, but with unstable interest (where fiat always fails) collapse is destined to occur. That sagging, swaying building can’t be added to forever. And when rates shoot up, taxes must follow. That’s the burden of debt. And who do you think the government is going to go after for revenues? Of course, that’s why lowering interest trend is damned persistent! You can see why republicans are, well, so damned republican about everything! “Come on, don’t tax us! Let us keep borrowing the country to death so we can blame it ALL on the democrats! It’s a free country!!! (repeated ad nauseum as they’re dragged away down the hall of the psycho ward)”

      But there’s good news for the republicrats. As bond prices drop and taxation rises, “capital” will certainly be decimated more quickly than we’d like to imagine.
      It’ll be consumed much faster than it is replaced, a quick death, ie, so they won’t have to whine for long! And for all that I admire and am thankful for the Tea Party, I think in the end they will be in for a shock, as will everyone else. At this point, it’s too late to say and MEAN no more taxes and borrowing. We can be rid of taxes PERIOD and cut ALL borrowing, but from where will the capital come to begin a genuine recovery that such things as low taxes and no borrowing are supposed to bring about? (ahem the central banks have the gold ahem!)

      But a Doomsday? That all depends on who you are in the vast configuration of things. Also depends on how quickly there would be a gold (silver will follow) redistribution. Myself, I know that at some point the right thing will be done, even if it takes a very bumpy road to get there. So in a way, I can agree with your prediction of a “muddle-through” period.

  • Chris T. August 28, 2010, 12:24 am

    Reply tip:

    Only an initial coment posted has a reply button.
    When someone uses it, that reply does not get a reply button.
    If you want to reply to a reply, ie become the second reply, and so on, just
    use the reply button under the initial comment.

    You then go in the proper spot, as second, third, etc. reply.

    DID NOT use that here, so that it would be seen by more people.
    This Opera browser, and Firefox with blocking too, allow it.

    • F. Beard August 28, 2010, 1:11 am

      Thanks Chris_T.

  • Chris T. August 27, 2010, 11:38 pm

    Keith writes:
    “The only noble action the government could take right now is to ‘let’ the whole system collapse and there isn’t a snowballs chance that’s going to happen”

    In this forum, as in what Ron Paul has been saying for a long time, that notion is seriously held and not taken lightly.

    But in the outside world, where Austrian economics still (if at all) thought to be the economy of a small counrty somewhere else, one would think regular folks would be disdainful.

    Not so.

    When this states (former Goldman Sachser) ex-gov. Corzine was bandying his (GS-designed) Turnpike derivization scheme about. he held a bunch of townhall meetings.
    Much criticism came at him at these, and the scheme thankfully failed.
    At the one we went to, an astounding number of people suggested that the Governor declare an official default.
    When I prodded yet again he answered (not verbatim though):
    “I will never permit the promises we have made to be broken and that would shut us off from the credit markets for 50 years”

    At the second part, a whole bunch of people spontaneously shoulted “good, that’s what we want!”
    The irony that a promise he would not allow to be broken was already even before it was given in the first place surely never occurred to him, system man that he was.

    So you are right of course as Corzine showed, but the repsonse from the regulars was still nice to hear.

    • Benjamin August 28, 2010, 12:30 am

      Thanks for sharing that encouraging story, Chris!

      I bet he’s thinking “damn! That Tea Party idea is starting to spread!”

  • Rick Ackerman August 27, 2010, 9:46 pm

    If newspapers stopped ginning up “good” news for their readers every day, circulation would drop, and then advertising revenues. Having been a newspaper editor myself, I can attest that economic recessions soften coverage — the effect has been cumulative, by the way — and that hard-hitting Pulitzer-winners who try to cover city hall tenaciously during hard times will find themselves transferred to the suburban boondocks. “Real” newspapers are dead.

    • Chris T. August 27, 2010, 11:18 pm

      Rick,

      your last four words sum it up perfectly.
      I hadn’t thought of the soft-persuasion method you mention, that is undoubtedly the major modus operandi. The baseball bat is surely seldom borne.

      As to why they would keep on talking about an upcoming “double-dip”, one thought on top of my above:

      This way, it makes the “last” recession appear as somehting conquered, are already overcome, however badly.
      And hence, what was done to solve it, worked if (very) imperfectly.
      Because the fact that it never truly ended will eventually become obvious to even the blindest of deniers, it can be termed as an unfortunate reoccurence, to be solved as the last one.
      Of course lets get it right this time, so we have to double our effort.
      No need to acknowledge the lies about there being a rebound, and justification for more of the same, all in one.

      &&&&&&

      Your explanation makes sense, Chris, but we’re in big trouble if the effort is indeed doubled the next time around. Bernanke would certainly seem to have set the stage for it last week. RA

  • Chris T. August 27, 2010, 9:12 pm

    [this posted by me prior to seeing all other comments, sorry if duplicating someone else].

    Rick, you write:
    “…telling its readers not what is, but what they presumably want to hear.”

    You should have written:
    “telling its readers not what is, but what its (the WSJ’s) owners want their readers to believe”

    Whether Dow’s heirs or Murdock, the WSJ has always been the mouthpiece of the establishment, helping spread those ideas that our masters want us to believe. I may be wrong about this at the WSJs outset, but to my knowledge, they did not write against the FED being set-up. If they, did, they certainly stopped being anti FED and anti-fiat by WWII.
    want to hear.”

  • F. Beard August 27, 2010, 8:44 pm

    We shall see Carol, with regard to CO2. People with no belief in God, will always find something to be frightened about. I’ve seen too many of the scares (global cooling in the 1970s for instance) come and go to be phased anymore. The End of the present order will come one day (maybe soon) but it won’t be because we burned too much carbon. It will be something along the lines of morality such as our murderous foreign policy or our banking and money system that dooms it.

  • ricecake August 27, 2010, 8:41 pm

    —- if “The Government” should actually attempt to bail out the cities and states with printing-press money, as they well may, …… —–

    Hyperinflation sure is coming! Prepare for The Weimar Republic and let go banana.

    • Rick Ackerman August 27, 2010, 9:38 pm

      I’ve posted the link here a dozen times, but Adam Fergusson’s book on the Weimar hyperinflation is essential reading for anyone who wants to use the word “Weimar” in this forum. Bottom line: U.S. hyperinflation can and will occur, but not in the way it occurred in Weimar Germany.

  • Carol August 27, 2010, 8:20 pm

    F. Beard

    You lost me on the connection between being religious and “the anti-life crowd”, whatever that may mean. Yes, CO2 is an essential plant food but, as with any blessing, too much of a good thing becomes a curse. Oxygen’s a blessing but too much to a premature baby and the child goes blind. The same thing obtains with anything. If we are destroying the most productive storers of CO2 (trees) while even continuing a flat-line production, then the extra CO2 has to go somewhere – the atmosphere, the oceans (shellfish are losing their ability to maintain their shells because CO2 reacts with the saltwater to become an acid that eats away the shells)… And this scenario doesn’t take into account the amount of CO2 that emerges from tailpipes, by far the greatest producer of excess CO2. Moreover, as the planet’s temperature rises, methane – a far more potent greenhouse gas – is released from permafrost.

    While the geologic record does, indeed, show that the earth’s atmosphere changes over time all by itself, I don’t agree that human action has not accelerated climate change.

    If by “anti-life crowd” you mean the pro-choice crowd, that’s a discussion, it would seem, for another venue. However, if the government is to stay out of people’s affairs as much as possible, one such sphere is people’s bedrooms and medical offices. I’ll leave it at that.

  • F. Beard August 27, 2010, 8:05 pm

    Mr. Beard, you are talking nonsense when you suggest that “everyone” would emerge from your scheme a winner. Bottom line, you cannot bail out debtors without screwing creditors. RA

    Like I said, the banks might suffer in real terms but since they are the villains that’s poetic justice, imo. In any case, the banks would be fixed in nominal terms. The problem is the banks create real debt with phony money, created via FRL. I propose to bailout their victims, both borrowers and savers, with real money and abolish their government backed counterfeiting cartel.

    Debt forgiveness is commanded in the Bible for even legitimate debt. How much more then for FR loans which are essentially counterfeiting? If the banks are the villains then too bad if they suffer. And too bad for the creditors too if they hoped to share in the loot from fractional reserve lending.

    Well, let’s just watch the Depression play out. Maybe my radical propsal won’t be necessary.

  • F. Beard August 27, 2010, 7:25 pm

    @Carol,

    Yes, I think thorium reactors are a way to go. As for risk to miners, yes that is a valid consideration but with protective gear and automation it should not be problem. Plus with thorium, it is only weakly radioactive till the reactor breeds it.

    As for the anti-CO2 movement, since you appear to be a Christian, I would point out that many of the anti-life crowd who think that the Earth’s population should be reduced to about 500 million are on that band-wagon. CO2 is an essential plant food and is a blessing not a curse. But hey, I can understand anyone being concerned about the environment since our current money and banking system is ruinous to it.

  • Steve August 27, 2010, 7:19 pm

    I’m trying to stay out of this. Yet, I am a net saver. I didn’t ask Uncle for anything, and I don’t want anything from Uncle except he protect the Boarders, and protect Our Unalienable Rights far antecedent to any government form.

    All I am hearing is bailouts for people who bought houses they could not afford, who took out loans they should not have taken, who drive cars too fancy, who fail to understand its a building to keep one warm, and dry.

    I believed ‘IT’ could be fixed. I now believe the course must be run. Let us just be progressive. Everyone turns in everything they have. “They” will give back according to our need. Everyone has a Right to be legislated a privilege. By the Way it is reported that Obama and Hillary signed onto the U.N. wherein a House is a Right.

  • F. Beard August 27, 2010, 7:09 pm

    “At this point, however, two years into the Great Recession, and having observed a so-far multi-trillion dollar bailout effort fall flat on its face…”

    D’oh! Benjamin

    Yeah because the bailout was for the villains, the banks, instead of the victims, both underwater homeowners and savers.

    OK, I’ve said enough for a while. I fear I bore. Let’s see how the depression plays out. Just remember there is a solution though it seems radical at the present.

  • F. Beard August 27, 2010, 7:01 pm

    How about we use the reply button, huh? Benjamin

    Sorry, my browser, Firefox with ad blocking, must be blocking it. Believe me, its absence annoys me plenty. I guess I’ll have to experiment. Suggestions anyone?

    • Carol August 27, 2010, 7:06 pm

      I have Firefox with ad blocking. In most cases, the reply button works but it doesn’t if you’re not the first to reply.

  • F. Beard August 27, 2010, 6:50 pm

    The funds should have been low cost loans to any eligible, competent small business that could provide the construction as well as an all-out push towards alternative energy. Carol

    If “alternative” includes nuclear then count me in. However, let us please let engineers and economists tell us what is practical. The CO2 scare is bogus though I think we should use nukes for power generation and not waste coal and natural gas.

    • Carol August 27, 2010, 7:05 pm

      F. Beard

      I’m no nuclear scientist by any means. I know it’s silly of me but I have concerns about the miners who have to dig up the uranium and the processors who have to process it. I try to live by the Second Commandment (love thy neighbor etc.). I have read that thorium somehow disposes of uranium (plutonium?). If so, then let’s go after the thorium and incorporate it so that it does, indeed, dispose of the stuff because there’s no other safe way to dispose of it or store it that I know of. Then there’s always the NIMBY factor. Other concerns about nuclear: no more Chernobyls or Three Mile Islands…or Vermont’s Yankee which leaks radioactive tritium and strontium. Finally, they have to be able to withstand the force of earthquakes, terrorists, etc.
      Primarily for these safety reasons, I won’t invest in nuclear. As for the CO2 scare, I disagree with your assessment.

  • F. Beard August 27, 2010, 6:32 pm

    “1. allow underwater homeowners to pay down their mortgages to current market prices.” FB

    Fine, but what does that even mean? The value of a peice of property is how badly the buyer is willing to get in at, and for how little the seller is willing to take to get out. All other valuations are alchemy. Benjamin

    The average amount a homeowner is underwater is calculable, I’d bet. Furthermore, the Bible commands at least two fold repayment for theft and I am not shy about calling FR bankers thieves so let’s at least double that amount.

    This will come up in a couple weeks, perhaps, so I don’t want to spoil it ahead of time. But I will ask this…

    Just how in the blazes does a house go from 30 grand to 90 inside of two decades? Think on that for a while, readers. We’ll see if I can answer this in a while. Benjamin

    With counterfeit but temporary money otherwise known as “credit” created via the fractional reserve lending process.

    “2. compensate savers for years of artificially suppressed interest rates.” FB

    More money in the bank would supress interest lower. Again, the cure for “cowbell” is more cowbell. Benjamin

    Which is a very good thing. However, reserve requirements should be set to 100% to put the banks out of the counterfeiting business till reform is implemented.

    Not that idling money should result in more money in the first place. So I would say there is no “interest” to compensate for. Usury, on the other hand… Benjamin

    Yea savers should keep that in mind, however I don’t think they should be punished for that since they had little choice other than to speculate. Besides, lending, even at interest, should not be illegal. However, I think a free market in money creation would render it obsolete.

    That aside, they just go out and spend it, in which case they’re punished with inflation. Benjamin

    Paying down debt is not inflationary in itself. As for the savers aren’t they inclined to save?

    How would you like it, F Beard, if you were given a new car for the one someone wrecked… just the same one, with more dents? Are we… feeling compensated yet?

    But that’s beside the point. Benjamin

    Huh?

    Just because you save doesn’t mean you have the right to charge usury. The question is whether we’re better off for it. Are good times back because of this? Hardly. Things are just as messed up as they’ve been. Benjamin

    In a free market, people should be able to lend as they please. However, they should not have the benefit of doing it in a government enforced monopoly money supply that we are all forced to use.

    “4. fix state and local tax revenues.”

    Nooo… I really, really, really beg to differ on that! See my question proposed to the first point, above. At best, it’s a temporary fix… for government, not the economy. Benjamin

    I propose fundamental reform afterword so we don’t get into this mess again.

    • Benjamin August 27, 2010, 6:55 pm

      Hey, F? How about we use the reply button, huh? I don’t like cluttering up forums if I can help it. Thanks.

      “However, reserve requirements should be set to 100% to put the banks out of the counterfeiting business till reform is implemented.”

      ie, A bank can never, by law (ahem, but you said…), make any loans, and act only as a storage/transaction service. But that’s not for you or anyone to decide, except for the person whose money it is.

      And yes, usury should be illegal, as should a bank lending out more money that it has to lend. But illegalizing either of those things are not synonymous with banning them. A ban requires active enforcement that never really works for all that it costs and puts us into a police state. Illegalization, however, only requires that the court not rule in favor of the perpetrator. And if that person/party says “not fair”, they can leave the country and go wherever they want, and be despicable low-lives. Live in America, and you will practive honest business, or you’ll go broke. Savvy?

      “Huh?”

      ie, It’s all flawed garbage anyhow, so let’s cut down to business and ask what’s really important here; we would not be put back on the road of productive economics by somehow both compensating and punishing savers; a car more dented up is not in better condition.

  • F. Beard August 27, 2010, 5:46 pm

    A drug lord, in his 18-wheeler, filled with FRNs, pulls up to the FRN-USN conversion ATM. other Paul

    Who said anything about converting? But if you prefer the US Treasury can borrow FRNs from the Fed at 0% interest for that purpose. But then you will have to hear endless static about the national debt from those who don’t realize that as a sovereign issuer of currency, the US cannot go broke. We are not Greece or Ireland.

  • F. Beard August 27, 2010, 5:39 pm

    Furthermore, I doubt a depression will benefit many savers if they lose their jobs just because the money supply dries up. What I propose is a crude version of running the fractional reserve looting machine BACKWARDS. I’m sorry if that seems strange to you.

    • Benjamin August 27, 2010, 6:38 pm

      Running FR backwards is exactly what you hope to avoid. ie, If it creates the money (I can think of other things that do, however), then running it backwards un-creates it… by injecting more of it.

      Now, where have we seen and heard this before?

      “At this point, however, two years into the Great Recession, and having observed a so-far multi-trillion dollar bailout effort fall flat on its face…”

      D’oh!

  • F. Beard August 27, 2010, 5:34 pm

    Is there someone who wants to speak up for all of the savers and creditors who would be destroyed for perhaps two generations by Mr. Beard’s Modest Plan? RA

    Yes, me. I said an equal distribution to ALL US adults not just borrowers. The only losers might be the banks in real terms which would be poetic justice.

    • Rick Ackerman August 27, 2010, 7:11 pm

      Mr. Beard, you are talking nonsense when you suggest that “everyone” would emerge from your scheme a winner. Bottom line, you cannot bail out debtors without screwing creditors. Even a fifth-grader can understand the underlying logic, which was stated elegantly by C.V. Myers:

      “Every penny of every debt must be repaid — if not by the borrower, then by the lender.”

  • andequip August 27, 2010, 4:26 pm

    Rick,

    Thanks for the food for thought. I speak for many when I say, “I don’t full understand all of the ins and outs of the current economic travails”. However, I do understand that our current situation will NOT get better until we extinguish a massive amount of debt, starting with this most toxic types.

    Here’s where I get into a subject, that you have touched upon, in the past…..jubilee, which is an historic debt “forgiveness” policy, decreed by not so ancient cultures.

    Why can’t this ancient “purging” of our economy, offer us the opportunity to eliminate debt……at some level? Why not consider jubilee for Mortgage Backed Securities and their derivatives? After all, even with all the supposed “help” from USG regarding the housing market,this “intervention” has resulted in a deterioration of home values, market conditions regarding home sales, and public confidence in this sector of the economy.

    There are a lot of intellectual people on this site, with many ideas. So, I ask you….Can we start a discussion regarding “debt forgiveness”, in some form? What debts, how much, etc.?

    There is so much for all of us to learn from our past (just read “Great Myths of the Great Depression” by Lawrence Reed), including “jubilee”. I hope people do not discount the wisdom of the “Jubilee period”, as a means of re-setting the economy.

    Not much out there, other than family and friends, that offer comfort these days. However, I find this site to be thought provoking and at times, highly entertaining.

    Keep up the good work! Just keep us focused on ANY clear, well -thought out, workable solutions for our current financial troubles. I feel strongly, that one day we ALL will be asked “what did you do to help?” I only hope that it is not asked of me, by my starving grand children.

    • Carol August 27, 2010, 6:18 pm

      I would have preferred no bank bailouts, a definite mandate for “mark to market” and no such thing as “too big to fail”. From my point of view as a New Dealer, all the stimulus should have gone into low-interest loans to small business to get that part of the private economy going and a muscular program to fund rebuilding the infrastructure – roads, bridges, the grid. The funds should have been low cost loans to any eligible, competent small business that could provide the construction as well as an all-out push towards alternative energy. But that’s just me. No short-term inventory clearing of clunkers, although we could not afford to lose what major manufacturing this country has left so the bailout of the auto industry didn’t bother me as much as rewarding the thieves who caused the mess.

      As long as the mega multinationals are sitting on a hoard of cash, using it to 1) richly reward the execs and their sweetheart boards, 2) merge and acquire competitors and 3) engage in stock buybacks instead of daring to hire, then we are left with millions upon millions of people without jobs, without homes, without food (now that the burgeoning demand for food stamps is met with a halving of funding for the program). So, if small business can’t hire, big business won’t hire, charities go begging for funds to aid these people (that money is earmarked for political campaigns), and the various religious outfits can’t meet the demand, that leaves only a few alternatives: 1) crime (only suckers rob convenience stores…the real money’s in the banks – just ask the bankers); 2) rebellion; or 3) shunt the money for unemployment compensation towards the aforementioned government ordered infrastructure and push into the 21st century.

      But again, that’s just me.

  • F. Beard August 27, 2010, 4:22 pm

    Yes, the only cure for alcoholism is more alcohol. Benjamin

    Nope, I propose to replace the fake, fractional reserve credit, with the real, genuine legal tender fiat, even if it is only paper. And after the reflation, we should have genuine liberty in money creation, usage and acceptance to prevent the problem from occurring again. The borrow-lend paradigm is dangerous and obsolete to boot if other solutions such as common stock and modern day tally sticks were allowed to compete with FRNs on a level playing field.

    • Rick August 27, 2010, 5:28 pm

      Is there someone who wants to speak up for all of the savers and creditors who would be destroyed for perhaps two generations by Mr. Beard’s Modest Plan?

    • Other Paul August 27, 2010, 5:36 pm

      I can see it now:
      A drug lord, in his 18-wheeler, filled with FRNs, pulls up to the FRN-USN conversion ATM. He steps outs of the rig, opens the trailer doors. 20 well-armed guards jump out. Then the accountant with green-eye shades is helped out of the trailer. He carries the first of tens of thousands of C-note bundles, and, diligently starts feeding in the FRN, one at a time. He then starts bundling the crispy, new USNs. After a couple of hours, a US Treasury teller comes out and calls a time-out, and efficiently removes the FRNs from the machine, and re-loads the ATM with USNs.

      One of the guards is asked to go to McD’s with a large takeout order in hand, and some crispy new USNs.

      To be continued–well, maybe not.

    • Benjamin August 27, 2010, 6:04 pm

      I don’t know that I can defend the savers, but…

      “1. allow underwater homeowners to pay down their mortgages to current market prices.”

      Fine, but what does that even mean? The value of a peice of property is how badly the buyer is willing to get in at, and for how little the seller is willing to take to get out. All other valuations are alchemy. This will come up in a couple weeks, perhaps, so I don’t want to spoil it ahead of time. But I will ask this…

      Just how in the blazes does a house go from 30 grand to 90 inside of two decades? Think on that for a while, readers. We’ll see if I can answer this in a while.

      “2. compensate savers for years of artificially suppressed interest rates.”

      More money in the bank would supress interest lower. Again, the cure for “cowbell” is more cowbell.

      Not that idling money should result in more money in the first place. So I would say there is no “interest” to compensate for. Usury, on the other hand…

      That aside, they just go out and spend it, in which case they’re punished with inflation. How would you like it, F Beard, if you were given a new car for the one someone wrecked… just the same one, with more dents? Are we… feeling compensated yet?

      But that’s beside the point. Just because you save doesn’t mean you have the right to charge usury. The question is whether we’re better off for it. Are good times back because of this? Hardly. Things are just as messed up as they’ve been.

      “4. fix state and local tax revenues.”

      Nooo… I really, really, really beg to differ on that! See my question proposed to the first point, above. At best, it’s a temporary fix… for government, not the economy.

    • Carol August 27, 2010, 6:49 pm

      Benjamin

      Regarding your question about how a house can go from $30K to $90K in 20 years. Some thoughts: 1) the baby boom which brought in, what, 75 million new people getting married, out of school, setting up housekeeping,coupled with 2) the conventional wisdom that home ownership is the start of building a nest egg, together 3) your correct answer that fair market value = what a willing buyer and willing seller, knowing all the material facts, agrees, and then add 4) the end of usury laws. That would be my answer.

    • Benjamin August 27, 2010, 7:04 pm

      Carol,

      I didn’t intend to get any answers yet, but since you bothered to present some, I’ll at least yay or nay them…

      “1) the baby boom which brought in, what, 75 million new people getting married, out of school, setting up housekeeping…”

      I’m afraid not. There is/was a glut of properties to meet demand. Though that strains limited capital, that would only push up the price of the excess, I would think. And so that doesn’t explain how every single house on a block suddenly went up, though.

      The second I took as an extension of the first point, so I’ll “nay” that one as well.

      I don’t know if the possible answer would wow anyone or not. We’ll have to wait and see 🙂

    • Larry August 27, 2010, 7:08 pm

      F,
      I think I’ve seen you with placard and bullhorn in front of 1600 Pennsylvania Ave.

      Pedestrians avert their gaze and scurry by, and frightened mothers hold their hands over their children’s eyes.

    • Carol August 27, 2010, 7:16 pm

      Benjamin

      You’re a hard case. You are absolutely entitled to give your yay or nay but I do wonder about your qualifications as the expert. Certainly, I don’t consider myself one. My observations are based on practical experience. Perhaps you have formulae? As for your assertion that there was plenty of housing stock, why then would so many buildings in every city have undergone segmenting into apartments? We are, indeed, completely overbuilt today. However to assume the same facts obtained in the 1970s when the first hit of that baby boom hit adulthood, as well as the continuing journey through the python of that boom while a significant portion grew rich enough to buy second and even third homes, still, your response does not, IMHO, account for the millions of old mansions turned into apartment buildings. After all, until the last 2 years, the big crush was on to own one’s own home which, given the government’s preference towards homeowners, plus the epidemic of fraud, resulted in today’s excess stock. You would be surprised at not only the old mansions but the sheer number of 3 and 4 bedroom houses turned into apartment houses in the 1970s.

    • Benjamin August 27, 2010, 7:35 pm

      Carol,

      Weeeell… If I turn out to be right, maybe I am just as much as an expert as the licensed pros. As for formulae, no, _I_ didn’t invent alchemy but understanding how it works became a nessecity. As for the segmenting into apartments…

      Oh, god. This is almost UNBEARABLE! I so want to say, but my mouth won’t unzip until the right time! Sorry 🙂

      And btw, I’m not saying your WRONG. Just incomplete. Maybe. I’ll get back to ya in a couple weeks, perhaps. Not being cryptic to razz, just so you know…

    • Carol August 27, 2010, 8:01 pm

      Benjamin

      Looking forward to it. Enjoy the weekend.

    • Chris T. August 28, 2010, 12:12 am

      The above also shows how the conventional wisdom on housing is SO broken in the US.
      Not only do people believe in the nest-egg, saving for retirement clap-trap, they also believe stuff like the NAR tells people.
      Ex: the old kitchen/bathroom/flooring, etc hurts the pric one can get, so fix that up, modernize, and you’ll get more back.

      Maybe a self-fulfilling prophesy due to the stupid CW, but rationally false.
      Why should the return on any of that be >100%?
      Even if just done, it is second-hand, and can never be exactly the buyer’s own preference.
      As consuptive goods, their value will only decline.
      Everyone accepts this for cars, but has a belief dichotomy for houses.
      A house is no different from a car as a depreciating asset, its curve is only much slower.
      Even most enlightened people, who adjust the purchase price/debt service cost of their homes for inflation, and then add in the property taxes (perhaps even those adjusted forward), forget to factor in the (infl. adj.) maintenance costs of that consumptive item, let alone the opportunity costs.
      Even Robert Shillers long-term average curve, showing that the “value” of homes just about kept even with inflation up to delusion phase II, doesn’t reflect all of the above.
      But them in his curve prior to 1980-1990, and its negative.
      Only the property under the home is the increasing part, the structure depreciates. Without human input, it quickly looks like Detroit.

  • F. Beard August 27, 2010, 3:47 pm

    … the thoughtful observer might be tempted to think only a few benighted Keynesians still believe that creating money out of thin air – which is to say, borrowing it against future production – can cure an ailing economy. RA

    Oh come on Rick, the debt was created from thin air via fractional reserves, why shouldn’t it be paid off with real legal tender from thin air? I’m not suggesting that the states and cities should be bailed but that the population be bailed out with new legal tender fiat from the US Treasury (United States Notes) just given equally to every US adult. This would:

    1. allow underwater homeowners to pay down their mortgages to current market prices.
    2. compensate savers for years of artificially suppressed interest rates.
    3. Fix the banks.
    4. fix state and local tax revenues.

    Inflation risk? Then put the banks out of the counterfeiting business via leverage restrictions.

    • Benjamin August 27, 2010, 4:04 pm

      “…the debt was created from thin air via fractional reserves, why shouldn’t it be paid off with real legal tender from thin air? I’m suggesting… the population be bailed out with new legal tender fiat…”

      Yes, the only cure for alcoholism is more alcohol.

      Now, F, I like ya, you write well, and you seem to know some things… But you’re apparently in a stumbling block phase in your life. Not trying to insult or start a debate, I’m just saying that it’s not even worth it to try and solve the messy disputes between Santa Claus and the Tooth Fairy… It’s all hocus pocus and the only thing to be done for it is to let it be, to let it evaporate like the fantasy it is.

    • Carol August 27, 2010, 6:04 pm

      F. Beard

      While what you propose might appear to be a good quick fix, you might look into Kim Jong Il’s recent adventure which had many similarities to what you suggest. In that case, Mr.Kim’s economic advisors said it would be a good idea to print up new money and exchange it for the old – 10 old for 1 new. It immediately wiped out what took the good citizens of North Korea probably decades to acquire in their off duty attempts to build wealth with their own small private ventures. Needless to say, the citizens are unhappy. But, never fear, they have their own Fox News service there to “inform” the citizens so all will be well.

  • rwe2late August 27, 2010, 3:06 pm

    Mr. Ackerman, as do many others, arrives at false conclusions after attacking what is essentially a “straw man” position.

    Were the federal government to continue spending on what it now does AND also additionally attempt to “bail out” local governments, that would be foolish.

    But even more foolish is it to conclude that pensioners should be hung out to dry, and that worthwhile government services be curtailed, just so that trillion$ may be diverted to wars, militarism, financial bailouts, bank subsidies, health insurance handouts, and promoting the upward transfer of wealth and power.

    The real argument is about how we should best utilize the resources we still do have.
    It is illogical to argue about what we cannot afford in the future without first examining what we are paying for currently.

    • Benjamin August 27, 2010, 3:49 pm

      “But even more foolish is it to conclude that pensioners should be hung out to dry, and that worthwhile government services be curtailed”

      Worthwhile service such as…? The much abused postal service? The BMV? The FDA, EPA, ATF, DEA, INS?

      What’s hurting the pensioners are those things. If it weren’t for those things (and all the other stuff you listed) in the first place, they could’ve had productive private sector jobs, saved, and retired. But since it’s impossible to put the toothpaste back in the tube, I guess the “chrysophobic” central banking system will have to surrendur all that gold it’s stolen over the years.

      Nope, ain’t no straw men here…

    • Rick August 27, 2010, 5:24 pm

      &&&&&&

      Nice to hear, finally, from the utopian left on how we can make the most of economic Armageddon using zero-base budgeting. At least, I think that’s what you seem to be saying. You should write your Congressman. If it’s Al Franken, he’ll get it right away.

    • Chris T. August 27, 2010, 11:54 pm

      “utopian left wing” is the right phrase.
      Delusional is another.
      Diversion of money? What a joke.
      Defense=~700 billion
      bailout=~ 700 billion
      current deficit =~1500 trillion

      Where is the diversion please? There was nothing to divert, it’s all just conjured out of the future or thin air, take your pick.

      As to those worthwhile services, one has to wonder how we ever made it through the first 150 years of our existence, when just about none of that stuff even existed.
      You should not even be around if you believe that we can’t do without this.

  • Dave August 27, 2010, 12:37 pm

    Can we choose the US Lotto-like $M payout as lump sum or over 20 years?

  • C.C. August 27, 2010, 8:31 am

    I think this can be distilled down. And the story the other night here about the Great Depression provides an excellent backdrop:

    In a nutshell, this populace is ill-equipped – financially and psychologically, for hardship. The political elite know this and so do their counterparts operating the country’s fiscal levers. Of course it doesn’t mean that they can change the ultimate destination (all out collapse), but they sure as Hell can distort the laws of physics along the way – State bailouts just one of many, to make that ultimate destination 10X worse.

    Pain is a great motivator. Activism/elections or not, let the pain attenuator approach 7-8-9 on the economic meter and see who (isn’t) crying to be ‘bailed out’. We haven’t seen anything yet.

    Understanding where we’re headed at this stage is nothing more than understanding today’s politics and the nature of the citizenry to demand that ‘Something be Done’.

  • Steve August 27, 2010, 5:41 am

    If only we could take the mental horsepower bounded by common sense contained herein and inject it into the wallow that is federal democracy.

    Thanks Rick.

  • Other Paul August 27, 2010, 5:29 am

    Rick–a great sentence:
    “Whenever anyone proposes a federal bailout of a bank, or a pension fund, or a city, or a state these days, he is implicitly suggesting that the bailout be accomplished not with real money, but with those magical dollars that the U.S. is able to conjure up in virtually unlimited quantities.”

    Policians see ever rising Treasury bond prices and lower yields. Until those magical dollars stop appearing, the Congress’ golden goose theories and practices will continue.

    And, it’s an election year! The extensions of the “xxx- week” unemployment programs will continue. CA and IL will get some “droppings” from the goose, to “tide them over until the economy rebounds.” How about US Gov’t guarantees for states’ bonds and pensions debentures, just like it will happen for GSEs’ bonds?

    Only the affects from a significant rise in interest rates or a fall in the dollar are going to stop the make-believe–in both politicians’ and the voters’ minds.

  • Grass Ranger August 27, 2010, 5:18 am

    When the Fed mails out those million dollar checks, I hope they send them all in one day. At least it would give me an even chance at some value. If they try to do it alphabetically by first letter of last name, taking one letter each day, by the time they get around to mailing my check on the 25th day, the million dollars would probably be worth a current 50 bucks. But they would have to do that a couple more times to raise the price of a house to Rick’s quadrillion dollars.

  • JohnJay August 27, 2010, 4:23 am

    “This whole thing is just going to end bad.”
    Very nice synopsis by Keith.
    With Bill Gross arguing we must have Nationalization of the entire housing (soon to include CRE) finance structure because our economy is too weak to support an increase of a couple of hundred basis points in a 30 year mortgage, we’re getting closer, aren’t we?

  • SDavid August 27, 2010, 2:08 am

    Thanks to Rick (and all) for all the wonderful and thought-provoking debates on this site.

    The argument I most often hear is that, “Gold has been our CURRENCY for 5,000 years.”

    The horse and buggy were our TRANSPORTATION for 5,000 years.

    Of course, it doesn’t make the analogy correct.

    But things change.

    And if there’s a way for the ultra-rich to screw us, I can assure you all that they’ll find it.

  • jj August 27, 2010, 1:19 am

    Would have been a hell-of-a lot cheaper 2 years ago to pay off every outstanding mortgage in the US….thats stimulas!!!….every residential-commercial mortgage debt free….it that wouldn’t stimulate an economy…..than its already dead!

    *its not a joke the amount the feds have tossed at the system is more than the outstanding US mortgage debts

  • Keith August 27, 2010, 12:38 am

    I know it sounds absurd to expect million dollar checks to be Fed-Ex’ed to our doorstep but a government in desperation will do anything. What’s even more absurd (like you said) is to believe it will pave the way to prosperity.

    The only noble action the government could take right now is to ‘let’ the whole system collapse and there isn’t a snowballs chance that’s going to happen. It’s far more likely we’ll see a $1 million check made out to my name then we’ll see the government throw in the towel ending stimulus and bailouts, cookies and candy. If they would have let it collapse during the financial crisis we would have been on the road to recovery by now. Instead we grind our teeth at night waiting for the next shoe to drop. America would have banded together with chins held high.

    As far as states and municipalities being bailed out. You’re so lost if you think they WON’T be bailed out. Not via borrowing mind you, via printing. This whole thing is just going to end bad 🙁

  • Jonathan August 27, 2010, 12:23 am

    Buffet is (was) one of the biggest insurers of muni-bonds, I can’t imagine why he thinks the Feds should provide a back-stop. I wonder what kind of margin calls he would face if his book got downgraded or (gasp) a few folks defaulted…