This idea of government intervention has capitalists divided over the soundness of government bailout. Those against the bailouts argue that it has been government intervention of free markets that has caused the crisis and the problems won’t be solved by more of the same. Those arguing for the bailouts contend that in the absence of government intervention, economies will grind themselves into oblivion.
These two sides of the heated debate are well represented by Peter Schiff and Steven Leeb, both presidents of capital management companies and authors who have predicted the coming crisis long before but are prescribing very different solutions.
Schiff and Leeb have been pit against each other since last year at critical junctures during the crisis. The three videos below show the two debating right after (in order): (a) the bank bailout proposed by Paulson in September 2008, (b) the bailout of the automakers in December 2008, and most recently (c) the unveiling of the Obama stimulus package in January 2009.
The two make passionate arguments for their side, and it isn’t an easy question to say who of the two is correct. Recently since the bailouts have begun, stock markets and the US dollar have recovered slightly but that recovery seems to be waning. Checkout the debate and see who you agree with.
After The Bank Bailout ( September 2008 )
After The Auto Bailout ( December 2008 )
After The Obama Stimulus Package ( January 2009 )
Wshew, the videos are a challenge to watch. Two “experts” hollering at each other and every time the commentators push them to definitively state where we go from here, the discussion ends before a solution is articulated. Leeb clearly favors government intervention and believes it is necessary for the government to provide massive bailouts to banks, investment houses the auto industry and what not. He suggests it is better to fund these massive bail outs now in hopes of avoiding nationalization or liquidation of these entities at a later time. This is akin to the argument put forward after 9-11 that it was necessary to surrender civil liberties in order to preserve them.
With in the frame work of “time” both Leeb and Schiff are probably correct in their views of monetary and economic policy. In the short term, enough cash infusion will address deflation and insolvency issues stemming from exaggerated leverage of reserves to loan ratios. In the longer term, massive governmental and central bank infusions of cash and credit/debt over time WILL lead to inflation and ultimate debasement of the currency.
There was an uptick in home sales data in January and Leeb infers governmental cash infusions contributed to this improvement. However as we see further deterioration in home values, as espoused by Schiff, it may be lower home prices also played a role in the sale of more homes in January over the previous month. It would be interesting to know who is taking on new mortgage debt for it would paint an entirely different picture if this increase in mortgages was coming from home owners/buyers versus property speculators. Perhaps enough cheap money has been dumped into the system to make a new mortgage attractive to a home buyer. Then again, perhaps home values have fallen to a level where the market can begin working again where a buyer can put 20% down and handle a mortgage payment set at not more than 30% of gross income.
In the end I side with those who would let bankrupt entities go bankrupt. This will purge the system of toxic debt, give an impartial arbiter an opportunity to negotiate and restructure payable debt while protecting performing assets letting the process reset so it can function again in a free market system. Not every entity entering bankruptcy will come out of it, but that is part of the market process. Painful, you bet. Scary, certainly. Ripple effects throughout the system, yes it’s the price we must pay. But it is doable and is an effective way to rebalance what has become grossly imbalanced.
The Cato Institute recently published a “manifesto” against more government bailouts. The following is from Agora Financial’s 5 Min. Forecast of Jan 29, 2009:
“If you read the headlines, you would believe that every working economist agrees this massive government program is necessary. Not true.
‘Notwithstanding reports that all economists are now Keynesians,’ reads a manifesto published by the Cato Institute, ‘and that we all support a big increase in the burden of government, we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s ‘lost decade’ in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.’ The Cato preamble is signed by 200 economists…”
While Schiff may seem to stand alone, he has a lot of folks standing behind him.
The root cause of all economic problems is the loss of jobs by too many people. It has the domino effect that topples everything else. For 30 years we have let jobs go away and we all can share the blame. Ignorant government trade policies, greedy corporations and unions, plus shortsighted citizen consumers, have all combined to get us where we are now. The jobs that supported our whole economy, manufacturing jobs, need to come back, whatever it takes. A purely service based economy can’t support our country. If you still have a job – follow the trail back to where your paycheck actually comes from and why your job exists. True capitalism takes raw materials, adds value, sells for a profit, supports employees and grows to match the growth of the country with a circular cash flow that gradually widens to support many other businesses. Manufacturing provides the largest number of jobs to the widest variety of people. Old, young, physically or mentally challenged, dropouts or college graduates could all find work in the manufacturing sector if they really wanted to work. Those opportunities have disappeared for too many people in the last few years and the remaining non-government job holding, tax-paying citizens and corporations can’t support our economy.
The cure for this is to take the stimulus / bailout money and use it to immediately increase production of anything manufactured in the USA. Clothes, appliances, cars and electronics are all industries that can provide many jobs that create the cash flow which allows the purchase of their own product and allows job security so people can pay for loans and mortgages to allow housing to pick up shortly after.
If our politicians don’t realize the importance of protecting American manufacturing – then this recession will be a long, painful one.
^ Problem is the stimulus might not be meant for production, but for consumption. I recently read a humorous bit about bailouts and stimulus:
IMPORTANT INFORMATION FOR AMERICANS ON THE U.S. STIMULUS PAYMENTS
This year, taxpayers will receive an Economic Stimulus Payment.
This is a very exciting new program that I will explain using the Q and A format:
Q. What is an Economic Stimulus Payment?
A. It is money that the federal government will send to taxpayers.
Q. Where will the government get this money?
A. From taxpayers.
Q. So the government is giving me back my own money?
A. Only a teeny amount of what you paid.
Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a high-definition TV set, thus stimulating the economy.
Q. But isn’t that stimulating the economy of China?
A. Shut up.
Below is some helpful advice on how to best help the US economy by spending your stimulus check wisely:
If you spend that money at Wal-Mart, all the money will go to China.
If you spend it on gasoline, it will go to the Arabs.
If you purchase a computer, it will go to India, China, or Taiwan.
If you purchase fruit and vegetables, it will go to Mexico, Honduras, and Guatemala .
If you buy a car,it will go to Japan.
If you purchase useless crap, it will go to Taiwan.
And none of it will help the American economy.
We need to keep that money here in America. You can keep the money in America by spending it at yard sales, going to a baseball game, or spend it on:
a. prostitutes,
b. beer (domestic ONLY), or
c. tattoos,
since those are the only businesses still in the US.
Pretty hilarious and sad at the same time because it’s too close to the truth.
I did a little research using NHTSA numbers and found that if Chrysler, Ford and GM would take three vehicles each and make sure every little part on them was made in the USA – it would bring back 3 to 400,000 jobs for the production run of those vehicles. Those are the types of jobs that have disappeared in the last 10 years and most of them were held by suppliers other than the big three.
Electronics, clothing, appliance and toy manufacturers bailed out of the USA first but when the automakers joined the party – that pushed our economy too far over the edge.
Honest, before I can even comment on the different points made (or the attempt at their making) I gotta say I wish I had a muzzle to put on the annoying guy on the right. He would not shut up, would not allow the obviously more level-headed and rational person make his complete point. Seriously, I need to go punch a pillow or something… the guy is that irritating.
Yes, it’s interesting how people argue sometimes–rather than hearing out the ideas of their opponent properly and making a proper rebuttal, they go by loudness of voice, irritating antics, and ad hominem.