Yesterday, the Federal Reserve Board revised its target rate for the Fed funds rate down from 0% to ¼%. This represents a record low (in more ways than one) for a quasi-governmental entity charged with pursuing monetary (as opposed to fiscal) policy independent of the United States. The Fed, in addition to lowering an interest rate already included in government bond yields, took the unprecedented step of issuing a statement that it would keep its rates low for the foreseeable future to combat endemic weakness. in the economy, and that it would use “quantitative easing” (whatever that means) to implement emergency measures to stimulate the economy. Now you’ve thrown everything but the kitchen sink into this problem. I can’t imagine what the additional measures might be. I would venture to say that I wouldn’t be too surprised if the Fed would soon offer to hand every American a bag of cash, rewrite all of our mortgages, give us new, higher paying jobs, offer us unlimited lines of credit (guaranteed by Uncle Sam) , so we can go back to overspending, re-grouting our bathroom tiles, sweeping our floors, and pleasing our wives.
I live in New York; yet he could smell the sweat pouring out of Mr. Bernanke’s pores from Washington. The desperation implicit in all of these statements, which are unprecedented in the Fed’s 95-year history, is shocking to behold.
The upshot of all this is an acknowledgment that everything the Fed and its partner, the Treasury Department have done to date (more on that later), has failed to ease an economy in severe recession.
Aside from the near certainty that these measures (even the ones we can only guess at this time) will fail, no one seems to consider the long-term effect, both financial and constitutional, of these endless attempts. rescue this economy from the natural and, indeed, necessary difficulties caused by the scandalous excesses of the last ten years. I’ve written a lot on this topic and won’t bore my readers with a rehash here.
It pains me to advance in this argument, since I have many friends and family who are suffering from the financial crisis in which we find ourselves. However, the only way back is to swallow the bitter pill and wait for the inevitable recovery. The more the government tries to improve it and avoid agony, the longer the recovery will take. Also, when the dust clears, we may find that America, as we know and love it, no longer exists.
Anyone paying attention has long realized that capitalism as an ideal is something of a quaint and nostalgic concept in 21st century America. I’m not too worried about it; the robber barons of the 19th century and unregulated securities markets never served us well and must be controlled. However, until recently, we still recognized a concept known as a private company. Corporations, even public corporations, were expected to succeed or fail depending on the competence of management and the convenience of the product or service offered to their buyers.
No one, a century ago, would have seriously advocated a government salvation of the whip industry for the purpose of saving jobs. Yet the president and his henchmen, in the last days of an otherwise listless and sleepy administration (if that’s not an oxymoron), propose throwing money at bankrupt industries, so that he can pass the mess on to the lords. Obama & Co.
Our Secretary of the Treasury, Mr. Paulson, without pretending to act in concert with the Fed (presumably with the approval of the President, although who knows these days?) Has thrown sacks of money at financial institutions, without significant strings attached. These institutions, our officials say, were “too big to fail,” even though their conditions were entirely self-created. These disasters were the result of unprecedented financial gluttony at all levels, and the staggering ineptitude of the SEC and other regulators (perhaps also with the approval of the President) in challenging transactions that, at first glance, violated fiduciary responsibilities with shareholders.
What have these financial institutions done with the money that John Q. Taxpayer has “loaned” them? Have they started making loans to the public? No way. Rather, they have borrowed the money and put it in the drawer, so they might say they are “adequately capitalized” given the current “market value” accounting standard.
Exactly how has this benefited the American public?
Now, in the face of overwhelming public opposition (some polls put it at 90%) and the refusal of our duly elected representatives, the executive branch of our government, acting on its own, has determined that it must unilaterally save us all from ourselves. and bailing out the “big three” automakers (I put “big three” in quotes, because their combined net worth is a small fraction of Yahoo’s).
Let us first ask ourselves whether such a plan will be successful: any attempt to pump taxpayer dollars into an industry that (whether we like it or not) is not selling its products is a futile exercise and, furthermore, a complete and utter waste of money. little that remains of the public good. It can be a difficult truth to face, especially given the potential for substantial job losses, both in the auto industry and the other businesses that depend on it. However, it is also true that a number of foreign-owned auto companies, which also provide employment and benefit other companies, are holding their own in an environment that is, to say the least, difficult. None of them, to this author’s knowledge, are on the brink of bankruptcy or running out of cash. The distinction, of course, is obvious: labor costs. And while one might be hard-pressed to blame the UAW for looking out for the interests of its constituency, one has to wonder if its leadership has a clue as to what those interests are. The conventional wisdom (which is probably correct for a change) is that the UAW has confidently called the government hoax – a “no-brainer,” no doubt, with the expectation that, by the end of January, a more laborious one) a friendly administration will be at work. But the foregone conclusion is that in an environment of rising unemployment and fear of unemployment, coupled with the general unavailability of credit terms, the public is simply unwilling to start buying cars, especially given the $ 2000 labor cost differential. and the uncertainty about the future of the “Big Three”.
The second question is whether this scheme is appropriate. You have to start with the problem that the Fed and the Administration go overboard in their respective writings. The Fed is not supposed to be in the business of “bailing out” the economy. Rather, it has a responsibility to adjust rates and increase or decrease the money supply to walk the tightrope between inflationary pressures and a weakening economy. Instead, the Fed has decided to become the lender of last resort, investing large sums of money (which remain unaccounted for) in financial institutions with no obligation to provide that money as loans.
The conduct of the Treasury Department is even more extravagant. In blatant defiance of the will of the public and of Congress, the Administration is determined to ram the auto rescue down our throats. It is easy for the government to do this; after all, he has a printing press. You and me, unfortunately, no. What is the consequence of this proposed bailout (the details of which, as of this writing, are either unresolved or kept secret)? Endless sums of freshly minted money thrown at financial institutions and auto companies can only have two outcomes: ultimate hyperinflation (caused by an excessive money supply) or the mortgage on our future and probably that of our children and grandchildren so which is doomed to be a useless gesture, albeit well-intentioned.
It may be hackneyed and cliche to say so, but this kind of government meddling is a “slippery slope.” First, it justifies that almost all types of businesses are justified in seeking a government bailout, if it can successfully argue that a significant number of jobs are at stake and that it represents a “vital” American industry. Second, by taking a stake in the companies it decides to save, the government has cynically relegated the idea of private enterprise to an illusion. The nationalization of the American company, believe me, is not what we want. The government is already too intrusive in our lives. Rather you should settle for the regulatory powers you already have, and really enforce them.
Larry Kudlow, on CNBC, advocates daily for a “prepackaged” bankruptcy for automakers, followed by termination of union contracts, but, as is often the case with Larry Kudlow, does not understand what a “prepackaged” is. . bankruptcy is how long it takes to put one together and what is required to terminate union contracts.
Once all the “important” industries are bailed out with increasingly worthless currency, we can all stand in line for a bailout. But be careful: there is no free lunch; especially when Uncle Sam is “shopping”. At the risk of quoting the villain John Wilkes Booth: “Sic Semper Tyrannous!”
Copyright 2008
Warren R. Graham