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Bailouts Didn't Save The World
From The Daily Capitalist
David Wessel, I have five words for you: post hoc, ergo propter hoc.
Mr. Wessel is the Wall Street Journal's chief economics commentator, and is often the face of the Journal on television. He wrote an article recently ("Bailouts Save Day, Win Scorn") that laments the fact that, despite the fact that the bailouts saved the world, Mr. and Mrs. America don't believe it. In fact, he points out that Americans' distrust of government and large corporations has grown as a result of the bailouts, something they see as unfair, and an example of cronyism between Wall Street and Washington.
He says in the article:
The world has had a terrifying brush with another Great Depression. Although the recent scare in Europe is a reminder that this isn't over yet, it looks like we've escaped that—in no small measure because of taxpayer-financed bailouts and fiscal stimulus, as maligned and imperfect as they were.
Mr. Wessel is a bright guy, a star of a pro-capitalism newspaper. Yet he makes serious economic and logic errors that are not based on theory or the record. He needs a lesson in economics and epistemology (the science of how we know what we know).
Post hoc, ergo propter hoc is a Latin phrase describing a logical fallacy. The fallacy is: because A occurred and then B occurred, then A caused B. In modern behavioral economics this also coincides with the principle of "confirmation bias," where you look for data that coincides with your desired conclusion.
There are two fallacies here.
The first fallacy is that bailouts saved the world. The second fallacy is that without the bailouts we would have had another Great Depression. As Mr. Wessel says:
It just doesn't seem fair. Because it isn't. The bailouts weren't designed to be fair. They were designed to prevent a financial virus from infecting the entire economy. And there was no quick way to keep credit flowing, so the economy kept functioning, without saving some big financial institutions and the folks who work in them.
With regard to the bailouts saving the world, I would ask him how he could prove that. I think I could easily argue that in fact the thing he feared would happen, a financial meltdown and credit freeze, did actually happen and the world didn't end. Except for the 10 largest banks which had access to the various Fed ATM machines, the economy is still suffering from the meltdown. Mr. Wessel confuses these large banks with the economy.
I could further argue that the bailouts have actually harmed the economy and have delayed recovery because some of these large financial institutions were bankrupt and should have been allowed to go under in an orderly manner. The pain would have been intense, but short. Now we are still in pain, the economy is on the verge of setback, and we have saddled future generations with the cost of paying for it.
There is no basis to say that fiscal or monetary stimulus has saved the economy. I challenge Mr. Wessel to prove this assertion as well.
Since the Fed had boasted that it could easily manage recessions by pumping money into the system, why hasn't that worked? Why are we still having a credit freeze? Why is money supply continuing to decline? Why is unemployment, especially U-6 unemployment, growing? Why are we experiencing deflation instead of inflation? Why does he assume that Keynesian fiscal stimulus has any lasting effect?
The second fallacy is that he believes we would have had another Great Depression without the bailout.
Again, what proof is the proof that that would have happened? I would say, as I have many times on The Daily Capitalist, that depressions are caused by government action. Mr. Wessel apparently believes that economies go into serious depression all on their own, which was not the case of the Great Depression. Had the government under Messrs. Hoover and Roosevelt not interfered with the corrective process of what was originally a garden variety recession, the economy would have recovered in 18 months, as did the much worse recession of 1920-1921 when the government did essentially nothing.
What really happened to us was the Great Panic of 2008. I'm not talking about the collapse of Lehman Brothers. I am talking about the panic of Hank Paulson and Ben Bernanke. They had no idea what was happening at the time and didn't know what to do. They too confused Wall Street with the economy. So they resorted to doing something, which was the bailout. History has shown that usually when the government does something in these circumstances, we all end up suffering.
Like the Great Depression, Mr. Wessel needs to understand the causes of this recession. It has more to do with the Fed and government housing policies than Wall Street. Wall Street made huge errors--mainly in assessing risk. But the cause can be found in the Halls of Power.
If the Journal wishes to be an advocate of capitalism, it needs to abandon its Keynesian myths. It seems the American people already understand this.
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Bailouts saved the world? What is Wessel, like five years old? Now you are really starting to see the Farcist hoofprints of Kentucky Fried Chicken Face Man all over the Journal. Talk about mixing dogshit with ice cream. Murdoch is like Hearst without the ethics.
I think Hearst's house was cooler too.
What ever happened to robber barons with Style?
The girls of page 3. Then that's another bail out story. Gotta give old Rupert credit for learning the lessons provided by Hurst's lead reporting from Havana.
You have a point. Credit where credit is due.
Wessel shows why I quit reading the Wall Street Journal after 3 decades. I have never been anti-big business until the last few years when I came to realize that the Wall Street banks are criminal organizations. The Wall Street Journal has gone from being capitalist to facsist on this subject. None of them have ever explained the process of the supposed meltdown if all these banks went bankrupt. What were they going to do, pull a John Gault on us? We may have had 30% unemployment without the bailouts (vs the current 20%). But if we acted like proper capitalists, we would currently be on the road to recovery.
CEO of the Sofa
Writing from the Republic of Yemen.
What part of the cover sheet of every FNM/FRE issue is too hard to comprehend? In bold letters it states that the issue is not an obligation of the taxcow under any circumstance. Wessel is a liar and a shill for what has ruined the productive economy. His paper is a collection of apologists for unlimited theft of the assets of those that never partook in their scams. Of course that is to be expected when the rentier cadres control all of the major media.
I knew that the outcome was to be sorry when the LBO's of the major and minor MSM news outlets gathered same into the anti middle class behemoth that it is. I cheer the decay of them. What we have lost is the last of the "independent" real investigative reporters. Nearly dead McClatchy has the last few of those. Unless there is an effort to set up a paid subscription service to fund real investigator reporters we will just have to rely on whatever quality of volunteer blogger-reporters that we can get. I do not want that, so I subscribe to local papers and reporting, even though they are at opposites to my interest in freedom. Rarely one of them finds the operations of the goo to be so reprehensible that it gets reported. Great?
Great stuff Econophile. Kudos.
Every time I hear some talking head or "pundit" say the economy is recovering, and uses the DOW or S&P performance as evidence, I just want to punch them in the face.
All this insanity reminds me of a recurring nightmare, the one where you're trying to run away from something, but your legs refuse to move! Every where you look, Monsters making sucking noises!
Or when you're asleep, and you're dreaming, and you try to wake up but you can't..
Thanks for pointing out this glaring logical error that is repeated ad nauseum in the MSM. "...back from the brink, yada yada yada",
I have been putting it this way:
Claiming you know what *would have* happened is tantamount to claiming you know what *will* happen.
Can we also sacrifice the sacred cows of neoclassical economics and monetarism on the altar of fiscal sanity?
Econophile - Hard to say, but I agree with most of what you conclude in this piece. Any "good" the bailouts did was a benefit for big banks, not regular folks. I do think govt did some things that stopped immediate collapse but essentially stopping bank runs - they backed mutual funds etc. but the TARP bailouts..could we have gone on if those banks defaulted on bondholders, yes...we simply seize banks, back deposits to avoid messy runs.
Housing is the star in making your point. If no support provided, it would have crashed even more, more quickly, which would mean more people would have defaulted or stragetically defaulted sooner, which would have wiped big banks...one big mess, but when its done, everyone can buy a house for less than it costs to build one for new...like maybe for 70k, and then you can hire people for 8 hr and they can still afford rent...voila, economy off and running again.
Even without collapse/depression there has been major deflation and real estate price reductions in construction, so I hear companies like CVS can build 6 or 7 stores for the price 5 would have cost before, so they can make stores work even if their sales are down 10 or 20 percent.
There were boom and busts that occurred without govt interference, Tulip bubble, 1800 US bust etc..but at least when they bust, price of everything crashed, defaults, jubilee and then we moved on.
David Wessel is not in possession of all the facts.
His publication is losing relevance as the real costs swamp any gains in the market. Soon he will be unable to compete with Plummer's Quarterly, and I mean no disrespect to Plummers who actually have useful skills.
Unless he takes action to uncover the truth, his rag will just sprew forth the obvious.
He should start a back page campaign with some under cover reporting to present some real news about the waste and corruption of the FED and DC. The title background should be blood red and read "The Fate of Freedom".
David, decide, do you want to be relevant? If so, you need to get off your status quo ass.
Mark Beck
Wall Street Journal?
Please. It had become a piece of shit before Murdoch bought it. Now it is a fully realized crap bucket.
Give me a fucking break.
+ 10,000
Don't even get me started on this theme, as well.
The WSJ was once a great newspaper, an insightful read.
Now, it is becoming more like USA Today with each passing moment. The turning point was Murdoch purchasing it.
Its a Depends filled to the overflow point.
Murdoch is the worst thing that ever happened to media and I hope he drops dead tonight.
Ripped chunk, i love your avatar and that's the biggest belly laugh I've had all day. Thank you. ( i envisioned Murdoch wearing that shit filled diaper and dying of a blocked colon)
Great article and sound points. It's simply simple...letting everything go down the tubes would have washed the system clean, hard & fast. Would it have hurt? Hell yes! But it should. I've never made a financial decision that cost me money that didn't hurt.
I have to agree that letting everything play out, naturally, would have gotten us to equilibrium sooner.
What bailouts do is artificially select winners and losers, sheltering those that otherwise should have lost AND prolonging the undesired behaviors, thereby keeping us further from gaining equilibrium.
Those that were going to failed, should have failed. If so, there would be a greater discipline in this society from that point forward.
Instead, the wrecklessness continues.
it 'recklessness' ... the wreck into the fiat ad infinitum brick wall is up ahead.
I'm by nature an optimist but cursed by the fact that I'm a mathematician (not an economist - just pure math) - I can't find a single number that does anything beyond dropping an economic atomic bomb on our kids and grand-kids. What a generous legacy we'll leave behind.
that's assuming we honor debts, which mean we sell our kids as debt slaves...doubt we are that stupid...defaults will happen and we will start over
No, your legacy is what you want it to be.
You can pass on your estate, and you can also remove your children form any burden the US says they owe.
The world is a big place, with many good opportunities, you do not need to hitch your life boat to the Titanic.
You are in control. You just need to act in your own best interest. If the US is not a good place to live, move. If it is not a good place to invest, don't.
Mark Beck
Another classic example of someone too busy writing to be bothered by reading, oh, I don't know, stuff like history and economics (austrian) maybe. Even though my bro works for that fishwrap, I cnanot bring myself to suscribe. I spend the money on silver instead.
Yeah, well, if you had been alive and still working in 1931, you probably would have thought that you had just missed a great depression.
Ask us again in 2016 how we feel.
You seem to assume we're still going to have a functioning (modern) society in 2016... If the internet is still available for the masses in six years, I'll let ya know. ;)
Umm, ok, let's pretend we let all these financial titans fail, including AIG, and we didn't have TARP or QE, would we really be better off? Unemployment at 10% is bad, but it's better than 33%!?!
I will add that the problem isn't with the bailouts per se, but with the lack of conditions that accompanied them...like a moratorium on bonuses for three years to all big banks, AIG and anyone else that got directly or indirectly bailed out!
Leo, much of your comment on pension is gold. You are wrong on the fallout from running the bk's through bankruptcy courts. By now we would have had a functioning way to discharge unpayable debts and been on the mend. The way it is guarantees interminable lawsuits that eat away at the real producers that have to pay for the pissing contests.
BK should have been done the same as in the hundreds of defunct LBO's that wrecked so many formerly viable manufacturing companies.
Leo
How about put $700 billion into real commercial banks to provide liquidity for small business and let the lazy ass crooks in Wall Street fail.
What was once the center of creation of investment capital is now solely a Cesspool Casino trading worthless paper, generating ZERO value for the economy.
Without real value added on the ground, all the worthless paper churned out by Wall Street will not support your precious Pension Funds. And don't expect Asia, especially China to send you long term dividends.
Once they have sucked all the free technology out of the West, we will be told politely to Fuck Off.
History has no degrees of freedom, so we can't know. I don't think there's any reason to believe that we'd be seeing 33% UE, or even the 25% that Paulson posited. I don't know that we'd be better off, but we'd be *done* with it. The path they've set us on has so far followed Japan's script. If that script holds, we're still going to be dealing with this in 20 years, without any of the advantages Japan had throughout the 90s.
I can't remember this exactly, and I can't put my finger on the paper in a quick search....
My counterargument would be the IMF's 2005 study of 67 financial crises from the 1960s onward. Their conclusion was, nationalization and recapitalization wound up costing less (something like 1/3rd less) and returning the economy to posiive growth faster (average 1 year) than any other approach.
I'll try to take the time tonight to find the paper I'm talking about. They have one from 2008 that contains a database of crises, but there's not the same analysis.
I think we should've picked a handful of survivors (not winners) to be nationalized. Shareholders are wiped out. Bondholders take a massive haircut on the order of what GM bondholders took. Loans are written off and sold into the private market. As quickly as possible afterwards, they are spun off as public companies.
Holy False Statistic Smoke Screens, Batman!!!
Does anyone really believe the 'official' unemployment numbers? We are being lied to. It is blatant and continuous.
We bought a little time, and made the problem worse such that the "system reboot" will be FAR more immediate.
So, we didn't really buy anything. We avoided nothing, and sacrificed hundreds of years of contract law (secured creditors) to do it. Oh, except that the reboot will now be more violent, because the same conversion-to-a-new-system will occur, but in a shorter period of time.
We won't "transition" from the old to the new. Because of our negligence, we will burn the old to the ground, and then try to construct a new.
Our current irresponsibility is criminal -- more people will die because of it.
I'm just glad that my Daughter has a Black Belt in Tae Kwon Do and can take care of herself. (Buy bullets, lots and lots of bullets!)
+1.
Exactly. They've pushed the problem out into the future and made the magnitude of the eventual crash even worse.
It's sad to think, when these problems were born of Fed policy after the Nascrash in 2000, all we really had was a slight credit contraction and a mild recession, before the economists started messing with it.
Unemployment probably is 33%. And we may not be better today but I bet you my last canned good and gold coin that my kids would be better off in 15 years if we let those corrupt and incompetent cowboys fail. Now they have no chance since they are not a part of the NYC-DC Aristocracy.
Leo, had the US government not bailed out AIG, then "counter-party risk" would make all derivatives worth far, far less valuable. Given these were unregulated risks, why should the taxpayer be responsible for paying up on the bad bet one party did? How can we prevent such bad bets in the future if we come to rescue those who did this?
Had AIG failed, Goldman (along with many others) would never have seen their $40 billions in profits from winning the bet because the couter-party was unable to pay up. Next time, they would not make bets like this. If you look at the $770 trillion derivative market out there, the world taxpayers cannot bail out the losers in these bets. I say let them all fail. Their earnings are not real, they never were. Bad stuff gets moved off to Special Purpose Vehicles and bonuses get paid out on winning bets only. The other alternative is make all derivatives illegal, unless you are a consumer or a produces of the underlying product. If you speculate and loose, you should be let to fail. Financial blackmail or financial hostages should not be permitted as justification for bailout.
The exchange establishment does this kind of thing everything every single day. It's standard operating procedure.
"The market rose sharply, today, on encouraging employment data"
Oh, yeah? How do you know the market wouldn't have done the exact same thing had this data not been released?
I'm willing to concede that the bailout delayed another "Great Depression". However, if history is any guide, just because doing A prevents B, does not mean C, D, E, F, or G won't happen now. Furthermore, C, D, E, F or G is likely going to be worse than B. Think the law of unintended consequences. We are in unchartered territory. The reality is that government helped cause this dislocation of capital with their interference (they should never have repealed Glass Stegal, short uptick rule, and pretty much every other depression era rule & they should never have supported those ugly twin sisters called Fannie and Freddie). Washington now believes in Communist style "central planning". Actually, they have been going that way for some time now. America is a corporate welfare state. We don't allow large companies to fail and we kill off small companies before they can grow to compete against the big boys. This is a Fascism/Farcism state. At least the fascists of the past had good management skills... I can't say that for Washington...
Agreed. I got a buzz on, so I won't go into to it but I agree 100%
And what is the basis for your concession? Gut feel? The continuing ravings of Hank Paulson that it would be so? There is absolutely no basis that anyone has provided to back up this absurb assertion that a total financial collapse was imminent.
What is a fact is that the banks that control the government were not allowed to fail, were given preferential treatment so that not a penny was lost to the bad deals they undertook, were allowed to mask their involvency by accounting rule changes, were given cheap money by the Fed to take additional risks, and were allowed to profit handsomely off the hard-working backs of the middle class. That is why Mr. and Mrs. America are pissed and want to take back their country from the fascist oligarchs.
When you open a wormhole into another place, NO amount of FRNs are gonna fill the vacuum. $13Trillion and counting!
Aw, come on now, Commander Cody,
Hank told us the Russkies were going to put a hex on us....
That's what triggered the need for $700 billion for Goldman, et al,
Now give me the $700 billion now, right now, or the kid gets it....
Dude... All I said was that I was willing to concede things would be ugly if we let the companies fail. But, no evidence that bailing them out was actually a better solution. In fact, I'm betting that the bailout will make things worse.
BTW... 1920-1921 was considered a "depression". It was bad. But, recovered quickly and led the world into the roaring 20s. Depressions are not necessarily bad.
I am not the Dude. Define ugly. The bailouts only allowed the oligarchs to remain whole and profit handsomely. Ugly for whom?
It is quite amazing to me actually how so many people who have gone to college for 10+ years with Master's degrees and Phd's in whatever, have not once, NOT ONCE taken a class in Logic. I took some logic courses at a fucking community college and walked out realizing that 99% of human beings have no clue to what they are talking about, especially during an argument. It is actually quite sad. I destroyed my best friends sister in a medical argument and she's a doctor! I just went to college for 3 years and dropped out to take a pretty good job. This isn't right.
Information <= Knowledge <= Wisdom!
If your education is what you say you should have hunted down that instructor that gave you logic insight and thanked him/her and perhaps given a token gift of appreciation. Superior instructors/teachers are so rare in hindsight.
Oh, most of them took some sort of Logic. However, the professor expected them to buy his book, read it, and then parrot it at the exam. Colleges are a part of the problem, expensive indoctrination factories.