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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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Don't even get me started about the uselessness of university degrees, whether undergraduate, masters or doctorate.
They do not certify that you are educated. (Patrick's point above confirms this.)
Rather, these pieces of paper serve to show that you submitted to the will of your instructors and were able to regurgitate what they fed you to their satisfaction.
A degree certifies that you are educated.
The problem is that you need to be informed and have the ability to learn.
Too much of the U.S. education system seems focused on the ability to memorize rather than reason and think. That's a bit of a problem.
I made this very comment ( a belief I've held since the 70's) to a young co-worker today. The look on her face was priceless.
i've been saying the same for years. my friends look at me like i'm crazy, but that's okay. in a world gone mad, it is the sane people appear to be off the deep end...
Thank you. I kind of thought I was alone on this, then I realized I was on zerohedge where people are logical and I'm not used to this!
Welcome to Fight Club Patrick ! I am far from logical at least some of the time, but as one of ZH's resident autodidacts (having graduated from the ninth grade before getting my ged) fight club is all about whatcha bring and nothing to do with some sort of preachy socially recognized bs status whatnot.
The problem with people like Wessel is that they confuse themselves and their interests with those of average Americans.
I've been reading the WSJ for over 30 years now... since high school... and while they're (at least the editorial side) right on target 80%-85% of the time, on certain issues - Immigration... China... "Free" Trade... - they just don't get the difference between "insiders" benefiting vs. "Joe Blow" ultimately paying the price.
While not supporting crony capitalism outright, what folks like Wessel gloss over is that when it comes to "the game" at a certain level... there's "them" vs. "us."
Two words: Franklin Raines.
Two more: Robert Rubin.
ZeroHedgers get my meaning.
Which "class" of "insider" benefited by the bailouts? Which "class" of American bears responsibility for the debt?
Oh... don't get me wrong... I think the rich and the upper class (upper middle class... heck... those making in the low six figures) get screwed by the tax code. I'm appalled on several levels by the Republicrat Bushbomian notion that "a family making less than $45,000 should pay no federal income taxes." (Obama would no doubt like to move Bush's $45,000 threshold to $80,000 or so.)
Still... coming from a libertarian bent I recognize - and cringe from - the reality that there are different "rules" for different "classes" of Americans.
Folks like Paulson and Bernanke - and Bush and Clinton (Obama being more ideological) - care about their fellow movers and shakers.
The Wessels of the world want to believe that they're "players" and via their "media status" part of "the establishment."
What they don't get is that more and more "the establishment" is totally at odds with your average American and his or her interests.
BILL
Years ago, I read a poly sci professor's book, which succinctly supports your argument: "The Collapse of the Liberal Empire" by Paul Goldstene. It's a great read, if you want to further delve into the subject.
The "movers and shakers" are narcissists who believe that they understand how to centrally plan the world. They don't really care about the wellbeing of their fellow aristocrats. They only care so long as it fuels their own power.
Aristocrats reach for their knives when it all begins to fall apart - every time.
All this malarkey (not your post btw), reminds me of those nesting Russian Matrushka dolls -- debt within debt within debt...
TPTB believe that they're just making a bigger doll to cover all the others, when in reality they're on the outside trying to create an even smaller inner doll! The Economy is no longer getting bigger you jerks, it's shrinking to zero!
+100 - good critique of a good paper and and a good columnist
Well, to be technically correct, it is a war of the mega-rich allied with the poor against the middle class. As long as you and I work and pay our taxes, all will be well. Never mind that the new estimate of taxes required of us is >80% ... which for all intents and purposes is little different from the residual income that a medieval serf enjoyed from his labors. Actually, if you decompose the whole slew of taxes you pay to various governments and entities, you are already at 60% or better, so I guess things can't be a whole lot worse than they are now.
Let's face it: Our 700+ year experiment with freedom and capitalism was a serious failure, and we should be eager to go back to the safety and surety provided to us through the protections of our lords and masters. What were we thinking with all that liberty crap anyway?
Bullshite, just POSTPONED the inevitable.
The bail out game was to postpone insolvency by creating greater insolvency. If a truck driver can figure this out why can't these wall street hustlers? The industrial world is too corrupt to carry on like this. Bankruptcy cuts the fat, clears out the poison and builds muscle. Time to get together with Brother Ass.
Treeplanter
The Wall Street Crooks and their political Puppets HAVE IT FIGURED OUT. Every dirty little fuck up and fraud they commit, will be passed on to you.
When Hank Paulson committed the daylight robbery of the Middle Class in the Fall of 2008, everyone was able to see the real world for what it is- Shameless Thievery.
Without a new revolution, in the same way this country was created, we are finished. You no longer send tribute to Mother England, you have it taken from you by the Government and they send it to the Masters of the Casino in New York.
And these grubby little worms reward themselves with bonuses for the success of their crimes.
It is like a science fiction movie. The aliens kept the economy alive so they can suck us all dry of our precious bodily fluids...
To follow-up on the root cause of what the article discusses above, this is what I think has been / is happening.
Warning: don't read this if you cannot think outside the box, accept potentially radical new ideas, or if you believe that everyone that goes to church on Sunday must be a good person who would look out for any stranger even if they had to make massive personal sacrifices to do it (yes, these are over-the-top statements).
I have been bearish for several years, but am a naturally optimistic guy. I like to live in new products, ideas and have many issued patents. I share this because I *know* how much we have left to discover, build and do in this universe as a species, but I just don't see it happening in the short term.
'The World is Flat' notwithstanding, I've felt for many years that first world countries would have to sacrifice further improvements in living standards / wealth while the 3rd world 'caught up' thus creating a sort of 'great leveling'. Unfortunately the dynamic that has developed instead is that there is a 'great sinking' going on of middle and lower classes all over the globe while the upper classes in first / second / third world countries continue to prosper or even increase their standard of living (yes, most of us on this board are likely in the latter category). This was something I didn't anticipate but in retrospect should have been obvious (e.g. why would the rich / powerful in any country suffer in any way from moving 1B people from 3rd world farms to 3rd world factories?).
The side effect of this is that power and wealth has become overly concentrated in the world. I know this seems heretical for any self-proclaimed capitalist, but I believe it is true nonetheless. This creates pressure on the political elites to attempt to prop-up the standard of living in the first world to stave off the 'great sinking', but the blunt instrument used is debt and it simply pushes the problem out in time because it is the single path in the solution space that isn't a negative in the very near term (think election cycle).
Meanwhile, the very top of the food chain of the business elite (e.g. the wealthy / powerful non-politicos) seem to further compound the problem, not necessarily out of any sort of premeditated hatred against the 'lower-classes', but because they can, given the current societal structure and that's what capitalism seems to mean to many, especially in the financial world (e.g. heads I win, tails you get the 'shitty deal', to steal a GS phrase).
This is the real core of the problem we face and even though I've tried to roll the future forward in my mind, I can't see anything except a very painful 'reset' of some kind in the future. I can't tell you - and no one can know - whether it takes the form of a world-wide depression, a French revolution style revolt or a climactic crisis that turns everything we rest our business models on now upside down, but we have a very unstable world on our hands right now and at some point something is going to snap.
EyeWall
Eyewall, you get it and very few do. You might be interested in The Zeitgeist Movement (www.thezeitgeistmovement.com)
The creator or father of the movement is suggesting the creation of a resource based economy world wide and aiming towards the elimination of money. His lectures are stunning in both their simplicity and overall truth. He's basically advocating what you did; an overall worldwide averaging of wealth. I've spent hours pouring over the material and except for the feeling that it's 'utopian', I have no issues with it. In fact, it gives me hope, something that has been in short supply lately. I'd rather work towards utopia than continue with the madness we find ourselves in now. As the man says, 'you have to start somewhere...'
Have a look, and thanks for thinking outside the box.
Nice sum up...debt must be reset, but that means there are really only two options - much of current wealth which fake (credit/debt- in the form of investment, lending to others) gets wiped out by people/countries defaulting and we start over with clean slate, global jubilee or people are taxes and underpaid in order for some of the wealth to stay in hands who currently have it. I think the latter result isn't very good for rich or poor, in that debt slave people and countries really don't produce a great economy for anyone (see slave plantation - yes plantation owner is doing well, but compare a southern US town/county in early 1800s to norther one, northern one was rather peaceful, bustling with lots of middle class types, artisans, printers, soap makers and while southerners in constant fear of slave revolts, living in gated communities spread land etc..)
Unfortunately, rich tend to pick latter...but if they push too far, people just say eff-it, this sucks so bad, I'd rather be a revolutionary.
My understanding is people are at their most riled up when their expectations dashed....so if everyone born into poverty/slavery with little hope, they are easy to "manage" but if most people in India, China, Brazil, US, Europe, etc expected so much more in their lifetime (third world people were thinking things were greatly improving, US etc thought things would stay good) but things end up horrible, lower standards for everyone....then people will be demand change.
We'll see