Maria Bartiromo interviews Quantum Fund co-founder Jim Rogers about the economic crisis and Rogers says Obama's policies are making the economic crisis worse.
What do you think of the government's response to the economic crisis?
Terrible. They're making it worse. It's pretty embarrassing for President Obama, who doesn't seem to have a clue what's going on—which would make sense from his background. And he has hired people who are part of the problem. [Treasury Secretary Tim] Geithner was head of the New York Fed, which was supposedly in charge of Wall Street and the banks more than anybody else. And as you remember, [Obama's chief economic adviser, Larry] Summers helped bail out Long-Term Capital Management years ago. These are people who think the only solution is to save their friends on Wall Street rather than to save 300 million Americans.
So what should they be doing?
What would I like to see happen? I'd like to see them let these people go bankrupt, let the bankrupt go bankrupt, stop bailing them out. There are plenty of banks in America that saw this coming, that kept their powder dry and have been waiting for the opportunity to go in and take over the assets of the incompetent. Likewise, many, many homeowners didn't go out and buy five homes with no income. Many homeowners have been waiting for this, and now all of a sudden the government is saying: "Well, too bad for you. We don't care if you did it right or not, we're going to bail out the 100,000 or 200,000 who did it wrong." I mean, this is outrageous economics, and it's terrible morality.
If the stock and bond holders of these financial companies lost all their investments then the market would become a lot more demanding on financial institutions to avoid risks and reveal what risks they are taking. This is why Citibank and other big financial institutions need to fail. We need those lessons.
What sorts of institutions are we propping up? When we taxpayers were forced to bail out AIG ($163 billion and rising) we were bailing out a massive hedge fund.
“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG,” Bernanke told lawmakers today. “AIG exploited a huge gap in the regulatory system, there was no oversight of the financial-products division, this was a hedge fund basically that was attached to a large and stable insurance company.”
In his response to Bernanke's comments Mish Shedlock says we need to let the big financial institutions fail in order to speed the recovery.
By attempting to bail out Fannie Mae, Freddie Mac, AIG, Citigroup, Bank of America, and Merrill Lynch, the Fed is making irresponsible bets, taking huge losses, and has no regulatory oversight. There is a huge gap in the system, and that gap is the Fed itself.
There is no need to prevent another Lehman. Instead, there is precisely a need for more Lehmans. The sooner we stop trying to prop up failed institutions, the sooner the economy recovers.
The Japanese government made the mistake of keeping weak financial institutions alive in zombie condition in the 1990s. That contributed to a decade-long economic stagnation in Japan. Hope that doesn't happen in America. But a lot of forces are lining up to hold down growth in the future. First off, lending is becoming even more politicized than it already was. Second, the baby boomers are retiring and the US demographic picture for the working age is deteriorating. The new generation is going to be less cognitively able than generations that went ahead of them. That means slower economic growth and even declining living standards.
My fear is that we will enter an era like the 1970s when wage and price controls and other interference by government in the market contributed to deep recessions. At the same time, oil price will go way up again and that will drain America of money to pay for the oil imports. Living standards look set to drop.
Of course, even if the private sector learned its lesson from the financial crisis it might not matter for the next disaster anyway. Why? The Obama administration is going to use government-controlled Fannie Mae and Freddie Mac to fund reckless lenders handing out new massive amounts of money to undeserving borrowers.
In the last six weeks alone, the Obama administration has essentially transformed Fannie Mae and Freddie Mac into arms of the federal government. Regulators have ordered the companies to oversee a vast new mortgage modification program, to buy greater numbers of loans, to refinance millions of at-risk homeowners and to loosen internal policies so they can work with more questionable borrowers.
So us net taxpayers (those who pay more in taxes than they get in benefits) will be forced to subsidize bad credit risks to buy houses. The more questionable borrowers who, in the old America, would not have gotten loans are championed as victims of capitalism who deserve big possessions even though they don't earn the dough. These credit risks are people who the old America would have accurately seen as not fit to borrow large sums. But the parasites who run our country want to redistribute the wealth from the most productive to the less productive. They do not want to believe that they'll destroy wealth in the process. But that is what they are doing.
Steve Sailer comments that while Obama's father wanted political control of businesses in Kenya the son Barack is achieving increased political control over the private sector in a far wealthier (at least for now) country. That political control undermines the positions of wiser managers in sound financial institutions. If the unsound institutions were allowed to fail then the surviving institutions would expand to supply financial services to the old customers of failed institutions. So the wiser managers would expand their reach while the bad managers would lose their positions of power. But government bail-outs prevent much of the purging of bad decision makers.
We need to prevent financial catastrophes. How? Megan Mcardle modestly proposes a return to partnerships in banking as a way to reduce the desire to take risks.
Pretty much everyone agrees that two of our biggest problems are, first, excess risk-taking by banks, and second, the existance of institutions that are too big to fail. So why not force banks to operate the way they used to: as partnerships? I don't think that anyone believed they were creating the kind of massive systemic exposure we ended up with, and in fact the heads of the banks tended to have their personal fortunes tied up in the bank's operations. But the lower level employees, the ones who actually knew what was going on in their trading books, didn't. If the banks had been partnerships, I'm willing to bet that a lot fewer of them would have been tempted to lever up quite so far.
They also wouldn't have been able to get too big to fail; the rationale behind going public, other than sheer greed, was the ability to raise more capital. We'd have a lot of little banks, no one of them big enough to take the whole system down with it.
This idea has merit. But a realistic view of human interests is kept out of policy deliberations since realism would constrain policy makers from doing what they want to do.
|Share |||By Randall Parker at 2009 March 04 10:24 PM Economics Disasters|