2009 March 04 Wednesday
Jim Rogers: Stop Bailing Out The Bankrupt

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.

MARIA BARTIROMO

What do you think of the government's response to the economic crisis?

JIM ROGERS

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


Comments
James Bowery said at March 4, 2009 11:51 PM:

Wow. That was one of your longer entries.

I find interesting the involvement of Warren Buffett in the AIG bailout. Buffett, that sockpuppet with a rather unique marriage among grandfatherly figures of the staid Midwestern insurance institutions. Buffett, the "liberal" who denies he owes society anything but is magnanimous enough to conflate income with net assets in defining his economic status -- despite the fact that it is his net assets, not his income, that really sets him apart from the rest of us, and his net assets enjoy protection given them by an income-tax-funded government.

If that weren't enough to make him despicable then I suppose one could point to his opposition to his fellow Nebraskans in their initiative to nullify the authoritarian Title VII of the Civil Rights Act of 1964.

There will be pitchforks...

A. Prole said at March 5, 2009 1:29 AM:

Cast your mind back 20 years.In the aftermath of clown Gorbachev's disastrous reign of error, that incompetent waste of skin Yeltsin took over Russia.
'Smart' western economists losts no time in gulling the stupid Russians into economic 'shock therapy' (a stupid termbelonging to psychiatry, the real motive was to ensure the permanent destruction of Russia as a world force), a asinine strategy that saw willing Russian idiots-in-charge wantonly destroy huger parts of their productive capacity than the sensible Mr. Rogers is cjustifiably calling for.

Ned said at March 5, 2009 11:45 AM:

According to the Federal Reserve, the US money supply (M1) from July 08 to January 09 increased at an annual rate of 25%, at a time that the economy was contracting. 25%! Get ready for some real inflation, coupled with the economic stagnation brought on by Obama's failed policies. It's called stagflation, brought to you by the latter-day Jimmy Carter - Barack Obama!

Randall Parker said at March 5, 2009 5:54 PM:

Ned,

I'm ready for stagflation. Got what I think are reasonable stock investments for stagflation.

anon said at March 5, 2009 7:34 PM:

These idiots aren't going to stop with the bailouts. They don't know/don't care about what they are doing. But more and more people don't want to be involved with the slow-motion train wreck: http://news.yahoo.com/s/ap/20090306/ap_on_bi_ge/geithner_choice_withdraws

The Fed ain't talking, one wonders why: http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=aG0_2ZIA96TI

I'm sure they know how bad the rot is and they are probably terrified. I can't really blame them.


Make no mistake, we are fucked. People had better prepare for economic collapse(and the insanity that is going to come with it, especially from NAMs), because that is where we are heading.

Kudzu Bob said at March 5, 2009 7:57 PM:

Funny you should use to that Bernanke quote. Karl Deninger also referred to in his Market Ticker blog, and added the following:

"That's true - there was no direct regulation of the financial products 'division.' and that's something we need to fix.

"But what Bernanke didn't say is that he did have the ability to regulate the swap writing and buying as it applied to the creation of systemic risk because he has primary regulatory authority over the banks on the other side of the trades.

"That is, while he could not have prohibited AIG from writing the swaps, he absolutely could have prevented the banks from either buying or holding them.

"That was within his power and authority - yet he did not exercise that authority.

"Of couse you can't sell something for which there is no buyer, and without buyers in the regulated financial system for these 'products' there would be no systemic risk.

"Bottom line: The Fed created the systemic risk that he claims he now 'had to rescue the system from' as a direct consequence of its willful blindness in regards to the banks buying all those CDS from AIG (and elsewhere.)

"Once again Ben dissembles and Congress plays the role of the blubbering idiot, unable to ask the tough questions and demand answers."

HellKaiserRyo said at March 5, 2009 8:29 PM:

I do not know if more loans will help or hurt, but Randall, those people are certainly victims of capitalism. At least Paul Craig Roberts (who is a paleoconservative who formulated supply side policies and writes on VDARE [I like him better than Steve Sailer]) think so. Didn't offshoring and free trade destroyed many jobs and lowered wages and benefits. Didn't it reduce tax base and force more people who do not earn enough when competing with Chinese people to apply for more benefits?

"Cast your mind back 20 years.In the aftermath of clown Gorbachev's disastrous reign of error, that incompetent waste of skin Yeltsin took over Russia.
'Smart' western economists losts no time in gulling the stupid Russians into economic 'shock therapy' (a stupid termbelonging to psychiatry, the real motive was to ensure the permanent destruction of Russia as a world force), a asinine strategy that saw willing Russian idiots-in-charge wantonly destroy huger parts of their productive capacity than the sensible Mr. Rogers is cjustifiably calling for."

I do not know if Ronald Reagan help facilitated the collapse of the Soviet Union (I think it was inevitable) by massive military spending, but it seems that the United States would have been better off if they didn't engage in that defense spending. Well, it did help the Russians (most of their productive assets got privatized by robber barons) or promoted even the US's own enlightened self interest. To the contrary, I agree with Paul Craig Roberts when he claimed that the US benefited from world socialism as it reduced the supply of global labor. (China was bound to rid it self of communism anyway if US did not intervene.)

Instead of more lending, I want more "labor market political activities" or "AMS-åtgärder" for these people.

Bob Badour said at March 6, 2009 7:39 AM:

"Didn't offshoring and free trade destroyed many jobs and lowered wages and benefits."

No. At least, not for the demographic currently getting bailed out of unaffordable mortgages. Offshoring had an impact on the upper middle class by reducing domestic demand for engineers, radiologists, accountants etc. but it had no real effect at the lower end of the economy.

Free trade created jobs and increased wages and benefits. Uncontrolled immigration of unskilled workers, though, more than consumed those jobs and drove down wages and benefits.

Massive price manipulations caused massive misallocation of resources thereby causing labour to seek jobs in the wrong industries, which eventually had the result of destroying many jobs and lowering wages and benefits when the imbalance finally corrected.

Hakeister Ro said at March 10, 2009 11:23 AM:

Massive economic regulation did not help Europe, which is in worse shape even than Obama's US. Obama is not satisfied with a 20% chance of depression. He's gonna push and push until the odds get close to 100%. The man is only a voice wrapped around obsolete instincts for social engineering implanted by his radical anthropologist mother.
Stagflation? You'll be lucky if you don't get blood in the streets.


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