[ExI] AIG Bail out

Lee Corbin lcorbin at rawbw.com
Fri Sep 19 06:38:29 UTC 2008

Kevin writes

> I worked in the mortgage industry for a very long time while this
> was going on. I can tell you first hand that out on the front lines
> we were simply amazed at some of the programs and rates
> being offered. Not a day would go by when I would see some
> company like Countrywide approve and close a loan that
> should not have been made. I personally watched millions of
> dollars every month being funded for loans where the borrower
> had no job, or was self-employed for 6 months and couldn't
> even prove it, yet had a bankruptcy discharged 3 months ago
> and had $3000 down payment that everyone knew darn well
> was coming from the seller of the house in question.

Yes, Kevin, but why? I'm really asking. From your point of
view, what caused these managers---who normally are profit-
oriented profit-hungry capitalists with no heart---take such
stupid chances?  WHY would they do it?

> What was even more amazing was that after this started to correct
> itself, the fed's actions were to LOWER interest rates in order to
> continue fueling the fire.

Oh, that?  It's called a "stimulant". I hear Democratic politicians
talking all the time about the need for a new "stimulant". Picture
an alcoholic on the morning after holding his aching head, and
the pretty little thing next to him saying, "Oh, Sam, you were *so*
much more fun last night than now. What you need is a stimulant,
so here:  here is what you need: $$$$$$".  And of course, the money
flows, the interest rates are dropped the debt increased, the metaphorical
printing pressed turned to ON.

But I wish I could blame just Democrats. Unfortunately, I got a good
dose of Mrs. Palin's views of the economy today. It was absolutely
dreadful. I can not look to Republicans to be any the less in love with
"stimulants" than the Democrats, I'm afraid.

>  They just gave these banks more rope to hang themselves with.
> The proper move would have been to raise interest rates despite
> the obvious recession that it would have put us into!

Of course. Schumpeter called it "creative destruction more than 60
years ago". Recessions are for weeding out the companies that are
not truly creating wealth. But hey, with easy money, more "stimulants"
even the companies losing money think they're hanging on, because
the resulting inflation allows their chief accountants to say, "Well, 
we didn't have a good year, but at least we didn't *lose* money."
No way.

Everybody likes the heyday when, as in the late nineties, we all thought
we were getting rich. The truth of the matter is that is when the most
wealth was being destroyed. Millions of people were employed on
projects that went nowhere and had to be canceled. So when wealth
was *actually* being created by those companies all folding the next
decade, everyone thinks that that is terrible. Well, hangovers *are*
terrible, but they're a sign that you're on the road to recovery. And
hopefully that you'll one day have enough sense to resist "stimulants".

> Now I have a greater concern. It would be a terrific thing for
> everyone is people began saving their money rather than
> spending it all, but what happens if everyone suddenly stops
> buying at once because they are afraid of losing their jobs
> and need to build a quick savings account?

Relax. It never happens that people "all" begin doing anything
or "all" stop doing anything. It's very subtle, actually, and I don't
want to tackle it tonight. But consider that if you save, the money
simply goes into investments so that someone else can spend.
The fundamental idea is that---and here is the true mystery for
me---when plain folks spend on ordinary items it is somehow
often wealth-destroying, and when companies spend on new
equipment or make other investments, it is somehow often 
wealth-creating, but I will be damned if I know when which is


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