US Govt will ensure a ‘Contained Depression’, but what’s left after that?
One of my favorite blogs, “Infectious Greed” by Paul Kedrosky, just posted the following:
Surviving the “Contained Depression”
Interesting David Levy piece in the current issue of Institutional Investor. Here is the money ‘graf(s):
Without the government’s containment the economy would indeed ace another Great Depression, but fortunately, nothing so dire will occur. The government will prevent a collapse of the financial system and partially buffer the damage to the economy, containing the depression. The government will succeed not because it is wise about economic affairs or because it won’t make mistakes. Rather, it will have no choice but to keep patching holes in the financial sector, and its sheer size and presence guarantee a sizable fiscal stabilization. The government has virtually unlimited power to intervene to protect the basic functioning of the financial system, and in an emergency can spend whatever is necessary. Although government solutions will not fix the fundamental problems that will cause the depression, they will limit the financial fallout. By the end of the contained depression, the government will likely have committed trillions between rescue operations and running huge deficits. And although some may complain about the price tag, it will be a bargain for enabling us to avoid another Great Depression.
Levy thinks we will be out the other side in late 2009 or early 2010, albeit out in a tepid way.
I’m wondering:
What will be left, in late 2009 or early 2010? An over-encumbered, has-been economy of broke taxpayers who finally realize that the assets they purchased are worthless, and over-leveraged? The next generation will be working their way out of our mess, for years and years to come?
Bailouts are socialistic. Bankruptcy pwns the shareholders, bailouts pwn taxpayers. I’d still rather see a domino effect of failures for two or three years, instead of this ‘contained’ depression.
Today, Robert Reich blogs:
The Real Difference Between Bankruptcy and Bailout
When a big company that gets into trouble is more valuable living than dead, there used to be a well-established legal process for reorganizing it – called chapter 11 of the bankruptcy code. Under it, creditors took some losses, shareholders even bigger ones, some managers’ heads rolled. Companies cleaned up their books and got a fresh start. And taxpayers didn’t pay a penny.So why, exactly, is the Treasury substituting government bailouts for chapter 11? Even if you assume Wall Street’s major banks and insurance giant AIG are so important to the national and global economy that they can’t be allowed to fail, that doesn’t mean they have to be bailed out. They could be reorganized under bankruptcy protection. True, their creditors, shareholders, and executives would take bigger hits than they’re taking now that taxpayers are bailing them out. But they’re the ones who took the risk. We didn’t.The Treasury seems to have lost sight of its real client. It’s client is not the creditors, shareholders, or executives of any of these firms. Its sole client is the American people.
It would be different if Main Street was getting something out of all this. But credit still isn’t flowing to small businesses or distressed homeowners, and unemployment is skyrocketing.
There’s more at stake for Main Street when it comes to General Motors and other automakers now teetering on the edge of bankruptcy, because two and a half million households depend directly or indirectly on them for their paychecks. But the best way to protect all these people is not to pay off the automakers’ creditors, shareholders, and executives, with no strings attached. Recall that when the government bailed out Chrysler in the early 1980s, a third of its employees lost their jobs.
In exchange for government aid, the Big Three’s creditors, shareholders, and executives should be required to accept losses as large as they’d endure under chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts. The resulting savings, combined with the bailout, should be enough to allow the Big Three to shift production to more fuel efficient cars while keeping almost all its current workforce employed. Ideally, major parts suppliers would adhere to the same conditions.
Remember: The underlying goal is to help Americans through this crisis and come out of it with a stronger economy.
And what a tragedy it would be if the government spends so much on these bailouts there isn’t enough money left for the next administration to help average people get affordable health insurance, send their kids to good schools, and find good jobs — including jobs rebuilding the nation’s crumbling infrastructure and finding alternative sources of energy.
It’s not the big guys who need rescuing. It’s the small. Right now, the government has its priorities upside down. posted by Robert Reich | 10:02 AM
I say PWN THE SHAREHOLDERS, NOT THE TAXPAYERS. Bankruptcy, not bailout.
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