Monday, 9 February 2009

the bail out

According to the BBC

The US government has unveiled a $250bn (£143bn) scheme to purchase stakes in leading American banks.

Announced by President George W Bush and US Treasury Secretary Henry Paulson, the move is the first stage of the government's wider $700bn bail-out plan aimed at rescuing the US financial system.

I was just reading that Barry Ritholtz, author of Bailout Nation, had put together a historical comparison of the cost of this to other substantial outlays. This will apparently be “the largest outlay in American history” costing more, in inflation adjusted terms, than all of the following historical expenditures:

  1. Marshall Plan: Cost: $US12.7 billion, inflation adjusted cost: $US115.3 billion
  2. Louisiana Purchase: Cost: $US15 million, inflation adjusted cost: $US217 billion
  3. Race to the Moon: Cost: $US36.4 billion, iflation adjusted cost: $US237 billion
  4. Savings & Loans Crisis: Cost: $US153 billion, inflation adjusted cost: $US256 billion
  5. Korean War: Cost: $US54 billion, inflation adjusted cost: $US454 billion
  6. The New Deal: Cost: $US32 billion (est), inflation adjusted cost: $US500 billion (est)
  7. Invasion of Iraq: Cost: $US551billion, inflation adjusted cost: $US597 billion
  8. Vietnam War: Cost: $US111 billion, inflation adjusted cost: $US698 billion
  9. NASA: Cost: $US416.7 billion, inflation ajusted cost: $US851.2 billion

Total cost: $US3.92 trillion

I'm no economist, but gosh, wouldn't it be cheaper just to give them all a decent social security pension and then let the market get back to being a free market?

What happened to Mr Smiths invisible hand?

1 comment:

bruce alan greene said...

Mr. Smith's invisible hand?

In a truly fully free market, the hand works to keep equilibrium by having the price adjust to make the supply equal the demand for products and services.

The 2008 crisis, practically overnight, lowered the money supply...by trillions of dollars. I know I'm about 40% poorer!

If prices and wages could fall instantly to match the supply with the demand, we could continue on our merry way knowing that money is now worth almost twice as much (there is almost 1/2 as much in circulation as there was a year ago). However, wages, loans, and other contracts don't change. For a producer of goods, they cannot lower the price to match the now lower dollar amount of demand because their wages are fixed by contract and their loans (money owed others) is as well. Therefore they must reduce supply and the people who work to make that supply by firing workers.

Unemployed workers create even less demand and the whole system spirals out of control until the bottom with massive foreclosures, business failures, and massive unemployment, and falling prices.

Because these previous labor contracts and loans of all sorts can not be reset, the only way out of the spiral is massive re-inflation of the money supply to the point that prices stay about where they were before the deflation caused by the credit crisis. Only the federal government can do this and if trillions of dollars have been lost to the money supply, than it takes trillions of dollars to stop the collapse.

In your example, the new deal cost an inflation adjusted $500 billion. It was not nearly enough and the economic collapse lasted until the federal government spent massively to fight world war II.

The danger in the government spending is poorly allocated resources and corruption (theft). But it pales in comparison to an economy with 25% unemployed.

The one point missing in all the so called "business journalism" is the cost of time. Yes the "bailout" will cost trillions. The cost to our standard of living of 25% unemployed for a few years will be even more trillions of dollars that can never be recaptured as workers production is limited by time and the clock can never be turned back.

Your idea of just giving decent social security is not a bad one. I thought that instead of complicated bailout bill, the government should have just started sending every taxpayer a check for $500/month or something like that.

Still, if we're going to invest for the future, there is only one true way: Invest in our children! Either we have a lot more of em...or we need to educate them better so that they will become more productive when the enter their working years. After all, it is the product of their labor that they will share with us when we are too old to continue to work. After all, we can't eat 401k's, we can only compete to buy what is on the shelf when we retire.

BTW, I liked your post on the resolution of large formats! Thanks.

-bruce