Safety Nets
If you happen to have some financial problem in your life, the Federal Reserve doesn’t care. At all. No matter how bad the problem is. Your personal desires and interests will have absolutely no bearing on the Fed’s thinking about interest rates or anything else. If you’re an extremely rich executive at a financial services firm, however, things look different. Even in circumstances where a taxpayer funded bailout isn’t undertaken — as with Lehman Brothers — the Fed still steps in in a variety of ways to ease the pain. Lehman will be given some time to unwind its assets in a patient way so as to try to minimize the extent to which it needs to sell at firesale prices in a way that undermines the portfolios of other firms. Needless to say, if bad economic times strike your town a very similar type of problem could emerge — it’s hard to sell your house for anything if half your neighbors are also selling — but Ben Bernanke’s not going to step in and save you.
And here we see a fundamental difference between the progressive worldview and the conservative worldview. Progressives believe in a robust safety net for everyone. It’s very possible, as we’re seeing, that you’ll experience financial hard times for reasons that have nothing to do with you. A lot of the people doing unskilled service work in the Lehman Brothers office may lose their jobs as a result of this unwinding even though they didn’t do anything wrong. And that sort of thing happens all the time — people get laid off because adverse things happen to the companies they work for. Or people are struck by other kinds of misfortune — they get hit by buses, hurricanes destroy their houses, all kinds of stuff. Misfortune strikes ordinary people, and not just billionaires. And in the case of ordinary people, just as in the case of billionaires, you can offer improve social welfare by helping people out when they wind up in trouble.
But conservatives don’t believe in that kind of safety net for regular people — just for the billionaires. Guaranteed health care? Forget it. Guaranteed retirement income? No way. Just let the market work, and when it stops working the executives will be okay and the rest of us will, oh, something or other.
It’s just something to keep in mind when you hear John McCain ranting about the horrors of government waste. Obviously, there is some waste in there, and certainly some stuff that sounds funny like Sarah Palin’s seal DNA earmark. But in McCain’s mind, it’s all waste. Nobody paid attention at the time, but back in the spring he came out with an extraordinarily stingy housing plan that would have done essentially nothing to help ordinary people hit by the foreclosure crisis. McCain, after all, managed to acquire eight homes through good old fashioned hard work marrying an heiresses, so why shouldn’t hard work and prudence be good enough to see any family through tough times?
44 Responses to “Safety Nets”
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September 15th, 2008 at 10:26 am
Lets’ cut to the chase with some essential corollaries:
People are a waste.
People helping people are a waste.
I’m all right, Jack–I married an heiress: Where did you screw up and miss the main chance?
September 15th, 2008 at 10:33 am
I think the idea is for the cleaners to wait around for a long time inside those bathrooms until something gets trickled down onto them.
September 15th, 2008 at 10:35 am
Just let the market work, and when it stops working the executives will be okay and the rest of us will, oh, something or other.
Much more willing to work at lower wage rates, which helps the economy!
max
['Solving the servant problem!']
September 15th, 2008 at 10:35 am
You know what would be nice? An American politician saying, “All of us are getting screwed over by a small number of incredibly rich, well-connected greed-heads who expect us to work 60 hours a week just to make ends meet while they live off us like parasites, buying their 4th vacation house and deciding on what kind of Bentley to buy their kid for his 18th birthday.
“You can vote for one of them to be our President, or you can vote for me and we can go kick their asses together and get our stuff back.”
September 15th, 2008 at 10:36 am
A compelling argument, but you’re overlooking the key fact that this is America, where anybody can make millions upon millions just by working hard. If the bathroom maintenance man cleans those toilets well enough you can bet your boots he’ll be promoted to managing director by the end of the decade. Or at least, that logic seems to form the bedrock of our current economic model.
September 15th, 2008 at 10:36 am
Why do cars have brakes? Most people would think it’s so you can stop, but the truth is it’s so the car can go faster. If you look at car design, the faster the car can go the better the brakes that car has.
This fact goes right back to one of the first safety mandates that Congress ever passed. The Safety Appliance Act of 1893 which mandated air brakes on trains. See before the air brake, the brakes on a train were manual, and when the train wanted to stop a couple of guys would jump up on the roof of the train and run along the top turning wheels to engage the brakes and stop the train. It was slow, and worse often times the brakemen would fall off the train. It’s hard to stop a train when your brakeman is dead. This led to crashes, which was the motivation for the 1893 act.
Well needless to say in 1893 the train companies were horribly upset. How dare they pass this mandate! It’s going to cost us money! We’re going to pass this on to consumers and it’s going to cost all you alls money! Someone stop Congress now!
But after 1900 when the act went into effect the guys running the trains realized something. Since air brakes could more reliably stop trains they could run the trains faster with tighter margins on the schedule. They could run more trains on the same track. This increased their revenues, and their profits.
The purpose of the safetynet, may appear to be to protect people from the evil capitalist bosses. We’re going to take some of your money, and give it to the poor sods you’ve trampled upon!
And while it does that, the bigger reality is that the safetynet allows Capitalism to go faster. Because of the safetynet, people know that they’re not up a creek without a paddle if they lose it all. They’ve got something. Not much, but at least they’ll have their basic needs and that gives them a chance to start again. This means people are more likely to take risks. From the small startup, to the guy who just simply moves to take a new job.
September 15th, 2008 at 10:44 am
In addition, many of those protected by the conservative world safety net are in a situation where they can pull income out of the front side of transactions, either through fees of some sort or an ability to securitize transactions and transfer risk and exposure to a broader market. Many of those involved in the financial reshuffling already have their money and will sit pretty henceforth. As things are currently arranged, these takings are pretty much out of the picture as far as the reshuffling. Workers and others who would be insured to some extent by a progressive safety net are not so comfortably situated.
September 15th, 2008 at 10:46 am
Matt, the Fed only gets involved when there’s SYSTEMIC risk. It has nothing at all to do with compassion, empathy or anything warm and fuzzy — it’s about preventing the failure of one firm from bringing down other firms that are counter-parties to it’s transactions and thus causing a general panic and crash. That’s a lesson from the Great Depression and from subsequent credit crises.
When the Fed intervenes, or the Treasury, it doesn’t look out for the shareholders of the troubled firm, but for the creditors — the bondholders and such. Bear was probably a mistake, but Fannie and Freddie would have brought down the whole system. The collapse of Lehman restores the proper sense to lenders that you’d better be careful whose bonds you buy because we won’t step in to save you.
September 15th, 2008 at 10:49 am
Gore Vidal put it best:
“America is a country of free enterprise for the poor, and socialism for the rich.”
September 15th, 2008 at 10:54 am
Why does the Fed step in to ease the pain in cases like this? To ensure that the financial system doesn’t collapse, which would have all sorts of bad effects for millions of people rather than the residents of one small town. Perhaps we should accept higher unemployment and less economic opportunity in exchange for a larger safety net; that’s a legitimate point for discussion, but this post is ridiculous.
Allowing Lehman time to sell its assets just means that some of the companies who Lehman owes money to are more likely to be paid. All of the ‘billionaires’ running Lehman have lost their money, and the period of time Lehman has to liquidate is in fact granted to most individuals who file for bankruptcy.
Either way, those companies and their shareholders are losing money on the deal, and if the Fed did not do even this, it would further undermine the confidence of investors.
In Matt’s world, helping companies get 50 cents on the dollar from the debt Lehman owed them is the Fed helping out unspecified ‘billionaires’. It’s hard to believe Matt is really this stupid/ignorant, but then he’s using the class warfare rhetoric, so anything’s possible. While I’m guessing his dad probably didn’t work in a mill, but maybe he did once encounter a little girl without a coat.
September 15th, 2008 at 10:57 am
Your post reminds me of comments by a conservative friend of mine when the stimulus payments plan came out. He was annoyed that rich people didn’t get a stimulus payment, signaling that they didn’t “deserve” it, even though they pay most of the taxes. What he didn’t get, of course, is that in order to be effective in its stated purpose, the stimulus plan needed to stimulate spending rather than saving, and thus went mostly to people with a higher propensity to spend extra income. In other words, effectiveness as policy trumped symbolism.
Now what about these financial company bailouts? The purpose of the policy is to keep the economy from collapsing, not to show who deserves attention. Just ask Krugman why we’re doing it: these companies are unregulated banks, and when banks go under or rapidly unwind their portfolios, the money supply contracts and we get a great depression. You know who does poorly in great depressions? Janitors.
So: did you think symbolism was the main purpose of both the stimulus payment eligibility scheme and the bailouts? Or are you applying a double standard?
September 15th, 2008 at 10:57 am
Your personal desires and interests will have absolutely no bearing on the Fed’s thinking about interest rates or anything else.
Of course it does. The Fed’s primary mandate is to keep inflation and unemployment low. I realize it’s election season, but this is an extraordinarily ignorant post.
September 15th, 2008 at 10:58 am
What rab said!
September 15th, 2008 at 11:05 am
and if the Fed did not do even this
Please, sir, I want some more.
The passage sounded so sensible until then, too. Why should the Fed treat investment bankers’s bankruptcies any different than a green grocer’s bankruptcy?
In Matt’s world, helping companies get 50 cents on the dollar from the debt Lehman owed them is the Fed helping out unspecified ‘billionaires’.
Not just Matt’s world. The Fed shouldn’t treat a financier’s bankruptcy any differently. Lehman’s debtors weren’t snookered by a mass mailing credit card solicitation. They were big bad wolves looking to get bigger and worse.
September 15th, 2008 at 11:05 am
“Allowing Lehman time to sell its assets just means that some of the companies who Lehman owes money to are more likely to be paid.”
Umm, that’s sort of Yglesias’s point.
September 15th, 2008 at 11:10 am
We need to start a campaign to get James K. Galbraith appointed Director of the Federal Reserve in an Obama administration. Who’s with me? Nobody but Galbraith knows as much about the Fed’s pro-Republican tilt in election years.
September 15th, 2008 at 11:12 am
Count me in with the critics; Bernanke deserves better. I think there are plenty of indications that he cares about what happens on Main St. [He grew up in a small town himself], and he’s urged the appropriate parties [namely Congress] to step up to the plate. But the guy’s not God; he has a limited mandate, and he has his hands full dealing with a mess that wasn’t of his making. Now, the Republicans . . . .
September 15th, 2008 at 11:19 am
If you want to understand how this happened, read this WaPo article about how Fannie and Freddie controlled the pols and prevented reasonable regulation and capital requirements. These companies, like investment banks were allowed astronomical leverage. This is OK when firms are risking their own money, but not when the taxpayers have to bail out their creditors when their assets turn sour.
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/13/AR2008091302638_2.html
Obama isn’t saying anything about Fannie and Freddie because he’s in up to his ass. Two of his top advisers, James Johnson and Franklin Raines, former heads of Fannie, participated in the accounting fraud and political influence-buying that led to this debacle. Obama has received $126,349 from Freddie and Fannie PACs.
http://blog.heritage.org/2008/09/15/morning-bell-a-viscious-cycle-of-their-own-making/
September 15th, 2008 at 11:22 am
Lehman Brothers is “de minnie mouse[1]” right now. AIG is going to step up to the Fed’s Free Money window to the tune of $50 billion dollars. It’s like the Super Trooper line,
-Who wants a moustache ride?
-I do, I do!
-Oooh, I vant von too!
Except the Fed only gives moustache rides to the very, very rich, but since they only give them moustache rides when they’ve been very, very naughty, that’s supposed to make it ok?
[1]Old joke. Dan O’Neil, a cartoonist, once did sexual parodies involving Disney characters. And got sued for his troubles. Had I been his attorney, I’d have won the case because as you all know, “de minnie mouse non curat lex”.
September 15th, 2008 at 11:34 am
I do think it is important not to forget unemployment benefits, etc, and the point made previously that in severe economic downturns, everyone does poorly.
I think the problem we’re trying to get at here is the privatization of profits and the socialization of risk as well as the disconnect of executive pay from executive performance.
September 15th, 2008 at 11:36 am
STOP BEING SILLY, Matt. You’re too smart to write stuff like this. The Fed’s lending expansion in the wake of this is helping the small guy as much as it does the big guy. Want proof? I work in finance and draw a respectable but modest fixed salary. Things for me are great, and my savings at WaMu look better today than they did yesterday thanks to the Fed. Some of my multimillionaire banker colleagues at Lehman? Turns out they’ve been working practically for free thanks to stock options. Don’t spin broad claims based on evidence you don’t know how to analyze.
September 15th, 2008 at 11:53 am
Sounds to me like Progressives believe that money grows on trees. It also sounds to me like way, way too many Republicans believe the same thing. It’ll be fascinating to watch the cognitive dissonance unfold over the next 2 decades as FICA collapses
September 15th, 2008 at 11:59 am
I agree with Seth. The ignorant populist take on this is so stupid. Instead of posting, some of you ninnies need to read the WSJ, NYT or WP and get your facts straight.
September 15th, 2008 at 12:17 pm
…says the guy who couldn’t even get “asset” right.
September 15th, 2008 at 12:32 pm
Matt also seems to ignore the fact that these interventions could very well be preventing larger catastrophes that would not discriminate based on wealth in their harmful effects.
The idea that Ben Bernanke and Hank Paulson are doing what they’re doing just because a bunch of rich banker friends are in trouble is simplistic and silly. Matt reads enough econ blogs to know at least that much.
September 15th, 2008 at 1:10 pm
It’s the difference between cronyism and equality, not conservatives and progressives.
September 15th, 2008 at 1:10 pm
Thinking of JKG, it’s oats for the horse, and horse processed oats on the road for the sparrows. Sort of like bathroom duty at Lehman.
September 15th, 2008 at 1:52 pm
mds, you ridiculed me for saying the taxpayers were on the hook for Fannie and Freddie’s $5 trillion in liabilities and guarantees. You thought the F’s $1.5T in balance sheet liabilities was the extent of our exposure. Turns out I was wrong. It’s been widely reported in the press since then that the taxpayer’s exposure is $5.4 trillion. Of course most of this is performing mortgages, but eventual taxpayer losses could exceed $100 billion.
September 15th, 2008 at 2:10 pm
“rab”
In Matt’s world, helping companies get 50 cents on the dollar from the debt Lehman owed them is the Fed helping out unspecified ‘billionaires’. It’s hard to believe Matt is really this stupid/ignorant, but then he’s using the class warfare rhetoric, so anything’s possible. While I’m guessing his dad probably didn’t work in a mill, but maybe he did once encounter a little girl without a coat.
Better conservatives, please. Those companies made a bad choice and should suffer the consequences. If they’re “too big to fail” they should be regulated more. The elite make class war on the middle and lower classes every day, and are being helped along by Democrats like Chris Dodd and Barney Frank and Hillary Clinton who voted for the Bankruptcy Bill. (at least her husband vetoed had it).
During the primary Obama had said both parties are the problem, which registered with me. In the general election he needs the Democrats so he’s toned down his criticism, which is understandable.
If it were up to the hard core conservatives, there would be no bailouts and the system would collapse, and then there would be class war, without the “rhetoric”.
September 15th, 2008 at 2:43 pm
Peter K.,
Uh, Lehman is failing. They are being liquidated. Slowing the process down somewhat so that the liquidation proceeds more slowly is a relatively minor intervention. You will hear no argument from me that better regulation is necessary…what about my post were you criticizing?
I was simply making the point that Matt was employing class warfare rhetoric in a context in which lower, middle, and upperclass interests were aligned. It’s not good for anybody if the financial markets fail, and this plan does nothing to help Lehman executives or investors; their investments are worth nothing now. Matt’s post suggested that he had no idea what he was talking about.
September 15th, 2008 at 5:07 pm
I was simply making the point that Matt was employing class warfare rhetoric in a context in which lower, middle, and upperclass interests were aligned.
Trickled down economics? Doesn’t work.
Matt’s point is that their interests are not aligned. And you’ll see that they’re not if you pay attention and keep track. If you want to be a propagandist for the elite/winning side in the class war, go right ahead, but please give us better arguments than the stale old ones you’re peddling.
September 15th, 2008 at 6:50 pm
good old e. o’neal is back!
actually, good ol’ e. o’neal, let’s try it again. your claim was that the national debt had increased by $5 – $6T. your claim remains not true.
the taxpayer out-of-pocket could be zero, it could be $300B, but it ain’t $5.4T.
September 15th, 2008 at 7:28 pm
Matt, E. O’Neal is right. The Fed only gets involved when there is risk to the entire system, a la the Great Depression. There are good reasons for their policies in intervention: your grocer’s bankruptcy isn’t going to bring down the entire financial system, including everyone’s retirement plans.
I’m a diehard progressive and I hate the golden parachutes as much as you do (and kudos to Congress for passing the law that could disallow the bonuses for the Fannie and Freddie execs). But the underlying problem here isn’t that the Fed is intervening in the wrong cases, it’s that the Fed lacks sufficient regulatory authority to make the structural changes that the financial system requires. I’m not saying the Fed should necessarily have that power, though, just that they have limited options given their mandate.
It’s really Congress that has shirked its duty in the absence of real Federal Reserve regulatory power. Read up on Glass-Steagall Act of 1933 and its 1999 repeal by the Gramm-Leach-Billey Act, and ponder if the destruction of the New Deal-era strictures on the financial system might not be the true culprit behind the subprime mess and its subsequent fallout. It is fundamentally the interconnectedness of the giant players that has made Fed interventions necessary; that’s something unseen between 1933 and 1999. Thanks, Phil Gramm!
September 15th, 2008 at 10:42 pm
Matt has a little bit of a valid point here, but the way he expresses it is likely to tarnish the image of progressives among economically sophisticated centrists.
The reasons to minimize the financial consequences of cataclysmic events like the Lehman failure have nothing to do with the rich people who benefit directly from that safety net. When the financial system collapses, it hurts everybody, and it tends to hurt poorer people more, because they have the least resources to cushion the blow. If the Fed had provided a “safety net…for [m]illionaires” (since there were no billionaires yet) in the early 1930s, it would have made things a lot better for poor people in the subsequent years.
It’s also true that a stronger safety net for the poor and middle class has some benefits for the economy generally. That’s where Matt has a valid point. A wise set of policies should include protection for the non-rich.
But I would say there is somewhat less urgency about that. A safety net for ordinary people would help, but the economy can get by without it — “get by” in the sense of avoiding a disaster like the 1930s. If the financial system collapses, on the other hand, the safety net for ordinary people will cushion the severity of the resulting disaster, but it probably won’t be enough to prevent it. Much of the New Deal was an attempt at a safety net for ordinary people, but the New Deal had only limited success in bringing about a recovery. By most accounts the Great Depression was still going on during the late 1930s.
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