Matthew Yglesias » Small Enough to Fail

Sep 22nd, 2008 at 10:05 am

Small Enough to Fail

Dear Mr. Bernanke and Mr. Paulson:

My student loans are too big and it is hurting the economy. Can I have a bailout, please? I need $92,000.

Maybe if you take out bigger loans and invest the money in a bunch of assets that are actually worthless, them you’ll be bailout-worthy. Modest debts incurred to invest in your own education don’t make the cut.

Comments
32

32 Responses to “Small Enough to Fail”

The Puzzled One Says:
September 22nd, 2008 at 10:15 am
Two things here:

You seem to be doing a better editing job here than at your past house of blogging. So please keep it up… make it “then” instead of “them”.

And: How many times do you have to say the same thing? Yes, yes, this is morally flawed. We all agree. Yet, look at an article way back in an eighties Playboy where they defined what “an Argentina” means: a debt so big it is no longer the debtor’s problem, but the lender’s. And, bail-outs are always wrong morally, but sometimes you’d do them anyways because of the cascading consequences of the alternative (i.e. not bailing out leads to bigger problems down the road including problems for “the little people”). A case can be made for *some* bailouts. As for this one, let’s say I don’t have anything intelligent to say at this point. But then again, who does?
peep Says:
September 22nd, 2008 at 10:20 am
Well, there’s a Dylan line, “Steal a little and they throw you in jail, steal a lot and they make you King” (I seem to remember reading that Dylan stole this from someone else).

Can anybody adapt this for borrowing?
Matthew Says:
September 22nd, 2008 at 10:20 am
How can they expect to fork over cash if they don’t know what his major was? Only then can we truly discern if it was a bad investment.

http://thesebastards.blogspot.com/
Ano Says:
September 22nd, 2008 at 10:21 am
You’re right: the only fair thing to do is to let the financial system collapse. We’ll all fail together, and no rich people will stay rich unduly. It’ll be great!
Don Williams Says:
September 22nd, 2008 at 10:23 am
1) I’ve decided that sober financial analysis doesn’t fly in the political arena unless it has a little pizzazzz. So
I added a little in my Kos Dairy this morning.

Go 50 hits within minutes. I LOVE the sound of pigs squealing in the morning. hee hee hee

From http://www.dailykos.com/story/2008/9/22/94341/1459?new=true
—————–
Obama Will Lose Election Over Bailout

1) The proposed Bailout of the financial industry will cost Obama the election. This $2 Trillion giveaway to the Superrich by the Democratic Congress will levy an additional $31,000 of debt onto the 65 million households who pay almost all of the income taxes. Most of those households are working class and middle class Democrats.

2) It will force a lot of those Democratic voters to ask why they should even bother to go to the polls — and to ask whether they should vote for Ralph Nader if they do.

3) Especially since Democratic Senators voted for Bush’s $2 Trillion tax cut for the Superrich in 2001, approved an unnecessary $1 Trillion Iraq War, and did nothing to stop Bush’s theft of $3 Trillion from the Trust Funds for Social Security and Medicare.

We constantly hear that the current Congress can do nothing because of Republican Senators — but when did we ever see a Democratic filibuster in the last 8 years?

4) If the bailout is necessary, then it should be paid for by the people who caused the crisis and who will benefit from the bailout. An Income Surtax to raise $2 Trillion should be imposed on the richest 3 percent of the population to pay for the bailout.
That MUST be part of the Bailout bill currently being debated in Congress.

5) Any LATER attempt to raise taxes on the Superrich after the Bailout will FAIL. The mass of Republicans Senators will filibuster increased taxing of the rich — and they will always be sustained by a few corrupt Democratic Senators like Zell Miller and the other 11 Democrats in the Senate who approved the 2001 tax cut.

6) The $31,000 that the Bailout will cost us is on top of the $154,000 per household we already owe on a $9.8 Trillion debt, much of which was incurred in the last 8 years.

7) You don’t like the message in Paragraphs 1 and 2. You will like it even less when Ralph Nader promotes it in the coming weeks, aided by $30 Million in new donations from McCain backers.

NOTES:
a) The total cost of the financial bailout is currently $1.5 Trillion, which is why the Democratic Congress is being asked to raise the federal debt limit to $11.3 Trillion, up from $9.8 Trillion. That’s $800B for Bear/Fannie/Freddie/AIG/Emergency Bank Loans plus another $700B for latest bailout Paulson proposed last Friday. Adding in 4 years of interest raises the cost to $2 Trillion.

b) There are roughly 116 Million households, but 50 million of those households make less than $40,000 per year, are barely surviving and can NOT afford to pay more taxes. The bottom 40 Percent of the households make less than $34,000 per year.

That leaves the cost of the federal debt to be borne by the other 65 million households, most of whom are working class and middle class Democrats.
See http://en.wikipedia.org/wiki/Household_income_in_the_United_States
El Cid Says:
September 22nd, 2008 at 10:23 am
My small business is in trouble due to a slow economy and bad business practices and I have a “rescue plan”.

The “rescue plan” involves you giving me a million dollars and then going away and never asking me about the money again.

Also, I need it by Thursday or everyone will die. Please hurry up with the money because my “rescue plan” depends on it.
John McCain: Serial Liar Says:
September 22nd, 2008 at 10:54 am
Fuck that guy — we have to make it even HARDER for anyone like him to declare bankrupcy! Health problems, loss of job, that doesn’t compare to Mr. Lehman Brothers having to give up his Private Jet!

Dem dat has da gold make da roools.
Rob Mac Says:
September 22nd, 2008 at 10:58 am
Puzzled one, the problem here isn’t so much the moral flaw of bailouts, but the specific problems with this particular bailout. It is a blank check to the institutions that caused the current financial crisis. A bailout could take the form of a loan which must be repaid or of the government buying a stake in the troubled institutions or of the government reducing mortgage debt to keep individuals in their homes. None of these would be as horrendous as the current plan.

We are not discussing a theoretical exercise. This is a very bad, very specific plan that essentially amounts to the final act of theft of a departing presidential administration.

peep, the phrase you’re looking for is, “When you owe the bank a million dollars, the bank owns you. When you owe the bank a billion dollars, you own the bank.”

Don Williams, you’re making some good points, but Obama has not yet stated a clear position on the bailout, so it’s too early to tar him like this I think. Well, we could tar him for not getting out in front on opposing the bailout, but I think it’s reasonable for him to proceed cautiously.
Freddie Says:
September 22nd, 2008 at 11:01 am
You’re right: the only fair thing to do is to let the financial system collapse.

Boy, I’m really tired of this bogus dichotomy. Saying that there is something wrong with the bailout, or pointing out the negative moral consequences of the bailout, or being angry about the philosophical considerations of the bailout, is not saying there should be no bailout at all, or that the economy “should” fail. Please feel free to cut and paste this if you need reminding.
Tyro Says:
September 22nd, 2008 at 11:22 am
It fascinates me that, as the wealthiest country in the world, our biggest priority seems to be to find ways to spend all of our national wealth on things like bailouts and wars to ensure that it doesn’t get wasted on things like infrastructure and efficient delivery of national services like health care.

It’s like we have TOO MUCH MONEY, and the presence of that money scares a lot of people into worrying that it might be used for “SOCIALISM”, so we need to find holes down which to pour all of that money and wealth lest it fall into the hands of “the wrong kind of people.”
Pesto Says:
September 22nd, 2008 at 11:27 am
Also, I need it by Thursday or everyone will die. Please hurry up with the money because my “rescue plan” depends on it.

This is what mass, direct action is for. Give us a raise, or health insurance, or a pension, or protection from abusive treatment, or we’ll strike your business and bankrupt you. Redeem our WWI veterans’ bonuses now, or we’ll embarrass the government with our Bonus Army (that one failed, but paid dividends later with the passage of the GI Bill after WWII). Use cops to bring scabs across a picket line? You get a General Strike.

Not that I think Americans are likely to engage in this kind of mass solidarity. But in principle, we, collectively, can shut down the economy just like Wall Street can. And if we can persuasively threaten to shut it down, we can sell Congress our collective decision to let it go on humming — for the right price.
Ano Says:
September 22nd, 2008 at 11:38 am
Freddie,

The specific critique Matt seems to be making is that “bailouts” aren’t being handed out on the basis of moral rectitude, but, rather, on the basis of whose failure poses a risk to the financial system.

You’re right that “no bailout at all” isn’t the only alternative. I guess “bailouts for everyone” would also be responsive to Matt’s complaint. If he wants to say “we should to what needs to be done (bail out the financial system), plus do what feels right (bail out other debtors who do not pose a risk of financial system collapse)” then he should make that argument.
Bob Oso Says:
September 22nd, 2008 at 11:49 am
Isn’t the whole “give us the $ or the whole system will fail” just a threat? Sounds like the only ones who say the entire system will fail without the bailout are the ones who want the money.

No doubt there were be systemic pain but do your really think the failure to bail these guys out will result in financial armageddon with cats and dogs living together? What about the systemic pain that our children and grandchildren will feel when they have to pay for this? Seriously, are we just printing T-bills now 24/7?
kafka Says:
September 22nd, 2008 at 12:17 pm
“2) It will force a lot of those Democratic voters to ask why they should even bother to go to the polls — and to ask whether they should vote for Ralph Nader if they do.”

That’s exactly what I’m going to do if this bullshit goes down.

The only bailout I’ll accept is one paid for by the same pond scum who profited all these years from creating this mess.
Tel Says:
September 22nd, 2008 at 1:01 pm
kafka – the thing is, it’s not just the Wall Street types that were profiting. It’s everybody who took on a risky loan, everybody who sold a house at an inflated price, everybody who bought a house at an inflated price, everybody who maxed out their credit cards and HELOC’s and didn’t have any savings (even back before the gas prices spiked). Yeah, the Wall Street guys were greedy and stupid. They were willing to look the other way and not manage their risk as long as the profits kept rolling in. That ought to be punished, and severely. But this whole mess couldn’t have happened if millions of other people hadn’t been engaged in risky, greedy, and stupid behavior. I can say that since I’m not running for office – most people (me included) don’t like being told when they’re behaving like a pack of idiots.

I honestly don’t know how we could separate out all of the blame. I guess that in a perfectly just world, Ralph Nader, Ron Paul, and a minority of other folks wouldn’t have to pay anything back. But with what we have now, it’s looking to me like it’s a collective responsibility. I don’t like the idea of that big of a bailout, but it seems like the least bad way of moving forward.
Don Williams Says:
September 22nd, 2008 at 1:34 pm
Re Tel’s comment ” it’s not just the Wall Street types that were profiting.

It’s everybody who took on a risky loan,
everybody who sold a house at an inflated price,

everybody who bought a house at an inflated price,

everybody who maxed out their credit cards and HELOC’s and didn’t have any savings (even back before the gas prices spiked).”
———–
I’m curious — how did the people who bought houses at inflated prices PROFIT?

How did people who got enslaved by the credit card loan sharks PROFIT?

And the Middle Class worker who sold a home at an inflated price –but then had to sink all the profits into buying a replacement home at an inflated price — how did he PROFIT?
James Gary Says:
September 22nd, 2008 at 2:15 pm
And the Middle Class worker who sold a home at an inflated price –but then had to sink all the profits into buying a replacement home at an inflated price — how did he PROFIT?

Well, someone else on this blog suggested that the worker got to live for a while in “more house than he could afford.” Don’t ask me what that’s supposed to mean.
Tel Says:
September 22nd, 2008 at 2:25 pm
The people who bought at the over-inflated prices did so on the assumption that they’d be able to sell the house at an even more inflated price than what they’d bought it – or they were too foolish to figure out just how much it would cost them. They gained by getting to live in a house they “owned,” rather than renting or paying a more reasonable price for a house that wasn’t quite as nice. The last ones who bought were the ones caught holding the bag when the whole house of cards collapsed. If they can afford the payments (that is, if they were being financially responsible about the loan to begin with) they’ll recover, assuming they stay in their house until a good bit of the principle is paid off. If they

The Middle Class worker who sold an inflated home, only to buy another, gained by getting a “nicer” house at an equal price. (Otherwise, why would he have sold?)

The people who maxed out their HELOCs and their credit cards gained by getting – well, whatever they used that credit to buy. They made up the cash when they flipped, securing their gains; or they got caught holding the bag when everything crashed.

The people who got enslaved to the credit card sharks, I have a lot more sympathy for them. They were still foolish, but on a much smaller and less malicious scale. The harm done to them was a whole lot more than the stress they put on the rest of the system. I’d put the card sharks pretty high on the list of “people who ought to pay,” just for shameless exploitation alone. That still leaves open the question of just how the poor are ever going to qualify for credit for things they actually do need. If I knew the answer to that one I’d be running for office instead of posting here.
Nick Says:
September 22nd, 2008 at 2:46 pm
I need 70,000 dollars.

Thanks,
Nick
JOhn I Says:
September 22nd, 2008 at 11:20 pm
#10 Tyro: Absofrikkenlutely.

And it’s not like there aren’t well-connected individuals on the other end of the holes scooping up yer hard earned cash. Every dollar “wasted” on no-bid contracts, bailouts, “lost” pallets of cash, failed reconstuction projects ends up making somebody rich. There’s got to be a tipping point where the propaganda gets overwhelmed by the plain facts in front of your face. Seems we may be moving ever so slightly towards such a thing.
StJoe Says:
September 22nd, 2008 at 11:56 pm
Tel, you are really stretching to try to make your equal-opportunity brand of self-righteousness work here. I can’t see how you can paint borrowers with the same brush as high-risk investors. Investors used beyond-maximum leverage to inject huge degrees of risk into the financial system for the prospect of huge profit, and did so as the market actors in the best possible position to understand those risks. Homeowners who refinanced (who make up nearly 2/3 of the subprime market) were making last-ditch efforts to preserve their economic stability amid rising costs of living, stagnant wages, and record levels of debt. If you have sympathy for credit card debtors, I can’t see how you wouldn’t have the same attitude towards distressed homeowners on principal. Precisely because they were in dire straits, they were vulnerable to being sold unjustifiably costly credit that was inherently dangerous to their solvency, lead to tremendous broker and original lender profit, and was made by lenders without regard to how it would affect the homeowner, the markets, or the investors up the securitization stream. Look up the term “yield spread premium” to see one example of why this market barely deserved to be called such, because it rarely provided products of actual value to consumers at competitive prices.

The other piece of the subprime pie, purchase money borrowers, are perhaps less symapthetic. But unless they were real estate investors not planning on using the property, they still end up taking a hit on finance charge and interest paid on excessively costly loans made with inflated principal. There is simply no way to square the circle by arguing that buying a home at a higher price is somehow of benefit to a home buyer. An inflated appraisal is fraud and in a courtroom it would give rise to damages based on the fairly assessed value and the purchase price.

It’s not greedy risk-taking if you never had any chance of profiting. It’s not greedy risk-taking to do what you think you have to do to survive. You want irresponsible greed, then look to the people who made money on these schemes: mortgage brokers, mortgage lenders, and investors who got out before it all exploded. Homeowners manifestly are not beneficiaries of the crisis, and never had any real prospect of benefitting. The entire system of “asset-based lending” disregarded homeowner interests by design.
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Matt Yglesias

Small Enough to Fail

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