[Vision2020] Why are we bailing out all these large corporations?

[Andreas Schou]

On Wed, Sep 24, 2008 at 7:43 AM, Paul Rumelhart <godshatter at yahoo.com> wrote:
> Andreas,
>
> What are the consequences of doing nothing that I hear mentioned a lot in
> passing but which are never laid out?  Will we really take down our economy
> and start harming the global economy if we don't do something?

What they're worried about is a complete lockdown of banks' ability to
extend short-term credit, followed by a lockdown of the banks' ability
to extend long-term credit. Everyone wants to gather as much cash and
T-bills (which are as good as cash) as possible; everyone wants to
sell risky assets. No one wants to borrow; no one wants to lend.

This freezes up the entire credit system, and probably, incidentally,
kills some banks, because banks have a tendency to borrow short and
lend long. If they can't roll over their loans, they grind to a halt.

The credit freeze is way worse than it sounds. The economy largely
operates in a prospective rather than a retrospective basis: people
buy things with chunks of money and then pay in installments, rather
than build up a chunk of money in installments and then pay all at
once. This makes a lot of sense for large assets like cars,
refrigerators, houses, et misc: it allows people to make gainful use
of the asset, and thus cause the asset to produce value, before they
otherwise would have been able to. Without access to credit, things
like cars and houses don't get bought, because people just can't buy
them in cash. Which means that the sectors producing and selling them
take a hit.

I'm unconvinced, given that Warren Buffet is throwing five billion
dollars at a financial services company, that it's going to be as bad
as all that*. But that's the theory.

-- ACS

* Of course, the cynic in me thinks that Buffet may just be taking his
place at the federal trough. But that seems like a risky bet, given
that the Bernanke/Paulson proposal appears to be DOA.