Tuesday, November 25, 2008

Calling All Commonsense Economists

The government "rescued" Citigroup. Have you noticed how we hear about the "Government" doing it when they want to spend really big bucks, but that it's the "taxpayers' money" when they don't think it's prudent (i.e. the automakers)? It reminds of Caesar's clever use of the passive and active voice. And never mind that the government is not doing at all what the citizens want done with their money. (Pausing to catch my breath.) I suppose there's no use getting riled up over another issue, when I already intend to get riled up over another. On to the point...

What would have happened if they let Citigroup fail? I'm still confused about why their response is better than letting the company go under.

I would think that if Citigroup failed, then the company would go bankrupt, all of the employees would lose their jobs, and stock investors would lose their money. But what about all the bad assets it holds? Would the people with mortgages get away scott free? I mean, if I understand this mortgage thing right, then Citigroup already paid the home seller, and the buyer is now paying Citigroup. Is there another company Citigroup borrowed the money from? If so, would the mortgage holders begin paying them? Or would they have a free house? And if they did, would that solve some of the "problems" the government is trying to tackle with the housing industry?

I may be ignorant, but I am willing to think about these things.

Despite all the details of the situation, I still don't understand how it will help the economy to give Citigroup billions of dollars that don't actually exist, but which somehow will be taken from the taxpayer, so that some people don't lose their jobs. Doesn't that make the situation worse by taxing the person you want to spend money, and enabling the companies who enabled consumers to overextend their credit, causing this whole mess? All to save some jobs?

Ah, yes. There is the stock holder. The Common Man. The Man Who Needs Protection from Everything. I suppose they believe that it is imperative that he not lose any of the money that he willingly invested, knowing full well the risks involved?

Still.

Where's the silver lining? It'd better be good.

2 comments:

Norman said...

Not sure if you wanted commentary from an academic economist (as opposed to the commonsense variety), but here are some thoughts.

Citigroup borrows money from other banks, so if Citi filed for bankruptcy, their "assets," including the bad mortgages, would be sold to cover the debts. Letting the company fail would not remove the bad debt from the system.

The problem with letting major banks fail is the risk of panics. If people see enough big banks fail, they won't believe their own banks will survive. If people rush to get all their money out before their own bank fails, the bank will fail (even if it has no bad debt). The whole goal of these "rescues"/"bailouts" is to avoid panic.

Doesn't mean it's the best idea, just that the people making these plans aren't completely stupid or evil. Which unfortunately isn't easy to tell these days.

Love to talk about this more, if you're interested.

Kelly said...

Is panic the only problem? Huh. That's interesting that all of this is happening because of the danger our emotions pose.

What if we panic, take all our money out, bury it in our backyards, and the banks fail?

I guess I'm showing my Laissex-Faire colors? I'm not set against intervention or regulation, just don't see the reason or principles behind it.