Debt ceiling prediction

The presumably upcoming vote on raising the debt ceiling is the big news story of the US today. Personally, I think they should just go with an up and down vote, but there is all these messy fights about wanting to attach conditions to the debt ceiling. Despite the ugly political fights, however, I have a feeling that things will go like this:

  1. The August 2 deadline will continue to approach, with no end in sight to the debt ceiling fight. In fact, Republicans will make increasingly outrageous demands, making it seem even more likely that the United States might default on part of its debt.
  2. With the huge amount of uncertainty and fears of a default by the United States government, the stock market will plummet drastically near the August 2 deadline.
  3. Goldman Sachs will make a killing with all the shorts it would have made. Right before the deadline, they will also buy up a whole lot of stock at rock bottom prices.
  4. In a dramatic vote immediately before the deadline, Congress will agree to raise the debt ceiling. Republicans may or may not be trying to deliberately cripple the American economy for working class people for their own political benefit, but they would never be allowed to actually block the raising of the debt ceiling. Goldman Sachs might like destroying parts of the economy to gather wealth from shorts, but even they might balk from a default which could threaten the wealth of even the incredibly rich.

But what do I know? I'm just a poor, cynical guy with no first-hand experience with the inner workings of any political or financial system, who probably has no idea what he is talking about.

Capitalism as a description, not an ideology

Sometimes when I am talking about economic systems with other people, it often feels as if we're talking past each other. With capitalists, often the standard answer is that the free market will take care of a problem, with very little details to back it up. With communists, capitalism is often talked about as a great evil and that the ideal economic system would have no element of capitalism included, also with very little details to back it up. Needless to say, I don't agree with either camp.

Continue reading "Capitalism as a description, not an ideology"

Failure of the bailout

The $700 billion bailout bill was supposed to save the economy from collapsing into ruin. While I had a bad vibe from the bailout bill because of the huge debt it incurs on the federal government and what it could incur, not to mention the moral hazards, it now seems that it isn't even accomplishing what it's supposed to be doing.

One of the things the bailout bill was supposed to do was to prevent large financial institutions from collapsing and taking some wealth from everyone with them. But the much more important and relevant function was to get them to make loans and investments again so that corporations in other industries can get the day-to-day capital they need to maintain their businesses. If this latter goal isn't achieved, then there isn't really much point to the financial bailout bill.

But it's failing miserably. Not only do we hear all the grumblings that the required loans aren't being made and the credit markets are still largely frozen, but we also have a vivid example of its failure with the attempted automaker bailout. If it was working, why are the automakers asking the government for loans? They should be asking the banks! Either the bailout bill is failing miserably to achieve its most important goal, or the automakers know that they can't pull the wool over the banks' eyes so they are trying to pull it over the public's.

Whether to bail out auto companies

American automakers seem to be begging for financial assistance from the federal government. Given the large number of people involved in the automobile industry, it's understandable that many people want to bail them out from possible bankruptcies. I have a different opinion. Given their historical performance in recent decades and their reluctance to change anything, I think they should weather the economic downturn on their own.

Unless they can put forward a viable and concrete plan to change their fortunes without outsourcing everything, putting up dozens of billions of dollars worth of loans may be throwing good money after bad. Unfortunately, the leaders of these companies have mostly focused on threats about what would happen if they went bankrupt, rather than outline changes in long-term policies and priorities that would change their fortune. A lot of people are afraid that the companies might go under, but it looks like they've been consistently self-destructing, anyways. It might be a lot better to put the money into infrastructure investments that will pay off economically instead of wasting it on drowning companies that would go bankrupt whatever we do.

It's a good sign that Democrats are now starting to think the same way, although I think they're still giving the auto industry too much benefit of the doubt with the way they're so eager to help the companies. However, I'm not sure it's a good sign that I'm actually agreeing with the Bush administration on this issue ...