Fire and Knowledge

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This “moral hazard” generates enormous distortions in an economy’s allocation of its financial resources….

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street’s hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

—Jeffrey A. Miron, “Bankruptcy, not bailout, is the right answer” (September 29, 2008)

I want an e-ink writer. I want it to have a large screen, like Plastic Logic’s E-Ink Reader (shown to the right). But it needs to have a on-screen keyboard with some kind of tactile feedback — I’d be happy with a laminate overlay until they get that technology worked out. And of course it must have a full-featured word processor, as well as the ability to create and edit blog posts.

Most of all, I want to write on something that doesn’t give me a headache. Who wants to stare at a backlit display for reading or writing?

The technology exists for this, but it hasn’t been created yet.

I’m waiting.

I have been thinking a lot about food lately. This is because I am not getting any. My wife, you see, recently put me on a diet. It is an interesting diet of her own devising that essentially allows me to eat anything I want so long as it contains no fat, cholesterol, sodium, or calories and isn’t tasty. In order to keep me from starving altogether, she went to the grocery store and bought everything that had “bran” in its title. I am not sure, but I believe I had bran cutlets for dinner last night. I am very depressed.

—Bill Bryson, I’m a Stranger Here Myself (Broadway Books: 1999), p. 222.

How do senators do their jobs and still have the time to campaign around the country for a year?

It’s amazing how someone’s IQ seems to double as soon as you give them responsibility and indicate that you trust them.

—Timothy Ferriss, The 4-Hour Workweek (2007), p. 106.

A computer is a stupid machine with the ability to do incredibly smart things, while computer programmers are smart people with the ability to do incredibly stupid things. They are, in short, a dangerously perfect match.

—Bill Bryson, I’m a Stranger Here Myself (Broadway Books: 1999), p. 168.

“I now believe we are in for one hell of a deep downturn,” Welch told the World Business Forum in New York on Wednesday, adding that the first quarter of 2009 will likely be “brutal.”

Until recently, Welch said, he had believed the U.S. economy could avoid recession, but he has changed his mind.

“I am now caving,” he said. “Get ready for real tough times. They’re coming. There is no credit available.” (source)

Ron Paul, economic prophet? He wrote this five years ago about Freddie and Fannie, in September 2003:

The connection between the GSEs and the government helps isolate the GSE management from market discipline. This isolation from market discipline is the root cause of the recent reports of mismanagement occurring at Fannie and Freddie. After all, if Fannie and Freddie were not underwritten by the federal government, investors would demand Fannie and Freddie provide assurance that they follow accepted management and accounting practices.

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans…

Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts….

I hope today’s hearing sheds light on how special privileges granted to GSEs distort the housing market and endanger American taxpayers. Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market.(source)