Here's another Socialism Unbound post from Bloomberg. I don't see government intervention as the problem. The idea that the Democratic Party could stomach an enormous intrusion of the government into our lives is bogus. I, being a good Burkean, fear social unrest and revulsion with the whole political culture, leading to God knows what:
"By Simon Kennedy, Matthew Benjamin and Rich Miller
Dec. 22 (Bloomberg) -- What’s good for General Motors may not ultimately be best for the global economy.( DO TELL )
The Bush administration’s $13.4 billion rescue of GM and Chrysler is a fitting finish to a year in which governments around the world expanded their role in the economy and markets after three decades of retreat.( WHAT WAS THE S & L CRISIS? A SKIRMISH? HOW ABOUT MILITARY SPENDING? AND THE LOSS OF INDIVIDUAL RIGHTS IN THE LAST EIGHT YEARS? THAT CAN EFFECT THE ECONOMY. HOW ABOUT BUSH'S SPENDING AND THE DEBT AND DEFICIT OVER THE LAST YEARS? NO EFFECT ON THE ECONOMY? )
The intervention comes at what may prove to be a steep price. Future investment may be allocated less efficiently as risk-averse politicians make business decisions( AS COMPARED TO WHAT? COWERING BUSINESSMEN AND BANKERS? ). Whenever banks decide to lend again, they are likely to find new capital requirements that will curb how freely they can do it( IF GOVERNMENT GUARANTEED. THEY CAN ALWAYS CUT THEMSELVES LOOSE ). Interest rates may be pushed up by government borrowing to finance trillions of dollars of bailouts( TRUE. I APPROVE ).
“We’re seeing a more statist world economy( WE'RE SEEING A SHIFT IN POWER IN THE WELFARE STATE SO FAR. NOTHING MORE ),” says Ken Rogoff, former chief economist at the International Monetary Fund and now a professor at Harvard University in Cambridge, Massachusetts. “That’s not good for growth in the longer run( THAT DEPENDS. DO YOU INCLUDE CRISES LIKE THIS ONE AS THE PRICE THAT YOU HAVE TO PAY? IF SO, LET'S DO THE MATH, AND NOT ASSUME ANYTHING ).”
It’s not good for stocks either, says Paola Sapienza, associate professor of finance at Northwestern University’s Kellogg School of Management. Slower economic growth means lower profits( HOW PROFOUND ). Shares might also be hurt by investor uncertainty about the scope and timing of government intervention in the corporate sector( THAT'S WHAT CAUSED THIS CRISIS. AN APPLICATION OF BAGEHOT'S PRINCIPLES SHOULD CLEAR THAT UP ).
“If the rules of the game are changing, people are reluctant to invest in the stock market( TRUE. SO PUT IN BAGEHOT'S PRINCIPLES, AND STOP FOOLING AROUND LIKE THE BUSH ADMINISTRATION. ),” Sapienza says.
Record Lows
The bond market will also be affected as it is forced to absorb ever bigger increases in government debt. While yields on Treasury securities touched record lows last week, they eventually “will go up significantly and dramatically” under pressure from added supply( I'M A BIT WORRIED ABOUT THIS ), says E. Craig Coats, co-head of fixed income at Keefe, Bruyette & Woods Inc. in New York.
The increase in the government’s role in the economy has been breathtaking( PLEASE COMPARE IT WITH THE FRAUD AND STUPIDITY IN THE PRIVATE SECTOR ). The U.S. looks set to rack up a budget deficit of at least $1 trillion this fiscal year, while the Federal Reserve has already increased its balance sheet by $1.4 trillion since last December. By way of comparison, U.S. gross domestic product last year was $13.8 trillion.
Winding back the intervention may not be easy( OTHER ACTIONS, LIKE NATIONALIZATION, WOULD HAVE MADE IT EASIER ), says Sapienza, who has studied the effect of government ownership on bank lending.
When Italy nationalized banks in 1933, “the architects who designed the system envisaged it as temporary,” she says. “It was in place until the end of the 1990s.”( THAT WAS ITALY ) More recently, the Japanese government injected capital into banks to get them to lend to big corporations, keeping alive( BAGEHOT'S PRINCIPLES WOULD WEED THEM OUT LOVE ) “the zombie companies that economists talk about,” she says.
Investors ‘Gambling’
Already, investors trying to decide where to put their money are “gambling very much on what they think the government will do, not what they think about the company,” Sapienza says. “That’s why there’s so much volatility.”( TRUE. AND? )
GM shares plunged as much as 37 percent Dec. 12 after the U.S. Senate failed to pass an emergency loan plan( CAN YOU SAY IMPLICIT AND EXPLICIT GOVERNMENT GUARANTEES TO INTERVENE IN CASE OF A FINANCIAL CRISIS. THAT'S WHY THE BIG THREE ARE ASKING. THAT'S OUR SYSTEM. ). The shares recovered after George W. Bush said his administration would consider funding a rescue with money already set aside for bank bailouts, then shot up 23 percent on Dec. 19 when he announced the emergency loans( THAT'S BECAUSE THE GOVERNMENT INTERVENED. DO THESE INVESTORS SOUND LIKE CATO SCHOLARS OR REASON EDITORS? ).
The auto-industry lifeline is just the latest in an extraordinary year of market interventions that have redefined capitalism( PLEASE. WE HAVE OUR OWN VERSION OF THE WELFARE STATE. IT'S A HYBRID ). The U.S. government previously seized control of mortgage lenders Fannie Mae and Freddie Mac and insurer American International Group Inc. and took stakes in the nation’s largest banks.
‘Necessary Evil’
Government activism has become a “necessary evil”( ON THE CONTRARY, IT'S THE UNDERPINNING OF THE SYSTEM. EVIL WOULD BE DEALING WITH THIS MESS ON YOUR OWN ) to help pull the global economy out of recession, says Marco Annunziata, chief economist at UniCredit MIB in London. Even Bush, who ran for the U.S. presidency espousing smaller government, agrees. He told a CNN interviewer last week he has “abandoned free-market principles to save the free-market system.”( BUSH! HE EPITOMIZES THE CRONY WELFARE STATE. HE COULDN'T FIND A FREE MARKET EVEN IF HE SAT ON IT)
Policy makers elsewhere extended their reach, too. The U.K. nationalized mortgage lenders Northern Rock Plc and Bradford & Bingley Plc. French President Nicolas Sarkozy created a 6 billion-euro ($8.7 billion) fund to invest in “strategic” firms. And the European Commission last week relaxed rules on state aid to businesses.
It isn’t inevitable that bigger government will hamstring free enterprise, says William Niskanen, chairman emeritus of the Cato Institute, a Washington research group that generally favors free markets over government solutions. Niskanen predicts that government intervention will prove to be “selective and temporary,” not “a long-term trend.”( THANK GOD THERE'S ONE SANE MAN IN THE ROOM )
Shy Away From Lending
Still, greater government involvement will make businesses less likely to deploy( I'VE BANNED THE USE OF THIS TERM ) capital in ways that spur growth and profits, says Eric Chaney, chief economist at AXA SA in Paris and a former official at the French finance ministry. Carmakers may be slower to innovate or cut costs, and financiers may shy away from lending to entrepreneurs.( MOTHER MAY I? AND THEY MIGHT NOT )
“It’s the job of companies, not governments, to take risk and accept the consequences,” Chaney says. “There is no incentive for governments to take risk, so they won’t.”( WHAT ARE WARS? )
The history of public aid to automakers highlights the threat, says Stuart Pearson, an analyst at Credit Suisse Group in London.( WE GET IT )
While the U.S. rescue of Chrysler in 1979 gave then-Chief Executive Officer Lee Iacocca time to streamline the company and restore profitability, it also sustained an outsized U.S. auto industry, leading to its current woes( THERE WERE PLENTY OF IDIOTIC DECISIONS IN THE INTERVENING YEARS ), Pearson says. The 1975 bailout of British Leyland Motor Corp. ended up costing U.K. taxpayers 11 billion pounds ($16.8 billion) and failed to keep successor MG Rover Group Ltd. from sinking into bankruptcy two decades later.
Help, Obstruction
“Government help has only been an obstruction to getting the car industry into a more economic shape,” Pearson says.
Back in 1953, when the industry was booming, GM Chief Executive Officer Charles Wilson famously observed: “For years I thought what was good for our country was good for General Motors and vice versa.” If the automakers’ importance has declined, so -- until recently -- had the government’s.
Just a dozen years ago, U.S. President Bill Clinton declared that “the era of big government is over( HE WAS CORRECT. HE MEANT A CERTAIN IDEAL OF THE GOVERNMENT INTERVENING EVERYWHERE ).” Sarkozy won election last year promising a “rupture” from France’s history of heavy regulation; these days, the French president has changed his tune. “Laissez-faire( WHAT'S THAT? COME ON ), it is finished,” he declared last month.
Role of Government
Until recently, “investors could, broadly speaking, ignore the role of the government when thinking about markets” says Alex Patelis, chief international economist at Merrill Lynch & Co. in London. “This period is over.”( ABSOLUTE ROT. DIDN'T YOU JUST PROVE THAT INVESTORS WERE BANKING ON A BAILOUT FOR THE BIG THREE? WHAT WAS THE REACTION TO LEHMAN? )
Regulation is back in style as policy makers seek to avoid a repeat of the financial crisis. Leaders from the Group of 20 nations are crafting a plan to require banks to maintain higher capital levels and disclose more about their holdings.( MAYBE THEY WON'T MAKE A PIG'S BREAKFAST OF IT THIS TIME )
That likely means a lower “speed limit for growth( POSSIBLY WITHOUT WRECKS ),” as banks have less cash available to lend and invest, says Mohamed el-Erian, co-chief executive at Pacific Investment Management Co., the Newport Beach, California-based manager of the world’s biggest bond fund.
“There will be less lubrication( DON'T USE THAT TERM ) in the form of credit creation,” he says.
Bailouts and economic-stimulus plans are also running up government borrowing. Economists at JPMorgan Chase & Co. estimate( THEY COULDN'T ESTMATE MY ANGER ) the budget deficits of developed economies will more than double next year to 6.3 percent of gross domestic product.
Higher Taxes
Bigger deficits, while necessary now, could spell trouble down the road if they lead to higher borrowing costs or prompt consumers to save more now on the assumption that bigger shortfalls will mean higher taxes later( RICARDIAN EQUIVALENCE ).
“We’ll end a financial crisis with a fiscal crisis,” says Vito Tanzi, former director of fiscal affairs at the IMF. “We’ll get out with very large public debt and very large public spending. That, for sure, will slow down the rate of growth for the next 10 years or so( PREDICTION GOOD WITHIN A CENTURY ).”
While bigger government is the unavoidable result of dealing with the turmoil, “it makes all of us economists uncomfortable seeing the government doing all these extraordinary things( THAT's ACTUALLY A GOOD SIGN ),” says Barry Eichengreen, an economics professor at the University of California at Berkeley.
On the other hand, he says, “I would feel even more uncomfortable if they weren’t doing them( JOIN THE CLUB ).”
Niskanen made the most sense. I simply say that the real threat would be social, and, as of now, we're far away from that.
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