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The Law of Money

Nothing has value in a transaction unless all participating parties agree it has value. This is the first law of money, and the reason why bailouts in general are a bad idea. The nation is facing, effectively, four crises at the same time:

1. A general recession of the economy, which boils down to falling production of goods and services, indicating a collapse of consumer confidence;
2. A credit crisis in the banks, as banks are risk-averse to the point that they are making fewer loans and requiring much stricter terms, even from customers who should be considered worth the deal;
3. A mortgage crisis, with high risk of foreclosure and loan defaults; and
4. The major automakers' crisis, as the three largest automakers plea for aid from Congress.

The last one is the real squirrel. It includes Ford, who claimed to need the money in order to survive, but which backed off once it saw the terms Congress would place on the deal, Chrysler which is still partly owned by Cerberus, a company best-known for sucking cash out of companies it owns and which could have infused needed cash into Chrysler but chose not to, and GM, which annual reports for the last three years' running have include material changes of their accounting practices, a proven inability to make a profit off their core operations, and a demonstrated arrogance against admitting that their business model is not only insufficient to their needs, it is causing at least some of their most serious problems. Another point to analyzing these crises, is to understand that they are inter-related; you cannot solve them just one at a time, but on the other hand an effective solution for one of the four crises will improve conditions for resolving the others.

Which brings us back to the first law - something does not have value unless both the seller and buyer agree on that value. And that is the nut to be worked out in the whole mess. For mortgages, after all, part of the problem is that many of the homes in trouble simply cannot be sold for anything like the price of the mortgage. If the people who live in those homes now were to work out a way to pay off those mortgages, they would still lose money because the homes' present value is less than the amount they paid. Similarly, an objective accounting of the true net value of the car companies would produce a number much lower than the billions they hope to receive from Congress over the next several years (because we all know at some level that this crisis will not be resolved quickly or cheaply, not even at the 50 billion dollar level tossed around not very long ago). The bottom line for both the mortgage and auto crisis, is that someone is going to have to take a large loss. Some want everyone to feel pain to some degree, and of course every special interest group puts out an argument that everyone but them should pay. And of course the most common argument is that the taxpayer should pay, simply because the most money is there, never mind that this argument would have innocents paying off crooks. The essential argument in front of Congress is how to spin this last option. It's the easiest short-term fix, if also the least ethical.


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Comments (10)

So what is your solution? ... (Below threshold)

So what is your solution? Do nothing and watch the country fall into a depression? That didn't work out too well for the country during the Hoover Administration. Why do you think it will work now?

Three trick questions, Blue... (Below threshold)
DJ Drummond:

Three trick questions, Blue, but they are necessary given your comment: What is the difference between a "recession" and a "depression"?

Next, when did the "Great Depression" end? Why?

And last, why do economists take Keynes with more than a grain of salt?

That is actually four quest... (Below threshold)

That is actually four questions but here you go....

What is the difference between a "recession" and a "depression"?


Next, when did the "Great Depression" end? Why?

It ended in the late thirties when the US Government spent a lot of money preparing to fight WWII.

And last, why do economists take Keynes with more than a grain of salt?

They don't.

See how easy it is to answer questions. Will you answer mine now?

If you know the answers to ... (Below threshold)
DJ Drummond:

If you know the answers to my questions Blue - but you're wrong, many economists consider Keynes incomplete at best, and just plain wrong in some respects - then you know my answers to your questions.

Ford did not change their m... (Below threshold)

Ford did not change their mind about needing the bailout money because of the terms. They never were going to ask for it. Mulally went before congress to show a unified front with GM and Chrysler because he knew that due to the realities of the parts supply chain Ford would not survive if the other two tanked (taking down the whole supply chain).

This is not the first time you have unfairly trashed Ford over the last few weeks. Makes me think that either you don't know what you're talking about or you're auditioning for a MSM gig.

Unfairly, Macy? Now you ma... (Below threshold)
DJ Drummond:

Unfairly, Macy? Now you make me wonder if you're a shill for Ford! Just kidding, but geez, it's hardly as if Ford has done a great job running its business.

Bought any Ford stock lately?

No, I don't work for Ford a... (Below threshold)

No, I don't work for Ford and thank goodness don't own the stock either though it may a good buy right now). The company has been poorly run for years with bad product but that was true ten years ago not now. They've been on a new path for several years with strong product and terrific quality. Personally, I believe the only way forward for any of them is to break the union.

The invisible hand of suppl... (Below threshold)

The invisible hand of supply and demand works very well. But on the downside, when we let free markets solve our problems, politicians don't get credit and the news media don't get to write scintillating headlines demonizing corporate executives.

I can't read your mind DJ. ... (Below threshold)

I can't read your mind DJ. Therefore, I don't know your answers to my questions. If you think doing nothing is the right thing to do then just come out and state it plainly.

Blue - "I can't read you... (Below threshold)
DJ Drummond:

Blue - "I can't read your mind". You don't have to, just read your own answers and apply them to your own questions. Neat, simple, easy, accurate. Of course, they are not answers you like or can use to smear President Bush, so that's probably where your mental stumbling is happening.

Tough cookies, hombre.






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