What is good? What is bad?

Hehehe, just noticed it

Well, back on topic, I missed the opportunity for now. With the government rescue most shares are going up, and I usually buy when they are going down. However, several analysts are saying the crisis won't be solved by just nationalizing debts, and that it will come back stronger.

If harm occurs, then the harmed party does have legal recourse.

So governments failing at their one major purpose should be resolved by governments taking on additional tasks? How about fixing the court system first? Clearly, if there are enough resources to police industry, there are enough resources to instead allow for redress.

How do you get harmed "indirectly"?

The local stores going bankrupt doesn't cause the stores or their merchandise to disappear. The creditors now own them. Typically, they will auction them off for the proceeds.

Couldn't the community manage to get enough money to buy those assets at a greatly reduced price of a bankruptcy auction?

If not, then clearly the store wasn't profitable and couldn't be profitable.

If someone wants to donate their money in the form of a store, that's their prerogative. They can do that if they want. Is the community "harmed" when the generous person runs out of money?

Should taxes be levied on the already poor population (the one that couldn't afford to buy up the store at a discount) to keep the store running?

Or should the store be restructured into a more (economically) efficient store, that would be profitable?

Conflict of interest is a great reason why the government shouldn't be in the business of regulating the economy, or performing bailouts. I agree, it's time for a change of guards.

Did they spend their own money? If so, how is that a problem? If not, then why would their creditors even loan them money? There are huge pieces missing in your puzzle.

Does taking a car inssurance policy cause you to drive worse? Why not? That's basically what you're arguing.

If the ratings were done by the buyer, then tough luck if you trust some new financial instrument. Except the ratings were paid for by the sellers. Surely there's no conflict of interest there.

Why do you assume that shells would be used? Perhaps paper currencies or credit money would be preferred? Why should currency be mandated from above? Why should currency be infinitely inflatable?

Gold was being used not because of government mandate, but because it fits all the necessary characteristics of money (which, btw, US dollars and the vast majority of currencies do not).

Intrinsic value is not a requirement of money.

As to your quote, you forgot that all money have the exact same characteristic. As available goods are reduced, the cost of the remaining goods go up, which makes each incremental unit of money worth less. It's called Supply and Demand.

Business cycles do not require bubbles, and bubbles are not necessarily effects of business cycles.

Sometimes, they occur simultaniously, but not always.

So in the most ideal cases, they benefit some subset of society while costing everyone at the same time. Great.

In case you haven't paid attention in the last 70 years of governments, wise spending of other people's money just doesn't happen. The US Constitution limits the powers of congress exactly for that reason.

I've just shown in my other post why this isn't possible. If the project was useful enough to be profitable, then it would have been done by the private sector. If it hasn't, then (Barring technological issues), it's because they're not profitable, and thus require more capital to be expanded than valued goods would be formed.

The fact is, governments are simply incapable of performing economic calculations because they are not spending their own resources: on shortfalls, they just tax more (or inflate - same thing).

No, and that's the problem. The deregulation causing the destruction of the Glass-Steagall act enabled savings banks and investment banks to merge. This meant the risks being taken on through shaky mortgage backed securities whose real risk was obscured through repackaging along with the inflation of house prices were being backed up by regular depositors money. Be sure to thank Phil Gramm (McCain's financial adviser) for that one.

Not quite - the risks of buying the insurance on the bad mortgage debt were understated, and compared to the phenomenal rates of return on them during the housing boom, investors and speculators flocked to them.

Except it's not just tough luck for a couple speculators. The market for all the funny investments is in the trillions of dollars.

Not every project is going to benefit everyone simultaneously. That's an unrealistic expectation. Over the long run, good government benefits everyone.

The profit of government comes from the consolidation of necessary major social works that need large scale organization that the private market can not readily provide. Also, government is a willing participant in the free market as well, taking bids on contracts with the private sector. Do you honestly think society would be better off with no government services whatsoever except that provided by supply and demand?

And if anyone wants to argue that the basis of Fannie Mae's existence was flawed to begin with, consider how well it worked for a long time before the deregulation came around :
From The Bubble Economy
<quote name="the section on "Repealing Roosevelt"">

The New Deal devised the modern long-term, fixed-rate, self-amortizing mortgage. Congress created the Federal Housing Administration to insure these mortgages and win their acceptance among lenders. It also created the Federal National Mortgage Association to sell bonds and buy mortgages, and thus replenish the funds of local lenders. And the New Deal devised a system of federal home loan banks to supervise and advance capital to savings and loan institutions. Deposit insurance was extended to government-supervised mortgage lenders.

The system worked like a watch, combining sound lending standards with expanded opportunity. The rate of home ownership rose from 44 percent in the late 1930s to 64 percent by the mid-1960s. Savings and loan associations almost always ran in the black, there were no serious scandals, and the government deposit-insurance funds regularly returned a profit.
</quote>

Interesting that you bring up the Glass-Steagall Act. Which one are you referring to?

The 1932 Glass-Steagall Act allowed for banks to legally create (more) money by loaning out a far larger fraction of deposits, by allowing for more types of deposits to be used as reserves in the Federal Reserve.

Glass also pushed for measures that worsened the stock market bubble in 1928: taxing stocks held for less than two months at a greater rate than those not, encouraged stocks to be held on for longer than needed. See Irving Fisher, The Stock Market Crash for details.

Something tells me Glass and Steagall weren't looking out for you and I. But anyway, let's address the second act, since that's what you're referring to.

The 1933 Glass-Steagall Act is the one that added a "firewall" between underwriting securities and loan facilities. Incidentally, that act also created the FDIC, which ensures depositor's money with taxpayer funds.

Except this firewall was in name only. Bypassing it was shown to be not difficult. The Morgan Bank thrived on this, especially considering the other parts of the Act. The repeal of a portion of a the Glass-Steagall act merely formalized what was already established.

Moreover, the FDIC (which is still around), allows for banks to take virtually unlimited risks with depositor's money; they are effectively backed by the government. What's the downside?

Did the insurer understate the risk, or the insured? If the former, then the receiver of the swaps isn't doing its due diligence. When you make a bad bet, should it surprise anyone that it goes bad? If the later, well, that's just stupid of them.

So the providers of insurance fail. Isn't that what's supposed to happen? After all, there has to be a downside. Otherwise, insurance would be the best business to be in.

If the insurance company is also the local grocery store or the bank, well that's too bad. When they go bankrupt, someone can pick up the remaining bank and store assets and keep those parts of the business running.

Well, it's tough luck for a lot of speculators: people like you and I who bought houses during the mania were largely speculating. That's the basis of taking a mortgage, after all. Or HELOCs. Or flipping.

Why are housing speculators any less greedy and evil than (say) oil speculators?

"That government is best which governs least" - Thomas Paine (also attributed to Thomas Jefferson).

If "good government" means "public works projects" or "social welfare", then no, it does not benefit everyone on the net. In fact, the only benefactors are the winners of the government contracts. Taxpayers are the losers, since they're funding an unprofitable venture.

What resource of its own do governments have that they can commit to such projects? Whatever they do have (SPR, various land, parks, etc), they're not committed to projects. Instead, taxpayer money (or newly created money) is committed instead.

Since it's not their money, there is no incentive to spend it wisely, and plenty of incentives to misspend it. Which politician doesn't want to be known as someone who is "helping the poor" and "thinking of the children" after all?

Moreover, since the money is effectively indefinitely replenishing (if there's a shortfall, just raise taxes or print more), economic calculation becomes impossible. (Edit: there is no competition, so no market prices for the goods / services produced, so you can't tell if there is a better use of your resources).

If you're going to retort that only selfless and intelligent politicians should run for office, then I agree! But let's face it: this isn't the case today, and in fact has never been the case.

An interesting question to which I have not yet formed an opinion. It's the difference between Libertarianism, Anarcho-capitalism and Minarchism.

Clearly, some protection of property rights and a mechanism for redress of grievances is required. It's not clear that a monopoly on force is fundamentally required though.

It would make for an interesting social experiment.

Three interesting points to be made about this:

1. Why pick the bottom of the Great Depression as the starting point? Just a few years earlier, the homeownership rate was 48% in 1930. Unfortunately, data for past years doesn't seem to be readily available.

2. Government guarantees of mortgages through the FHA? Sounds like free money to me. Why wouldn't anyone go for it?

3. Correlation != Causation. Once Fannie Mae and Freddie Mac were spun off from direct Federal control with less guarantees, the home ownership rate increased even more, to a peak of 69%.

Perhaps productivity improvements, allowing for higher real wages for most of the population, was the real reason for the increase in home ownership.

Edit: Clarified the economic calculation problem. I skipped a step I shouldn't have. Sorry for potentially confusing would-be economists.

The latest news inform the Congress is going to delay the rescue. This means markets will go down again. Democrats say they should get help from other countries to solve the issue, while everyone expects US to solve it alone. USD 700 billion (or in our numbers, 700,000 million) is a pretty big amount of money...

None of the rhetoric means anything at this point. Wait and see if it's passed by Friday, then we'll know if the politicians are serious about what they're saying or simply posturing for the upcoming election.

I say they should start criminal investigations on wall street. Throw these mother f*ckers into jail.

Ben Stein has a good article about the root cause and how it's grown unexpectedly: commoditized mortgages.

http://finance.yahoo.com/expert/article/yourlife/109609

I just watched Mr. Bush on CNN. He said not approving the economic plan would "put the country on the road to a long and painful recession.". I guess we are still not in a recession, huh?

Approving the plan will put the country onto an even longer and more painful recession

The problem is that the government should not go bankrupt, and they would do (everyone would do eventually) if they participated in a truly free market.

(Edited: And talking about bankrupt, there goes Washington Mutual. They fall like flies!)