Alternatives
Posted by Joshua Claybourn on 25 September 2008 | 8 responses
What will $700 billion buy? The South Florida Sun-Sentinel provides some interesting answers. Some examples:
- Gasoline for a year for every adult in America. (175 billion gallons of gas)
- You could literally buy the world a Coke. One 2-liter bottle per week for a year.
- You could buy a 60-inch HDTV for every man, woman and child in the U.S.
- Sounds like Monopoly money? It should. You could buy 10 Monopoly games for each of the 6.7 billion human beings on planet earth.
- You could buy everyone in America 2200 McDonalds apple pies. What’s more American than that?
- You could buy a brand new Hummer for each of the 11 million people on the island of Cuba
- You could buy 2 mountain bikes for everyone in China
- You could buy 438 pounds of rice for every single person in Africa.
- You could buy a Caribbean Island for every single person in the state of South Dakota.
- Entire population of South Florida could cruise around the world continuously for 8.4 months.
I guess that’s what you get when the dollar figure is “not based on any particular data point.” According to a Treasury spokeswoman, “We just wanted to choose a really large number.” Shouldn’t that be getting a bit more press?
I think the Cubans would prefer something seaworthy. Or something that shoots 600 rounds per minute. Or both.
Here’s another alternative: tens of millions of houses for American families who couldn’t have otherwise afforded them. In reality, the housing boom was financed by governments and institutions which saw Fannie, Freddie and MBS’s as treasury bonds with higher yields. To keep everyone with money to not horde their money, we need to pay these back somehow or at least get them off the balance sheet as possible future losses.
Second thing to note is that the government is buying assets. At least initially, this money will add to the government’s assets, not lower the government’s equity. The only way for these assets to become complete losses is every mortgage held in them to default. And Paulson’s goal is to pay as close to possible the current market price for these securities. Although I consider it highly unlikely, the government could make money off these purchases.
Why hasn’t the private market done the same thing? Well, while some companies can take on a portion of these securities, nobody else could take the same downside risk or provide the same liqudity as the government. AIG, for example, was considered a fundamentally healthy company but nobody was parting with enough liquidy to meet their short-term obligations.
Govenment action brought us here but giveenment action also needs to keep money flowing and to stave off a panic. The great depression shows one more alternative to 700 billion dollars.
Matt, I award you no points, and may God have mercy on your soul.
The Great Depresssion is really a bad comparison - the dynamics are very different today. Today’s financial institution failures are caused by those who make reckless subprime mortgages, and those who invested heavily in finaicial instruments rooted in those mortgages. Subprime lending doesn’t have a 1929 parallel.
We also have a housing market whose product has at least quintupled in cost since the 1970s - I remember when the rule of thumb was that you but a home whose value is equal to your annual salary. How in the heckity heck did THAT happen?
The Depression became a depression because of banking collapse. The “first domino” was the New York Bank of the United States, so say Wikipedia and Milton Friedman’s Free to Choose. (Uncle Milty raised the subject to dispute the claim that we inherited a depression from overseas - NYBOUS fell prior to the chain of European bank failures.) The unanswered question is - why?
Sadly, it’s not as easy to find the Depression’s initial causes as it is to find out what exacerbated it - Fed monetary deflation, FDR’s ag subsidies (which inflated grocery prices and reduced food supply), and protectionism on steroids (Smoot-Hawley), for starters. The 1929 crashes seem insufficient cause, looking at this graph; the market recovered in early 1930. Looking at looking at this chart, the July ‘32 crash seems far more significant. But nobody ever talks about Black July.
Re Alan’s second chart: wow the market stunk from 1960-1980.
Yes the market “stunk” 1960-80. That this seems like ancient history is one reason people of different generations have trouble understanding each other’s world views, and thus, many other differences that would stem from that.
That this seems like ancient history is one reason people of different generations have trouble understanding each other’s world views
1960-80 marked the first 20 years of my life. My interest in politics began with the economic liberation meme - Howard Jarvis’ crusade against exhorbitant property taxes in CA, and Reagan’s centerpiece election promise, the 30% across-the-board income tax cut (which got watered down to 25% phased in over three years). The Democrats resisted Reagan’s attempts at spending control more fiercely than the Afghans resisted the Soviet invaders.
Speaking of which…my ideological formative years, the 1980s, were saturated in the Cold War. Remembering how we abandoned South Vietnam during my early teen years, I was pleased to see someone actually fight against the Communists. Reagan sought to out-gun and out-tech the Soviets, and to aid rebellions against Communist hegemony, while much of Democrat leadership fought to preserve Communism in Nicaragua. I cheered Solidarnosc and the Contras. The decade ended in victory for most of Eastern Europe, with the Velvet Revolution, the fall of the Berlin Wall, and the coup in Romania.
My time from ages 20 to 29 was, regarding the top currents events issues of the day, a time of growing optimism. It was a time of increasing economic and political freedom.
Culturally, the nation sucked dirt. We had some marvelous tech advances, and not all of the music was disco, but community was disintegrating and human shallowness choked the cultural landscape like that red weed in H. G. Wells’ War of the Worlds.
How does all that contrast with someone whose formative years were the 1990s or later?
Josh wrote:
Matt, I award you no points, and may God have mercy on your soul.
What was wrong with Matt’s comment? I ask in part because I’m trying to learn some of the economics behind the Wall Street problems and the proposed solutions.
I actually think the fact that the $700 billion being proposed will not actually be given away but used to buy assets whose value almost certainly will not drop to zero, is an important but little-understood aspect of the “bailout”.