The Crisis of Confidence No One is Talking About
It’s fairly well known that much of the problem we are experiencing in the financial markets is due to a crisis of confidence. Bankers have lost confidence that their loans will be repaid, home buyers have lost confidence in real estate values, investors have lost confidence in the stock market, and consumers have lost confidence in their continued ability to afford the goods and services they wish to purchase. When confidence is lost, we get cautious. This leads to less demand, which leads to lower prices. Credit tightens, stocks lose value, the economy slows. Eventually, confidence begins to build and the process is reversed. There’s nothing new here, especially if you have even a rudimentary understanding of market forces.
Now Congress and the White House have put forward a plan to boost confidence in the financial markets. But their proposed $700 billion bailout bill has hit a snag. Not enough members of the House are willing to vote for the bill because they know their constituents do not support it. Although the President, Treasury Secretary Paulson and congressional leaders have tried to assure the public that the bill is absolutely necessary, that we’re in dire danger without it, and that it will help all Americans, the people just aren’t buying it. But why?
The answer, of course, is the other crisis of confidence brewing in America – the American public’s loss of confidence in their elected and appointed officials. For too many years we have seen our politicians enrich themselves and their friends at taxpayer expense. We have seen our tax dollars squandered on pork-barrel projects, giveaways to those with access and influence, and a war we should never have started. We have seen our hard earned wages confiscated by our government to create government program after government program and we have little to show for it. Waste and mismanagement are the norm.
And we have been directly lied to. We have previously been warned about other crises and that we must give up our civil liberties in order for our government to keep us safe. We have been promised that our government will do the right thing, play fair, and watch out for our best interests. But time after time we have been disappointed. We have seen the hypocrisy, double dealing, and politics as usual practiced by our elected officials.
So now, once again, they say “trust us”, “we need this bailout”, “we will look out for the average Joe”, “this time we will do it right”. But the American people have had enough. They no longer feel they can trust Washington. Whatever little good will was left evaporated along will billions of dollars in investments, much of which found its way into the pockets of the very people who our politicians say we now need to bail out.
Is it any surprise that our members of congress can’t seem to get the support of the people? Is it any surprise that they can’t seem to get their constituents on board with this bailout? Not when you realize that the crisis of confidence that Americans have in their elected officials has been brewing for some time, far longer than the current financial crisis. We simply don’t believe them, and it is their own fault. Our politicians in Washington must take a long hard look at themselves and their actions over the last few decades and realize that they are to blame for this particular crisis. And it is only when Washington cleans up its act that our confidence can be restored. Until then, this crisis of confidence will continue and they will find it difficult, if not impossible, to engender the support of those they are supposed to put first – the American people.
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Comment by endithinks | September 30th, 2008
You can track the loss of belief in government back to the year 1965. If you look at the numbers before that date the trust in government was high. After that number the trust begins to drop very quickly. The book “The Big Sort” explains why our politics is becoming more divisive and it touches on this phenomenon as well.
I would also say that the regular citizen has not done enough research into what this 700 billion bill would do. Most people just looked at the largess of the number and assumed someone wa getting rich by it. The flaw is of course ignorance and I think that is the biggest problem we have here in the states.
People don’t take the time to actually be aware of the challenges we face instead watching four and ahalf hours of television a night. We don’t become involved in our politics until it is an election year of the president and we don’t even know the differences between Sunni and Shia.
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Comment by Josh | September 30th, 2008
I have always valued and trusted your political, social and economic stands. It is great that you are putting it out to the world so everyone can benefit from your opinions. I am looking forward to your website. I am also anxious to see what you think of the mass of confusing propositions that fill our ballots.
Thank you
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Comment by Jason | September 30th, 2008
The 700 billion dollar bailout makes me angry.
But what also makes me angry – sorry, libertarian friends – is seeing the blind faith in the “free-market” that the ideologues in the Republican caucus trumpet all the time. We have seen again and again the effects of laissez-faire freemarket fundamentalism – vast swings of capital, market instability, and an increasing concentration of wealth in the hands of the very, very few.
Trickle-down economics – “voodoo economics” – has never worked – indeed it appears to be more “trickle-up” economics as wealth is transfered from the middle class to the superrich. In the last 7 years, this has become even more disgusting, as Republicans trumpet “free markets” whenever the people seek communal solutions to their very real problems – economy, health care, energy – yet at the same time gleefully shovel money into the hands of their cronies.
There is an underlying reality here – the U.S. economy is vastly overleveraged – at every level from individual, personal finance all the way up to the biggest hedge funds and banks. The credit crisis and the finance crisis is real. In my business – entertainment – the lack of liquidity means that it will be increasingly difficult or impossible to finance films. This means lost jobs, lost opportunities, businesses closing.
We need to address the crisis. But why address it by placing more of our tax dollars into the hands of the very folks who caused this mess? There are better alternatives – though not so palatable to the “free-marketers” on the right, who mostly seem to feel that the only good government intervention is something that enriches their wealthy friends in the finance, defense, oil, and mining/timber industries. These guys are running around howling about removing the capital gains tax – talk about rewarding the fox for eating the chickens!
There are other alternatives – how about stabilizing the underlying mortgages themselves, as Roosevelt did during the New Deal? At the height of the New Deal, the government re-negotiated 1 in 5 mortgages, stabilized the real estate markets, kept people in their homes, and repaired the underlying credit crisis in the economy. Now, the Wall Street bankers don’t like that – they want our tax money so that they can write off the losses of their bad loans, but they also don’t want to give the actual mortgage holders any relief. They want it both ways – your money AND your house.
How about removing the mark-to-market accounting rules? Now, these very same supersmart Wall Streeters LOVED mark-to-market when it allowed them to post vast (and illusionary) profits and collect huge bonuses. It makes me angry that once again we’ll let them have it both ways. But it would be a way to addresses the valuation problem – the fact that right now banks are unwilling to lend because they cannot assess each other’s actual asset basis, since nobody knows what these collateralized mortgage-backed securities and credit default swaps and other exotic financial instruments are worth right this second. Removing mark-to-market would allow banks to record at least some value out of the loans – the majority of which ARE valuable if held to term.
Most of all, this crisis is yet another object lesson – how many do we need? – in the failure of pure free-market economics. Markets do work – well-regulated markets that manage risk, balance innovation and stability, establish rules of fair competition and transparency. Blind faith in “the magic of the market” has destroyed economy after economy all over the world – usually in emerging economies that climb on the IMF bandwagon. Read THE COLLAPSE OF GLOBALISM by John Ralston Saul. Now it is our turn.
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Comment by Heather | September 30th, 2008
Yes, and it is our responsibility to stay informed and to press our representatives to do the right things. This is what our great country is born on, we cannot forget this.
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Comment by madkd | September 30th, 2008
The bi-partisan system is a hangover from the time of the Pony Express, until we have a true multi-candidate system nothing will change. We have developed a political society that insists on culling its heard and getting paid. It’s only about the politics of the issue AFTER it’s been tested to support the bi-partisan stranglehold.
That being said, I can see only two reasons for this urgency and truly don’t know what is the correct path. Trying to ram 700 million down the tax-payers throats practically overnight, is a bit scary. On the other hand, I think they fear that once the package falls into the hands of the “system” each party will want so much and want to prevent so much for the other party, that the plan will either be eviscerated or take 9 months to finalize, both of which would be devastating.
Again, their panic seems to me another indication that the system that should be protecting us in this situation is broken.
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Comment by freedomminute | September 30th, 2008
Jason,
Thanks for your thoughtful comments. There’s a lot here to respond to and I’ll be back to do that later (perhaps in a separate post altogether). Meanwhile, I’d like to point out that most of what you see as the failure of the free market isn’t actually a failure of the free market. We don’t have a truly free market in the US or anywhere else for that matter. The government always intervenes in various places, picking winners and losers, and as a result, we have a market that is only partly free where the rich and powerful can co-opt the coercive power of government to gain an advantage that they would not otherwise have in a truly free market.
By the way, I do believe that a free market doesn’t mean a market with no rules, it means a market that is free to work itself out through millions of voluntary interactions in which no one is given an advantage over another through the power of some superior force (government). Besides, the alternative is to have a central authority that decides everything for us (effectively owning us) for as you point out, just a little market manipulation leads to the kind of huge problems we are seeing now.
As for the bailout, we shouldn’t do it because, among other reasons, we will be rewarding those that acted recklessly and sending the message that if you’re big enough and get yourself in enough trouble, the government will bail you out. This is not the lesson we want to be teaching, either to the Wall Street bankers or the guy who got a mortgage he couldn’t afford.
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Comment by Jeremy Aldridge | October 1st, 2008
Thank you for this insight Jay.
I agree that as a whole we have lost faith in our government representatives and I feel that is a very good development. I am heartened by the amount of people that are becoming engaged in our political process for this very reason- and the recent efforts by many politicians to increase transperancy in our political process. BO has led in this area in his breif time at the Federal level.
I like to think that I am a well informed person. Pretty sure that I follow politics more closely than the average American- however this current “crisis” baffles me. The case has yet to be made in any intelligent or decipherable way to the public. It seems to be scare tactics on either side with very little actual information about the solution. I am actually heartened that the American people have forced a pause and a harder look at the proposal. Faith in government and our leaders would have led to this bailout without anyone being informed as to what was actually going on.
The basic case I have heard repeatedly from both Obama and McCain is that we cannot have the credit markets “frozen”. By “frozen” they seem mean lending only to people and businesses who actually qualify for those loans and are a decent risk. Isn’t that how the financial markets should work? Shouldn’t a lender be factoring the probablility of repayment into their decisions to lend? If that is the fate of our economy without the bailout- that it will reflect reality- maybe that is what should happen. I am not in any way a financial expert- I am scouring for more information in order to take an actual position on this. Haven’t been able to do anything yet except question the two party line on it.
Lastly, I believe you are spot on about government intervention in markets. It seems the Fed has continually been working to maintain an illusion of growth through housing and it’s associated industries, when in reality the market and the economy should have been correcting itself. Like putting out literal forest fires- good in the short term- horrible in the long term. This in itself is a political matter and therefore shortsighted. Businesses are fixated on quarterly results- they are even more shortsighted and I’m not sure removing oversight is a good solution to that. Is there a more basic deficiency here? What about a free market system where value is assesed by sustainability rather that fraudulent bottom lines and the cancerous need for “growth”.
I’d like to read more in response to Jason- who strikes a chord with me. Can you explain more about how you feel the market itself regulates abuse- in the areas of finance and environmental degredation? Do workers have rights in a Libertarian economy? Do labor standards exist etc… From what I gather from the book I read- Libertarians believe the governement exists to protect individuals rights- what is a right?
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Comment by David | October 4th, 2008
Great post and conversation here! While I’m not against a bailout, I’m glad to see that the Bush administration “crisis” approach has been suspended in favor of additional discussion and negotiation in Congress. The last thing we need is a financial patriot act. =)
Jason’s comments about free market fundamentalism resonate with me. I’d like to hear more from you, Jay, on your comment that “a free market doesn’t mean a market with no rules, it means a market that is free to work itself out through millions of voluntary interactions in which no one is given an advantage over another through the power of some superior force (government). Besides, the alternative is to have a central authority that decides everything for us (effectively owning us) for as you point out, just a little market manipulation leads to the kind of huge problems we are seeing now.”
While I agree in principle with your sentiment, I think that accumulations of capital and wealth can become so massive that businesses, rather than governments, can become “authorities” that decide things for individuals in just the way that governments do — but governments are at least nominally answerable to people! This is why I think that free markets are desirable beneath a certain plateau of mega-wealth, and also why they can allow vast human exploitation at larger levels.
Lots more to say on this, but not enough time right now! I’ll look forward to talking more later…
d!
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Comment by freedomminute | October 8th, 2008
David,
Unfortunately, what the additional discussion got us was another $100 billion in additional giveaways. Congress just can’t control itself. Even in the midst of a “crisis”, it’s business as usual.
I’m not sure what part of my statement about “a free market doesn’t mean a market with no rules…” you’d like me to expand upon, so I’ll just say this for now. In order for any society to work, there has to be a basic set of rules. For example, we have rules about not killing people or stealing their property. We also have rules about enforceable contracts and the recourse we have when those contracts are broken. Some of our rules are enforced through the criminal codes and some through the civil code.
It seems to me that the rules that apply to our society in general are the same rules you would apply to business transactions. You wouldn’t be allowed to get your way through force and you wouldn’t be allowed to steal. This includes theft by deception, otherwise know as fraud.
I obviously haven’t laid out all the necessary rules, but I think if businesses followed the basic rules that everyone agrees on, you wouldn’t need much more than that. This is my definition of a free market with rules as opposed to a free market with no rules. And I strongly believe that most of the problems you attribute to the “free market” are problems caused by government interfering in the free market and businesses using their influence to get a powerful authority (the government) to do their bidding. If the government couldn’t interfere on behalf of any one player, the playing field would be a lot more even and I think you’d have a lot less problem with the concept of a free market.
I’ll do a longer post on this topic once I catch up with all the current events that need to be covered. In the mean time, I’m curious what you (and Jason, if he’s reading this) think are the specific abuses inherent in the free market that makes you feel as though a free market isn’t a good thing.
J
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