Heart Failure

Posted by – September 30, 2008

Here’s a great description of why the economy greatly depends on Congress acting to rescue the credit economy.

The financial services sector is the heart of the economy.  They have fucked up badly in the last couple of years, but really, they’ve generally fucked up because we have allowed it.  Companies don’t exist to provide good jobs or good benefits.  Companies exist to turn a profit, and public companies exist to return value to their shareholders.  They are made to do this on a quarterly basis.  A good quarterly report returns profit to shareholders.  A bad one returns no profit to shareholders (generally).  So why would we think, after removing regulations and failing to enforce most of those that remained in place, that Wall Street would do anything beyond what we have made it possible for them to do?  And that, in a nutshell, is to work the system – mostly within the law – to return insane short-term quarterly profits and therefore shareholder value.  The idea that business would think a) long term (when we are painfully short-term focused from a market perspective; and b) do things to benefit people rather than their own bottom line is counter-intuitive because we don’t reward business for behaving in that fashion.

But do go read the whole thing.

2 Comments on Heart Failure

  1. Sara says:

    IANAE (economist, that is), but there is another viewpoint to this whole mess. To continue RenaRF’s analogy of the human body, when a person is a crack addict, you don’t solve their life problems by giving them more crack.

    “The financial services sector is the heart of the economy.” -Maybe we should try making real stuff instead of furthering a gambling addiction?

    To borrow her example of the Dot-com bubble, we were in a credit bubble. As in, there was way too much credit available for any and all takers. She brought up examples of how, “to keep the economy healthy”, companies needed to expand but could not do so unless they had ample credit available. Well, in the “old days”, the entire expansion was not floated on credit. And, just like in the old days, the less you finance the less at risk you are. And our society has put a lot of itself at risk. Bad risk, it turns out, and it lost the bet. And now, the investors want a “Do Over”.

    Consider much of what is happening right now to be a credit market correction, similar to a stock market or real estate market correction. Yes, companies will fail. Yes, credit will dry up for a while. But when it reappears, it will be available for smaller amounts and only when the risk is significantly less. As it should be.

    Perhaps, in the long run it is better to *slow down*. Build up capital, then use it to either fund expansion or lessen the amount of risk exposed by borrowing and betting on success. Ah, but my competitor is willing to take the risk and get ahead by borrowing! And thus begins the upward credit spiral anew…

    I’m not saying to simply let the market “ride it out”. Help is needed, in the form of halfway but not overly cheap loans. Help is needed in clamping down irresponsible behavior via (gasp!) government regulation in the financial markets. Help is needed in providing credit to allow homeowners to refinance into a longer term non-variable mortgage at a sustainable interest rate, as each bank sees fit to maintain it’s balance sheet. $700 Billion seems shocking, but keep in mind that in the last week alone, the Fed has pumped $1350 Billion in via seizure and lower-interest loans, but with conditions and strings attached. The money was not simply given away as free credit.

  2. The trouble with the Financial Services key word services

    is they suck everything OUT of the economy – they put nothing back in , like jobs or solid goods.

    not everybody can be a bond trader..they have unregulated for far to too long and i frankly am wanting punative damages filed against the scoundrels that suspenced laws , created new ones, to allow for breaking the common sense of the bedrock of any economy -

    being money good. balancing the books. Where exactly is this money gonna come from – the ether. .

    The whole thing needs to melt down so it can be rebuilt – thats how bad free reign Freidman Economics and the Shock Doctrine is – but if we know we are being shocked We will NOT allow the draconian cutting of all social services as is their plan to privatize everything..

    disclaimer – i am sorry for all the people who are hurting because of this – but many of us were writing about this over a yr and half ago -

    my words for it are this – what is HERE is NOW and is gonna continue , regardless of so called bail out is gonna make the GREAT depression LOOK LIKE A BAD MOOD.

    We must regulate speculators , get back to sound accounting and accountability – and to think these NEO LIBS and CONs same beast – would not cough up a few million to ensure children..

    We need to clean house entirely in Washington.

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