Sunday, January 25, 2009

The same thing, only different

This is why politicians should have no authority to steal our money and redistribute it in an effort to "stimulate the economy". They do not understand economics at all:

The president also used the session to reassure Congressional leaders and Americans that money would be used wisely, promising to impose tight controls. He criticized companies that have used federal money they received under the financial bailout for low priority or wasteful purposes and promised not to let that happen.

He cited “reports that we’ve seen over the last couple of days about companies that have received taxpayer assistance, then going out and renovating bathrooms or offices, or in other ways not managing those dollars appropriately.”


I do not support any government bailout of a private company, so don't misconstrue this post as such. But please explain to me the difference between these two scenarios:

1. National Banking and Trust Company receives bailout money from the government and uses $50,000 of it hire a construction company to remodel the bank's offices.

2. National Banking and Trust Company receives bailout money from the government and lends $50,000 of it to Larry's Landscaping who hires the same construction company to remodel Larry's offices.

Both scenarios are the same freaking thing!

14 comments:

jim adams said...

Besides the fact that it looks very
self centered for the bank not to make a loan, as intented by the bailout. In #1,there is no lending,to a third party, so the bank receives no interest revenue (shame on them), and gov. receives no tax income from bank on bank's loan interest revenue, because the loan was not made.
Less tax revenue does tend to make gov mad.

F.M. it is like smacking at a honeybee, even if it provides you with honey, it may sting you if you threaten it.

Freemarket said...

For home equity loans, business loans and student loans (which make up a large portion of all loans) the interest is tax deductible. So while the bank pays tax on the income, the borrower pays less tax by deducting the interest. In my example, Larry received a business loan, so of course the interest is deductible. Therefore, the effect on tax revenues is not significant (probably no effect at all) in either case.

The Intellectual Redneck said...

Do all our Congressmen and Congresswomen own bank stock? Nancy Pelosi wants more TARP money than the 700 billion already wasted

jim adams said...

I agree with you f.m., but the net affect is an increase to gov earnings, and the trick is not how much money is placed in the market place, but how much moves around.

if the amount of money doubled, but remains stagent, it equals depression.

if the amount of money remains the same, but doubles in circulation,
it equals prosperity.

Freemarket said...

Now you are talking about changing the money supply which is not the same thing as stealing (or borrowing) from Peter and giving the money to Paul.

Furthermore, Economists consider the turnover of money to be constant. To drift further down this road, the actual equation is MV=PO. M is the money supply, V is the turnover of that money which has generally held constant. P is the price deflator (a measure of inflation) and O is real GDP or output. Any change in one variable must be met by a change in another variable.

If the money supply doubled quickly, that would mean the prices would also have to double unless output doubled quickly (since V is constant). Since output is a function of capital and labor, it is unlikely that GDP will change quickly without an increase in new machines and new workers. So the most likely effect of a doubling of the money supply would be massive inflation.

If you are interested in this kind of stuff, you should read Milton Friedman’s Monetary Mischief. One of the freaky things about our money now is that it is only backed by the promise of the US Government (fiat money), as opposed to being backed by a commodity (like gold). This has only been the case since Nixon broke the link in the 70’s.

jim adams said...

f.m., i know you have a great admiration for friedman, and i will not, and never want to understand economics as well as either one of you.

abstract is great in the ivory tower, but it is meat and potatoes in the home that is important to the rest of us.

i spent time in finance, thought it was like gambling, studied economics, thought it was too much like dreaming, earned a living in accounting and was bored to death.
now i protect my assets, maintain a good cash flow, and i am happier than ever.

Anonymous said...

I dare you to say that in any respectable economics venue.

The social equivalent:

1. Jail door left unlocked, prisoner escapes. Caught, returned with diligent law enforcement work.

2. Jail door left unlocked, prisoner escapes. Not caught, commits murder while law enforcement go for coffee.

jim adams said...

help me anonymous 7:28,
identify "that",
and try a different metaphor.
thanks.

Freemarket said...

Anon 7:28, your comment does not even begin to make sense.

PZGURU said...

Jim,

I am afraid I don't get your point of view.

The CEO of the bank at the root of this story, Mr. Thain, has been vilified by Obama and the press for having spent 1 million $$$ on an executive office suite.

The truth is; however, that the renovation took place in early 2008, LONNNNGGGGG before the TARP money was given out.

And, as FM correctly pointed out, the bank spent 1 million $$$, so that money ended up stimulating the economy by paying moeny to various designers and contractors who did the work.

And furthermore, you don't hear Obama mention that he and his wife will be using the SAME EXACT designer to renovate the White House, and I'm sure their renovation will be a hell of a lot more money (paid by taxpayers) than the bank renovation was (which was paid for with private money).

So, Obama and the media are once again playing loose with the facts, injecting lies and politics into the situation, and distorting everything in a pathetic attempt to make capitalism seem like a bad thing.

Anyone who wants to live in a socialistic or communistic form of government can move to another country. Please leave the USA and its capitalistic economy alone.

jim adams said...

PZGURU, I'll answer your posting point to point, in the near future.

But I have to ask, do you think anything I said implied a socialistic or communistic point of view????

Thanks

PZGURU said...

Not directly, and that part of my post was not specifically targeted at you.

However, your own comments suggest that you favor the government dictating where the banks re-direct or allocate the money. I completely disagree (I oppose the bailout entirely!!) since it was the same government dummies whose interference in the mortgage industry in the first place, caused the whole real estate industry collapse. It was not because of a fundamental flaw in capitalism or because of greed. Now those same government dummies want to tell us how to fix the problem??? As a man of high intellect, surely you can see the irony in that?

jim adams said...

PZGURU, my point is the more hands money moves through the more successful the ecomony.

I question the bank's wisdom. PZGURU, the bank HAD to know the banking industry was in trouble, the bank HAD to know that one of it's main reasons for being, main means for succeeding is in offering good loans, not by spending money on it's business suites when business is bad. This smacks of extreme poor judgement.

I agree with you the bail out was a bad thing, but not because it happened, but because of the way it happened, it was a knee jerk reaction with unfounded expectations with no assurances that the money would be used to benefit the economy. The banks did not lend the money, they hoarded it, they restricted it from going into the hands of many.

I feel that a bailout of tax payers, by lowing interest rates and income taxes on the middle and lower class would have been more effective, again because it places money in more hands, but I feel banking restrictions should be put in place to reduce the stupidy and poor judgement displayed by banks offering the type of loans that have brought us to this point.

Your point on Obama spending money on the White House is not new for Presidents, it started with Washington and has continued through most Presidents. I think we would agree it would improve his political capital to forgo this tradition, BUT it is my feeling, Barrack runs the Country, Michelle runs Barrack.

That brings me to my own pet peeve, Obama earmarked, in 2007, $1
million for the University of Chicage Medical Center, and his wife, an employee there, than received a pay raise of nearly $200,000.00 Enough said for Obama's thoughts for controlling the Country's medical expence, for doing away with earmarks, and for being just another politician.

PZGURU said...

All good and true points, Jim, except that the banks were forced to approve these bad loans by people in Congress. If Congress had not done that, then the collapse wouldn't have happened.

I don't even mind that Obama want's to redo the White House, partly because it is tradition, and partly because him spending that money will benefit varaious contractors and so on. I think the cost should be moderated though (none of those $50k gold plated toilet seats like at the Pentagon).