Monday, September 29, 2008

Is credit flow like a car radiator flush? Why (they say) we need The Bailout right now!

Okay, everybody has heard that the Bailout Vote failed (228-205), and there isn’t any clear direction yet. Even a Redskin victory in Dallas Sunday had no psychological effect.

Ali Velshi on CNN (and Oprah’s favorite, Suze Orman) came on to warn viewers what’s next. We know you’re mad, to see 6% of your portfolio evaporate in one hour. But don’t point fingers. Don’t try to fix blame when your house is on fire, they said. Hose out the fire first.

It is important to understand what they mean. The stock market indexes aren’t the real issue. It is the flow of credit. Velshi said it’s like soapy water in a pipe. The water is shut off. The soap is the mess of toxic mortgages. You need the water to flush them out. The water is the $700 billion “loan” (so to speak) from the taxpayer. It’s sort of like doing a radiator power flush for your car.

The practical problem is that so many companies, especially smaller ones, need credit to keep operating. If banks shut off their credit, they can miss payrolls. They can shut down. That may be more likely to happen with your local independent hardware or grocery store, perhaps.

Velshi, Orman (and probably most of Oprah's other friends -- but no Dr. Phil) and, for that matter, Paulson all say that most voters don't understand this, because they don't see how credit markers work. Maybe some of the bulldog congressmen don't get it. A couple years ago, I listened to some seminars (I didn't pay for them) on the "cash flow" business and, I can say, it's much more important than many think. (Otherwise "cash flow" companies wouldn't have $2995 seminars for agents.)

I’m told in my own private conversations today (mostly with business, mostly with some ties to the GOP) that credit has been severely pinched for at least two weeks. I haven’t personally noticed businesses closing yet, other than out of the normal turbulence of business. We all know that small retail businesses have been replaced or bought out by huge chains, as a result of demographic or other fundamental pressures related to economy of scale and short term profit pressures, but not because of credit problems per se. So, for example, ideological opposition (especially from conservative Republicans and some libertarians) to the bailout may stem from an observation that the stress on many business is already there because of market or societal fundamentals.

The idea that many more businesses will miss payroll or that credit cards or even bank debit cards will fail for people with good credit and not much debt is frightening. Think of the services I depend on even for this blog – electricity, cable, Internet, publishing services, ISP’s? Could they disappear if the credit crisis isn’t resolved. It sounds unthinkable. So far, outside of banking itself, size and economy of scale seems to be protective for most other businesses in a situation like this. Sure, many smaller ISP’s have failed, but because of business fundamentals; generally, they have been replaced by larger providers with scale.

There is something about this that sounds “mean”. It seems ideological republicans want to see a Darwinian battle, where the strong survive. In personal terms, they want to see the weak become more dependent on blood family and not government or even a technical infrastructure. They want to see certain kinds of people learn to interdepend on others personally to adapt and survive rather than live a false “personal sovereignty” of institutionalism.

Or perhaps not. The GOP “boll weevils” surely know about the credit lubrication argument. They just don’t buy it, because they haven’t seen many failures yet that wouldn’t happen anyway. They think that failures always result from fundamentals, but these might be moral or religious.

Then there is the silly way Congress behaved. Supposedly, Eric Cantor (R-VA) said that some of his GOP members were “offended” by Pelosi’s own partisanship. Maybe she’s right, but her remarks were unwelcome and at best pleonastic for the circumstances. She thought she was arguing for the bill! (That’s like a school administrator where I subbed being “offended” by what I wrote on my own website – yup, it really happened, in 2005. I was right, but someone in my position shouldn’t say it, perhaps. ) Barney Frank thinks he hit that one out of the park by saying “if my feelings are hurt, I’ll punish the country.” Of course, John McCain should be the one to say that. Where was he today? (Frank, you’re no Lloyd Bentsen.)

Everyone says that this is partisan bickering, letting ordinary Americans slide into barter and unwilling filial interdependence while Congress fiddles. Bush and McCain and Paulson can’t control their own troopers. But, then, why did Nancy Pelosi lose so many of the Democratic votes? If every Democrat had voted for the bill, it would have passed.

Can the Administration do anything more without Congress in the short term? How about suspending rules that force banks to devalue assets on their books immediately. Well, then, hello, isn't that how we got into Enron and Worldcomm? How about more FDIC guarantees? Well, doesn't that require Congress? Again, there is this ideological problem about how to avoid the Prisoner's Dilemma, by making everybody "play family".

Then, there is the issue of the banks. Why, we ask, did they engage in such reckless behavior, inventing almost illegal financial instruments to throw main street money into the toilet, without Main Street’s knowledge or consent? Well, go back to the 1970s, when laws were passed requiring banks to make mortgage money available to low income people. Banks that didn’t play along were to be punished. So, are we to be surprised that they came up with “creative” ways to put people who couldn’t pay into their “own” homes?

There's a really interesting interpretation of all of this at "Gay Patriot" here. Start with "Barney Frank's fire."

No comments: