When trust melts down

In conversation with a friend yesterday, he asked me why the government needed to play any role in the current economic situation. My reply: in our economy the federal government plays a vital role in creating trust among citizens, and modern capitalist economies rely heavily upon trust.

To function, our economy requires a free flow of capital. Various mechanisms permit capital to flow, including banks lending to each other, banks lending to individuals, individuals investing in corporations, corporations investing in innovation. In a modern economy these mechanisms rely heavily on something quite intangible: trust. When loans are made lenders have to trust that borrowers will be around to repay them (whether the borrower is a homeowner or a bank. Similarly, when a person or a company places money in a bank or uses it to purchase equity (stock or some other ownership interest), that person or company must trust that that the bank will not fail and that asset has sufficient value to be worth buying.

In the current economic climate, consumers do not trust banks, banks do not trust each other, investors do not trust that available equity interests have the worth they are represented as having and they do not trust that these interests will hold whatever current value they do have.

This is why central banks around the world are being asked to or affirmatively trying to step in as lenders - suppliers of capital.

Meanwhile the U.S. Congress, led by Nancy Pelosi and Harry Reid, are attempting to pass legislation that vouches for the different players in the financial world so that some level of trust will be restored. Their problem is that they think that vouching for these institutions means giving them lots of money.But nobody trusts a bill that gives money directly to institutions nobody trusts. (I realize the gift is being put in the form of "buying distressed assets" but the government is prepared to overpay wildly for these assets; the gift is the difference between the assets' true worth (unknown) and the price the government plans to pay (to be determined by a complicated reverse auction process.))

And people who followed the Democratic Party convention closely certainly have no reason to trust anything Nancy Pelosi says or does or anybody she endorses, including her preferred presidential candidate, Senator Obama. At the Convention, Speaker Pelosi played a major role in abandoning Party rules and coercing delegates into a rigged process to produce the Obama nomination. So it comes as no surprise to see her willing to change rules for special interests she apparently favors, to promote a bailout for large banks who speculated with depositors' money. That's the Pelosi way.

I am not urging that the government take no steps to stabilize the credit markets. Nor am I suggesting that only Speaker Pelosi and Senator Reid are solely responsible for the bill, which was originally put forth from the White House. But the House of Representatives has consitutional responsibility for appropriations, and a spending bill that has the the support of the Speaker is the Speaker's responsibility. Sure, Speaker Pelosi can say she's holding her nose while voting for the bill. That would be in keeping with what she's asking millions of voters to do on November 4 on behalf of her preferred candidate.

Comments

[linda]

You can like or dislike the bailout, but we are not actually giving money to big financial institutions. We are buying assets from them. Admittedly, distressed assets (mortgage-backed securities), but we are not just handing them money. The taxpayer is getting real assets in return.

And in fairness to Pelosi, Reid and Frank, they are working from a bill proposed by Bush. Their changes have been improvements.

I still oppose the bailout. But please don't misrepresent what it is in your rush to criticize the folks you don't like. ACCURATE criticism is much better.

[democraticjack]

Isn't there enough money on Wall Street itself to bail out their comrades in greed? It seems to me if every millionaire in this great land would put off buying that new Mercedes for one year and donate the money to the cause, it would generate a number closer to a trillion dollars for some sort of rescue fund that doesn't penalize the taxpayer.
And, yes linda, it is a giveaway. Arguing semantics is counterproductive to the fact you both agree on the basics.

[kavala007]

Heidi, once again you state exactly what is going on. There is no trust in the MSM or in Congress. The "bailout bill", as written and changed by very partisan Democrats to create a slush fund for Acorn and pack it with additional pork, became a handout bill that just exacerbated that lack of trust. 66% of the House Republicans voted against the bill but what is amazing is that 40% of the House Democrats did so as well. Perhaps that shows some sense of responsibility on the part of some members of Congress. It is important that the financial markets are liquid and that trust in the system begins to be re-built. I do not think the current so called Congressional "leadership" can do that since they have lost all credibility.

[BA]

People have to decide which one to trust, that's all.

Obama did not do very much in the last two weeks to get undecideds to go his way. Some of the non-voting Clinton supporters might even decide to vote, but against him.

I don't understand why Obama cares so much about his "traditional voters". They are supposed to vote for him even if he came from Mars. I don't understand either why he seems to believe he can convince others that he is a leader. Nothing wrong about flip-flopping on real issues, but his timing is lamentably off.

[artemis]

I'm beginning to think the whole thing was engineered to get another tax break on capital gains tax. They tank the market, buy up all the cheap stock, sell it off when it goes up a few points after the bailout - and BINGO! NO TAXES ON THE INCOME! Bravo, John Boehner, part well played again. Pelosi, Obama, Dean, Bravo! You got played again!

[Shtuey]

Speaking of trust, I have no indication that this bill guarantees that any profits the government generates on this venture is going to go directly to the tax payers. It certainly should. They're spending our money after all. I'm not holding my breath.