More on the Mess

More from Dr. Pournelle: http://www.jerrypournelle.com/view/2008/Q3/view537.html#Friday

He is no lover of government intervention, but as a child of the Great Depression, he has a different perspective than I do. He also recommends an editorial by John Paulson that deserves consideration. If I understand Paulson correctly, he favors government purchase of preferred stock of companies/banks/institutions thought to be critical to the system rather than buying bad or low-value assets. As he puts it:

This mechanism -- purchases of senior preferred stock with warrants in troubled institutions -- addresses the problems with the Treasury plan. The financial market is stabilized, companies get recapitalized, failures are avoided, debt securities are supported, and time is gained for illiquid assets to mature.

This would make the government more of a conservator than an hostile takeover agent. One thing Paulson does not make explicit is how much this purchase of preferred stock would cost. However, he seems to hint that his approach would be a better way to spend $700B, not a way to spend less.

I do know this: Obama wants to spend more federal money than has even been contemplated to date. He has made this quite clear. It seems unlikely that such spending would not occur without increasing taxes. Increasing taxes in the midst of a recession is precisely the wrong thing to do. If you take away more money from "the rich," who are the ones investing and making the economy go, just as they're losing money from a tanking market, there will be even less money available to expand the economy, hire workers, or buy products and services.

Another idea I heard suggested dropping the capital gains and corporate tax rates. Obama himself has admitted that, given the current economic circumstances, he wouldn't automatically repeal the Bush tax cuts, so he must have some inkling that raising taxes in the current situation is bad. Economic growth is necessary, or the whole structure falls. We've had approximately 25 years of economic expansion. We're much wealthier now than we were in 1983. Maybe we can afford the $700B, but we'll need something to offset the expense. That means dropping federal expenditures elsewhere (McCain wants to do that) or increasing incomes. "Stimulus checks" are not the answer, allowing people to keep more of their money is.

So: do a conservator-type bailout, decrease corporate/capital gains taxes, increase economic growth, restore confidence, and make the Bush individual tax rate cuts permanent. Maybe it would work. Maybe. But who's to stop this mess from happening again? Oy. I've got a headache. Time to stop thinking for the evening, I think.