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September 26, 2008

Buffett’s Bailout Blackmail

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From the Wall Street Journal:

"If Congress fails to approve the bailout, Mr. Buffett says, all bets are off. His investment in Goldman will "get killed, and so will all our other investments.""

This article and others explain how Buffett stands to make a large profit if his deal to buy Goldman goes through. Fine for Buffett to make a profit; he does that well. Not fine for that profit to be created by an expenditure of government funds. It's too bad about his other investments, but we don't need to bail them out either.

Apparently the bailout deal is not yet done; the people's House of Representatives may stand firm against the mandarins of the Senate. Actually it's the way the system was supposed to work – good job, Founders. All those representatives are up for reelection this Fall; their mail is almost unanimous against the bailout and it's real mail and email and phone call from real angry people – not something generated by pressure group bots. For someone up for reelection the public outcry may be drowning the din of the big contributors calling to they may not be able to pay the next installment on their contributions if they don't get bailed out.

Letters and calls today will make a difference.

But what about the claim that we'll have a depression if this bailout doesn't pass? I'm sure some of the people making the claim believe it; even the fact that the claim has been made will intensify a short-term negative reaction in markets if the bailout bill fails. I can't disprove this. I also can't disprove the theory that, if all say "OM" at the same time, markets will miraculously recover.

It's up to those who make such scary statements and propose such expensive solutions and advance the proposition that we have to bail out the super rich to save ourselves to prove these statements and propositions. That hasn't happened. The excuse for not "proving" that there were weapons of mass destruction in Iraq was that we couldn't compromise intelligence sources – pretty good excuse. Now we're being asked to risk as much as we spent directly on the Iraq war but all we're getting to justify both the expenditure of cash and the enormous damage that a bailout'll do to the principles of free enterprise and fairness is inchoate fear and threats by banks to shoot themselves if we don't pay ransom.

What should the government do?

Build up the Main Street defenses. We've already re-nationalized Freddie Mac and Fannie Mae to keep mortgages flowing. The quick move taken to stop a panic in money market funds was a good one. Make sure there is a standby appropriation for Federal Deposit Insurance. Get some massive public investment underway in thing there ought to be public investment in: the electric grid, maybe broadband, government energy efficiency, bridges and roads. Banks are not public infrastructure; they're not where we ought to be investing public money.

Meanwhile, the real economy is working towards its own cure. People are breaking up their big deposits and CDs into $100,000 chunks covered by the FDIC. The big deposits tended to be in big banks; the chunks get distributed to local and regional banks (because there are more of them). Money is flowing but not the way Wall Street wants it to. The proposed bailout reverses the flow and pumps money back uphill to Wall Street.

Housing prices were down again last month; but lower prices are bringing buyers back into the market (surprise). The inventory of unsold homes was also down significantly for the month. Artificially keeping prices high doesn't end the pain from a burst bubble; it prolongs it.

Oil imports are down and gasoline prices still falling. Sure, we cut back out of pain but we cut back.

Now Mr. Buffett may need to cut back a bit, too. We shouldn't bail him or the rest of Wall Street out; we shouldn't let ourselves be panicked into a bailout. The stock market's going to try to scare us this morning with a swoon; we shouldn't buy the histrionics. The real buying opportunity is if the bailout fails; we can benefit from Wall Street's panic and buy into an economy and a country strong enough to withstand the anguish of its superrich.

It's time to just say NO.

Two other differing views from people I respect:

Fred Wilson is persuaded that we do need some form of a bailout but wants to see real upside for us, the investors in the bailout.

Andy Kessler who is a cynic and knows a lot about financial markets thinks that we the people will make a killing on all this bad debt, that "Paulson's Folly" will be a bonanza.

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