Ken Nelson

The Economist’s World in 2009 predictions are up….  In spite of the “promise of a new president” the US economy will shrink .2%:

Gosh… shrinking .2% hardly seems worth trillions of dollars in bailouts.

Let me put it another way…. .2% of 14 trillion is 28 billion.  So why all the fuss?

Update: An e-mailer complains that I don’t distinguish between (presumably needed) “bailouts” of the financial sector and “stimulus” proposed as an action by the government to force spending that consumers and businesses are currently deciding to forgo.

At the heart of the “difference” is that financial institutions are highly leveraged. A dollar not paid back on loans they hold reverse leverages down through their balance sheet and through the economy (in the form of 10 or more times that dollar not available for loans).

So yes, I understand bailouts, banks, and high finance just fine.  Even though I don’t read the Economist or WSJ daily. I get it.

And I don’t mind injecting liquidity into the credit system. It concerns me because they print new money to do it, but I’m up for it in measured doses.  However, I’m very dubious of “bailouts” that reward failed institutions and keep the stupidly  aggregated risk stupidly aggregated. 

A dollar of capital available to a good bank to make loans is 10 to 12 dollars out in the economy after leverage.  The effect is the same no matter the bank -  EXCEPT if done through a good bank then an important message is sent. The good bank is rewarded, the bad bank is dead, good money is kept well away from bad.  A BETTER result.

This should be obvious but apparently it isn’t to “smart” people in Washington, D.C..

The bailout is really of shareholders, bank employees and bank executives who made poor risk decisions.

I don’t mind liquidity injection – I hate bailouts of poor decisions when obvious alternatives exist.

Now on to stimulus…. The money they spend has two sources…. me and a printing press.  Taking money from me is inefficient, I’ll spend it just fine.  Printing new money kicks the can down the road and causes WAY more problems than it helps.

H/T: Dad