Category Archives: Money

“Spending Like Drunken Sailors”

How many times have we used that expression to describe how Congress uses our tax dollars? Actually, as Glenn Reynolds notes, we should be so lucky.

I think that expression is actually unfair to drunken sailors. Drunken sailors generally spend cash that they’ve already earned themselves, rather than running up debt to be paid by others. If our politicians started spending like drunken sailors, it would in fact represent a dramatic improvement.

Amen, bro.

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If It Wasn’t My Money, I’d Be Laughing

You know you’re in trouble when they start making jokes about you. And right now, Treasury Secretary Tim Geithner is the butt of a lot of jokes.

The fundamental problem, of course, is that Geithner hasn’t come up with a financial rescue plan.  There is nearly unanimous agreement among economists and policymakers that the single most important thing the Secretary of the Treasury should do now is develop a plan to deal with the “toxic assets” that threaten the survival of financial institutions.  But Geithner, who has been acutely aware of this problem for months, doesn’t have such a plan.  If he had, the comedians wouldn’t be talking about 1-800-IDEAS.

The Negative Wealth Effect

Robert Samuelson gives a simple explanation of why recessions happen — and how a recession can turn into a depression.

The “wealth effect” refers to the tendency of people to adjust their spending as their wealth — concentrated heavily in housing and stocks — changes. When wealth rises, spending strengthens; when wealth falls, spending weakens. For the past quarter-century, higher stock prices and home values propelled the economy forward by inducing Americans to spend more of their incomes and to borrow more. , , , ,

But now the wealth effect is reversing. As stock and home values drop, Americans are scrambling to increase savings and curb spending. . . . Everywhere, financial commentators urge “belt tightening” and more thrift. If the swing toward saving is too sharp, consumer spending wouldn’t just weaken; it would collapse.

But the solution is not a return to binge spending. We just need to be patient.

With time, economic slumps correct themselves as borrowers repay debts, surplus inventories are sold, industries consolidate and government policies promote recovery.

Going-Out-of-Business Sales Aren’t

This confirms what I always knew from personal experience: Those “slashed prices” at going-out-of-business sales are discounts from inflated prices, not the normal pre-sale prices. The “sale” price may not be any lower than what you can find elsewhere.

Going-out-of-business sales are more of a play upon human psychology. “Retail is all about excitement, to get people into a store and get them into a mood to spend money.” . . .

But it’s not necessarily a rip-off racket.

It’s not that you can’t get good deals at going-out-of-business sales. You can. Just don’t assume the prices are lower there. You need to shop around as you would with any other purchase.

Argh! There Be Pirates!

But these are not the lovable Captain Jack Sparrow variety, unfortunately.

Congress Dodging the Meltdown

When the lights come on, the cockroaches scatter. That’s why Congress will adjourn this year without addressing the financial crisis that has hit Wall Street.

As more details emerge about who was in bed with who, it’s becoming increasingly obvious who bears significant, if not primary, responsibility for this mess.

President Bush in 2003 tried desperately to stop Fannie Mae and Freddie Mac from metastasizing into the problem they have since become.

Here’s the lead of a New York Times story on Sept. 11, 2003: “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.”

Bush tried to act. Who stopped him? Congress, especially Democrats with their deep financial and patronage ties to the two government-sponsored enterprises, Fannie and Freddie.

And Bush was not the only one who tried to warn the country of what was coming.

Just two years after Bush’s plan, McCain also called for badly needed reforms to prevent a crisis like the one we’re now in.

“If Congress does not act,” McCain said in 2005, “American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole.”

Sounds like McCain was spot on.

But his warnings, too, were ignored by Congress.

Of course, with the media now a bona fide adjunct to the Democratic Party, the public likely will not hear much of these details until after the election — or maybe never.

UPDATE: Okay, Congress is not entirely passive. Barney Frank’s House Financial Services Committee just voted to overturn a ban on seller-financed down payments for some government-backed loans. According to Nicole Gelinas, this move perpetuates the very high-risk atmosphere that got us in the mess we’re in now.

It seems that Frank and his colleagues remain keen on coddling the tenacious bad-lending lobby (including the National Association of Homebuilders and what’s left of the banking industry), which desperately needs suckers to buy newly built homes at inflated prices so that builders can pay back at least some of their construction debt to the banks and investors. Frank is certainly not looking out for average-Joe home buyers and sellers with this action.

The House of Cards Comes Down

Robert Samuelson: “Wall Street’s business model has collapsed.”

Samuelson explains three fundamental changes in how the giant Wall Street firms did business over the last twenty years that has contributed to the current mess. What does the future hold?

It’s hard to know, because financial crises resemble wars in one crucial respect: They result from miscalculation.