The Metaphysics of the Bailout
Inherent in the notion of "bailout" one can find two principles.
The first: One must determine whom one is attempting to rescue.
The second: One can only "bailout" a smaller volume into a larger one.
Take the familiar example of the life boat. It is assumed but not necessary that one would "bailout" the lifeboat to save its occupants. Logically the reverse could be true. One might wish to feed the sharks, in which case one would place more water into the lifeboat. Determining whom one wishes to rescue provides what Aristotle would call the Final Cause of the act of "bailing out," its purpose.
If the Final Cause is to rescue the occupants, one is still constrained by the second principle. It is not in the nature of things that one can "bailout" a larger volume into a smaller one. That would be properly termed a "bail-in." Again for Aristotle, the Formal Cause of 'bailing out" is moving the smaller volume into the larger.
In light of this let us consider our present economic circumstance and the policies that are meant to address it. Which is the larger volume - the debt of the financial institutions or the wealth of the Federal Government. We have tended to think in terms of individual institutions, but that is like thinking of the ocean one bucket full at a time. The total volume, the sea of debt, is most likely larger than the wealth of the Federal Government. I have seen numbers suggesting that the total value of the "bad paper" equals the GDP of the entire world for one year. I suppose stretched into eternity, the sea of debt is less than the wealth of the Federal Government. After all, given enough time, one person could drink the oceans dry. In practical terms however the reverse is actually the case - the debt is the larger volume.
And so I conclude that what we actually have is a policy of "bail-in," in which case the occupants of the lifeboat are not the Final Cause. In fact the Final Cause, the "purpose" of the "bail-in" is to feed the sharks. QED.
Brilliantly reasoned, Larry! We need more metaphysical analyses!
March 11, 2009 6:03 PM | Reply | Permalink
The Bail-In. Stretch this out a bit, send it to one or many MSM's. This is good.
March 11, 2009 6:12 PM | Reply | Permalink
are they sand sharks? Or nurse sharks? Or Hammerhead sharks? Or, um....
Other sharks? Some sharks aren't really too bad. So I am not sure if I wish to bail in or out.
March 11, 2009 7:11 PM | Reply | Permalink
Can I person swallow ocean water?
March 11, 2009 7:27 PM | Reply | Permalink
I really like this Larry!! Love this kind of reasoning. Well, anything that involves aristotle and formal causes. lol.
(not too sure about the numbers you're assuming in the argument though...)
March 11, 2009 7:27 PM | Reply | Permalink
That is because you and L haz different numbers of toes.
It's all perspective, pug.
March 11, 2009 8:53 PM | Reply | Permalink
hahahaha!! But L's a GD broom! How many gd toes does he have?!? trillions... I don't know- I can only count to four.
March 12, 2009 10:41 AM | Reply | Permalink
Glad you enjoyed it.
Here’s a junk food (aka 60 Minutes) discussion of the numbers. It dates from last October. The facts that have come out since this broadcast are not reassuring. Now I’ve never been in a lifeboat but I don’t think I would be so concerned about how big the ocean is. It would be enough to scare me that I couldn’t see land any where on the horizon.
March 11, 2009 9:01 PM | Reply | Permalink
Larry - that's unfair! I gotta watch 60 minutes now?!?
anyway, in the meantime, I'm very much in agreement with your picture of what we're being asked to do...
But if I'm going to be annoying, just the following remarks:
given the way we're going about this, cleaning the mess up will likely, one way or another, cost the government 4-5 trillion. That's about 1/3 of our collective annual cash-flow - otherwise known as GDP. We'll probably end up having a lower sustainable growth rate and govt debt amounting to 100% of GDP. Which means our fiscal picture will be similar to Italy.
But the numbers about the total value of bad debt or national wealth don't factor in...
March 12, 2009 11:09 AM | Reply | Permalink
You are not annoying anyone. I was not trying to escape the facts. I just wanted to suggest a different perspective. The facts still matter but what matters even more is the understanding of what the facts mean. So let’s have at it.
Similar to Italy? That’s not so bad. It kind of turns my lifeboat into a gondola in Venice I suppose but I can hear the mandolins and smell the fennel in the salami. I just don’t want it to be similar to Chile under Pinochet. So I asked my “meta” question.
The “total numbers” don’t factor in, it’s true but consider this. If the debts that underlie this financial crisis are really just of a large but manageable size, then we are witnessing the greatest hoax since Piltdown Man. We have been told that the financial world was within hours of collapse. If the debts are not manageable, then my question “Who are we choosing to save?” has merit if we can not save all. Or are we witnessing an historic paradigm shift, from some “old capitalism” toward some “new capitalism?” There is no real “meta” but sometimes it is a way toward understanding.
All I am able to do is to ask a question. I have tried to find an answer but my reading was just like being in a mirror maze. So you be the hammer and break the mirrors and show us the way out of here.
March 12, 2009 1:24 PM | Reply | Permalink
(larry- btw. that first bit about 60M was a joke - forgot my emoticons... :0)
Like I said - I agree with your perspective on this. You're right - the debt is perfectly manageable. The first to take losses are shareholders - they're virtually wiped out, but hold on to shares as quasi options on a future bailout. The second are creditors. That should cover the losses. Wipe them out too (above whatever FDIC guarantee there is).
Why are we bailing them out? In my darker moments I'd say its because Schumer and Frank work for the banks, and so do Geithner and Summers. In my less dark moments I look at reasonable people like Krugman who's undecided - thinks it's a 'deeply technical issue'. I don't see any issue (or rather I see both pros and cons) apart from the political one, but he makes me undecided about being undecided.
I suck at analogies - but here's a go.
Take a systemically important industry - say agriculture. Say 4 companies run 70% of US Ag. The four CEOs go on a trip to Vegas and blow $3 tn of the companies' money. Result: the four companies no longer have the cash to run their daily business. The country risks starving. What do we do? Hand those CEOs 3 tn dollars and make them whole? Or wipe out the stupid shareholders and creditors, and hand over the assets to people who will run the companies responsibly? The second option is called capitalism. The first option I'd called Fascism. take your pick...
March 12, 2009 2:10 PM | Reply | Permalink
Let's not forget who owns "Vegas", and that the 3tn didn't just go up in smoke. This applies to Madoff too, where did his $60B go, since it didn't go into the ordinary market (or did it?).
I say, back to the land, and repossess the tractors too.
March 12, 2009 2:15 PM | Reply | Permalink
See - my analogy sucks! ok ... the four of them go out into the forest and smoke the 3 tn dollars - in hemp-based $100 bills.
March 12, 2009 2:20 PM | Reply | Permalink
I don't believe Madoff had $60B of original deposits. But I don't know what he did have. That is, on paper he may have been supposed to have $60B including reinvested profits. But if we subtract out those fake profits and subtract out actual payouts to clients, how does the picture change? Clearly he had a lot of redemptions in 2008, for example.
March 13, 2009 5:10 AM | Reply | Permalink
Where do you get $4-5T when even Roubini puts the losses to banks et al at $1.8T?
And why would you expect the government to cover even that much?
Take a look at this as linked by Nate Silver:
http://www.hussmanfunds.com/wmc/wmc090309.htm
Haircuts, please.
March 12, 2009 2:09 PM | Reply | Permalink
Well - I'm separating my wishes from my expectations. i'd like them not to bail out. But I expect them to try (hence Geithner coming back for another 800 bn). As for 4-5 trillion: counting banks, insurance, fannie and freddie, mortgage reworks, stimulus bills, it all adds up. Especially if you do it badly and slowly...
March 12, 2009 2:17 PM | Reply | Permalink
"Determining whom one wishes to rescue provides what Aristotle would call the Final Cause of the act of "bailing out," its purpose."
The unexamined lifeboat is not worth bailing.
I want them to save "us", adrift in the rising seas of our poverty. But I think you and Ari are right - instead, they are feeding the sharks.
March 11, 2009 11:21 PM | Reply | Permalink
Priceless
March 12, 2009 12:13 AM | Reply | Permalink
I had hoped to change the world with my little post but being the setup for your line is even better. I feel like a band that opened for the Rolling Stones.
March 12, 2009 12:24 PM | Reply | Permalink
Smiles, Larry. Your blog ROCKS! Yesterday I was reading “MARX IN SOHO” with Socrates as a character and then I read your blog and they intertwined. Yahoo the philosophical interlocutors!
March 12, 2009 7:26 PM | Reply | Permalink
Nicely reasoned, and confirming the idea that "great minds think alike" or synchronistry I came across this at Scoop "Brother, Can You Spare a Trillion?."
It seems pretty clear to me is who we are bailing "in" are the "sharks." We are making the conspirators and their colluders "whole."
One perhaps questionable assumption is that the process of magnifying earnings (make money out of nothing which the CDOs seem to be) has stopped. My guess is that it has not. Therefore, the sharks are still out there calling for dinner.
I also agree with stratofrog, that perhaps we should be questioning out the boat, and whether we should be building a different one, or talk the other sea life into teaching us how to swim again.
Nice, thought provoking post!
March 12, 2009 12:01 AM | Reply | Permalink
OOPS - typo
This "questioning out the boat" should have read
"I also agree with stratofrog, that perhaps we should be questioning the boat, and whether we should be building a different one, or talk the other sea life into teaching us how to swim again."
March 12, 2009 12:16 AM | Reply | Permalink
Here's a thought, aren't sharks a part of the evolutionary food chain? Maybe feeding them is not the problem but overpopulation is. If that were the case, I guess the question would be, how many sharks are too many and how do we determine which ones need to be harpooned?
March 12, 2009 1:53 AM | Reply | Permalink
That would be a trick question:
"Which is the larger volume - the debt of the financial institutions or the wealth of the Federal Government. "
The Federal Government has no wealth and the financial institutions owe each other whatever debt is significant here.
The Feds can borrow, but that isn't wealth. The Feds can tax, but that isn't wealth. If you want to count government owned land and other property (nuclear weapons anyone?), I suppose there is some wealth in all that, but I don't believe those are at issue here.
March 12, 2009 3:01 AM | Reply | Permalink
I'm confused. If the Feds can borrow money, why wouldn't that be considered wealth? Same question goes for taxed money? Also, wouldn't the wealth of the nation include it's resources and people? I would think the wealth of our nation (I'm biased) would always be more than the debt of the financial institution. Money is only worth, the value we place on it.
Maybe I'm looking at this in more esoteric terms. Then again, maybe I'm missing the entire point. Bwakfat said, not all sharks are bad and I guess that's what made me go off on this particular thought pattern. Just me thinking out loud, sorry. Help me to understand please.
March 12, 2009 3:40 AM | Reply | Permalink
The ability to borrow does not mean you are wealthy, look at unsecured credit cards. Taxing power isn't wealth in my view, it's a way of tapping the collected wealth of the nation. The Federal Government isn't quite the same as the nation even if in theory it is "of by and for the people" or some such.
The Feds don't put up collateral when they borrow to cover budget deficits. They simply write IOUs called Treasuries.
If you borrow $1000, you have $1000 AND you owe $1000 (plus fees and interest usually). So borrowing usually takes wealth away from you. If you are a Producer and use that loss of wealth effectively, you can generate enough profits to pay off the loan, and then some. But just having the $1000 doesn't make you wealthy, it makes you indebted. Consumer borrowing in this sense never generates a profit, it simply squanders future potential wealth in favor of current consumption.
Enuf?
March 12, 2009 1:17 PM | Reply | Permalink
"If you are a Producer and use that loss of wealth effectively, you can generate enough profits to pay off the loan, and then some."
I was thinking in terms of making money from the money that was borrowed or taxed. I didn't word it very well.
I understand your point eds, I think we're simply looking at this differently and I don't see it as a right or wrong answer.
If I'm the occupant of the boat, I want the debt to be bailed out. If not, I'm forced to tread water while dodging,(possibly) man eating creatures. Not a good thing in my world.
I understand in Larry H's analogy the water (debt) inside the boat is greater than outside but I see it differently. I see the water outside the boat as the nation's wealth and sharks as the predators that feed on that wealth. Since sharks are a part of the ecological food chain, I don't mind the sharks as long as they are under control.
Maybe logical, maybe not but it works for me and gets me through the day:)
Thanks for your feedback.
Please don't stop thinking Larry H. It's the reason I enjoy it here so much. People using their brains turns me on. In a non sexual sort of way , of course. LOL
March 12, 2009 1:49 PM | Reply | Permalink
Well, perhaps what I'm trying to say is that the whole bailing notion is a misframe, not a great way to look at things if the truth is your objective. It's like being in a bathtub and dealing with one toy boat taking on water. Meanwhile the bathtub as the context/frame itself has problems, whether it is overflowing or leaking common sense.
March 13, 2009 2:42 PM | Reply | Permalink
Often the better way to look at a problem is revealed by someone else whose hardwiring is simply different from one's own.
"Bail-in" is brilliant. WD-40 for the brain.
Now, what needs to be done, from that more accurate perspective?
March 12, 2009 3:19 AM | Reply | Permalink
BTW, love your new avatar.
Because global crisis and moral breakdown are issues too profound for me to make a viable contribution, I've been amusing myself over this term break by putting together an art teacher's/pop psychologist's analysis of TPM avatars, which is almost finished.
I know. Gallows humor. But still: is it better to weep, wail or laugh in the tumbrel?
March 12, 2009 3:27 AM | Reply | Permalink
I’m as ordinary as a broom but that doesn’t mean I don’t have a place in the world. I chose this avatar in part because of what I say in my bio below:
I am also alluding to the rich fable that is the Sorcerer’s Apprentice segment of Disney’s Fantasia.
March 12, 2009 12:46 PM | Reply | Permalink
I agree wwstaebler. I think it's an excellent post and analogy. I have a habit of taking ideas, bending and twisting them to see if I can come up with something different or take it to another plane. I hope that doesn't insult anyone?
March 12, 2009 3:46 AM | Reply | Permalink
Offended! That is what a lot of us here are looking for. Keep on keepin on.
March 12, 2009 8:19 AM | Reply | Permalink
Insult? It is why I published this piece. When I was Secretary of the Treasury I used to think about this. Oh wait I never was Secretary of the Treasury. No matter, I’m still allowed to think.
March 12, 2009 12:51 PM | Reply | Permalink
Thanks dickday, will do.:)
March 12, 2009 9:50 AM | Reply | Permalink