Friday, February 06, 2009


I've been reading a lot of complaints about the bailout plan, and rewarding incompetence, and the mortgage bailout plan, and how it is rewarding lazy and stupid people that bit off more than they can chew, etc...

What struck me about all this complaining is that these folks fail to grasp a fundamental change that occurred in our society. There is an old saying "If you owe a bank $1000 and can't pay it back, you have a problem. If you owe the bank $10,000,000 and you can't pay it back, the bank has a problem."

Americans have been putting all their money into the stock market. And so, you can argue for tough love for all these companies, but in the end, you are just hurting yourself. They are corrupt, they are greedy, it was wrong, but guess what - we are all shackled to them. Unions that still have a 1920's view of "workers" vs "management" are not getting the fact that their constituents are shareholders in the same companies that they are striking against! Shareholder means owner! You are making yourselves lose money!

For many years, I worked for a company whose business it was to calculate scores based on large amounts of data and then sell these to customers. They have been doing this for decades. As part of a re-engineering effort we discovered that some of these scores were being calculated incorrectly and we proposed to our customers that we would fix the calculations. They all balked. A sudden change in scores would be deadly to them. They preferred receiving incorrect values, and incrementally fixing the problem.

This is a common property of large, complex systems. Change needs to be introduced in a controlled fashion to avoid the risk of out of control fluctuations. The same needs to happen in our economic system. Reform needs to happen, but it cannot happen in a drastic fashion - that would be an enormous risk to our economy and our well-being.


Blogger -suitepotato- said...

"Reform needs to happen, but it cannot happen in a drastic fashion - that would be an enormous risk to our economy and our well-being."

Currently the people in charge with their hogs to the trough spending bill are proving themselves manifestly not to be the ones to do any reforming. If anything, they'd do what they are doing now, using it cynically as an opportunity to aggrandize themselves further.

Reform of the system also cannot be done unless people know what the actual problems are. With respect to the mortgage meltdown, what is being ignored are A)the size of the mortgage principle, B)anti-redlining, C)mortgage arrangers.

There's no reason any family with an under $80K yearly combined income should with cable, gas, electric, car gasoline, durable goods costs, etc. be getting a 5% rate for two years on a $450K principle that climbs to 10% in two years. NONE. They can be afforded at the beginning, but not later on when the increase happens. They are given out because the people arranging these loans get paid more to arrange bigger loans and by the time they become unaffordable, the mortgage is likely to have been sold once or twice, and besides, not their problem. They just got the two sides to sign. Besides that, a buttload of these were federally backed and the government can always pick up the tab.

It's not that people don't deserve or need their own homes, or that people had whatever skin color, but that on flimsy and often very venal and specious reasoning, people were encouraged to help set themselves up for failure and all of us for a headache.

February 06, 2009 2:12 PM  
Blogger evanstonjew said...

I couldn't agree more. If they had not insisted on mark to market acctg. and allowed a smoother convergence over a few years trillions would have been saved.

I heard a the old days you went to a new bank you got a toaster, Today you buy a toaster, you get a bank.

February 12, 2009 2:02 PM  

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