FINANCIAL ANGER

Posted at 7:25 p.m. ET

The financial bailout package got a cold reception on Capitol Hill today.  There is gut anger at what has happened.   A loyal reader alerts us to an article by the mysterious Spengler, a pen name for a widely quoted writer who publishes in the Asia Times.  Agree with him or not, he expresses the anger and frustration that so many feel about the financial mess on Wall Street:

Why should American taxpayers give US Treasury Secretary "Hank" Paulson a blank check to bail out the shareholders of busted banks? Why should the Treasury turn itself into a toxic waste dump for their bad loans? Why not let other banks join the unlamented Brothers Lehman in bankruptcy court, and start a new bank with taxpayers' money?

Those are the questions people are asking.

Why are the voices raised in protest so shrill and few? Why will Americans fall on their fountain-pens for their bankers? If America is to adopt socialism, why not have socialism for the poor, rather than for the rich? Why should American households that earn $50,000 a year subsidize Goldman Sachs partners who earn $5 million a year?

You can call that demagoguery.  But, those, too, are the questions people are asking. 

Paulson's dreadful scheme will become law, because Americans love their bankers. The bankers enable their collective gambling habit. Think of America as a town with one casino, in which the only economic activity is gambling. Most people lose, but the casino keeps lending them more money to play. Eventually, of course, the casino must go bankrupt. At this point, the townspeople people vote to tax themselves in order to bail out the casino. Collectively, the gamblers cannot help but lose; individually they nonetheless hope to win their way out of the hole.

Sorry to say it, but there's a lot of truth to that.  Frugality and savings, once American staples, seem to have been forgotten. 

As it is, many of the baby boomers now on the verge of retirement will spend their declining years working at Wal-Mart or McDonalds rather than cruising the Caribbean. Some of them still have time to tighten their belts and save 10% of their income (by consuming 10% less), plus a good deal more to compensate for the missing savings of the 1990s.

And...

The homeowners of America hope against hope that somehow, sometime, the price of their one only asset will bounce back...

...Sadly, there is no reason to expect the bailout of bank shareholders to have any effect at all on American home prices, which will continue to sink into the sand.

One of the biggest economic mistakes we made was to sell people on the notion that a house was a guaranteed investment, rather than a place to live.  It let people live the illusion that they were wealthy. 

Why the taxpayers of America would allow their pockets to be picked in this fashion requires a different sort of explanation than one finds in economics textbooks. My analogy of gamblers taxing themselves to bail out the casino is inspired, in part, by a remarkable new book by the Canadian economists Reuven and Gabrielle Brenner (with Aaron Brown), A World of Chance. In effect, the Brenners re-interpret economic theory in terms of gambling, showing how profoundly gambling figures into human behavior, especially in such matters as so-called life-cycle investing.

Felix Rohatyn, the highly respected investment banker, once said that the stock market had become a casino.  Ditto, today, for other markets.

Alas for the gamblers of America: they will tax themselves to keep the casino in operation, but it will not profit them. Where, oh where, is America's Vladimir Putin, who will drive out the oligarchs who have stolen the country's treasure and debased its currency?

Now there's a frightening thought, isn't it?  Do we really need a Putin?  The sad fact is, if things get bad, some Americans will accept greater and greater central control.

We were taught in history classes that Franklin D. Roosevelt saved capitalism, and prevented America from going too far to the left.  We may not be so lucky next time, especially if real leftists are already in place in Washington.

A time to be cautious, wise, and not to panic.

September 23, 2008.