Tradeoffs Don’t Exist

Or so say Larry Summers and Mark Thoma who argue that we can have a bailout and a stimulus package and still have tax cuts and more spending on energy, health care, education and all the other goodies that we have been promised.  Salesman Summers explains:

Just as a family that goes on a $500,000 vacation is $500,000 poorer
but a family that buys a $500,000 home is only poorer if it overpays,
the impact of the $700bn programme on the fiscal position depends on
how it is deployed and how the economy performs. The American
experience with financial support programmes is somewhat encouraging.
The Chrysler bail-out, President Bill Clinton’s emergency loans to
Mexico, and the Depression-era support programmes for housing and
financial sectors all ultimately made profits for taxpayers…

Does this sound familiar?  I can hear it now.  A vacation sir is consumption but a home, ah a home, that’s investment.  Investments pay off.  Just look at the American experience.  Rising home prices!  Never a downturn.  Isn’t that encouraging?  Hell, at prices like these you can hardly afford not to buy.  Yes sir, a home that’s a wise investment.  And that makes you sir, a wise investor.  And a wise investor, well a wise investor can certainly afford a nice vacation.    


If you are interested in the relationship between the Bush-Rove political strategy for bringing about a realignment of voters and the subsequent mortgage meltdown, see my article:

Mind me being a pleb for just a sec, but if taxpayers make a profit, then you're already in another housing bubble?

Steve Sailer nails this one:

Screwing around lowering down payments just pushed the discovery of this fact off into the future, after we've wasted all that money on homes, which aren't really investments in the sense that they generate new wealth, they're just expensive consumer durables. And, they aren't all that durable, either.

I like that. Homes as "expensive consumer durables." Reminds me of the saying that "We don't really own anything, everything is merely rented."

Also of the old wisdom that in real estate you make your money when you buy, not when you sell.


I too think that bailout plan will cost less than $700 billion but the fact of the matter is that it could cost more so it's not clear to me that Summers is helping things.


The test here is; Would you buy this investment if you weren't being forced to buy it? I think the nays have it.

"a family that buys a $500,000 home is only poorer if it overpays"

-- isn't that the heart of the problem? People overpaid, and financial institutions let them?

Is Summers argument really supposed to make me less angry?

Suppose the end cost isn't $700 billion but $110 billion. That's still bleeping gigantic. We will have costs amounting to $1,000 per American household and taken on substantial risk while doing it. [lest we forget, we also own or guarantee Fannie, Freddie, AIG, ...]

Alex, I imagine you are aware of the original contingency that allowed Treasury to have $700B on its books at any one time, not just a ceiling of $700B. In other words, Paulson could keep going back to the well.

I'm not sure if that provision has been changed in this latest iteration; if not, taxpayers could lose a lot more than $700B.

I think there's way too much being made of Summers' words because of his poorly-chosen example. My reading is that he was attempting to explain the difference between expensing and capitalizing a cost, and why the bailout package is more like the latter than the former. He could have said: "A company that spends $500,000 on an employee party is $500,000 poorer but a company that buys a $500,000 piece of capital equipment is only poorer if it overpays."

Of course, you can quibble with whether the bailout is a good deal for the government or not; I think it's probably not. However, it seems possible that the government and only the government is able to make money on this deal. First, their financing costs are much lower. Second, they have a much greater ability to change rules they don't like for their benefit (like helping restructure mortgages so that some homeowners can stay in their homes). Third, they (hopefully) won't have to worry about a run on the bank, and thus face no pressure to liquidate assets in a tight time frame.

I don't want the purpose of this post to be misconstrued. I don't think this is a great deal for taxpayers. But I do think the above two points are being misconstrued to some degree.

Did Summers work for Worldcom?

Summers is "cost-benefitting"

All costs and benefist must be considered. The 7 bi will not be thrown away. We just don't know whether it's going to pay-off or not, because investiments can fail.

I believe that summer's statment is correct. Even with the bailout and the stimulus package I believe that we can afford tax cuts, and more spending on things such as education, energy, and health care. I believe this because like summers say's those things are more of an investment than they are an expense. Especially with energy because even if we pour a lot of money into researching alternative energy in the short term, that could save us a lot of money in the long term because it will reduce our dependance on foreign oil.

so the world is unfair

it is commen in the market

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