GIMME THAT OLD TIME RELIGION

9/30/08

As you might guess, I am delighted that the Troubled Assets Relief Fund (“TARF”), a moniker that seems not to have caught on but sounds especially apt because of a word with which it rhymes, was voted down by a bipartisan group of courageous legislators, led by a group of GOPers who seem to have found their long missing spines.

The more I listen to the hysteria on CNBC (the voice of the Wall Street downtrodden) the more I am convinced that TARF was unnecessary. Despite all the tortured screeching about “companies not being able to meet payrolls,” very few of the Wall Street cheerleaders offer any solid evidence that such cataclysms are occurring. Deal flow is down, way down, but is not non-existent, and even severely reduced deal flow does not seem to warrant a $700b raid on the taxpayers’ wallets and nationalization of a sizable chunk of the financial system. CNBC (again, consider the source) indicated that ATT is having a hard time rolling its commercial paper, but offers only vague evidence of this contention, all of which is coming from people with a dog in this fight. Even if it is true that ATT is having trouble rolling its CP, this won’t last long. A friend asked what would happen if GE couldn’t roll its CP. While I doubt this would happen, I suppose such a well deserved slap in the face would force Jeff Immelt and his team (or perhaps a replacement crew) to dismantle the rickety and ill-considered house that Jack built, separating the financial anchor that threatens to sink that venerable ship from the bankable industrial companies and allowing the financial arm to flounder, if indeed this is necessary. (The “business community” might also want to reconsider its hagiographic approach to Jack Welch, but that will never happen.) This is creative destruction in the most Schumpeterian sense and it is how a well functioning free market economy works. It’s not painless, nor should it be.

The larger point is that even if good risks are not getting credit, this situation cannot prevail for long. People and financial institutions are not going to stuff their money in their mattresses and they can’t buy T-bills forever. Money will seek a profitable, yet prudent, home, if it is allowed to do so. One thing is certain, though: bad risks will not get credit. Perhaps that is what the Wall Street rah-rahs on CNBC and in that bastion of shameless hypocrisy, the Wall Street Journal, fear. But is it such a bad thing? This economy is severely overleveraged at the consumer, business, and government level. We have to return to financial prudence.

Speaking of financial prudence, I am getting tired of the pom-pom section at CNBC and elsewhere asking “How will people buy cars if they can’t borrow money?” Here’s an idea: Save your money and pay cash! What concept! Yes, it sounds alien, but it was common only a generation ago, and, in the Quinn household, has always been our practice. It’s not that we’ve made tremendous money; we haven’t. But maybe it has something to do with the cars we buy and the way we live: within our means. My ancestors came from Ireland and Poland (but the south side of Chicago, really), my wife’s people from Poland. But when we mention things like paying cash for cars, people look at us as if our people came from much father away—like Mars.

The bad news, of course, is that the GOPers will probably buckle in exchange for eliminating the mark to market rule. Apparently, the Party of Prudence favors the “out of sight, out of mind” approach to economic problems, but that is another discussion.

Point of clarification: I am not saying everything will be fine if we don’t fund the TARF. Regular readers know that I am quite convinced that the world, and not just the financial world, is in a rapid downward spiral. Passing the TARF would not make any difference in this seemingly inevitable degeneration of our economy and society. And, as I said in my 9/19/08 post, TARF might not work in achieving the aims it is designed to address. What if the detritus is removed from the books and spilled in the laps of the taxpayers, yet the arteries of the economy remain clogged due to a dearth of decent credits? What will we have accomplished then?