Comments on: Don’t Throw in the Towel http://wallstreetpit.com/1860-dont-throw-in-the-towel Tue, 22 May 2012 19:21:52 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: David Birchler http://wallstreetpit.com/1860-dont-throw-in-the-towel#comment-15628 David Birchler Tue, 21 Apr 2009 21:37:19 +0000 http://wallstreetpit.com/?p=1860#comment-15628 Let us view the larger picture of the final example: The government steps in and gives funds, that were aquired through taxation, to the people of the town, with stipulations. In this case, the people of the town have no responsibility for any losses, and we will assume they had absolutely no idea their windows would not be strong enough. In this case, the townspeople are good credit risks, as they were productive before and should be again. Let's assume that it's the local government doing the helping, as federal help is akin to forced charity. I repeat, I am assuming no charity, forced or otherwise. I expect everyone to pay their debts. Now, assuming the local government is good for it, the local government borrows money to help its people, and now has a debt to pay off. If it does not pay off the debt, it will merely gain interest and be a millstone around the government's neck. It is obvious to me that the government assistance is merely an investment in its own people. If it is done fairly, it is possible that the people helped could go on to produce wealth; in the cases of loans, they could be paid off by the recipients, and for grants, everyone could subsequently be taxed, and the debt could be payed off. There is a limit, of course, to how much they can sustain, as the people need to produce enough to survive as well as keep up with interest payments in order to keep the debt manageable. This is possible! It can be a workable scenario, certainly, so long as the debt is eventually paid! However, if these people turn out to not be good credit risks, or, more likely, some much worse than others, very few win out in the end; the people can attempt to use their government as a debtor to keep them afloat, but, of course, there are always limits. You see, the government does not create wealth, but reallocate it. Consider that government programs are notoriously inefficient, and you may just be making life more difficult for the entire town, even for those few who did not lose much in the storm. My point is that if the investment were bad or misguided (for which government programs are also notorious), the town would eventually be in a similar situation, or perhaps worse, and the only way to escape the debt and misery would be to move away. As for private loans, the asumption that none of the previously productive buisness owners can find a method of borrowing money is absurd. If I were a banker in the town next to theirs, I would invest heavily in their town, and with confidence, unless given a reason not to. Of course, not if the government got involved, as the goverment would be acting as a loser bank, nigh impossible to compete with. There is always the risk that the local economy would be set back because loans could be scarce, but, again, this is a disaster! How can you not expect a setback? It would cost a lot, but it would cost those who lost their property. The ones who were not prepared, lose; If they are not at fault, there is insurance, as well as the fact that they are very good credit risks. Finally, if the insurance could not pay everyone, then they made a bad investment, and would fail. If they would refuse to pay anyone, they would lose their business, and fail. That is harsh, but that is the result of so much lost wealth. The windstorm cannot be considered to be serendipitous. Keynes was wrong. Using government at the federal level merely increases the scale of the issue, the inefficiencies (corruption, bureaucracy, inability to reverse bad programs), and the distribution of the distruction. Yes, that would spread it out more, but there are limits! The end of your article should be rewritten as "Because of the government action, the economy is temporarily revived, and they all live happily ever after, if they manage to pay off their debt. If not, they don't." Let us view the larger picture of the final example: The government steps in and gives funds, that were aquired through taxation, to the people of the town, with stipulations. In this case, the people of the town have no responsibility for any losses, and we will assume they had absolutely no idea their windows would not be strong enough. In this case, the townspeople are good credit risks, as they were productive before and should be again. Let’s assume that it’s the local government doing the helping, as federal help is akin to forced charity. I repeat, I am assuming no charity, forced or otherwise. I expect everyone to pay their debts. Now, assuming the local government is good for it, the local government borrows money to help its people, and now has a debt to pay off. If it does not pay off the debt, it will merely gain interest and be a millstone around the government’s neck. It is obvious to me that the government assistance is merely an investment in its own people. If it is done fairly, it is possible that the people helped could go on to produce wealth; in the cases of loans, they could be paid off by the recipients, and for grants, everyone could subsequently be taxed, and the debt could be payed off. There is a limit, of course, to how much they can sustain, as the people need to produce enough to survive as well as keep up with interest payments in order to keep the debt manageable. This is possible! It can be a workable scenario, certainly, so long as the debt is eventually paid!

However, if these people turn out to not be good credit risks, or, more likely, some much worse than others, very few win out in the end; the people can attempt to use their government as a debtor to keep them afloat, but, of course, there are always limits. You see, the government does not create wealth, but reallocate it. Consider that government programs are notoriously inefficient, and you may just be making life more difficult for the entire town, even for those few who did not lose much in the storm. My point is that if the investment were bad or misguided (for which government programs are also notorious), the town would eventually be in a similar situation, or perhaps worse, and the only way to escape the debt and misery would be to move away.

As for private loans, the asumption that none of the previously productive buisness owners can find a method of borrowing money is absurd. If I were a banker in the town next to theirs, I would invest heavily in their town, and with confidence, unless given a reason not to. Of course, not if the government got involved, as the goverment would be acting as a loser bank, nigh impossible to compete with. There is always the risk that the local economy would be set back because loans could be scarce, but, again, this is a disaster! How can you not expect a setback? It would cost a lot, but it would cost those who lost their property. The ones who were not prepared, lose; If they are not at fault, there is insurance, as well as the fact that they are very good credit risks. Finally, if the insurance could not pay everyone, then they made a bad investment, and would fail. If they would refuse to pay anyone, they would lose their business, and fail. That is harsh, but that is the result of so much lost wealth.

The windstorm cannot be considered to be serendipitous. Keynes was wrong. Using government at the federal level merely increases the scale of the issue, the inefficiencies (corruption, bureaucracy, inability to reverse bad programs), and the distribution of the distruction. Yes, that would spread it out more, but there are limits! The end of your article should be rewritten as “Because of the government action, the economy is temporarily revived, and they all live happily ever after, if they manage to pay off their debt. If not, they don’t.”

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