I was giving consideration last night to the popular opposition to the bailout plan. Philosophically I’m not opposed to the plan. At the practical level, I don’t think the plan will significantly help the corporate solvency issue with regard to derivative exposure. I am however in the camp of a government intervention most likely being prudent. Politicians are necessarily wary of being too attached to this proposal, because the reality is that if it works – works being defined almost as coherently as Victory in Iraq – they won’t get much credit and if it fails they will get all the credit. Analogously, this is like informing a friend that his significant other is having an affair: the best outcome is the recognition that your act was necessary.
As much as there has been an effort to establish otherwise, the American people seem to believe that this is an issue that affects them and not us. Having the plan being described as a “Wall Street” bailout hasn’t helped matters. There is also the not so significant matter that is compounded by the non-financial press in addressing this issue that the cause of this crisis is people taking mortgage loans they couldn’t afford. People are loathe to render aid to those they believe acted irresponsibly. My apologizes if this flies over people’s heads, but the problem is derivatives, and mortgages only happen to be the derived instrument. On a much smaller scale, Orange County, CA, ran into a similar issue with interest rate swaps. Add in two parts of unbridled optimism that things can’t get worse, and we find ourselves at an impasse.
As I was considered this further, I think the most relevant statistic is the Gini coefficient. The Gini is a crude measure of inequality in society. As the Gini approaches zero, income is more evenly distributed. As the Gini approaches 1, income is more disparate. To make a long story short, the US is experiencing a high Gini right now at 46%. Comparatively, it is close to Mexico and China. When Reagan took office, it was 40%. Much of Europe is in a 35%-40% range. Perhaps, the populists in this debate are telling the rich to eat cake. Of course, the prudence of doing so is a whole other issue.
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