Mises Daily Articles
Then you might get the chance to put your money where your ideological convictions are. The Obama administration is cajoling investment companies to create bailout bonds. These would be similar to the bonds that wartime presidents created to find sucker-investors for their wars. Americans were browbeaten into buying them as a patriotic duty. So too those who say "yes, we can" to the bailouts will be asked to do their patriotic duty, and buy the debt of loser companies.
It's all part of the war on depression, which is destined to be as successful as the war on drugs. But, hey, if it is a good investment, why not buy bailout bonds? Well, there's a problem. The bonds represent credit extended to companies and projects that are proven market failures. Creating these bonds is a way of institutionalizing the principle of buying low and selling lower.
So why would anyone do it? Well, an article in the New York Times says it is a good deal because the bonds represent underpriced assets. The economy will recover and the mortgages with them. "If all goes well, the funds will eventually sell the investments at a profit."
Catch that? "If all goes well…"
If all goes well, I can leap out my window and fly to the moon and be back by lunch.
Here is a tip for understanding market economics. When you hear that something is overpriced or underpriced, these comments are always and everywhere without exception a speculation. The prices that exist right now, in any market, are precisely the right prices that need to exist. If there were certainty that a price should be higher or a price should be lower, the price would already be higher or lower. That is because investors are always looking for a sure thing, and the reality of a certain future is always bid back to the present, with a premium embedded for the cost of time transfer.
In the absence of price controls, you can trust that today's prices embody the existing conventional wisdom, which is pretty good most of the time, and certainly not something a journalist is in a position to second guess. On the other hand, maybe you are an entrepreneur who can outwit the conventional wisdom. That is your profession and your means of income. It is your job to give history a shove forward.
But here is the problem. If an entrepreneur believes that these mortgages and other "toxic assets" are underpriced, he doesn't need a special bond to act on his hunch. He can just buy the stocks of the companies holding the assets or he can go one better and buy the assets themselves.
What does the creation of a new bond do? It is there as a subterfuge, something to pull the wool over your eyes, with the wool made of fancy financial language that masks a very grim reality.
But now comes the billion-dollar question. How will these bonds be rated? If market conditions prevail, there is no reason for the bailout bonds to be rated any higher than the toxic assets that back them. If I have a mud pie and wrap it in mud, it doesn't become edible. It becomes more of the same.
Thus do we come to the most important aspect of the bailout bonds, which is not being publicly discussed, namely, who is going to back them? The answer is you and your money, which is also called the "full faith and credit of the US government." The bonds will be backed by the usual way that the government gets money, which is to tax it or inflate it away.
In this case, the bonds will indeed achieve a higher rating than they otherwise would, in precisely the same way that the Fannie and Freddie financial instruments backed by mortgages received a higher rating than they otherwise would, because the government was implicitly backing them.
In other words, this entire tactic is an extension of the exact path that got us into this mess in the first place!
So it is with every new plan, every new strategy, every new program, every new idea from the regime. They are all some variation on a theme that repeats the mistakes of the past. It's like a person who bumps into a wall, and keeps bumping into the wall again and again. Every new plan for going forward keeps coming back to the same reality of bumping into the wall.
What would we say about this person? We would say he is obtuse and refuses to learn from his mistakes. So it is with all government programs that have been put in place since this crisis began. They are the very embodiment of what it means to not learn from past error.
If private markets have learned from past mistakes, they will stay away from these bonds. They will freely tell others not to buy them either.
But then what happens, especially as the depression deepens? In the First World War, such people were sent to jail. That tended to have a chilling effect on open discussion of the subject.
Will Obama try such tactics? Surely this great humanitarian will not resort to fining and jailing people for not supporting his war effort. Or can he really go to such lengths? If history is our guide, the answer is, Yes He Can!