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A Quick Primer on Liberal & Conservative Economic Theory

We may or may not be in favor of the bailout.  We may or may not fully understand what the bailout will or won’t do.  We may or may not be any smarter than the politicians who (in my humble opinion) don’t have a clue what the bailout will or will not do.  But I am guessing we can all recognize good ideas from bad ideas.  It’s easy: the former stimulates business and the latter stifles it.

Case in point (you can read the full story here):

Congressional leaders scrambled Tuesday to come up with changes to help them sell the failed $700 billion financial bailout to rank-and-file members. One idea gathering support: raise the federal deposit insurance limit to reassure nervous savers and help small businesses…

Republican House aides said the FDIC proposal might attract some conservatives who want to help small business owners and avert runs on banks by customers fearful of losing their savings…

Another possible change to the bill would modify “mark to market” accounting rules. Such rules require banks and other financial institutions to adjust the value of their assets to reflect current market prices, even if they plan to hold the assets for years…

Some House Republicans say current rules forced banks to report huge paper losses on mortgage-backed securities, which might have been avoided…

Liberal Democrats who opposed the bill are suggesting other changes. Their ideas include extending unemployment insurance and banning some forms of “short selling,” in which investors bet that a stock’s value will drop…

The conservatives want to

  • Raise the insured limit on bank deposits.  Of dubious actual benefit in my opinion – but tough times call for paper mache measures.
  • Change the mark-to-market rules.  The mark-to-market rules are onerous to investment companies and do not reflect asset values accurately.  This should have been enacted long ago.  Using the bond concept of yield to average life would make more sense.

The liberals, on the other hand, want to

  • Extend unemployement insurance.  What? To stimulate the economy you want to increase the weight of one of its anchors?  I know this is a liberal favorite but does it have to be trotted out everytime they want to negotiate?
  • Ban aspects of short selling.  Typical of those that neither understand how markets work or how short selling in particular works.  Without short sales we not only lose true price discovery, but more importantly the firms that help insure risk for the creators of debt have no where to lay off that risk.  A two-for-one bad idea.

So we have two camps; one finds ways to increase confidence while improving the bottom line for financial companies, the other looks for ways to stifle business and markets alike.  Is it any wonder big items like the bail out don’t get done?

I am not a big fan of either party, but at times like this the choice is easy.

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