Keeping The Lions Strong So They Have The Stamina To Hunt The Gazelles
March 19, 2009 3:55 PM   Subscribe

Why is all this money going to industry and commerce, not the citizenry?

Ok, this is a dumbass question, but I've not actually seen it answered anywhere, so I figured I'd ask here. I'm not that familiar with economics so I'm only going by my own simple logic, which is sadly for me not applicable to the world at large.

Why are these hundreds of billions upon hundreds of billions of dollars going from the US Treasury to a demonstrably incompetent financial sector, and not to the population? You know, the ones who are losing their homes because they can't afford to pay them off, because they lost their jobs? If the money went to them, or was administrated such that it was injected directly back into mortgage payments, wouldn't this have the same overall effect, and actually be of greater benefit to a greater number of people?

If someone could enlighten me, that would be great.
posted by turgid dahlia to Work & Money (18 answers total) 3 users marked this as a favorite
Recession is thought to be a disease of too little spending. The "stimulus" treatment aims to create more spending. This can't be achieved by just giving money to individual people because they would rather save it than spend it. This is known as the paradox of thrift.

All of this is part of the mainstream macroeconomic consensus. That doesn't mean it's true, but hey I can't do any better.
posted by grobstein at 3:58 PM on March 19, 2009

(This explains the general trend of stimulus spending on "industry and commerce." Explaining why bailout money goes to financial firms holding bad mortgages rather than individuals defaulting on bad mortgages is trickier; I don't know if there's a neat theoretical answer. Likely some combination of 1) parceling out money to millions of the correct people is hard, 2) keeping financial firms above water is urgent because their failure represents a systemic threat, 3) general political immorality.)
posted by grobstein at 4:03 PM on March 19, 2009

Response by poster: Okay, so, dumb followup number 1: why not pay people's mortgages instead? The banks are getting it anyway, and people aren't getting booted out into the street. Win-win! Giving it to the banks instead of the homeowners seems like a reward for trillions of dollars worth of outright hostile greed and stupidity, rather than a few hundred thousand dollars worth of poor judgement. Or not?
posted by turgid dahlia at 4:04 PM on March 19, 2009

Read some of the past metafilter threads about mortgage bailouts, and see how many different opinions there are on that subject.
posted by inigo2 at 4:11 PM on March 19, 2009

Best answer: Because their first priority is not to reward nice people or punish people who screwed up. Their first priority is to get the system working again, and to prevent it from degrading further. Businesses, which employ the people, so they can get paid, so they can make their mortgage payments, use credit. Lots of it. They borrow money, however briefly, to buy materials and equipment, to hire people when expanding, etc. Big banks are ordinarily happy to loan businesses (and consumers) money. Big banks are normally able to loan businesses money. They are normally able to loan money because they normally have money to lend. When the bottom dropped out of the housing market, many of the assets held by these big banks lost a large fraction of their value. Some lost all of their value. Many are so complicated that nobody's quite sure whether they're worth anything or not. In any case, the banks suddenly find themselves both short of cash and much more risk-averse than they have been for the last couple of decades. Many banks are completely insolvent. Banks are no longer so enthusiastic about loaning money to either consumers so they can buy stuff, or to businesses so they can make stuff. So it's harder to buy stuff and harder to make stuff. Which means that people get laid off. Which means they don't get paid. Which means they can't buy stuff or pay their bills. Lather, rinse, repeat. Getting the banking system back on its feet is not optional.
posted by jon1270 at 4:23 PM on March 19, 2009 [3 favorites]

Giving money directly to people would go against "free market" philosophies upon which our economy is ostensibly built. The hope is that routing money through business and industry will get people working and getting paid again, so they will go back to buying shit they don't need at Wal Mart, and/or paying their mortgages.

If the government were to just pay off people's mortgages, those of us who responsibly pay our own mortgages would rightly call foul. Though many foreclosures are the results of job loss, many more are the fault of buyers who overextended themselves in an era of easy credit, and this would be politically prickly.
posted by M.C. Lo-Carb! at 4:25 PM on March 19, 2009

1- Business and industry IS the citizenry. It's not like you lose your citizenship when you work at or have some ownership in a business.

2- Because this bailout money is, in some form or another, a loan. Or a purchase of equity in the entities.

3- Because of how the banking system works, if everyone paid off their mortgages, the banking system would collapse.
posted by gjc at 4:50 PM on March 19, 2009

why not pay people's mortgages?

Houses only sell for as much as someone is willing to buy them for. If the government comes in and pays artificially high prices by subsidizing homeowners who can't otherwise afford homes, then those people stay in their homes instead of allowing foreclosure, which keeps house prices artificially high.

This is good for you if you already own a home in the short term, but bad for anyone who does not own their own home as it makes houses much more expensive than if there was no government action.
In general I feel housing prices are inflated over their 'real' value and need to come down to a level roughly reflecting the median incomes of the surrounding areas. (see this chart )
posted by spatula at 4:57 PM on March 19, 2009

Giving money directly to people would go against "free market" philosophies upon which our economy is ostensibly built.

As does giving money to businesses, or bailing out banks, etc. There may be nominally "pro-business" types who argue that the two are somehow different (to the detriment of "business" as a whole, I might add) but the essential ideas associated with free market philosophies frown on favoring one business over another and subsidies generally. Therefore, I don't think this is a strong concern in this area and I second gjc's point above about the false distinction between business owners/employees and citizens.
posted by Inspector.Gadget at 5:27 PM on March 19, 2009

Another reason: The government simply paying off mortgages screws over an even bigger group of people, those without mortgages. You know, renters and the like. Who are disproportionately young, poor, single, non-white, etc.

The government paying off mortgages is wealth transfer from the young, from singles, from the poor, and from minorities to the old, married, rich, and white.
posted by Justinian at 5:53 PM on March 19, 2009 [2 favorites]

Short, simple answer that touches on some other replies...

1). Businesses employ people.

2). If businesses don't have money, they can't pay employees.

3). The government gives money to businesses, and those companies in turn give it to their employees. (Or they give it to the companies they owe money, who in turn give it to their employees, etc. etc. Either way, the money funnels down to the citizenry.)

It's just a matter of choosing the insertion point into the system, and the government can target certain "problem areas" of the system more easily by inserting via the business rather than via the citizen.

At least, that's how I see it. I'm not an economist -- I'm just some guy on AskMe.
posted by ElDiabloConQueso at 7:06 PM on March 19, 2009

I Am Not An Economist.

That said, here in Australia, the government is giving people money as part of its financial stimulus package. This is a small part of the scheme, but has attracted the most media attention to date that I've noticed. People have focused on how people will take the cash, and travel (thus improving overseas economies, not Australia's), or how people already living overseas will get the money. Or how they will use it to pay debt and not spend on consumer goods like the government is hoping.
posted by Admira at 7:49 PM on March 19, 2009

Response by poster: That said, here in Australia, the government is giving people money as part of its financial stimulus package.

And I'm looking forward to mine too! Nine hundred bucks never hurt anybody, except for the bloke who had the loan shark after him because he owed a grand.

This is all good stuff, thanks guys. I'd love to hear more.
posted by turgid dahlia at 8:45 PM on March 19, 2009

Here's another piece of it. People generally, like person-on-the-street people, still trust banks and the financial system for the most part. They have faith that their deposits will still be available to them and they see that when they pay for things with the little plastic cards in their pockets that the transactions still work and all that stuff.

Now, there are many very large financial institutions that, if they were forced to nakedly lay their cards on the table, would be completely and utterly broke. Not a going concern. Shuttered. Owe way more than they're worth. If they tried to pay their creditors with every last penny, including every penny entrusted to them by their depositors, they wouldn't even get close.

What do you think would happen if say a dozen of the biggest banks in the country said, "Well, that's it then, we give up", and closed?

The FDIC would be sucked dry in, oh, a millisecond. The runs on the remaining solvent banks would take about a millisecond more. Pretty much our entire economy would grind to a halt. (Remember that part about 70% of it from consumer spending? How much of that occurs in cash these days, I wonder?)

In the Depression, many people were ruined because their bank deposits vaporized. A good deal of the pain and suffering afterward were because people didn't trust banks and so many of the positive consequences of a functional banking system (i.e., loans for businesses, houses, other large purchases) didn't come to pass.

The FDIC and all those regulations that were dismantled by the Reagan revolution and its aftermath were put in place to prevent this situation from happening again. Well, here we are and the government is working like crazy from slipping back over the edge again. It's important to keep the banks solvent, because if people really and truly lose trust in them, the game is functionally over for quite some time to come.
posted by Sublimity at 9:28 PM on March 19, 2009

Two or three times a week, NPR's Planet Money does a great job of putting together short, sophisticated yet very accessible podcasts about the economy.

The same team has also done three hour-long specials for This American Life.

355: The Giant Pool of Money

365: Another Frightening Show About the Economy

375: Bad Bank
posted by jon1270 at 11:42 PM on March 19, 2009 [1 favorite]

And I'm looking forward to mine too! Nine hundred bucks never hurt anybody...
Is this where I skite about getting nearly four grand in my bank last week? I used it to pay bills ...

While I fundamentally disagree with the concept of rewarding incompetent CEOs by bailing their company out of the mess they caused so they can collect their multi-million dollar golden handshake and fuck off before the money runs out again, if the government doesn't bail out these companies, "the people" won't have jobs and any stimulus payments will go on food and housing, not stimulating the economy, so there is no way for businesses to grow, so no new jobs and the whole thing just spirals down and down. By bailing the company out, they stop the cycle cold.

I'm also just some guy on AskMe, but that's my take on things.
posted by dg at 6:10 AM on March 20, 2009

why not pay people's mortgages?

Unless part of that involves giving people who don't already own homes a place for free, it is inherently unfair.
posted by Civil_Disobedient at 8:56 AM on March 20, 2009

Best answer: Here's how the fact that industry and commerce are the primary (though not only) beneficiaries of the government's stimulus money can be explained from a purely theoretical economic perspective:

There two most prominent schools of economics are the Keynesian and the neoclassical schools. John Maynard Keynes was particularly active during the Depression, and many of his theories applied to it, which is why, after a period of unpopularity, they have one again become relevant.

As one of its core beliefs, Keynesian economics states that fluctuations in the largely inevitable business cycle (peak - trough - peak - ...) are a result of changes in aggregate demand (the total demand of good and services in an economy). More importantly, Keynes believed that, once when we're in a trough of the business cycle - especially a bad one, like the Depression or the current crisis - only government spending could increase aggregate demand enough to get us out of the hole. He proposed fiscal policy as a solution.

So now that we've decided to give away government money, the question is: who do we give it to? It could taxpayers, or businesses. The answer lies in Keynes's idea of a multiplier. Suppose the government pays a company to build a road. They will rent equipment, hire people, etc. - i.e., spend money. The other firms and people they hire will now have extra cash, which they will in turn spend on their own needs. In this way, the money will "trickle" through the economy, increasing GDP by a greater amount than the original injection. Which is good - the more the better. So why doesn't this continue indefinitely? Because, at some point along the chain, people will choose to save all or part of the extra money. This is good for them, but bad from a macroeconomic/multiplier standpoint.

This saving will happen eventually whether you give the money to individuals or businesses, but it'll happen more quickly with individuals, who would be more likely to save the bonus immediately after they get it. (Businesses, on the other hand, can't really save, especially when they get money with a certain condition, like being hired to build a road.) That's the difference between a tax multiplier and a government spending multiplier. If you look at the numeric formulas for computing these, the latter will come out greater.

In reality, governments give money to both firms and individuals. Australia, brought up above, split the money in a roughly 3:1 ratio. But, as you've noticed, businesses are definitely favored. Hopefully, this explains why.
posted by AnimalKing at 3:34 PM on March 20, 2009

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