Can we do this? Not without fanning the outrage on Main St. Americans are angry about Big Finance and the trillion or so dollars the government has pumped in to save it. Those expenditures may have been necessary at the time to keep the world economy from going over the cliff. But now we need a permanent fix and Washington won’t act against it captors without a public groundswell of anger and demands for action. Don’t contain your outrage, direct it where it will do the most good!

http://www.thedailyshow.com/watch/thu-november-19-2009/things-not-to-be-thankful-for—silverdome–goldman-sachs—congressional-recess

They do not play to maybe win. We know this.

Regarding the Social Security issue, your point is one that has come to be associated with the movement to Privatize Social Security.

Leaving aside the issue that privatization will create individual variation (and the point of Social Security is to establish a floor, not to create more wealth dispersion), there is the problem of the sheer amount of liquidity in the Social Security system.

Currently, private funds enter various investment channels – the marginal return on investment is set by the market. If the supply of funds into private channels were to dramatically increase, private investments would see rates of returns drop (in other words, more dollars competing to make the same investments). This would cause a huge spike in the value of assets currently being held (bonds, equities), but a long term low interest rate.

This would, theoretically, make it possible to invest in lower-return private investments (and decrease the interest rate on savings). But in practice, most of the private sector doesn’t seem to make investments with longer than a 3-5 year payoff even if the interest rate is near zero, so I’m not sure we’d see more longer term investment. (At some point, the inherent risk in long term investments just swamps the slightly lower interest rate.)

Another effect would be to increase the interest rate on government debt (unless all of the freed up social security funds get used to buy T-bills). Currently, social security is effectively “invested” in government debt. The government invests this by doing things that improve productivity (and, hence, tax revenue)… infrastructure, education, etc. Ideally, stuff that is _public_ infrastructure or generates lots of good externalities or is too risky/long term for private investment. (Unfortunately, we’ve spent a lot of govt debt on subsidizing unsustainable consumption rather than investing…)

But simply getting government to spend less of our “savings” doesn’t fix the problem unless the private sector invests those savings efficiently (which, of course, requires banks that make good decisions with other peoples’ money… ahem… and that private actors start to make investments with time horizons of 7 to 20 years or more).

There are many illusions surrounding money. The money that gets saved by individuals is merely a measure of an obligation. BUT at the aggregate level it reflects deferred consumption, where that intertemporal consumption tradeoff is determined by investment (and the technical factors underlying this investment).

Enter the Baby Boomers. If you have a huge population bulge go from 50 to 70, then something needs to be able to support the 70 year old population in the future. At the individual level this is savings, but at the national level (not accounting for international credit) savings aren’t the issue. The issue is dedicating resources into investments that will make the saved money _mean_ something when the population bulge turns 70.

FINALLY, there’s the immediate effects of dropping the private savings rate so rapidly. The net effect is to MASSIVELY and rapidly inflate asset prices (e.g. the price of bonds and equities). You would see a _one-time_ spike in those asset prices, achieved through a permanent drop in the private savings rate and a permanent increase in the cost of financing federal debt.

Anti-govt. folks think this is great. Among other things it “starves the beast”. In practice, privatizing social security right now (without first reducing federal consumption expenditures) is just another massive transfer of wealth from future generations to those people currently holding private assets. The resulting bubble could dwarf the housing bubble, while destroying the credit of the US government (and simultaneously crushing the dollar).

It’s just like cutting taxes without cutting expenses first – just another way to subsidize current consumption by indebting our children.

I have to wonder, for example, whether AIG shareholders have a legitimate class action against GS.

From Timmy G’s perspective, btw, it’s not clear whether he deliberately acted to save GS, or whether he didn’t realize that the entire system was buckling until he saw the GS people raising the alarm. Was Tim G aware of GS’ direct exposure to AIG, or did he simply respond to GS folks who argued vociferously that “If AIG went down, it would be the end of everything.”

Frankly, I _do_ believe if AIG went down, it would have been catastrophic. It wasn’t just GS, Barclays and many others got paid off, and the psychological impact is impossible to retrospectively assess. So maybe GS simply made a _political_ gamble in going with AIG (rather than relying on collateral posting). The Fed couldn’t let AIG go down, while the monolines weren’t as sacrosanct. Shrewd.

Sounds like a new version of the trickle down effect – what’s good for big banks is also good for small banks.