Thursday, February 5, 2009

My Metaphor's on Empty

I just listened to the last Econtalk podcast featuring John Cochrane of the University of Chicago. While he couldn't turn a phrase like the late Johnny Cochran of O.J. Simpson fame, he did offer a useful analogy.

Forget the stimulus bill still working its way through the Senate for a minute and think back to our initial response last fall. Under the TARP we were going to give money to banks so that the seized lending markets would start moving again, something that for the most part hasn't happened. Cochrane compares the institutions that do the lending to refineries that turn crude oil into gas.

He notes that there is still a large supply of money to lend which is like the crude oil for the refineries. The evidence for this is the continued demand for government securities.

Cochrane also argues that there is still a demand for loans to be made, which is like the gasoline from the refineries. He offers the example of a friend who works at Kraft. His friend says they still need to borrow in order to run their operations.

Now imagine, Cochrane dares us, that all of the refineries are wiped out so that we have no mechanism to make gasoline. There is still a demand for the gasoline and a ready supply of the raw material, but we have no way to bridge the gap between the two. This is a terrible state of affairs.

This is where Cochrane leaves his analogy, but I think it still has some mileage left in it.

Not only did the refineries get wiped out, the company that they bought insurance from in case of just such an emergency isn't able to pay their claim due to its own massive losses.

In fact, we find out that the refineries had taken out second and third mortgages to finance all sorts of lavish expenditures. Now that they are wiped out they have no refinery and debt amounting to several times what the original refinery was worth.

So now the government steps in and gives the refiners money (this is the TARP) to build new refineries. But because they are so deep in the hole they use the money to pay off some of their own debts rather than rebuild. Or, if they sense an opportunity, they use the money to buy out what is left of a competitor's refinery hoping to cash in through reduced competition once the gas starts flowing again.

Now gasoline (lending) hasn't completely stopped. Cochrane's friend from Kraft told him they have been able to borrow at good rates since lenders are only willing to lend to the most credit worthy borrowers. This is like the refineries only making enough gas to fuel Rolls Royce automobiles. The problem is that our economy is full of Camry's that also need gas. Now a Camry may not have the luxury features and upscale reputation of a Rolls, but it is a reliable car (that is, a good credit risk). It just can't go anywhere without gas (lending)!

Next we get the stimulus bill. Through which the government is trying to bypass the refineries altogether. Through the magic of debt, they are able to go into some (unspecified) point in the future where gas is plentiful and bring it back and pour it directly into the tanks of all of those Camry's. Multiple problems with this:
1. When you use your mouth to siphon gas out of a tank, you inevitably swallow some. This will make you sick.
2. Undoubtedly the futuristic gas can that they bring back will have a spout way too big for the Camry and as they try to fill the tank, gas will spill all over the ground.
3. That future gas really belongs to our children so I hope they all learn how to ride a bike.

Enough. All of this gasoline talk makes me think of convenience stores. I sure could use some beef jerky.

Johnny Cochran's, "if it doesn't fit, you must acquit," didn't advance the cause of Justice, but did become a pop culture phenomenon in its own right. I think Cochran style rhetoric could liven the debate on the stimulus.
For the stimulus:
-Jobs won't grow if you vote no
And Against:
-If it doesn't mend, you must not spend
-If it doesn't stimulate, you must not capitulate

Leave your own Cochran style stimulus slogan (either for or against) in the comments section! The best slogan will be declared the winner, and the winning slogan will appear in this blog where it will be read by at least two or three people to whom I am not related by blood or marriage.


Cindy Kilkenny said...

Two or three? Hmmm...

Jeremy R. Shown said...

All two or three will, of course, come over from Fairly Conservative.

Most of my other readership will is drawn for from the same pool where I got my genes.


Steve said...

If it is not comprehensive
we should be apprehensive.
If it is not revolutionary
it will become evolutionary.
If it is not shock and awe
it will stick in our craw.
If the buck ain't sound
we'll praise Ezra Pound.

(You asked for it!)