1929
I was in DC when the financial crisis began to play it out. Every evening I'd turn on CNN and listen to some new horror: Lehman Brothers gone, the Treasury refusing to bail out AIG at twenty billion and then deciding to bail them out once the price had risen to eighty-five billion; Morgan Stanley and Goldman Sachs on the ropes; and now a seven hundred billion dollar bailout covering every single bad money market decision that anyone has made in the last half-dozen years.
If your bank goes belly-up, you're only insured for the first $100,000. But if you've got billions in bad mortgages, the government will totally cover your ass.
The worst of it is that even if this plan goes into effect, the crisis isn't necessarily over. This could only be the beginning.
One can get a certain sardonic amusement at watching our stalwart free-marketeers turning into a bunch of whining socialists. A few years ago they were saying, "Deregulate the markets! We demand that you let us take on more debt! Everyone in America has the right to own a house! The markets decide what is right! If the markets decide you made a bad investment, you should suck it up and take it like a man! No bailouts, no government interference in the marketplace, never! Let the markets rule!"
Now the story's a little different. Now it's, "Oh jeez, the markets say we suck! We've got billions in losses! Please please pleeeeeeeeease bail us out! We demand that you nationalize us immediately!"
Personally I don't think we should bail out a single business until their entire board of directors comes before the public, waves red flags, and sings "The Internationale." "Arise, ye prisoners of starvation . . . " Then they can bow, kiss a copy of Das Kapital, and be sent into the countryside for re-education.
Bruce Sterling's blog pointed me at this excellent article from Time: How We Became the United States of France. The opening section is so delicious I have to quote it here.
This is the state of our great republic: We've nationalized the financial system, taking control from Wall Street bankers we no longer trust. We're about to quasi-nationalize the Detroit auto companies via massive loans because they're a source of American pride, and too many jobs — and votes — are at stake. Our Social Security system is going broke as we head for a future where too many retirees will be supported by too few workers. How long before we have national healthcare? Put it all together, and the America that emerges is a cartoonish version of the country most despised by red-meat red-state patriots: France. Only with worse food.
Admit it, mes amis, the rugged individualism and cutthroat capitalism that made America the land of unlimited opportunity has been shrink-wrapped by a half dozen short sellers in Greenwich, Conn. and FedExed to Washington D.C. to be spoon-fed back to life by Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson. We're now no different from any of those Western European semi-socialist welfare states that we love to deride . . .
Tant pis, y'all.
Labels: 1929, financial markets, France
posted by dubjay at 10:55 PM
30 Comments:
Nice post.
Oz
If the government purchases all of the bad real estate loans, it will be the government's job to foreclose on all the people who can't pay for their house. Do you think people don't like "The Government" now?
I think the job should fall to the IRS. Everyone already hates the IRS . I don't think the average American could hate them any more. My guess, The government will outsource the job to private companies that will charge the government twice as much and kick people out of the wrong house.
I don't think it is a bad thing for big companies to fail. If an insurance company fails, let the government provide coverage to the policy holders for the short time it takes to find a new company. The ecological niches opened up will create new opportunity and new wealth.
Man, this is going to be just like back in the 1980s when we spent $500 billion bailing out the S&Ls, and society completely collapsed and millions starved and inflation went up to a billion percent.
Oh wait, that's right, the end result was "nothing very much". This is yet another example of the typical cycle of American financial business: a few smart guys find a loophole and fuck it as hard as they can; then a bunch of suckers notice and try to get-rich-quick, and the whole thing falls over.
On the other hand, imagine a world where the government intervened in the financial market every day. Do you really want them to have that much power?
Walter. You are absolutely correct that this entire situation is like the kettle calling the pot black.
Yes, the whole effin industry is in crisis mode and asking for help.
Oh, boo hoo. Go suck your rotten eggs you bastards.
But no, that not the way things work. These folks (I would have said guys, but just maybe there are enough women at that strata to make it incorrect) screwed the pooch and DESERVE to be eviscerated. Not physically, just financially.
But if they are fired right now they get these nice severance packages and other benefits.
The one really positive (and I say that in the most vindictive way possible) result of this legislation is that Congress will be able to require that the executives in question will have the forgo their parachutes and give BACK their compensation from years past. (called a Claw-back clause)
It will not come anywhere close to making up the 700+B that is being sought.
But it will make me sleep a little better at night.
I don't want the government to intervene in the financial markets on a regular basis, but it looks like that's what we're going to get.
Or, as Secretary Paulson said when asked if his plan wasn't socialism, "it's necessary."
The executive compensation issue really does stick in my craw. Richard Fuld, who bankrupted Lehman Brothers, was rewarded by a payout amounting to nearly =half a billion dollars.=
Nice payday, if you can get it.
Of course Secretary Paulson, if he gets what he wants, will be in the world's first trillionaire. So there you go.
"The executive compensation issue really does stick in my craw."
Yeah; there's really not an excuse for any of that. Of course, the people who run companies are all One Big Happy Family; the only way these execs would be denied compensation would be for the board of directors to sue them and demand it back. Which means, of course, that their own golden parachutes would immediately disappear; so of course that'll never happen.
I have no problem with extreme executive compensation if the companies do well. Is the company raking in record levels of cash? Are the banks complaining because the companies are stuffing too much money in their accounts? If the answer is yes, the executives have earned the money they get payed.
Dubjay- the banking issues is far worse than you may realize.
This credit bubble is probably larger than the South Sea's credit bubble of 1720 and is certainly larger as % of GDP than the debt cycle which caused the great depression or the recent implosion of Argentina in 2001.
In fact, as far as historians know, Americans have racked up more debt as a % of GDP than any nation on the history of this planet (even more than the debt which collapsed Rome or the debt which collapsed the Turkish empire). Please look at this chart showing US debt as % GDP since 1915. Then realize the rise in debt as % GDP which occurred during the great depression WAS NOT because people borrowed more money, it was because the economy contracted shrinking the denominator and making the total credit market debt as % GDP look larger.
Today we are going into our current debt cycle with a total % debt to GDP of over 370%- this chart stops at 2005 and trust me, debt has exploded in the last 3 years-- think sub-prime lending, etc...
EVERYTHING now hangs on jobs as it is employment that will determine people's ability to repay their debt and pay taxes.
America's current problem cannot be solved by 'taxing the rich more' (they are in just as much debt as everyone else). In fact, it cannot be solved by taxes at all, but it can be made MUCH worse by continuing to borrow more and more money (whether that borrowing is public OR private) and refusing to cut (or at least no longer subsidize) unproductive assets and behaviors from the economy. This is why I urge everyone to write their congressman(woman) and ask him/her to vote "no" on the upcoming fiscal bailout. We might hold things off for a while if we do bail the financial institutions out, but we will worsen our debt problem and in the process risk the US dollar itself (notice oil jumped $30 in one day yesterday as international investors increasingly fear a dollar collapse or US default- gold jumped almost $100 in 2 days of trading).
You cannot solve a debt problem with more debt, it is impossible. And right now, foreign creditors are on the hook for 1/2 our debt. If we start putting the balance on the US taxpayer, Americans will be responsible for 100%. This means we risk defaulting on ourselves for the whole thing.
This problem can ONLY be solved by rationing (particularly in areas like healthcare where the discussions on what is wrong with America's healthcare system have reach an almost infantile levels of immaturity/anti-intellectualism), it can only be solved by saving a much greater % of our earnings, it can only be solved by improving worker productivity (which would happen thru things like investment in scientific research and development, etc... who knows, maybe the singularity will save us?)
The intervene-not intervene, free marker-socialism debate is a smokescreen.
Whether you are for or against it, using your last nickel to pay for heroine for a junky is still a bad bet.
Baillout does not stop the fundamental problem. And the truth is America cannot afford a lot more than it thinks.
People who can't afford things shouldn't be buying them, even if it sounds ugly.
"Whether you are for or against it, using your last nickel to pay for heroine..."
What, like calling 1-900-DCCOMIC?
"uh...what are you wearing?"
"Spandex, really smooth skintight spandex, with thigh-high plastic boots and a cape. And a mask."
"um...I'm a very, um, very naughty villain and I need to be defeated."
"Your nefarious scheme will never succeed!"
Is it just me, or does this remind anyone of the Savings & Loan bailout?
What current serving Senator was investigated by the United States Department of Justice, and impeached for taking bribes (cash and vacations) to shut down an investigation and prevent regulation of the Savings and Loan industry?
Let me give you a hint, He is running for President of the United States and his name is John McCain.
I find the timing quite funny.
LOL!!!! :-)
Exposed! I truly am the worst speller-spell checker on this planet. I guess I should have realized this would become immediately obvious when blogging with a bunch of authors!
Regards
Thai
I only wish I'd come up with the "1-900-DCCOMIC" joke myself; I saw it on Usenet somewhere.
halojones-fan, So if I want to start the company for real, I don't have to pay you royalties? Cool!
Well, there is a critical difference between our great nation and the Western European Socialist states. Ikea socialism generally behaves in a benevolent manner, or at least tries to. Tapping phone lines, holding, and god help us, torturing suspects pre trial, invading other nations for political purposes....doesn't sound like Western Europe to *me*. Sounds like two different forms of socialism altogether.
I've been helping people with their IRA's for years, and seeing money market funds, MONEY MARKET funds, lose value over the last week has really shaken my faith in free markets. I never thought they were benevolent, but I at least thought they tended towards efficency. I guess if the nerves and tendons of the "invisible hand" are composed of glue sniffing jackasses, the hand gets palsied.
Pete, I agree. I have often thought the free market-socialism debate is not the issue.
I think ANY system can work or fail- the success of the system has much more to do with issues of social cooperation (which scandinavian countries are legendary for achieving). In game theory, it is basically how a society plays The Tragedy of the Commons with itself.
I created a PowerPoint on just this topic.
Interesting slide show, Thai. Though it zipped by so fast i didn't quite get it all; I'll have to view it again at a slower speed.
So Mitsubishi bailed out Morgan Stanley, and Goldman Sachs--- which didn't have any of the bad securities, but was being pummeled because the market didn't like banks all of a sudden--- has been bailed out by Warren Buffet.
Is it still a crisis worth $700 billion?
Much bigger than that.
Though in truth I am beginning to sense it may be "checkmate" for the US economy even if the government does pass this bill (notice the date on Kasriel's analysis)...
it is clear that people are starting to cut back on their spending and that foreigners are increasingly less prone to lend to us (FYI- the US economy needs to borrow an additional 6% every year from abroad to keep everything going- that 6% shows up in our trade deficit, which is really the biggest misnomer on the planet- it should more correctly be called "the amount we need to borrow each year"). Once this gets going, and unemployment picks up, the non-linear nature of the system will reach a 'tipping point' and everything will collapse.
If there is any one thing that will tell you what is going on out in market land right now, it is the TED spread. Basically the TED spread is the rate good credit customers pay to borrow money from the market minus what the US government pays to borrow money from the market. When the TED spread is high, it is saying that people are unwilling to loan to even good credit customers and thus there is "stress" in the credit markets (we call this a credit crunch)- and it is the cause of deflation. (If it was up to me I would post the TED spread as a ticker on MSNBC like the DOW).
Anyway, right now the TED spread is saying there is EXTREME STRESS in the market: cash is being hoarded, no one wants to lend. We have not seen TED spreads like this relative to current interest rates (and this is a key to understanding TED) in many many generations.
TED dropped for 1 day when the $700 billion plan was first announced by Treasury, but it is basically back to just under its highs-- the market is saying the plan won't work. And while I am the first to admit that the market is not perfect in its prediction ability, that tends to be when "Black Swan's" are not understood by Wall Street (I think I saw one of your readers recommended Taleb's book on your request for new material-- I also suggest it as very good). But once the Black Swans are made public, the market tends to work VERY efficiently and quickly at predicting the future. And right now TED IS NOT whispering "sweet nothings" in our collective ears.
And the problem in all this is whether we will defend the US dollar.
FYI- the reason I follow all this so closely is:
1. I am interested
2. I am the trust officer for my company's 401k plan and therefore have over 100 people's retirement plans I fee responsible to watch over.
"I've been helping people with their IRA's for years, and seeing money market funds, MONEY MARKET funds, lose value over the last week has really shaken my faith in free markets."
Because God knows that markets always go up, right?
****
"And while I am the first to admit that the market is not perfect in its prediction ability, that tends to be when "Black Swan's" are not understood by Wall Street..."
Please don't bring Black Swans into this. A Black Swan would be "suddenly, all oil is radioactive." What's going on now is that a bunch of people who were paid to know better ignored a bunch of very clear warning signs. While it's statistically improbable that my entire body will explode at any given moment, that doesn't mean I can swallow a lit stick of dynamite without suffering ill effects.
"A Black Swan would be "suddenly, all oil is radioactive."
LOL! :-)
... Perhaps the term "Grey Swan" might be better. Though I am sure you agree that to some degree the difference is simply a matter of our collective attention.
I remember Water Mondale saying "where's the beef" in his debate with Ronald Regan (about the time this current credit cycle started imo)- but people forgot.
Then over time people started making distinctions between government debt (i.e. ignoring local and state debt and focusing only on federal debt-- several states MAY go bankrupt in this credit cycle as you are probably aware- several cities and counties have already gone bankrupt and the pain has only just begun).
Then people started making distinctions between their own household debt and government debt and eventually only a very few voices seemed to even remember that debt was an issue at all.
At a certain point the distinction between a Grey and a Black swan becomes somewhat moot as far as a population's attention is concerned.
It is a fundamental problem of information itself (the need for data compression algorithms as information gets larger and larger)... in fact it is probably the origin of evolutionary systems.
There is a fundamental law of information science which goes something like: "as we manipulate information to make it useful, we make it wrong" (I put it on my Power Point FYI).
My analysis could be wrong, but I think that is what happened here. One of those "every generation needs to relearn the lessons of its predecessors).
Hopefully the rationing lesson will not be too ugly either.
Re: Thai (Checkmate)
"...it is clear that people are starting to cut back on their spending and that foreigners are increasingly less prone to lend to us..."
Spending and borowing less might be a good thing if we started making stuff other countries wanted.
Yes
That is why I am opposed to spending the $700 billion on the "bailout" and why I encourage you to call your representatives.
We will just be throwing good money after bad.
We do not need to prop up housing (as much as I like my home) and profligate credit card spending- if we are going to spend $700 billion, I would much rather it be spend it on (say) cures for dementia and cancer, or research and development into new energy systems and thereby eliminate our reliance on petrolium, etc...
How do you want to spend your money?
Honestly, this is not about money. The people responsible for this are the same people who have been trying to get us to buy things we don't need with money we don't have.
Many Americans no longer work to save, go to school or make a better life, they work to pay debt. People who work only to pay a debt that will last until they day they die are slaves.
ralf: "The people responsible for this are the same people who have been trying to get us to buy things we don't need with money we don't have."
Yeah, things like books. I don't need books, I can make up stories inside my own head! Eat it, Walter, you bastard, you're just trying to get me to buy things I don't need!
Halojones-fan (a little long, sorry) I agree.
If you think about it, you will realize that ever dollar on this planet is really nothing more than debt- it is a promise one person made to another and the second person transferred that promise to someone else in order to achieve and economic ends. Every dollar in your wallet is really nothing more than debt, and debt has always been about trust-cooperation-consequence.
Credit cycles are as old as humans have been on this planet.
For what it is worth- my own two cents on the origins of our current debt crisis rest with the double edge sword that is America's greatest strength and its greatest weakness- our core embracement of diversity as our top national priority.
For if you think about it, really from our inception, America developed a system to protect the individuality and autonomy of different groups within a much larger collective. And while it is true that this original vision of America was corrupted at inception with a kind of "original sin" (slavery), still our national template has allowed America to maintain, incorporate and indeed grow a VERY diverse mixture of cultures and nationalities with a large degree of social harmony unique (imo) for a nation of 300 million people.
But our system, which protects and encourages cultural diversity, also makes cooperation on THE MOST DIFFICULT issue of all- rationing- all the more difficult.
For the reality of this world is that rationing and prioritization are simple facts of life. Every culture in the world rations in order to survive. But each culture rations in very different ways as they evolved different relationships with their environment, their neighbors and each other. They ration differently based on their life median expectancy, they ration differently based on their socioeconomic situation, they ration differently based on their differences in birth rates, etc…
Even in the most homogeneous societies, rationing discussions are contentious. But it is MUCH easier to reach agreement on rationing when cultural values are similar.
But in America, with its separate and unequal cultures all remaining integrated yet autonomous within a much larger collective; getting agreement on the incredibly painful issue of rationing is VERY VERY difficult. As a result, we do not ration. It is the one concept that is almost uniquely ‘un-American’. It is too painful for us to address.
For how do we agree on rationing when our cultures are so different? (I think it no accident that many of the areas where America spends the most on healthcare are precisely the areas where cultural and language differences are also the greatest vs. whatever "american benchmark" exists out there).
Think about how hard it is for us to reach agreement on rationing when the cultural and socioeconomic differences are so great?
Do I spend my money keeping my parents alive in a longer retirement with some reasonable quality of life? Do I try to shrink the classroom size of my children? Do I fund research and development into alternative energy systems? Do I put a (wo)man on Mars?
If I have no children or parents, and I am asked to keep someone else's ailing parents alive and instead have less to enjoy my own retirement, how do I do this when I do not approve of the attitudes an “other” culture has towards saving and investment?
If I am asked to shrink the classroom size of someone else's children and again I do not have children of my own and further I do not approve of the spending or education choices I see being made by an "other" culture, how am I to react?
What if one culture has not experienced longevity to the same degree a second culture has? And therefore the first culture does not have an experiential reference to understand what longevity truly implies? And then by some miracle of modern medicine the median life expectancy of our short-lived culture suddenly rises and yet cultural attitudes toward longevity take many generations to change?
I think it is these issues (which are really attitudes about money, attitudes about trust-cooperation-consequence, which are really attitudes about rationing) that I think America has a real problem addressing. And unlike the Europeans, without in any way sounding critical of Europeans) who were simply lucky enough to create social institutions for collective action at a time when their cultures were far more homogeneous than they are today, we have never been so fortunately cohesive.
(imo) America faces a reverse engineering issue that is not easy to overcome and for which I have no solution to offer- I do ration according to my own values, I understand others ration according to theirs… And I love our nation’s diversity.
"But in America, with its separate and unequal cultures all remaining integrated yet autonomous within a much larger collective; getting agreement on the incredibly painful issue of rationing is VERY VERY difficult."
Actually, your examples are about socialism, not rationing; indeed, they're sort of the exact opposite of rationing.
Clearly we are looking at what I am saying differently.
While I don't necessarily disagree with you, can you explain what you mean?
... I certainly 'think' I am talking about rationing.
You seem to be discussing government-run health-care and education; as in, health-care and education supported by taxes. This is the very heart of socialism; I think maybe you're confused about what "rationing" means. (I think we're talking about the same thing, though.)
I see, you are misunderstanding me. Rationing is a fundamental of ANY system, whether the system is 100% free market or 100% socialism.
The two systems simply ration by different approaches- we call these demand side rationing (free market system) or supply side rationing (socialism).
All societies still come to some form of agreement around rationing whether they are 100% free market or 100% socialistic.
The American society's current agreement is to avoid-deny-pretend the issue does not exist and we have therefor "sold" future claims on a rationing discussion for options to avoid the discussion today.
FYI- I think people are going to learn those options were a lot more expensive than they thought.
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