Esoteric Dissertations from a One-Track Mind

February 25, 2009

Bank Re-privatization?

Filed under: capitalism, economy — Tags: , , , — codesmithy @ 9:50 am

The growing consensus seems to be that banks will be nationalized. The case for nationalizing banks is pretty much a done deal as far as economists are concerned.  Krugman lays out the case fairly well.  I hate the term “stockholders” in this context, because it isn’t really stockholders that are the problem, at least directly.  The problem is with the executives of the banking companies and the ridiculous moral hazard they are faced with.  Society has an incentive to keep these financial institutions afloat.  The executives have an incentive to run the businesses into the ground precisely because they know society will not allow these institutions to fail.  

Why not pay exorbitant bonuses to yourself as your company is losing money hand-over-fist?  Might as well do it now while you still can.  It is precisely this perverse incentive for those who actually run the company that necessitates a government intervention, especially if the institution is FDIC insured.

As such, it is an illusion to say stockholders control a company.  I’m a stockholder and in many cases the ownership is indirect through mutual funds.  It is a complete illusion to say I exercise any power in the corporations in which I own a stake.  Myself and stockholders like me theoretically have power but it is too dilute.  Locking me out from benefits of a bailout is nothing compared to the executives.  However, saying so requires an admission that there is a corporate master class, and such an admission is not considered polite when you are an academic talking to the proles in the New York Times.

Regardless, the nationalization that is proposed is always temporary.  Why?  I’m not saying that re-privatization is not a good idea, but I want someone to explain it to me.  And one key point I would like to see addressed is explaining how re-privatizing banks would ensure a crisis like this won’t happen again, because, to me, this current crisis seems to be a direct result of a private profit motive combined with successful lobbying.  

It is particularly galling because the alternative is so obvious.  Why not keep the banks nationalized and centralize them?  Why not lock out the for-profit motive of lending entirely?  The Federal Reserve system already effectively sets interest rates, why not just take it one step further and provide financial services directly to citizens and businesses in the form of a national bank. Citizens could deposit and obtain loans from this bank.  We could get rid of FDIC.  If people wanted to risk putting their money in private banks, fine.  But, if it goes under, the government is not going to come and bail you out.  I even imagine there are some economies of scale with such an approach, in that it may be more efficient than the current banking system.  It would also reduce the need for regulatory oversight of private banks.  At the very least, there wouldn’t be “stockholders” to screw things up.

September 17, 2008

The Credit Crisis: AIG Bailout

Filed under: economy — Tags: , — codesmithy @ 6:17 am

In yet another twist in the Credit Crisis, the Fed stepped in to give AIG a $85 billion loan.  AIG, and the other insurance companies like AIG that guaranteed the mortgage backed securities (through “credit default swaps”) are basically where the buck stops in the credit crisis.  Well, not exactly, if the insurance companies go bankrupt, then the mortgage backed securities would have to be reevaluated because they obviously aren’t going to be AAA any longer, which in turn would cause massive write-downs and losses.  It is a fear of the second scenario that made the Fed act.  Another reason the Fed had to act was because no one else would.  AIG’s obligations on these mortgage backed securities are so odious, only the government, an institution that can raise funds through coercion, could make such a poor investment.  Therefore, I find the following highly dubious.

Fed staffers said that they expected A.I.G. would repay the loan before it comes due in two years, either through the sales of assets or through operations.

The $85 billion is what is needed continue a delusion, i.e. that by chopping and slicing a bundle of bad debt, you wind up with something that just isn’t repackaged bad debt.  Well, it isn’t anymore, because now the American tax-payer is footing the bill, but AIG’s ability to repay the loan is predicated on re-couping some of that debt through selling the underlying asset, like the house (good luck with that), selling other assets and firing employees.

This isn’t to say the Fed didn’t do the right thing.  If this is the approach the Fed takes, guaranteeing AAA rated securities with taxpayer money, then it needs to be regulated.  The second issue is anti-trust.  There should be no entity on Wall Street that is “too big to fail.”  Third, people who perpetrated this fraud need to be sent to prison and some of their property confiscated in order to repay American tax-payers.  The end result of the credit crises cannot be a financial system that continues with “business-as-usual” after getting bailed out by American tax-payers.  It is morally indefensible to have a system that privatizes profits and socializes losses.  The effects of this crisis are going to linger for years to come, so we are faced with a choice: the people can either demand something better or let the moment pass.

September 9, 2008

Fannie Mae and Freddie Mac Takeover

Filed under: economy — Tags: — codesmithy @ 8:08 am

Fannie Mae and Freddie Mac were taken over by the government.

The government pledged to inject taxpayer dollars into the companies to prevent insolvency — up to $100 billion total for each company. It also will also start buying mortgage-backed securities from the companies.

The stocks of the respective companies have plunged over the past year, losing over 90% of their value.  Fannie Mae was trading at 62.76 on 9/10/2007 and Freddie Mac was trading at 58.75 on the same date.  Fannie Mae closed at 0.730 and Freddie Mac closed at 0.880.

Banks make terrible neighbors, and resulting suburban blight is likely to give positive feedback to already hurting home values.  In short, suburbia is dying.  Depending on energy prices and future technology, it could be a terminal case for millions of Americans.

July 15, 2008

Credit Crisis: Fannie Mae, Freddie Mac

Filed under: capitalism, economy, politics — Tags: , , , — codesmithy @ 9:11 am

Paul Krugman examines the coming bailout of Fannie Mae and Freddie Mac in his op-ed column “Fannie, Freddie and You.”  Basically, a bailout of Fannie Mae and Freddie Mac is coming.  Both are quasi-government institutions to encourage home ownership.  While, profits are privatived and losses are socialized, Fannie Mae and Freddie Mac are examples of regulation that worked, well, for the most part.

Krugman points out that both institutions were tightly regulated in terms of lending.  However, they weren’t required to put up enough capital, which left them vulernable to this type of problem when the assets declined.  The capital requirement is just insurance, and without a doubt both institutions should have had more.   Nevertheless, given the scope of the current crisis, taxpayers would be left holding the bag one way or another.  This is the very essence of a social safety net.

The question of whether they should have ever been privatized to begin with is another question entirely, and tellingly, one that Krugman doesn’t ask.  Privatizing these institutions gave rise to the perversity of incentives which led to the lack of capital backing.  However, it is unlikely that a corporation would do much better.  The same type of perversity exists, only it is the shareholders left footing the bill instead of taxpayers.  Sometimes, the financial leaders can spur an after the fact taxpayer bailout by pointing out that it is not them who will suffer, but rather shareholders who depend on some form of financial instruments for their retirement.

There are lots things to get very upset about surrounding this entire crisis.  The Fannie Mae and Freddie Mac bailout is small in the big scheme of things.  If the government starts buying up bad debt from private instutions that avoided regulation, that is the time to get really upset.

March 28, 2008

Credit Crisis: Equity Loans

Filed under: economy — Tags: — codesmithy @ 9:46 am

The New York Times has an article called “Equity Loans as Next Round in Credit Crisis.”  Home equity loans represent second-lien holders.  It basically means home equity loan creditors don’t get paid until first-lien holders (usually, the original mortgage) gets paid in full.  Now with homes worth less, these second-lien holders are looking at potentially huge losses.  Hence, they are using a bit of the legal standing that they do have to try to reduce some of their loss.  In some cases, it is just denial.  However, these creditors would rather go down fighting than concede defeat.  In an age of corporatism, it will probably be the people in the middle who will suffer the most.

March 18, 2008

One Key to being a CEO: Having No Shame

Filed under: capitalism, economy, politics — Tags: , , , — codesmithy @ 9:45 am

James Cayne, the recently departed chief executive of Bear Stearns walked away with over $232 million in compensation over the period of 1993 to 2006.

The company he ran (into the insolvency) was bought out by JPMorgan using $30 billion of American citizen’s money. Remember folks, it doesn’t matter if they tax it, borrow it, or print it, at the end of the day it is all about the reducing your purchasing power.

Paul Krugman explains in his column “The B Word.”

Nobody expects an investment bank to be a charitable institution, but Bear has a particularly nasty reputation. As Gretchen Morgenson of The New York Times reminds us, Bear “has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach.”

Bear was a major promoter of the most questionable subprime lenders. It lured customers into two of its own hedge funds that were among the first to go bust in the current crisis. And it’s a bad financial citizen: the last time the Fed tried to contain a financial crisis, after the collapse of Long-Term Capital Management in 1998, Bear refused to participate in the rescue operation.

Bear, in other words, deserved to be allowed to fail — both on the merits and to teach Wall Street not to expect someone else to clean up its messes.

But the Fed is rescuing them anyway, with your purchasing power. And people like Cayne will still be on top, completely unaccountable. As Krugman explains, we have to save the system. Yeah, well this system is flawed and it is taking us all to destruction anyway. Maybe it is time to recognize that it has failed and move on to something better. A system that values the environment, social equality, human rights and dignity. One that isn’t based on asset ownership, but rather labor and contribution. This isn’t idealism talking, it is pragmatism. As FDR noted, “we have always known that heedless self-interest was bad morals; we know now that it is bad economics.” So, why did we build the whole system based on heedless self-interest again?

March 15, 2008

Credit Crisis: Bear Naked

Filed under: economy, politics — Tags: , , — codesmithy @ 10:15 am

Paul Krugman has a good article titled “Betting the Bank.” He has a succinct description of what the Federal Reserves does and the power that it has.

The Fed’s economic power rests on the fact that it’s the only institution with the right to add to the “monetary base”: pieces of green paper bearing portraits of dead presidents, plus deposits that private banks hold at the Fed and can convert into green paper at will.

He also describes how the Fed will assume risker forms of debt.  Basically, converting bad home loans that are essentially worthless into cash.  It is essentially a $400 billion bailout.

There has been a lot of talk about liquidity.  About financial institutions are basically sound, however they have fallen victim to a run on the bank.  The symptoms are the same, but the disease is different.  Yes, a run on the bank can cause an otherwise sound financial institution to be pushed under because it is in their nature to loan some percentage of the deposits to people who need loans.  If all the depositors come to the bank and demand their money, of course they don’t have the money to give every depositor their due.  The bank loaned it out, and it hasn’t been paid back yet.  This is exactly the type of scenario that the Fed can solve.

However, what we are facing is much different.  The loans were bad.  Many people have taken their money and walked away.  People got a loan for a home they can’t afford and started defaulting on their payments.  In fact, many people are defaulting at the same time.  The assets are not worth the value of loans. The transitive effect of people not fulfilling their obligations have finally reached the financial institutions.

To the degree that the Fed injects liquidity, it just delays the inevitable.  The real money on a loan is made on the interest years in the future.  The differences in actual value and these investments initial perceived value couldn’t be more stark.

The short of it, someone is not going to get paid.  The elites and the politically connected are ensuring that the person not getting paid is you, the taxpayer.  Losses are socialized, profits are privatized.  We are living in a corporate welfare state.  If we don’t allow these banks to fail at at least have some semblance of capitalism and accountability, we are not on the road to serfdom, we are at the destination.

March 10, 2008

A Review of the Credit Crisis

Filed under: economy — Tags: , , — codesmithy @ 7:04 am

Back in November I wrote this about the credit crisis:

Basically, things aren’t adding up. I honestly don’t think we’ll know how bad things will get until February 2008. However, there still seems to be a lot of potential to go down, and an accurate picture of the situation is still elusive.

Well, February 2008 came and went, so it is worthwhile to look around and see what is going on. According to a recently released Federal Reserve report, revolving credit, made up of credit and charge cards, rose $5.5 billion to $947.4 billion in January. Why is revolving credit important? It is the credit of last resort. We expect those who are coming up a little bit short to use this line of credit to make up the difference between expenditures and income. The $5.5 billion increase represents about .6% of the total and projects a 7% increase for the year. Thankfully, the Federal Reserve has the report online so we can compare it to other years. It doesn’t represent a huge spike, but it seems to represent a continual strain that started around 2006. Given that there were already concerns back in October about consumer debt, can this rate of growth really continue?

U.S. foreclosures are soaring as borrowers give up. The central point of concern is that this isn’t even due to rate resets. People are foreclosing because they could never afford their mortgages in the first place. Many of these are prime borrowers, not sub-prime.

New foreclosures jumped to 0.83 per cent of all home loans in the fourth quarter from 0.54 per cent a year earlier. Late payments rose to a 23-year high, the organization said in a report issued yesterday.

“We’re seeing people give up even before they get to the reset because they couldn’t afford the home in the first place,” said Jay Brinkmann, vice-president of research and economics for the Washington-based trade group.

I wasn’t anticipating the three month lag in the financial data. It looks like it is typically three-four months behind. However, things are not looking like they’ve turned the corner, and people will feel the crunch much sooner than people like me can demonstrably prove it.

This is why it is important to listen to people carefully. Generally, there is good information out there. It just gets drowned out in the blather. Here is Peter Schiff predicting this problem as early as August 2006. Please don’t be turned off by the Ron Paul advertisement. One can agree on the facts about a problem without agreeing on the solution. Just listen to what Schiff says and what Art Laffer says. I think we know who deserves that penny now.

February 22, 2008

Maxed Out

Filed under: capitalism, culture, economy, film, politics — Tags: , , — codesmithy @ 10:19 am

“Maxed Out” is a documentary on credit in America.  The documentary itself is copyrighted.  So, I don’t know how long the google video link will last.

There is no kind way to say it, but America has a massive financial establishment dedicated to predatory lending.  Why people take up these predatory lending deals has to do with a complex interplay of consumerist culture, a vast infrastructure of marketing, exploitative collection and perverse incentives, stagnant wages, and political shifts.  However, the short of it is: many Americans have a problem and are burdened with inescapable debt.  Falling house prices may just be the trigger that stops the endless debt surfing people were engaged in.

The long view is that this correction is going to take a while.  And as Krugman has already shown, it is likely to have some unexpected consequences.

February 3, 2008

The Delapodated Social Contract

Filed under: culture, economy, politics — Tags: — codesmithy @ 3:15 pm

CBS had a segment on 60 minutes called “House of Cards: The Mortgage Mess.”  They had an interview with a couple that had a fixed-rate loan, a prime borrower and had an ability to make payments on their home, instead they are going to foreclose.  Their economic logic is simple, they weighed the penalties versus the benefits, and because they owe more money on their home than what it is worth, they are going to walk away.

This effectively deepens the hole, giving other borrowers with the ability to make payments greater incentives to foreclose.  In the face of so much bad debt, creditors will be forced to raise interest rates.  In the end, there might be plenty of cheap houses on the market, but people will be unable to get credit to buy them.

The underlying point is that a society needs a component of trust instead of exclusively relying on economic self-interest.  A trust, a social contract, that has been under attack long before this particular crisis developed.  It is the trust that people will not just take into consideration their own interests, but also the burdens they are placing on society by their actions.  In an era of globalization, flexible labor markets, rampant consumerism and borrowed prosperity, maybe it should come as no surprise that this sensibility has become more an exception than the rule.  However, we should not delude ourselves about the nature of the collective failure, and the need to reform it.  In the immortal words of Franklin Delano Roosevelt:  “We have always known that heedless self-interest was bad morals; we know now that it is bad economics.”

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