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.

January 13, 2009

The Enron Economy

Filed under: capitalism, economy, politics — Tags: , — codesmithy @ 8:49 am

Paul Krugman called our economy the Madoff economy back in December.  With all due respect to Mr. Krugman, I would tweak his description and call what we are experiencing the Enron economy.

60 Minutes ran an investigation into the price of oil.  It is not a coincidence that banks going south the same time the price of oil dropped.  

Oil has been the prime factor in the economy taking a turn for the worse.  Living in the suburbs, or exburbs became unaffordable because of transportation costs, rising food prices, and the rising prices of other basic necessities.  The root of all of these problems were oil prices.  Prices that were artificially inflated to feed speculative traders, and it was the productive economy that took the hit.  The direct parallel to this is what Enron was able to do to the California electricity market, not the Ponzi scheme Madoff set up.

The potential political ramifications were nearly as concerning.  Enron, whose former CEO and figurehead of the company had intimate ties with the Bush family, played a key part in getting Democratic governor Gray Davis recalled.  This resulted in the election of Republican governor Arnold Schwarzenegger.  The parallel between this and “drill, baby, drill” is left for the reader.

Enron was not just the story of one company, it was the canary in the coal-mine.  The first one to go.  Enron did not just implode on its own, it took the law firms, accounting firms, government regulators and investment banks to look the other way.  However, in reality, the facts are so much more damning than that.  It isn’t that these institutions merely looked the other way, they were actively complicit in the fraud.  No, they didn’t know everything, but that doesn’t mean they didn’t know anything.

When history looks back on the first decade of this new century, I think they will label it the age of fraud and negligence.    The defining characteristic will be incompetence, a contempt for the rule of law, and the failure of institutions to properly check and balance other centers of power.  It is all born out of a ideology that abhors rules, and the very notion of democratic governance.  Now, we are all experiencing its benefits.

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 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.

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 6, 2008

Super Tuesday Redux

Filed under: politics — Tags: , , , , — codesmithy @ 9:48 am

Super Tuesday ended without a clear winner being crowned in race for the Democratic presidential nomination. By all indications, it looks like it will come down to the wire.

To begin with, I want to say that I believe Clinton or Obama would be a better president than George W. Bush has been.  So, I don’t want to come off overly negative on Clinton.  Paul Krugman provides some sound technical reasons to prefer Clinton over Obama when it comes to health care.  Krugman is also correct that a full suite of Rovean attacks will be launched at either Democratic nominee.

The rational side of me even agrees with Krugman that the nature of American politics will be partisan for years to come but, that doesn’t stop me from hoping for a different future.  The president is a leader.  A great president is someone who inspires us.  Someone we are willing to make sacrifices because they call upon our help.  America has already managed to dig a massive hole for ourselves and the world.  I believe we need a leader, a president, who will inspire us for massive tasks that lie before us, not necessarily the most experienced and skilled political technocrat.

After 9/11, the United States changed, we changed.  We are a country that openly tortures.  We wage wars of aggression based on proven falsehoods.  We have proven incapable of upholding the rule of law and sustaining our system of checks and balances on power.  Even the short-term problems we face as a nation are almost overwhelming to say nothing of the long-term issues surrounding nuclear proliferation and the threats posed by climate change.  In that respect, viewing a future with Hillary Clinton as president feels more like trying to go backwards in time.  It conveys a message that after 6-8 years, this nation finally decided that it didn’t really like the policies of George W. Bush and decided to go back to Clinton, or the closest thing we could get.  A decision I agree with, but is that all we really need to say?  After all that has happened?  After all we have done?  Is that all that we have learned?

Lawrence Lessig gives a presentation on his choice between the two candidates.  He conveys a similar point.  Both candidates offer change.  Clinton offers a change in the guard, away from the policies of George W. Bush.  Obama offers a change in how we approach the every issue in politics.  If one believes the nature of politics won’t change, that it will always be like a fight between cats and dogs, then I understand giving their support to Clinton for better handling of specific concerns.  However, if we want a transformative figure in politics, someone who demonstrates that there is another way of solving our problems and resolving our differences, then I think Obama offers something that Clinton just doesn’t.

The largest mistake the cynical make is to underestimate the naive and determined.

December 22, 2007

Authors@Google: Paul Krugman

Filed under: economy, politics — Tags: — codesmithy @ 2:55 pm

Paul Krugman gives a good talk about the current credit crisis, although it was supposed to be about his book “The Conscience of a Liberal” which I’ve already read and reviewed.  He apparently gave this at Google.  The New York Times article he mentions is here.  For some reason he didn’t think many people got the reference to Pottersville in Frank Capra’s “It’s a Wonderful Life.”

Anyway, it gives some good perspective.  Krugman’s cough is a little annoying, but it is good to see the audience asking some good questions.

November 2, 2007

The Conscience of a Liberal

Filed under: books, politics — Tags: — codesmithy @ 8:12 am

I just finished reading “The Conscience of a Liberal” by Paul Krugman. The title is a little bit misleading because it I came in half-expecting a high-minded work like Milton Friedman’s “Capitalism and Freedom,” a lot of rhetoric and precious little substance. I was pleasantly surprised that wasn’t the case. So, a better title might be “The Case for Liberalism and How to Get There from Here.” The book is really about re-establishing the shared prosperity of the 1950’s and 60’s and overcoming the obstacles in the way.

Krugman gives a fair history of 20th century, although he tends to focus more on economic factors and realities. What is clear is that the United States has re-entered an economic situation similar to the one in the 1920’s.

Krugman underscores some of the political realities pursuing a progressive agenda will face and what he feels what needs to be the modern centerpiece of the movement: universal health care. The simplest solution for universal health care is “Medicare for All.” Dennis Kucinich has already co-authored the legislation and it now sits as H.R. 676. I think it is fair to say that H.R. 676 has the same chance of passing as Kucinich has of becoming president. Nevertheless, Krugman offers a more convoluted proposal that attempts to achieve the same ends, but will face less opposition from various groups. However, that doesn’t mean it won’t face opposition. In fact, Krugman admits there will be some groups that are simply unappeasable. Given that business leaders tried to stage a coup against F.D.R. when he started implementing New Deal policies, it should give one an idea of the political environment that we might experience in an attempt to complete it.

Krugman believes that demonstrably good, progressive governance will form a modern equivalent of “New Deal Coalition” which fell apart when the South started voting Republican in the 70’s. Although, Krugman points to reasons why liberals should be optimistic about the future, re-establishing a shared prosperity is by no means inevitable. It will take work, organization, sacrifice and most importantly, a conviction that what progressives are doing is right. Thankfully, facts and reality seem firmly in favor of the progressive side which is an asset that should be used to its maximum advantage.

October 23, 2007

Understanding the Credit Crisis

Filed under: economy, politics — Tags: , — codesmithy @ 8:13 am

I went over some key points in a post titled “Economic Contraction Looming?” So, the two questions we have to ask ourselves are: “how does it work?” and “is this true?”

So, we’ll address “how it works” first. For those that don’t like the dry articles maybe some British humor will penetrate and be enlightening.

Based on this story, what data can we find to confirm it or to contradict it, essentially “is this true?” So, we start with the fundamentals. The base of how much money will be lost is directly proportional to the number of loan defaults we see. This can be measured by the foreclosure rates on homes. Compared to last year, the foreclosure rate is nearly double for September. To be fair it was down from August, but the article states:

It’s likely that the sequential decline in foreclosure activity between August and September was just a blip, not a bellwether of lessening foreclosure filings.

Fine, is there any data to back up that assertion. A significant portion of the crisis is in the so called sub-prime sector.

Well, one way is actually survey people that have these types of loans. 73% don’t know how much their payment will increase after the ARM resets. Only 1 in 5 knew what factors determine their rate adjustment. 1 in 3 answered incorrectly, and approximately half have no idea what factors affect their rate. In other words, these loans are not a responsible borrowing of money.

So, we expect the foreclosure rate to rise. Especially given the hit most home owners are going to take to heat their homes given current energy prices.

The structured investment vehicles based on mortgage-backed securities are hot potatoes. Right now, the hedge funds that own these securities are bluffing. They are trying to find a way to give these worthless securities to someone. Paul Krugman examines Henry Paulson’s plan to deal with the crisis.

Right now the bleeding edge of the crisis in confidence involves worries that there may be large losses hidden inside so-called “structured investment vehicles” — basically hedge funds that borrow from the public and invest the proceeds in mortgage-backed securities. The new plan would create a “super-fund,” the Master Liquidity Enhancement Conduit, which would seek to restore confidence by, um, borrowing from the public and investing the proceeds in mortgage-backed securities.

Although, I would state the thesis much stronger than Krugman. I would rewrite the sentence “Right now the bleeding edge of the crisis in confidence involves worries that there may be large losses hidden inside so-called “structured investment vehicles”” to be “Right now the bleeding edge of the crisis in confidence involves evidence showing there are large losses hidden inside so-called “structured investment vehicles””. The “may” makes it sound like it is 50/50, when it is in fact more like 90/10 when one examines the fundamentals.

However, Krugman is fundamentally correct in the solution. “… [T]his rescue scheme could be seen as an attempt to hide the bad debts everyone knows are out there, and as a result could delay any return of trust to the markets.” To return trust to the markets calls for an investigation and honest accounting of the “structured investment vehicles” and proper oversight of the hedge funds. Until that happens, there will be a continued belief that hedge funds are bluffing about their state of affairs.

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