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Archive for the ‘Bailout’ Category

I wrote this in March and it’s more true than ever:

Bailouts are bad for many reasons. But the two worst are that they cost a ton of money, and, second, they get government in bed with business. As a result, we’re becoming increasingly numb as a people to the idea that a $1T here and a $1T there is no big deal, just as we’re getting used to the idea of the government has any business directing how private companies should spend their money. The bailout is an anti-capitalist virus that attacks our public finances and our commitment to corporate independence. We must let these companies fail or we’ll destroy free market capitalism. That is the real systemic risk.

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The “real economy” is still very messed up: a super weak and declining dollar, double digit unemployment, and a housing market saddled with inventory and foreclosures (and soon-to-be foreclosures). So why is the stock market rising? Does this make sense?

When in doubt, consider the possibility of a bubble. Goldman Sachs and Wall Street has been fueled with government money, both directly and through the AIG bailout which prevented any of the MBS bond-holders from taking a haircut on their bad investments. The Federal Reserve balance sheet has exploded, and its exposure to the housing market remains significant. It’s overall asset sheet (which translates into money in supply) is 2X what it was in August of 2008. Incidentally, I don’t believe they’ve taken their MBS assets and “marked them to market”; they’re valued at “coupon value,” which is an implicitly subsidy to the entire housing market.

This seems why we’re finally seeing reality hitting the banks; broke, unemployed people don’t pay their bills, don’t pay back their loans, get kicked out of their houses, and don’t make deposits with which banks can make loans. Citi declared a loss. BofA missed its earnings report. This is called a reality check.

The 10,000 Dow seems to show two things. One, that dollar deflation is masking the real decline in the Dow. And, two, this is an asset bubble driven by cheap, government-subsidized bailout money. Like the housing bubble, it’s all dependent ultimately on a projected robust real economy, investments in real businesses, and cash flows at the consumer level, all of which are in the dumps and will remain so for the foreseeable future.

The huge national deficit and the dubious Keynesian theories of Obama and company likely will slow down the recovery, create additional short-lived bubbles, and I am not encouraged by the good news that so excites the cheerleaders at CNBC.

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There is little more lawless than changing the rules of contracts in the middle of the game. Chrysler’s creditors entered into deals with one set of expectations (including their known benefits and risk in bankruptcy) only to have them changed by Obama in order to benefit a politically connected group. Obama has strong-armed secured creditors (even threatening to ruin one firm’s reputation) into signing off on a deal in order to “save Chrysler” and benefit unions, the latter of which gave up little in this process and whose pension benefits are largely unsecured obligations. This is true Bannana Republic territory, where the risk of nationalization and confiscation has long created major premiums on the cost of capital and dampened economic growth. Mexico had its own Obamas one hundred years ago with names like Diaz and Obregon. It has long lagged behind us as a result.

The Founders wrote a great deal about “minorities” in their commentaries on the Constitution, but the minority they had in mind was the minority everywhere and at every time in history most vulnerable to demagoguery and shifting winds: the relatively small numbers of wealthy investors in a given society, whose wealth is a relatively insecure monument to generations-long investments, innovations, and prudence.

Mickey Kaus notes that this whole thing will only delay the pain and prove a costly political failure for Obama. Chrysler produces a medicore product that few want to buy. Unless gas skyrockets (which itself will require swift economic growth), Americans will not be snatching up the death-traps known as Fiats. It’s unclear when Obama will ever allow a big business or connected group to suffer so long as he is at the helm. Instead, the rest of us, who are not so organized or visible, must suffer higher taxes, reduced growth, and an uncertain future so Obama can claim a victory and appear sympathetic and charitable by spending our money. This charade can’t go on forever though. The very thing Obama needs more of to ensure economic growth–predictability and respect for capital–has become increasingly absent from his administration, in spite of his moderate talk during the campaign. You can’t force people to invest, and no one will when government changes the rules in the middle of the game repeatedly.

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Great piece on how the entire bailout is one collossal waste of money and example of “throwing good money after bad.”  For example, the pledged total bailout funds pf $8T exceed the entire market cap of the S&P 500.  Wow.

Useful collection of bearish charts.  While a certain optimism has its place, the naive hope that we can unwind the lunacy of the last ten years and the inherent instability of our post-1970s experiment with fiat currency is not exactly conservative.  It’s stupid.  And I’m sick of stupid people talking half-intelligently about a bottom in 2009 or 2010.   No one knows where it is, but it’s probably a ways off.

Incidentally, of all the stupid things that have come down the pike in recent years, one of the dumbest is the idea that conservatism is all about optimism.  It’s not. It’s a certain attitude about change that includes a love of traditional American institutions and folkways rooted in a respect for our heritage, our ancestors, our past, including that past’s recognition of the necessary limits of government and human nature.  Our Founders’ achievements acquire even more respect in light of the human material with which they were working and the sorry history of most other times and peoples.  By contrast, the left’s pessemism, which was in full effect in  the 1970s after Vietnam, was rooted in contempt for Western Civilization, a cult of the exotic, and hatred of our known way of life.  That affectation does not mean we must, in order to oppose them, embrace a naive, exceptionalist optimism which is much more the province of America’s Englightenment-rooted liberals and their gospel of “progress.” 

Finally, Gary Becker and Dick Posner both dissect Obama’s housing help for losers.  Just to be clear:  I don’t like the bank bailouts, but I don’t like them for the same reason I don’t like most expensive welfare state projects and see no reason to have two huge welfare programs in the name of symmetry:  they’re both inefficient, they reward bad behavior, they don’t come with the strings and incentives of private charity, they distort markets, and they siphon money from the most productive people and companies and give it to unproductive people.  Like most welfare, the collectively harmful but personally beneficial skill of wrangling funds from the public coffers is the only thing being rewarded. 

I’ve been opposed to all of this nonsense:  the stimulus, the TARP, and now the housing help for improvident homeowners.  After all, we’re not talking about sending people to Siberia but foreclosure; they can still rent, and they can buy again some day. They and new homeowners would both benefit from allowing prices to find their natural floor. Liquidate everything.   Obama’s problem is that all his sour talk about our hopeless economy is parried with incredible (literally) optimism about the power of government to sort everything out without any tradeoffs.  His limousine liberal supporters, indebted young professionals,  private business owners, fixed income recipients, anyone with any position in the stock market, and those who do pay their mortgages are all about to find out they’re the “rich” that are going to get soaked becuase there simply are not enough hedge fund empressarios to foot the bill, and they too have lost huge sums of wealth due to their stupid gambles.

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Obama has basically proposed on housing that the biggest losers, the people who are behind on their upside down mortgages, put the least money down, have low income, and are likely to default or already in foreclosure, get to have their mortgages renegotiated and the taxpayers foot half the bill (the whole bill, of course, when you count the TARP).  He’s just delaying the inevitable.  It’s cowardice of the most extreme kind, which presumes to “stabilize” housing and avoid the massive wealth crisis of our lopsided economy.  Obama and all of America needs to learn that broke people don’t belong in homes that cost 10X their annual income, which they lied about years ago when they got in the McMansions they were chiefly interested in flipping.  With the TARP, the Stimulus, and the proposed housing law, it’s all the same theme:  money sucked out of the productive economy and given to losers, whether on Wall Street, Main Street, or foreign-occupied East LA.

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There is a view shared by a minority of elite Republicans that it’s wrong to criticize the bonuses and other spending of banks and financial institutions that took TARP funds, particularly now that the heat is on following the classy moves of John Thain of Merrill and the idiotic Ken Lewis of Bank of America in buying Merrill. After all, they’re private businesses, everyone takes some subsidies of one kind or another, money is fungible, and it’s unseemly for the government to care. 

What?!?  This is the kind of “let them eat cake” corporate nonsense that will kill conservatism as a viable political movement.  Anyone who suggests we mount the least defense of this is living in a bubble.  There are not enough guys on Wall Street to keep the Republican  party elected.  Many people are Republicans because they’re cultural conservatives, small businessmen, limited government types, or some combination of the three.  They’ve been skeptical of the TARP from day one.  But you can’t say, “Give me money or the economy will implode” and then, in the next breath, congratulate yourself for your business acumen and the glories of the private sector.  Merrill, BofA, and everyone who has taken the TARP funds are no more private businesses now than the TVA or Fannie Mae and Freddie Mac.  And this crap about the funds being fungible is utterly insulting.  That’s the whole point of the criticism:  that bonus money could have contributed to these firms’ operating capital.

To me the proper concept is “tracing” or “fiduciary duty.”  Until these funds are paid back in full to the US Treasury, any extravagant or unneeded expense should be put off. No one should get a nickel in bonuses unless tied to direct individual productivity, let alone the several billion that the $40B loser Merrill leaked right before being acquired by Bank of America.  While I wouldn’t demand they all get on the GS schedule, it wouldn’t bother me terribly if they were required to do so.

The business model of Wall Street for many years now has been one of opaque financial engineering, siphoning off profits in the form of enormous bonuses, crazy risk models, and, now, massive subsidization coupled with the arrogant defense of business as usual.  If folks don’t like the TARP funds, let their companies not take them and let their employees go elsewhere.  Surely a legitimate business out in the heartland could use someone who can make a twenty-tranche asset-backed-security for ultimate sale to Fannie Mae. Yeah, right, and go bus those tables while you’re at it!

I don’t buy this argument the Wall Street Journal has proffered that Merrill and the big banks were all “forced” to take TARP.  They didn’t have to, and people that didn’t want to live under the kind of scrutiny such huge subsidies rightly entail can go elsewhere or go out of business.  There’s few other places to go, of course, because the economy is in the tank. That’s their real fear.  The world is starting to realize that the value added from much of the activity on Wall Street is highly dubious. Contracts that are legally enforceable have always been subject to “public policy” exceptions, and massive gains of money that do not ultimately get channeled into productive investment have long been subject to regulation and prohibition under the rubric of gambling or usury.

I have no problem with people making lots of money, particularly folks that develop, invent, manage, or otherwise run a productive business or invest in the same.  I’m glad someone like Henry Ford or Bill Gates made it big.  I do however have problems with people making lots of money in an industry whose benefit for the rest of the society is dubious, whose chief productive activity in recent years has been making impenetrable instruments that defy honest valuation, and who have now come hat in hand to beg for public funds,  even though they’re balk when they’re told they might have to cut expenses like every other person and every other business in America.  It’s a ridiculous, insulting, crony capitalist style of behavior that is more reminiscent of Mexico or Indonesia.  It should not be defended by those who purport to believe in free markets.

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One noteworthy aspect of the current bailouts and its discontents is that investors seem to like it.  Even pseudo-tough Wall Street types who make a fetish of greed and the necessary hard knocks of the economy have whined like a bunch of college kids stranded in Cancun after their credit cards got stolen.  $700B is not enough.  We need lower interest rates . . . again!!!!

There is a notable dichotomy between the reaction of investors–for whom a downturn on Wall Street is a calamity far worse than the intense shocks endured by the working class for the last 30 years–and the more level-headed treatment of Paulson’s proposal by academic economists who remind us that loss, liquidation, and readjustments are facts of life inevitable after years of artificial inflation. 

Economists, after all, tend to consider the economy as a whole.  It is economists, and not big business types, who have long taught that everything from rent controls and farm subsidies to the public-private gobbeldygook partnerships in local government are inefficient at best, graft-breeding albatrosses at worst. 

Wall Street is simply not to be trusted; the individual and institutional interests of these whiners is on the line, and their institutional culture and compensation structures breed a highly irresponsible penchant for extreme risk.  They lack objectivity and credibility, as too does the former Goldman guy at the head of treasury and the former Goldman guy he just put at the helm of the toxic debt buyback.  Don’t listen to them; it’s the guys in the tweed suits who actually have some stake in reality and objectivity.

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