September 29th, 2008
After the House of Representatives’ NO vote on the $700-Bil. bailout the free market just may have a chance to show it ability to solve a problem of its own making. In doing so there will be pain, but much of it will fall on those who deserve to suffer it due to their poor judgment and irresponsibility. We’ll all experience some discomfort, but we’ll get it over more quickly too.
There is a lot of money out there just waiting to acquire valuable assets at fire-sale prices and profit mightily from taking the risk. The whole bail-out logic was based on the presumption that these “toxic” assets aren’t really as toxic as they are feared to be. The government wanted to protect financial institutions from selling at fear-based prices. Let’s see if enterprising fianciers in the private sector can put together a market for these assets at whatever price makes sense, consolidate the failed banks and get things set right without massive government intervention.
Markets work. Government doesn’t.
September 26th, 2008
Recently Senator Shelby held up what he described as a “5-page report” from economists objecting to the Paulson $400 Bil. Bailout plan. Here’s the detail.
The recommendation signed by 200 economists
OK, Congress. Now go to work and fashion a sensible plan. The stampede is over.
September 25th, 2008
A new article by Dr. Richard S. Lindzen, Professor (Program in Atmospheres, Oceans and Climate
Massachusetts Institute of Technology) discusses the perversion of the scientific establishment caused by the insinuation of leftist environmental politics into its very structure.
Climate Science: Is it currently designed to answer questions?
This reinforces the point that the climate debate isn’t about science. It is about politics. Dr. Lindzen describes in detail how the climate science establishment has been corrupted by the influence of non-scientist environmental zealots whom he names and documents. Read the paper.
September 24th, 2008
It’s a weak light, but light nonetheless:
An Alternative Proposal
Dick Army’s article
NY Times, Joe Nocera
From Naked Capitalism: Banking Expert: Bailout Not Necessary, Industry Can Take Losses
They’re worth a peek.
P.S. For Libertarians: Ron Paul sounded off on this. Not a significant word from Bob Barr so far.
September 24th, 2008
The longer this financial “Crisis” goes on, the more it appears to be another case of herd instinct. Where are the other viewpoints on how to solve the problem? Near silence. Is everyone scared to speak up? Is anyone unafraid to get out of the stampede and speak clearly and originally? We’ve heard nothing sensible from congress.
Last night on PBS-TV we heard a panel discussion that included Allan Meltzer, PHD of Carnegie Mellon, the first fresh voice I’ve heard on the matter. His viewpoint is that the market should get us out of the “crisis” just as it got us in. If government support is needed, and he seemed to think it is, then it should come in the form or interest bearing loans to distressed institutions. They should borrow the money to work it out, then pay it back – and forgo executive bonuses and dividend payments until such time as the loans are repaid. For the first time an alternative, and one that makes sense.
And who are these institutions that Paulson wants to rescue? Wall Street as we knew it is gone. Maybe he’s thinking of Freddie and Fannie, who should be liquidated, not rescued. Who else is he talking about that needs the $700 Billion? Tell us Ben. Tell us Paul. We need to know.
And why should we believe that the same government regulators and politicians that nurtured the crisis are the ones we should rely upon to get us out? Turn the herd and the crisis will end.
September 22nd, 2008
Crisis politics is what we’re now seeing. The pols and bureaucrats are really scared out of their wits — someone might be blamed for the failures of the financial markets in recent days.
OK, but what are some of the facts:
1) The financial industry is already among the most regulated industries in the country. So did regulations cause the problem? Are new regulations the answer?
2) Hedge funds are lightly regulated. They also trade stuff, including some of the mortgage instruments blamed for the current crisis. Why do these lightly regulated operations continue to function normally while the highly regulated “banks” are in need of rescue?
3) Newly enforced “Mark to Market” accounting rules imposed by regulators explain much of the current panic. Who are the regulators that imposed these rules? Should these guys be put in jail?
4) The poster kids, the real originators or secuitized mortgages, Fannie and Freddie are creatures of the U.S. Congress. They are not, and never have been free market enterprises. They have been packed with patronage employees, forced to do the bidding of congressmen and having contributed liberally to the campaign chests of congressmen such as Barnie Frank and Chuck Schumer, among others. Should we trust the congressional patrons of these delinquent institutions with the governance of the whole financial system?
5) This whole mess is vastly out of proportion to the original source of the problem — flaky home loans. So can a solution be concocted that will proportional and will attack the actual cause? If there were no risk of default by mortgage holders, would this situation be anywhere as huge as it has become? Maybe some creative thinking in this department would suggest a few workable and less drastic fixes than nationalizing the whole mortgage industry.
6) Short sellers are merely scapegoats trotted out for the ignorant public to blame. No reputable economist has ever shown that short selling a) is responsible for market declines, or b) is harmful to the markets in any way. So should be believe people who blame short sellers for the market’s malaise?
7) The Fed and Treasury, Congress and President haven’t given this problem much original thought. New regulations and government interventions risk destroying the entire capitalist system on which our country’s prosperity depends. Let’s not let the regulators and socialists kill off the entire economy in the name of saving it.
September 20th, 2008
Since my last post I’ve been searching for an explanation as to why an admittely high, but not catastrophic (6.4%) default rate on home mortgages could possibly cause the chaos we see in the financial markets. Today’s Wall Street Journal (9/20/08) has an article (page A15) Maybe the Banks Are Just Counting Wrong” by John Berlau. This article is the first I’ve seen that contributes real understanding to the problem.
Mr Berlau observes that last November Federal Accounting Standard 157 was imposed by U.S. regulators. This standard requires financial institutions to use “mark to market” accounting for assets. So in the current situation, if Bank-A has a perfectly good $100 thousand mortgage asset, and another bank (B) in distress sells a similar asset for $20 thousand, the value of Bank-A’s $100 thousand morgage is now reduced by 80%. In thin, illiquid markets where a little fear can cause panic sales of assets at panic-induced prices, and where the panic of one party impacts another party’s balance sheet in this way — well, you can see what happens.
So, as suspected, the regulators have had a hand in the panic. The reaction of the government is massive and heavy handed and the crisis is completely out of proportion to the modest cause. Which leaves me with nothing to recommend, since I find this all quite difficult to comprehend. Maybe this explanation will help others such as me, with our limited financial knowledge, to understand what is happening.
September 17th, 2008
Over the years I’ve developed a keen sense for what constitutes irrational public behavior. The current financial “crisis” is a good example of this. The self-delusion about home prices rising forever created the real estate bubble. The real estate bubble was amplified by the irrationality of the financial industry, and now we have a panic, essentially a run on the banks.
If one looks only at the magnitude of the failed loans it doesn’t add up to the chaos we see in financial markets. Yes, there have been defaults and foreclosures. But somehow I just can’t believe that the magnitude of these, alone, can account for the current financial devastation. My admittedly non-mathematical, gut conclusion is that what we’re seeing is a panic, a run, a loss of confidence. Financial markets depend almost entirely on trust and hope. When either of these weaken history shows that panics ensue.
September 17th, 2008
A mass delusion produced the financial mess this week that led to the U.S. Government’s take-over of AIG, Freddie Mac and Fannie Mae, and the failures of Bear Stearns, Merrill Lynch, and Lehman Bros. A bigger delusion remains and strengthens like a hurricane gathering force from warm water.
The first big delusion, shared by nearly everyone, is that real estate prices will rise forever. It is this delusion that is the basis for the entire upside down pyramid that is now collapsing. That delusion is really odd in light of the Japanese experience over the past couple of decades, but then delusion is usually accompanied by blindness. The whole financial mess stems from the belief that low-rate, baloon payment, variable interest loans could be easily refinanced as real estate prices rose. Hence, these loans bore little risk. But prices didn’t rise. So how could the giants of finance worldwide fall so completely for this delusion? Human nature and the juices of greed are two answers that immediately come to mind.
But could there be more?
What we’ll have now is a rush to regulation. That’s the bigger delusion, that bureaucratic judgment and legal shackles will tame the beast. The lie of this notion is proven by the fact that the two biggest failures were Fannie and Freddie. These were the darlings of the political set as personified by Barnie Frank and Chuck Schumer, whose regulatory oversight amounted to treating the two entities as giant candy stores generating patronage jobs, political contributions and boodle to woo voters. Should we now believe that the same people who cobbled together and for many decades regulated the two largest failures of the current mess will successfully regulate the industry’s future operations? What nonsense!
And finally, consider this. The financial industry is arguably the most highly regulated sector of our entire economy right now. So could it be that regulation provides the cover for managers, who know better, to engage in risky behavior – with the comfort that others (regulators) are minding the store, and anyway everyone else is doing it?