2/29/08
Mark Gongloff makes some insightful points in his “Ahead of the Tape” column on page C1 of today’s Wall Street Journal, but he misses the magnitude, and some key aspects, of the problem he is describing.
Mr. Gongloff writes:
“Adjusted for inflation, after-tax incomes have contacted in two of the past three quarters. To keep spending, households have effectively stopped saving. Many were happy to do that during the housing boom. It was easy to borrow against their appreciating homes instead. Now that credit is tight and home equity is evaporating, plain old income will become much more important.” (Emphasis mine)
He concludes his article with:
“With credit tight now and households in need of building up their savings, a deeper spending slowdown could be on the way this time.” (Emphasis mine)
There is very little with which to argue in Mr. Gongloff’s article, except….
First, households’ ceasing saving is not something that has happened over the last three quarters or so. Americans stopped saving years ago; the savings rate has flitted back and forth between negative and positive readings for years before seemingly getting stuck in negative readings over the last few years. We have become such prodigious spenders that the entire world economic system (described, perhaps neither ironically nor coincidentally in an article by Mr. Gongloff’s colleague, Scott Patterson, that immediately follows Mr. Gongloff’s article) depends not on Americans’ spending all of their income, but on American’s spending more than all of their income.
Second, Americans will no longer spend more than they make not because they are in need of building up their savings; they have been in need of building up their savings for at least the last ten years. Americans will no longer spend more than they make simply because they can’t, largely due to the reluctance of foreigners’ to continue to finance our prodigious spending, as described by Mr. Patterson.
Americans’ inability to borrow money coupled with weakening household incomes in the U.S. will lead to a more dramatic cutback in spending than most people, and certainly most “experts,” anticipate. In the long run, this could be a good thing if Americans rediscover the virtue of saving, a virtue with which their (in some cases) parents and grandparents seemingly were born and thus had no need of learning or discovering. In the short run, however, the consequences for the world economic system, built around Americans’ profligacy and the world’s willingness to finance that profligacy, will be dire.
Friday, February 29, 2008
Thursday, February 28, 2008
IF ONLY THESE GUYS WOULD DO AS THEY SAY…
2/28/08
In an interview with The Wall Street Journal on the housing market yesterday, Treasury Secretary Hank Paulson said the following:
“I’m seeing a series of ideas suggesting major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes. Then when you look at them more carefully, what they really amount to is a bailout for financial institutions or Wall Street.”
Mr. Paulson was close to being right in this utterance; the reason that he was not completely right is discussed more thoroughly below. What is especially salient in Mr. Paulson’s statement is not that he was not completely right but rather that he displays the malady endemic to Republicans: saying the right thing and then doing the near opposite. What Mr. Paulson has consistently presented since the onset of the “housing crisis,” after initially echoing his Wall Street and Administration colleagues’ contention that it was nothing to worry about, an isolated incident that could easily be handled by the wunderkinds on the Street, is a series of schemes that involve Washington intervening in the market without completely losing its virginity: knocking heads in order to get financial institutions to go along with schemes to exonerate overextended homeowners and, by extension, foolish traders and investors, effectively forcing banks into a (now failed, thank God) super-conduit to bail clueless banks out of yet another idiotic foray into areas of the market they created but did not understand, cheering on Obsequious Ben as he doggedly pursues a policy of debasing the dollar and igniting inflation in order to provide sucre to Wall Street free marketeer tough guys, etc. Indeed, in the same interview in which he uttered the above free market pieties, Mr. Paulson cited the good work, and his involvement in fostering, the Hope Now alliance that cajoles lenders into various Rube Goldberg refinancing schemes. He also said he “planned to keep the pressure on mortgage servicers to cut a deal with homeowners who are current on their payments but might slip into delinquency if rates were to jump.” He further said that he would “press the (financial) industry to expand the program to reach borrowers struggling with prime-rate and other mortgages.” (I quote the article, not Mr. Paulson.) So, clearly, Mr. Paulson talks a free market game while pursuing just another form of market intervention, as do all but a few Republicans.
As I said above, not even Mr. Paulson’s quote cited above is entirely accurate. Even if the programs he is pressuring (forcing, really) financial institutions to participate in were limited to “helping homeowners stay in their homes,” that would not make them desirable. Mr. Paulson and his co-enablers on the Democratic side talk as if it is always a good thing to keep people in their homes and that their “solution” is not designed to help speculators and/or Wall Street. However, amateur and professional real estate speculators, while a large contributor to our difficulties, are not the major source of the housing problem. The major source of the problem is addle-brained “homeowners” who simply bought more house than they could afford or borrowed against their already heavily mortgaged homes and are now looking for a bailout from people on whom they would normally look down their noses. (In fact, a cynic (realist) might argue that one of the major motivations for these people’s buying more homes than they could afford was that it would give them justification for looking down their noses at the people they are currently begging for a handout, but that is grist for past and future posts.) Why should these people be protected? Why should financial foolishness be rewarded and encouraged? If someone bought too much house and/or borrowed against his house in order to achieve or maintain a “lifestyle” (another one of those namby-pamby words that clear thinkers despise) that was beyond his reach and/or is suddenly surprised by a (clearly stated in the contract) rate readjustment or a decline in the price of their home (which these geniuses assured people like yours truly could never happen), that is his, and his lender’s, problem. If they can, and wish to, negotiate some kind of solution, that is great; that is how a free market, with freedom to contract, is supposed to work. But no one should force either of the parties into a financial arrangement. And responsible taxpayers should not be forced to subsidize irresponsible home buyers. That is not only anathema to the free enterprise system, it is morally wrong.
The largest problem with Mr. Paulson’s plans is not that they are the equivalent of financial heavy petting or that his perception of what the government can or should do is still skewed in favor of activism. The biggest problem is that one gets the nagging notion that something bigger and that involves direct taxpayer subsidies is on the way. (See my 1/25/08 and 1/17/08 posts.) It might be something the full effect of which will not be felt until long after George Bush is back in Texas and Hank Paulson is back in New York, but a scheme under which the financially prudent will bail out the financially feckless is on its way.
In fairness to Mr. Paulson and to the Administration, at least they are paying verbal homage to free markets, delaying a full scale taxpayer bailout of the financially foolish (perhaps for political reasons), and at least trying to appear virtuous.. The Democrats want to jump right in the sack and get it done. Barney Frank (D., Mass.) want to use $10 billion of your money to, in most cases, keep people in homes you and I could only dream of. He also wants the FHA, originally designed to (not, as you might understandably suspect, destroy neighborhoods on the south side of Chicago in the ‘60s, but, I digress) help lower income people buy homes, guarantee mortgages in amounts approaching $750,000. Senator Barack Obama (D., the campaign trail), wants to use your money to create a $10 billion fund to help overextended homeowners refinance (as if the overextension was somehow forced upon these big spenders) and to (get this) help people buy first homes, thus putting more people who can’t afford homes into homes they can’t afford. The other senator from the campaign trail, Hillary Clinton, has a plan that is even more fecund of future folly: she wants to declare a 90 day moratorium on foreclosures, which punishes the formerly admirable actions of homeowners who struggled, scraped, and denied themselves in order to avoid foreclosure while rewarding those who just had to have the new BMW and the vacation in Maui while denying lenders the foreclosure option that enabled them to make relatively low cost loans in the first place, and to impose a five year interest rate freeze on ARMs. This will reward those who couldn’t be bothered to read their mortgage contracts (apparently too busy either for self-government (See my 2/26/08 post.) or for managing their own finances; those gormless situation comedies take up lots of time, you know) and completely destroy banks’ incentive to provide adjustable rate mortgages. Great idea.
All of these programs, whether from proudly interventionist Democrats or sneakily interventionist Republicans, have one thing in common: They use the heavy hand of government to “solve” a problem that cannot be solved by government, and will exacerbate the problems we will face in the future. But, hey, it’s not the pols’ money and there is a good chance that these estimables will be out of office when the product of defecation really hits the climate management device. The “mortgage crisis” will only be solved through the market finding its own level and by private parties’ working out their own means of mitigating their mutual financial difficulties without the government either holding a cudgel over their heads or handing them large sums of money in order to reward them for their mendacious and/or purblind financial behavior.
And if the market is allowed to play out, if people are not saved from the consequences of their financial irresponsibility and arrogant, misguided approach to investing, there is a chance that Americans will learn to live within their financial means and that the financial “pros” will actually learn to think before investing other people’s money. If the government “rides to the rescue,” we will merely continue on our self-destructive path to financial and societal doom.
In an interview with The Wall Street Journal on the housing market yesterday, Treasury Secretary Hank Paulson said the following:
“I’m seeing a series of ideas suggesting major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes. Then when you look at them more carefully, what they really amount to is a bailout for financial institutions or Wall Street.”
Mr. Paulson was close to being right in this utterance; the reason that he was not completely right is discussed more thoroughly below. What is especially salient in Mr. Paulson’s statement is not that he was not completely right but rather that he displays the malady endemic to Republicans: saying the right thing and then doing the near opposite. What Mr. Paulson has consistently presented since the onset of the “housing crisis,” after initially echoing his Wall Street and Administration colleagues’ contention that it was nothing to worry about, an isolated incident that could easily be handled by the wunderkinds on the Street, is a series of schemes that involve Washington intervening in the market without completely losing its virginity: knocking heads in order to get financial institutions to go along with schemes to exonerate overextended homeowners and, by extension, foolish traders and investors, effectively forcing banks into a (now failed, thank God) super-conduit to bail clueless banks out of yet another idiotic foray into areas of the market they created but did not understand, cheering on Obsequious Ben as he doggedly pursues a policy of debasing the dollar and igniting inflation in order to provide sucre to Wall Street free marketeer tough guys, etc. Indeed, in the same interview in which he uttered the above free market pieties, Mr. Paulson cited the good work, and his involvement in fostering, the Hope Now alliance that cajoles lenders into various Rube Goldberg refinancing schemes. He also said he “planned to keep the pressure on mortgage servicers to cut a deal with homeowners who are current on their payments but might slip into delinquency if rates were to jump.” He further said that he would “press the (financial) industry to expand the program to reach borrowers struggling with prime-rate and other mortgages.” (I quote the article, not Mr. Paulson.) So, clearly, Mr. Paulson talks a free market game while pursuing just another form of market intervention, as do all but a few Republicans.
As I said above, not even Mr. Paulson’s quote cited above is entirely accurate. Even if the programs he is pressuring (forcing, really) financial institutions to participate in were limited to “helping homeowners stay in their homes,” that would not make them desirable. Mr. Paulson and his co-enablers on the Democratic side talk as if it is always a good thing to keep people in their homes and that their “solution” is not designed to help speculators and/or Wall Street. However, amateur and professional real estate speculators, while a large contributor to our difficulties, are not the major source of the housing problem. The major source of the problem is addle-brained “homeowners” who simply bought more house than they could afford or borrowed against their already heavily mortgaged homes and are now looking for a bailout from people on whom they would normally look down their noses. (In fact, a cynic (realist) might argue that one of the major motivations for these people’s buying more homes than they could afford was that it would give them justification for looking down their noses at the people they are currently begging for a handout, but that is grist for past and future posts.) Why should these people be protected? Why should financial foolishness be rewarded and encouraged? If someone bought too much house and/or borrowed against his house in order to achieve or maintain a “lifestyle” (another one of those namby-pamby words that clear thinkers despise) that was beyond his reach and/or is suddenly surprised by a (clearly stated in the contract) rate readjustment or a decline in the price of their home (which these geniuses assured people like yours truly could never happen), that is his, and his lender’s, problem. If they can, and wish to, negotiate some kind of solution, that is great; that is how a free market, with freedom to contract, is supposed to work. But no one should force either of the parties into a financial arrangement. And responsible taxpayers should not be forced to subsidize irresponsible home buyers. That is not only anathema to the free enterprise system, it is morally wrong.
The largest problem with Mr. Paulson’s plans is not that they are the equivalent of financial heavy petting or that his perception of what the government can or should do is still skewed in favor of activism. The biggest problem is that one gets the nagging notion that something bigger and that involves direct taxpayer subsidies is on the way. (See my 1/25/08 and 1/17/08 posts.) It might be something the full effect of which will not be felt until long after George Bush is back in Texas and Hank Paulson is back in New York, but a scheme under which the financially prudent will bail out the financially feckless is on its way.
In fairness to Mr. Paulson and to the Administration, at least they are paying verbal homage to free markets, delaying a full scale taxpayer bailout of the financially foolish (perhaps for political reasons), and at least trying to appear virtuous.. The Democrats want to jump right in the sack and get it done. Barney Frank (D., Mass.) want to use $10 billion of your money to, in most cases, keep people in homes you and I could only dream of. He also wants the FHA, originally designed to (not, as you might understandably suspect, destroy neighborhoods on the south side of Chicago in the ‘60s, but, I digress) help lower income people buy homes, guarantee mortgages in amounts approaching $750,000. Senator Barack Obama (D., the campaign trail), wants to use your money to create a $10 billion fund to help overextended homeowners refinance (as if the overextension was somehow forced upon these big spenders) and to (get this) help people buy first homes, thus putting more people who can’t afford homes into homes they can’t afford. The other senator from the campaign trail, Hillary Clinton, has a plan that is even more fecund of future folly: she wants to declare a 90 day moratorium on foreclosures, which punishes the formerly admirable actions of homeowners who struggled, scraped, and denied themselves in order to avoid foreclosure while rewarding those who just had to have the new BMW and the vacation in Maui while denying lenders the foreclosure option that enabled them to make relatively low cost loans in the first place, and to impose a five year interest rate freeze on ARMs. This will reward those who couldn’t be bothered to read their mortgage contracts (apparently too busy either for self-government (See my 2/26/08 post.) or for managing their own finances; those gormless situation comedies take up lots of time, you know) and completely destroy banks’ incentive to provide adjustable rate mortgages. Great idea.
All of these programs, whether from proudly interventionist Democrats or sneakily interventionist Republicans, have one thing in common: They use the heavy hand of government to “solve” a problem that cannot be solved by government, and will exacerbate the problems we will face in the future. But, hey, it’s not the pols’ money and there is a good chance that these estimables will be out of office when the product of defecation really hits the climate management device. The “mortgage crisis” will only be solved through the market finding its own level and by private parties’ working out their own means of mitigating their mutual financial difficulties without the government either holding a cudgel over their heads or handing them large sums of money in order to reward them for their mendacious and/or purblind financial behavior.
And if the market is allowed to play out, if people are not saved from the consequences of their financial irresponsibility and arrogant, misguided approach to investing, there is a chance that Americans will learn to live within their financial means and that the financial “pros” will actually learn to think before investing other people’s money. If the government “rides to the rescue,” we will merely continue on our self-destructive path to financial and societal doom.
Wednesday, February 27, 2008
OH, THE DEPRIVATION!!!
2/27/08
This morning, CBS radio news reported that consumers are having to give things up in the wake of the economic travails our once great nation is experiencing. The news report cited people (horrors!) forgoing $3.00 cups of coffee, refilling bottles of water from the (Can you imagine this?) tap, and (gasp!) skipping trips to the spa. (Parenthetical remarks mine, of course.)
Is there no end to the sacrifice required of us? How much more can we take? Our parents and grandparents surely did not have to endure forgoing $3.00 cups of coffee, refilling their bottled water from the tap, and skipping trips to the spa! Oh, the humanity!
Just keep repeating to yourself: “This is the greatest, toughest, most dominant nation on earth! We are willing to make any sacrifice, bear any hardship, and assume any burden life throws in our path. We are battle hardened, tested, and ready to tell every other nation how to conduct its affairs because we have been toughened and made wise and have figured it all out. The best is yet to come! The best is yet to come!”
O tempora, o mores!
This morning, CBS radio news reported that consumers are having to give things up in the wake of the economic travails our once great nation is experiencing. The news report cited people (horrors!) forgoing $3.00 cups of coffee, refilling bottles of water from the (Can you imagine this?) tap, and (gasp!) skipping trips to the spa. (Parenthetical remarks mine, of course.)
Is there no end to the sacrifice required of us? How much more can we take? Our parents and grandparents surely did not have to endure forgoing $3.00 cups of coffee, refilling their bottled water from the tap, and skipping trips to the spa! Oh, the humanity!
Just keep repeating to yourself: “This is the greatest, toughest, most dominant nation on earth! We are willing to make any sacrifice, bear any hardship, and assume any burden life throws in our path. We are battle hardened, tested, and ready to tell every other nation how to conduct its affairs because we have been toughened and made wise and have figured it all out. The best is yet to come! The best is yet to come!”
O tempora, o mores!
Tuesday, February 26, 2008
TODAY’S UPLIFTING MESSAGE OF HOPE
2/26/08
The below is a response to an e-mail sent by a good friend commenting on my last several posts. This particular friend is one of the most original thinkers and brilliant people I know. Not coincidentally, he agrees with me on most issues.
Note that, since my correspondent’s e-mail dealt with political issues, my response was limited to our country’s political and governance decline. I did not address the sewerification of our culture, deification of artifice and denigration of honesty and good character, decline (near absence, really) of meaningful educational standards, spiritual bankruptcy, crass materialism, personal financial irresponsibility, decline in the family, ubiquitous me-meism and disregard for our fellow person, collective unwillingness to control our borders or defend the concept of our nationhood, or the other maladies that permeate modern American society and give us further cause for believing that, as the blowhard Rush Limbaugh would say, our best years lie ahead of us.
Thanks.
2/26/08
I've thought for at least the last twenty years that this country was doomed. It took Rome (depending on the point at which you start, and, arguably, the point at which you end) about 250 years to fall from its peak to oblivion. Things move more quickly now; we won't have that much time.
The problem is that people have not taken their responsibilities as citizens of
a self-governing nation seriously. Self-government is just that--governing that
you have to do yourself, and hence involves some work. If you don't want to do
the work on, say, your house or your lawn, you can hire someone to do it for
you. Similarly, if you don't want to do the work necessary for self-government
(keeping informed, reading up on the issues, thinking about things), someone
will do it for you, and that someone will expect to be paid. That is just what has happened. People have anesthetized themselves with sports, TV, movies, etc. while protesting that they are just "too busy" to follow what is going on in their country (like
Letterman's top ten or the Bulls' latest exercise in futility is REALLY
compelling), leaving the work of governance to someone else--the manipulators,
the money people, the swindlers, the con-men, the hornswogglers, the professional trough sloppers. That is why we have this choice of three patheticoes for our next president.
Yes, self-government requires some time and effort, that is why it is called
SELF-government. If we're too busy for self-government, well, I guess we're too
busy for self-government.
To use (again) perhaps my favorite Mencken quote, "The American people get the
government they deserve, and they get it good."
The below is a response to an e-mail sent by a good friend commenting on my last several posts. This particular friend is one of the most original thinkers and brilliant people I know. Not coincidentally, he agrees with me on most issues.
Note that, since my correspondent’s e-mail dealt with political issues, my response was limited to our country’s political and governance decline. I did not address the sewerification of our culture, deification of artifice and denigration of honesty and good character, decline (near absence, really) of meaningful educational standards, spiritual bankruptcy, crass materialism, personal financial irresponsibility, decline in the family, ubiquitous me-meism and disregard for our fellow person, collective unwillingness to control our borders or defend the concept of our nationhood, or the other maladies that permeate modern American society and give us further cause for believing that, as the blowhard Rush Limbaugh would say, our best years lie ahead of us.
Thanks.
2/26/08
I've thought for at least the last twenty years that this country was doomed. It took Rome (depending on the point at which you start, and, arguably, the point at which you end) about 250 years to fall from its peak to oblivion. Things move more quickly now; we won't have that much time.
The problem is that people have not taken their responsibilities as citizens of
a self-governing nation seriously. Self-government is just that--governing that
you have to do yourself, and hence involves some work. If you don't want to do
the work on, say, your house or your lawn, you can hire someone to do it for
you. Similarly, if you don't want to do the work necessary for self-government
(keeping informed, reading up on the issues, thinking about things), someone
will do it for you, and that someone will expect to be paid. That is just what has happened. People have anesthetized themselves with sports, TV, movies, etc. while protesting that they are just "too busy" to follow what is going on in their country (like
Letterman's top ten or the Bulls' latest exercise in futility is REALLY
compelling), leaving the work of governance to someone else--the manipulators,
the money people, the swindlers, the con-men, the hornswogglers, the professional trough sloppers. That is why we have this choice of three patheticoes for our next president.
Yes, self-government requires some time and effort, that is why it is called
SELF-government. If we're too busy for self-government, well, I guess we're too
busy for self-government.
To use (again) perhaps my favorite Mencken quote, "The American people get the
government they deserve, and they get it good."
Saturday, February 23, 2008
SHUT UP AND PAY
2/23/08
Today I heard Bob Brinker (the host of Money Talk, a syndicated radio talk show on money heard in Chicago on WLS on Saturdays and Sundays at 3:00 p.m.) express an opinion that deserves comment. I don’t mean to pick on Mr. Brinker alone because he is not the only “fiscal conservative” to voice such a glaringly inconsistent argument; he just happened to be the last person I have heard express it.
Mr. Brinker was in the middle of his usual lambasting of both Barack Obama and Hillary Clinton when he uttered the oft-heard contention that he didn’t know who was going to pay for all the promises these two have made. I want to clear up two things. First, as readers of the Pontificator know, I certainly have no problem with anyone blasting either Senator Obama or Senator Clinton, or any politician for that matter. There is plenty to criticize. Second, one of the ripest grounds for criticism of either Mr. Obama or Mrs. Clinton is on fiscal matters; I wholeheartedly agree that no one has any idea who is going to pay for the promises of these two purblind pols. Certainly, neither of these two poltroons has come forth with a credible method of paying for all of the promises that he or she has made.
However…
It’s curious that I never hear Mr. Brinker or any other self-styled “fiscal conservatives” say something like “I just don’t know how who is going to pay for Mr. McCain’s plan to continue, and possibly expand, the war in Iraq for generations.” Mr. McCain has never advanced a plan to pay for his military ambitions, but the Bob Brinkers and the other “fiscally conservative” types of the world never get around to pointing this out.
It would seem to this fiscal conservative that some consistency is demanded here. And maybe the faux fiscal conservatives do think they are consistent: They are protective of the public purse when it’s the Democrats who are spending our money. And, for these self-stlyed guardians of the public purse, that is good enough.
Today I heard Bob Brinker (the host of Money Talk, a syndicated radio talk show on money heard in Chicago on WLS on Saturdays and Sundays at 3:00 p.m.) express an opinion that deserves comment. I don’t mean to pick on Mr. Brinker alone because he is not the only “fiscal conservative” to voice such a glaringly inconsistent argument; he just happened to be the last person I have heard express it.
Mr. Brinker was in the middle of his usual lambasting of both Barack Obama and Hillary Clinton when he uttered the oft-heard contention that he didn’t know who was going to pay for all the promises these two have made. I want to clear up two things. First, as readers of the Pontificator know, I certainly have no problem with anyone blasting either Senator Obama or Senator Clinton, or any politician for that matter. There is plenty to criticize. Second, one of the ripest grounds for criticism of either Mr. Obama or Mrs. Clinton is on fiscal matters; I wholeheartedly agree that no one has any idea who is going to pay for the promises of these two purblind pols. Certainly, neither of these two poltroons has come forth with a credible method of paying for all of the promises that he or she has made.
However…
It’s curious that I never hear Mr. Brinker or any other self-styled “fiscal conservatives” say something like “I just don’t know how who is going to pay for Mr. McCain’s plan to continue, and possibly expand, the war in Iraq for generations.” Mr. McCain has never advanced a plan to pay for his military ambitions, but the Bob Brinkers and the other “fiscally conservative” types of the world never get around to pointing this out.
It would seem to this fiscal conservative that some consistency is demanded here. And maybe the faux fiscal conservatives do think they are consistent: They are protective of the public purse when it’s the Democrats who are spending our money. And, for these self-stlyed guardians of the public purse, that is good enough.
“HERE IS COME TO SAVE THE DAY!”
2/23/08
The stock market turned around abruptly yesterday on news that a private bailout was being arranged for Ambac. The experts assure us that Ambac is at the heart of the current financial difficulties we are facing and thus that solving Ambac’s (along with FGIC’s and the other bond insurers’) problems would put us back on the path to nirvana. Hence the rally in stocks on news of the bailout.
Leave aside that this will probably not prove to be an entirely private operation; though details are scarce on the bailout, everyone agrees that New York Eric Dinallo was a major player in the dealing that led to the plan, and the U.S. Treasury was involved, reports say, only to assure that the arrangement involved no taxpayer money. (A realist (er, sorry, a cynic) might add the words “for now” to that prior sentence, but I digress.) What else is wrong with this embryonic bailout plan?
This might be simplistic thinking, but I have long held that if a little more simplistic thinking, rather than the highly sophisticated financial sophistry in which the Wall Street deep thinkers appear to revel, had been employed in the recent past, we might not be in the financial soup in which we are currently swimming. So here goes:
Again, while details are scare, it looks like the deal will involve various banks’, investment banks’, and other financial institutions’ investing $2.5 billion in equity and $500mm in debt in Ambac. Some credible analysts estimate that Wall Street firms could have as much as $40 billion in exposure if the bond insurers endure further downgrades. Note that that $40 billion in losses could result if all the insurers get downgraded. So, in order to adjust for Ambac’s share of the bond insurance market, which I admittedly don’t know, let’s just say that it would take three times as much capital, say $9b, to bail out all the insurers along the lines of the inchoate Ambac plan. That number could be smaller, but probably wouldn’t be much larger.
So, for a $9b investment, the investment banks and other financial denizens can avoid $40 billion in losses. Who wouldn’t do such a deal all day? I understand the concept of leverage at least as well as most people, but wasn’t it leverage, real and notional, that got us into this trouble in the first place? How will a generous dollop of more aggressive leverage save us from a problem that had its origins in excessive leverage? This deal sounds sounds too good to be true from the perspectives of both the banks and the economy as a whole, and, at the risk of again sounding too simplistic in this era of sophistication for the sake of sophistication, it probably is. Yes, I know that the plan supposedly works because it will be sufficient for the rating agencies to restore Ambac’s and its cohorts’ AAA (or Aaa) ratings, but how much acuity have the rating agencies shown of late in these matters? A restructuring that leads to a rating upgrade will only, at best, postpone the problem.
The problems with which we are dealing arose because a lot of people made a lot of foolish financial decisions. In the case immediately at hand, as I’ve said before, debt analysis involves more than asking looking up a rating and/or asking “Is it insured?” In order for whatever vestiges of free enterprise that remain in our economy to function, those who made those poor financial decisions must be allowed to suffer the consequent financial pain. Financial wizardry (Some might say financial black magic.) aimed at avoiding this simplistic reality can only delay, and exacerbate, the damage that our economy will suffer.
The stock market turned around abruptly yesterday on news that a private bailout was being arranged for Ambac. The experts assure us that Ambac is at the heart of the current financial difficulties we are facing and thus that solving Ambac’s (along with FGIC’s and the other bond insurers’) problems would put us back on the path to nirvana. Hence the rally in stocks on news of the bailout.
Leave aside that this will probably not prove to be an entirely private operation; though details are scarce on the bailout, everyone agrees that New York Eric Dinallo was a major player in the dealing that led to the plan, and the U.S. Treasury was involved, reports say, only to assure that the arrangement involved no taxpayer money. (A realist (er, sorry, a cynic) might add the words “for now” to that prior sentence, but I digress.) What else is wrong with this embryonic bailout plan?
This might be simplistic thinking, but I have long held that if a little more simplistic thinking, rather than the highly sophisticated financial sophistry in which the Wall Street deep thinkers appear to revel, had been employed in the recent past, we might not be in the financial soup in which we are currently swimming. So here goes:
Again, while details are scare, it looks like the deal will involve various banks’, investment banks’, and other financial institutions’ investing $2.5 billion in equity and $500mm in debt in Ambac. Some credible analysts estimate that Wall Street firms could have as much as $40 billion in exposure if the bond insurers endure further downgrades. Note that that $40 billion in losses could result if all the insurers get downgraded. So, in order to adjust for Ambac’s share of the bond insurance market, which I admittedly don’t know, let’s just say that it would take three times as much capital, say $9b, to bail out all the insurers along the lines of the inchoate Ambac plan. That number could be smaller, but probably wouldn’t be much larger.
So, for a $9b investment, the investment banks and other financial denizens can avoid $40 billion in losses. Who wouldn’t do such a deal all day? I understand the concept of leverage at least as well as most people, but wasn’t it leverage, real and notional, that got us into this trouble in the first place? How will a generous dollop of more aggressive leverage save us from a problem that had its origins in excessive leverage? This deal sounds sounds too good to be true from the perspectives of both the banks and the economy as a whole, and, at the risk of again sounding too simplistic in this era of sophistication for the sake of sophistication, it probably is. Yes, I know that the plan supposedly works because it will be sufficient for the rating agencies to restore Ambac’s and its cohorts’ AAA (or Aaa) ratings, but how much acuity have the rating agencies shown of late in these matters? A restructuring that leads to a rating upgrade will only, at best, postpone the problem.
The problems with which we are dealing arose because a lot of people made a lot of foolish financial decisions. In the case immediately at hand, as I’ve said before, debt analysis involves more than asking looking up a rating and/or asking “Is it insured?” In order for whatever vestiges of free enterprise that remain in our economy to function, those who made those poor financial decisions must be allowed to suffer the consequent financial pain. Financial wizardry (Some might say financial black magic.) aimed at avoiding this simplistic reality can only delay, and exacerbate, the damage that our economy will suffer.
NO BIAS HERE, NO SIR
2/23/08
In its largely fluffy weekend edition today, The Wall Street Journal reports that Representative Rick Renzi has been indicted on 35 counts of extortion, money laundering, embezzlement, and other nefarious manifestations of public corruption. So one of our public servants is indicted with his hand, directly or indirectly, in the till. Nothing new here.
What is interesting about the Journal story, however, is that it never explicitly identifies Rep. Renzi as a Republican. My interest in this aspect of the story was piqued when I noticed that there is no “(R., Arizona)” after his name anywhere in the story. Then, as I read the story, I noted that never in the story is Renzi’s party directly identified. Admittedly, in the fourth paragraph, there is the statement
“Those probes (of corrupt, and, in the Journal’s view, as long as they are Republicans, presumably selfless, public servants) are likely to lead to more troubling headlines in the months before the election, especially for Republicans.”
and one could infer from that statement that Rep. Renzi is a GOPer, but, then again, maybe not. The word “Republican” again appears in the very last sentence in the story, to with
“His (Rep. Renzi’s) future in Congress now is uncertain; on Capitol Hill, Republican House leaders have said they have taken a ‘zero tolerance’ approach with members facing federal investigation.”
and in this sentence, the inference that Rep. Renzi is a Republican is easy to draw. Still, the very last sentence? And then only to compliment the GOP leadership over its supposed diligence against corruption?
Note also that this story was not in the opinion section of the paper, but in the supposedly news section of the paper (page A3).
The next time the Journal assumes its disingenuous “We aren’t for any political party; we are merely for free men and free markets” pose, and then goes on to castigate the “mainstream media” for its liberal Democratic bias (which does exist, by the way) take the Journal’s posturing for what it is: blatant, shameless artifice.
In its largely fluffy weekend edition today, The Wall Street Journal reports that Representative Rick Renzi has been indicted on 35 counts of extortion, money laundering, embezzlement, and other nefarious manifestations of public corruption. So one of our public servants is indicted with his hand, directly or indirectly, in the till. Nothing new here.
What is interesting about the Journal story, however, is that it never explicitly identifies Rep. Renzi as a Republican. My interest in this aspect of the story was piqued when I noticed that there is no “(R., Arizona)” after his name anywhere in the story. Then, as I read the story, I noted that never in the story is Renzi’s party directly identified. Admittedly, in the fourth paragraph, there is the statement
“Those probes (of corrupt, and, in the Journal’s view, as long as they are Republicans, presumably selfless, public servants) are likely to lead to more troubling headlines in the months before the election, especially for Republicans.”
and one could infer from that statement that Rep. Renzi is a GOPer, but, then again, maybe not. The word “Republican” again appears in the very last sentence in the story, to with
“His (Rep. Renzi’s) future in Congress now is uncertain; on Capitol Hill, Republican House leaders have said they have taken a ‘zero tolerance’ approach with members facing federal investigation.”
and in this sentence, the inference that Rep. Renzi is a Republican is easy to draw. Still, the very last sentence? And then only to compliment the GOP leadership over its supposed diligence against corruption?
Note also that this story was not in the opinion section of the paper, but in the supposedly news section of the paper (page A3).
The next time the Journal assumes its disingenuous “We aren’t for any political party; we are merely for free men and free markets” pose, and then goes on to castigate the “mainstream media” for its liberal Democratic bias (which does exist, by the way) take the Journal’s posturing for what it is: blatant, shameless artifice.
Subscribe to:
Posts (Atom)
