America's Financial Mess

[K-Mac]

From http://www.washingtonpost.com/wp-dyn/conte...1403378_pf.html

Community banking executives around the country responded with anger yesterday to the Bush administration's strategy of investing $250 billion in financial firms, saying they don't need the money, resent the intrusion and feel it's unfair to rescue companies from their own mistakes.

But regulators said some banks will be pressed to take the taxpayer dollars anyway. Others banks judged too sick to save will be allowed to fail.

(Emphasis mine.) Let the bickering, string-pulling and favors begin!

[KendallJ]

If you haven't read the WSJ's account of the 9 banks deal signing, you should. A summary is posted at Naken Capitalism.

http://feedproxy.google.com/~r/NakedCapita...is-telling.html

It is a complete sham.

[Thomas M. Miovas Jr.]

From http://www.washingtonpost.com/wp-dyn/conte...1403378_pf.html

Also from that article:

"Federal regulators said they did expect some banks to volunteer, though none stepped forward yesterday. But they added that they would not rely on volunteers. Treasury will set standards for deciding which banks can be helped, and the regulatory agencies will triage the banks they oversee: The institutions faring best and worst will not receive investments. The institutions in the middle, whose fortunes could be improved by putting a little more money in the bank, will be pushed to accept the money from the government." [emphasis added]

They are trying to make this out as some sort of reverse thuggery, but forcing someone to take a loan "for his own good" or else, is thuggery; especially since those bank CEO's must have a pay cut and eventually must do with it what the Feds want them to do with it.

My biggest concern, other than the thuggery, is where is this money coming from? We are at an all-time high Federal deficit of about half a trillion dollars; so, is this a way of hiding future inflation? They want money to get into the economy, but they are not cutting taxes and they are not giving tax rebates, they are just doling out the money and the conditions to well-run banks.

There is going to be another false boom somewhere because of this action, and in the mean time other Federal regulations will be dragging down the economy.

[agrippa1]

If you haven't read the WSJ's account of the 9 banks deal signing, you should. A summary is posted at Naken Capitalism.

http://feedproxy.google.com/~r/NakedCapita...is-telling.html

It is a complete sham.

The topper is that they are forcing sound banks to take the bailout too, so as not to make the unsound banks appear... unsound.

There is going to be another false boom...

That was the 900+ point rise we saw Monday.

[softwareNerd]

It is a complete sham.

Paulson and Bush are behaving like Chavez or any other petty dictator. Long live the king!

The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry M. Paulson Jr. said they must sign it before they left.

The chairman of JPMorgan Chase, Jamie Dimon, was receptive, saying he thought the deal looked pretty good once he ran the numbers through his head. The chairman of Wells Fargo, Richard M. Kovacevich, protested strongly that, unlike his New York rivals, his bank was not in trouble because of investments in exotic mortgages, and did not need a bailout, ...

[gags]

We're gonna make ya an offer ya can't refuse! Where have I heard that before?

[KendallJ]

Paulson and Bush are behaving like Chavez or any other petty dictator.

Except of course that they admit they "feel badly" about it...

Someone (was it Burgess) described the character of American statism as a form of paternalism. Here, instead of the stern dictator, we have the "reluctant father." Nevermind that both have to punish their misbehaving children, in exactly the same fashion.

[brian0918]

All the stock gains from Monday have been erased today. Talk about pragmatism in action - Paulson has to announce a new bailout plan every two days to keep limping along.

[adrock3215]

This really is a travesty. The modern banking industry has always been the most heavily regulated industry in history, so maybe that's why these executives are so receptive to the deal. Although, from what I read, a good many of them were not. The story gets worse with smaller banks. There are small banks that were looking forward to picking up market share when larger banks went under. Now, the large banks that took on too much risk are being protected, at the expense of the smaller more thrifty banks who will not be able to expand market share. This entire catastrophe is a debacle. There has not been an event that has hurt the case for free markets as large as this since the Great Depression.

What gets me is that there is hardly a voice out there who is questioning the legitimacy of such a proposal. Since the entire process is being done by the Republicans, there is no supposed "free market" party in opposition to question such a scheme, and the left simply watches on the sidelines and cries: "See, I told you so...even you free market guys have to come over to our side when things get bad."

Think of the precedent that these last few weeks have set. I don't know if people understand that if this can be done, anything can be done. In my estimation, if the ideas of this country don't change quickly, we are heading toward some form of dictatorship. Milton Friedman said a few smart things in his day, one of which was, “Only a crisis produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around.” Look at the ideas lying around in our universities; the political actions being taken right now are the logical ends of those ideas. We've been sold short by the Humanities departments in our universities while the idiots in the SEC ban shorting in the financial markets.

[softwareNerd]

Here's a cartoonist's take on the bail-out of Main Street

[Thomas M. Miovas Jr.]

All the stock gains from Monday have been erased today. Talk about pragmatism in action - Paulson has to announce a new bailout plan every two days to keep limping along.

Yes, well that party didn't last very long....

Now they are saying we are either in a recession or will be in one shortly. Of course, every time the numbers guys say that, it almost becomes a self-fulfilled prophecy, because once some people hear the "R" word, they run for cover with their money. And, of course, if we do head for economic bad times, there will be few who blame the bail-out package or the policies that led to the decline in the first place, except maybe twenty years from now when the beginning of the new millennium will be studied. Heck, it is only fairly recently (in time scales) that they've been talking how the New Deal extended or caused the Great Depression.

Speaking of which, we certainly cannot expect that the politicians will learn their lesson, so I don't think there will be a slow turn-around on policies. At some point, the political winds will change because the philosophic winds have changed, though I shudder to think of how long that might take, since we cannot count on the supposed "free market" policies of the Republicans.

Edited October 15, 2008 by Thomas M. Miovas Jr.

[brian0918]

it is only fairly recently (in time scales) that they've been talking how the New Deal extended or caused the Great Depression.

Raymond Moley, the chief architect of the New Deal, was criticizing it almost immediately after it was finished. I just bought a copy of his After Seven Years (1939) which is supposed to speak in unprecedentedly-critical terms of Roosevelt and his people (particularly unprecedented as these things don't usually come out until well after their political lives are over, or after they have all died)

Now I wonder what led people to forget about these criticisms and prop up the New Deal as a positive example.

Edited October 15, 2008 by brian0918

[EC]

All the stock gains from Monday have been erased today. Talk about pragmatism in action - Paulson has to announce a new bailout plan every two days to keep limping along.

See what I meant Brian, there is going to be a lot of ups and downs in the short term during all this because there is a degree of emotionalism and panic going on. Over the long term, however, however the emotional roller-coaster effect is negligible and government interference in the economy can't only have horrible results.

It's scary; banks are essentially being nationalized, and they have effectively given Paulson the position that John Galt refused to take in AS.

[KendallJ]

Don't count on the fact that the Depression is discredited to keep policies from still destroying the economy. It's amazing how new devices are invented that look different, but aren't.

btw. Carbon caps have the potential to kill the economy as well.

[gags]

Now there is speculation that the executive pay limitations in this bailout plan are going to creep over to other companies. From an article on CFO.com:

While the Treasury Department has not yet issued guidance on how to interpret or implement most of the vaguely worded pay provisions in the federal Troubled Asset Relief Program, observers aren't waiting around to voice their displeasure.

Particularly troubling to these critics is their growing suspicion that a new presidential administration and Congress will try to expand the bailout legislation's compensation restrictions — meant to limit pay at troubled companies — by applying them to the entire community of public companies, as well.

According to Steve Barth, a partner in the transactional and securities practice at the law firm Foley & Lardner. "We think [the legislation] is the blueprint for what is going to be imposed on all public companies, and that will raise some incredibly complex issues," he told CFO.com.

For example, he pointed to the provision whereby financial firms that sell troubled assets directly to the government, or receive an equity infusion, would be prohibited from structuring pay packages encouraging executives to take "excessive or unnecessary risks." (emphasis added)

The Treasury Department has not explained how it will define that phrase, but to Barth, discouraging risk-taking is antithetical to a healthy free-enterprise system. "If you apply these rules designed for troubled financial institutions to, say, software firms or other very entrepreneurial companies, what will it do to their capital-raising and business-development efforts? These companies are in the business of high risk. Are we really going to disincentivize risk-taking?"

http://www.cfo.com/article.cfm/12416870/1/c_2984789?f=alerts

I wonder how and why the government proposes to limit excessive risk taking?

The left in this country has been salivating over the idea of limiting CEO pay for years. This economic situation is going to give them a great opportunity to make us all a little bit more equal and a lot more poor.

[brian0918]

I'm reading The Forgotten Man by Amity Shlaes, about the Great Depression, and it's frightening how similar the idiotic government bailout rationale are then and now. For a view of what your local bank could soon look like, check out this Google Street View of New York's Bank of United States, the first huge failure that set off the chain reaction of bank failures. The city apparently still owns the lot and has not done anything with it for the last 80 years.

Edited October 16, 2008 by brian0918

[Thomas M. Miovas Jr.]

The Ayn Rand Center for Individual Rights just came out with a new press release. Referring to the recent banking arm twisting, Yaron Brook calls it The Road to Fascism. It's not up on their website, yet, but should be in a few days.

“If fascism means coercive state control over nominally private property, then there is no more chilling sign of creeping fascism in America than government’s encroachment on the lifeblood of the U.S. economy--its financial institutions. While the government assures us it will be a ‘passive investor,’ merely funneling cash into the banking system rather than dictating how banks function, this is a lie."

Interestingly, he quotes McCain on agreeing that more oversight is needed, though I think Obama's position is that bad or worse. But I suppose since McCain is running as a Republican, and they had been for at least some form of the free market, his comments need to be singled out.

[Thomas M. Miovas Jr.]

The Ayn Rand Center for Individual Rights just came out with a new press release. Referring to the recent banking arm twisting, Yaron Brook calls it The Road to Fascism.

The Road to Fascism is now up on the ARC website.

[softwareNerd]

More comments from John Allison, reported here.

[K-Mac]

Not that I agree with Warren Buffet's philosophy for life (collectivism, higher taxes, etc.) but I sure agree with his investment philosophy, and he's always great for good quotes. From http://www.nytimes.com/2008/10/17/opinion/...tml?ref=opinion

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.

In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

[brian0918]

More comments from John Allison, reported here.

Do you agree with what he says about how it was right for the government to inject capital into the banks? Haven't many of the complaints on this forum been specifically about that?

[KendallJ]

Do you agree with what he says about how it was right for the government to inject capital into the banks? Haven't many of the complaints on this forum been specifically about that?

Without being able to tell what else he said, and how he couched this, I can't say for sure. On the surface it is disappointing, but I'd like to see the rest of the speech.

[softwareNerd]

Do you agree with what he says about how it was right for the government to inject capital into the banks? Haven't many of the complaints on this forum been specifically about that?

In general, the government cannot walk away from all banks, and shrug off any credit-market panic as being "not its problem". In this post, I tried to make two points:

• the government has to "back" good banks (this raises questions about what a good bank is, and what it means for the government to "back" it, but that's the broad approach)
  
• some concrete structural change must be enacted at the same time, even the law rolls it out over time
  

As a follow-up, in this post, I pointed out that the original plan to buy up bad paper drew negative reactions, but those reactions are only valid if they are made for the right reason. Two (very different) wrong reasons:

• the general public reaction, thinking Wall Street is swindling them
  
• a libertarian-type reaction that the government should get out of the bank-backing business tomorrow
  

The original paper-buying bail-out plan was not good, because it planned aid wider than just banks. Secondly, it had no penalties in the form of actions that would remove support from some while helping others. Instead of structuring a plan to let poorer institutions fail, the morons imposed a populist penalty: let them survive, but with salary caps. What we saw is Bush applying the principles of "No Child Left Behind", not wanting to leave any financial institution behind. There were also other required penalties that the Treasury failed to impose before this bill was even an idea (e.g. forcing Fannie/Freddie creditors to take some % of the risk of holding Fannie/Freddie paper). There was much more to dislike about the bail-out bill. However, not the idea that the government needs to prevent certain bank-run (and equivalent) type of scenarios.

Of course, if we were in a free-market, I would not say that.

In terms of process, I pointed out that the banks themselves need to be allowed to come up with a solution. The government has become so all-doing and all-powerful, that everyone else has to sit around and wait for what the princes decide.

[On a related blog post, I just read that the next rung, the smaller banks, are protesting the government's move.]

[brian0918]

On the surface it is disappointing

I'm reading The Forgotten Man now and getting disappointed as well. The author is right a lot of the time, but then blames the government for not bailing out the New York Bank of United States, so she's not consistent.

[Thomas M. Miovas Jr.]

Of course, if we were in a free-market, I would not say that.

In terms of process, I pointed out that the banks themselves need to be allowed to come up with a solution. The government has become so all-doing and all-powerful, that everyone else has to sit around and wait for what the princes decide.

The problem is that one does not solve one government boondoggle problem by making another one the law of the land. In principle, I could agree that one maybe ought not to set the entire market free at one time, as the regulations have distorted the markets and a predictable decrease in government controls would be better -- unless we get into a situation, as in Atlas Shrugged, whereby we become a dictatorship, because then one does whatever one can to change to freedom as soon as possible, even if that means a non-peaceful rebellion. Of course, some are seeing Paulson as the new dictator over finance or at least the new finance Czar.

On the question of the government backing banks, so long as we have the FDIC that is supposed to insure depositors, but it certainly did not prevent a run on Washington Mutual, which lost something like 16 billion dollars in one week just before its collapse. Whether there should be an FDIC I would have to answer in the negative. Under capitalism, one could put one's money in the bank and a private insurer could insure it; but it would not be a role for the government to play.

The idea that banks are so crucial that the government needs to back them is incorrect. The only role of the government under capitalism is to prevent force and fraud; so it could prevent banks from taking your deposits and giving them away, but it couldn't back your deposits directly, so long as force and fraud are not involved. And, of course, the government would have nothing to do with the money of the land, except to also prevent force and fraud -- i.e. there would be a role for the bureau of weights and standards. But, there would be no regulations on any economic transaction, including banks. If depositors lost confidence in their bank, then they would be free to take out their money, simple as that.

But, certainly, what to do now is not to come up with an even worse law that got us here in the first place, or to try to back up housing prices or any other prices by government fiat and regulations. Let the market ride, since that is the only moral solution. And it would be up to each person storing his money in a bank to look into the soundness of the bank before taking such actions as giving one's money to them for safe keeping; just as one would go by the reputation of a storage garage before giving them anything to keep for you.