For a progressive, subordinating your will to the will of the state is the second-noblest goal to which you can aspire. Becoming part of the thin circle of thoughtful, expert, progressive men or women of action, rightfully ready to represent the public, is the noblest goal.
That public's consent of your good governance doesn't matter. Your credentials attest to that. If the public could govern themselves there would not have been need for your ascendance. You may then assess matters and, representing the nation, dictate the best course of action. One that will produce to your highly educated and comprehensive judgement, the greatest good for the greatest number. Social justice.
Many of you will endure some pain. In the eyes of those people of just action who represent you, this is unavoidable and necessary to provide for those whom are judged more worthy. You wouldn't have been able to help yourselves anyway, for you haven't been ordained with the wisdom and intellect for the just application of power which those who represent you can claim. Subordinate your will to the state. The state can expertly judge your worth, and thus weighed, care for you as that worth deems appropriate. Thus, ensuring a fair and just distribution of limited resources to those who are most deserving, in the sole judgment of the progressive elite, and preventing inefficient waste on individual desires.
Critics of the policies and politics of the present administration, and opponents of progressivism more generally, often comment that we appear to be on the road to socialism or Marxism.
I beg to differ a bit. It's more unsettling to me than this. You might be simply looking around and seeing a diminished importance and role of private enterprise and free (unfettered) markets in our economy, and calling that socialism. Socialism as the opposite of a private, free market approach.
But we need to be more clear. While socialism prescribes a state-run economy, the state owns the factors of production, and dictates their use. All workers work for government owned and managed concerns, for the benefit of their fellows and themselves.
We (probably) won't ever have that in America, I believe. What we're getting now is a gradient into fascism. Fascism prescribes a state-run economy, as does socialism, but under fascism, the factors of production remain in private hands. The government doesn't own the factors of production per-se (Obama's said he doesn't want to be in the car business), but it does dictate to the owners how they will run their companies, invest their capital, market their products. Bureaucracies and departments will take in economic data, operate on it according to their desired objectives, and generate a compulsory program to be taken up by the owners of firms to direct production and attempt to satisfy the wants of the economy as those wants come to be expressed by the progressive policymakers (not by individual buyers).
It is and will remain General Motors after all, not Government Motors. But, it is now obliged to acquiesce to the will of the state and produce those sorts of cars which the state desires, in volumes the state determines appropriate, and pay the wages the state shall determine though its "pay czar".
This is done not to satisfy the desires of the consumer, but for the good of the state. Whatever the state's objectives might be (low-cost models for increased car ownership by the poor, or better environmental friendliness, perhaps even lower utility to encourage use of public transport alternatives, etc. and whatever).
Suppression of individual will and desires for the good of the state. "We have determined, it's for your own good." "It's for the good of the nation, by our decree." "You must buy a private health insurance package from one of these two government sanctioned private providers, because it's for your own good, and for the good of all Americans." That would not be socialism, that would be fascism.
In the end, I believe this is the destination of all progressive ideology, whether supporters of such ideas and policy understand it or not. One need only look to 20th century history. During the golden-era of progressivism, American progressives were supremely enamored of the action and efficiency which seemed to embody the fascist personalities and governments of the 20s, 30s, and 40s. To them, people like Mussolini were take-charge kinds of folks who imposed their will and got things done. Because such action was in their view in the best interests of the state. It wasn't a dirty word then, and many progressives openly expressed their support for fascists and lobbied for fascist-inspired policy here in America.
How is this so different from the Obama administration and its pantheon of extra-Constitutional czars? Or the Bush administration's Hank Paulson, crafting the TARP program and dictating its compulsory acceptance and program features to major banks?
The individual? Who cares about him? He must make is desires subservient to the needs of his nation. He must learn to give up a little for the good of his country, so that others may instead benefit. It's what JFK extolled. We must act to save the whole economy! It's for the good of the nation! (And by extension, you.)
Showing posts with label capitalism. Show all posts
Showing posts with label capitalism. Show all posts
Thursday, June 11, 2009
Wednesday, October 1, 2008
Monday's vote failed to pass. Let's decide to adjourn.
I read this article from an economist part of a large like-minded group who is urging Congress not to proceed on the bailout proposals, as laid out by Treasury and the administration. It's worth your while to check it out!
Re: bailout plan. This guy has it right in my view. I've been listening to a lot of folks on the issue. We don't need a bailout, at all. The more the superbanks holding onto "troubled" assets get the notion that the Feds are not going to come to the rescue, the quicker the credit markets will thaw on their own.
The worst unsaavy risk takers (and I'm beginning to think Goldman Sachs has a heavier stake in this than they've let on) will go bankrupt. The article explains why that's actually good. Shareholders in firms going BK will be hammered, and that's good (there are no guarantees in stocks, when you invest, you take on the risk the firm you're buying into might be retarded, and you accept that for the prospect of a nice return). Creditors claim the solvent business units and residual assets.
I think the author is dead right on his point that the freeze is occurring because Wall St. believes a taxpayer-funded rescue is on the way. And of course they'll try to scare the bejezus out of you, me, gov't, and anyone who'll listen, because it means they'll be saved from their bad trades.
If I make a bad trade in my stock portfolio and get wiped out, there's no bailout for me. I knew that going in, and it's top-of-mind when I decide what and how to trade. I want to try and make some money, but I also don't want to be wiped out. So, I try to be careful.
Frozen, because why sell your crap at market prices when you can hold out for the Treasury, who might just buy at 50 to 80 cents on the dollar, rather than settling for 20. Take Treasury off the table, and the market will naturally reliquify.
I'm a big fan of Investors Business Daily. I also generally enjoy CNBC, and I love the can-do optimism of Larry Kudlow, host of Kudlow & Company. He frequently writes in the op-ed pages of IBD and makes a lot of sense to me.
In the 30-SEP-08 issue, page A11, Kudlow makes the case for the bailout plan and urges us and congress to calm down and come back to the table and get it done. Once in place, we'll all be the better for it. By the end of his argument, he calls the idea a, "win-win-win-win," claiming a likely windfall for taxpayers.
I have heard this line of reasoning from a number of folks, not least of all Treasury's Paulson and the Federal Reserve's Bernanke. But I am always left to wonder in plain country-bumpkin logic: If these troubled assets would be such a great thing for taxpayers to finance, likely to yield profit down the line, why isn't private money stepping right up all over the place to buy?
I think the answer is just what the author of the article states. Other sources I've been listening to also warn that we're not just talking about bad mortgages here. Treasury would be buying "mortgage backed securities" and "collateralized debt obligations" (although hashes of the failed bill and of the reformulated bills yet to come to a vote would expand Treasury's power to buy other types of securities than simply the mortgage backed paper defined at the plan's unveiling...sheesh).
I'm learning that a lot of fraud has been going into these securities. The allegation is that lenders would take a helping of junk debt, say auto and consumer loans, credit card debt, etc., and fashion it into a new security, but to make sure the security was rated highly by the investment rating agencies, a couple of mortgages would also be attached.
So we're not only dealing with troubled mortgage debt, but also the types of junk debt that is typically even more risky than mortgages! How likely would the taxpayers be to make back their money on that? I think Wall St. knows how likely, and that's the real reason the market pricing on this paper is so low.
Also developing: The Chicago Mercantile Exchange is hammering out a standardized and regulated exchange for trading credit default swaps, another exotic security tied to this mess.
CDS's "swap" a stream of payments from the buyer of the CDS to the seller, in exchange for a payout of the face-value of the CDS by the seller to the buyer, in the event that a credit default event occurs on the debt to which the CDS is tied. It is like a form of insurance that a firm can purchase to hedge exposure to risky debt.
These have become very popular among the superbanks issuing all this crap mortgage paper. However, unlike stocks and bonds and commodities, which trade on exchanges with explicit rules and standards, CDS's trade between parties "over-the-counter". The parties basically just negotiate a CDS contract and deal. But, because of the economic downturn, a problem has developed. Some firms having written and sold a lot of CDS's to debt holders looking for protection, are popping because they can't make good on the payouts. The chance that a party with whom you trade doesn't hold up his end of the bargain is called counter-party risk. It's booming, and is part of the reason credit markets have frozen.
The CME's new idea of a regulated exchange for CDS's solves this problem. Strict standards would screen parties to insure parties will abide by their obligations. Once screened and approved for trading, the exchange becomes the counter-party to all trades. This adds confidence. By acting as "seller to all buyers" and "buyer to all sellers", the traders of CDS's would have security in the knowledge that their trading partner has been vetted and approved, like they, and in the rare event a party did fail to deliver (necessarily so because the CME wants to stay in business and limit its own risk, ergo the strict standards to be approved for trading) the CME would make good for the counter-party.
Hey! This is the market fixing its own problems! Another reason to keep gov't on the sidelines. We need to give private enterprise the space to work out solutions like this.
Coming back to Larry Kudlow and CNBC in general: their anchors have made so much hay about pushing this bailout through that I'm starting to wonder if there isn't an agenda behind it all. It may only be a rather subconscious result of the workplace culture. It is GE who owns the NBC empire and is responsible for all their jobs, and GE had spread into banking and finance big time over the last few years. Heck, I used to offer GE credit cards to every customer I did business with at my last retail job. GE likely has skin in this game. For some of the anchors and hosts, it's come down almost to the level of insulting the intelligence of anyone who has appeared on the channel with a dissenting view of the bailout.
Finally, I'll close up this post by touching on the safety of your own checking and savings accounts. Much fear-mongering has been made about this as well. Jim Cramer's said that if this doesn't get done, we're headed for Great Depression II, and you'll one day head over to your neighborhood ATM and it won't have any cash.
Even President Bush had made similar comments about the availability of your checking and savings funds at your local bank during his address on prime time TV last week. You know, I thought our top leaders' jobs were partly to offer calm and confident leadership during crisis events. But I found Bush's comments truly scary! You mean, I will walk up to my bank soon and my money might be gone?!
For shame! Put the gun down. Stop pointing it at us, we're the ones you're supposed to be concerned about protecting!
The truth is, our everyday checking and savings accounts are perfectly safe. They're of course insured by the FDIC to $100,000 (if you're fortunate enough to have more, don't be silly and make sure it's spread around). What bank failures (and I'm talking about depository banks here) we have seen so far have been largely triggered by fear on the part of the depositors. WaMu was the most recent notable example. They were shaky and likely would have failed anyway, but depositors' money was never in danger. The mass exodus of depositors' funds just helped speed up the process. Those caught unawares experienced only a name-change as the deposits were later bought up by JPMorgan Chase. After a weekend of important paperwork, it's business as usual. The ATM still has cash to give you.
The rise of large corporations has led to a consolidation of banking. Espcially in the larger cities, you might have your everyday accounts at a superbank with national and even global exposure. These have turned out to be the riskiest banks because their large size meant they could do more toxic subprime mortgage business.
Those folks who are or were scared about their money and pulled it from a superbank, what are they now doing with it? In today's modern economy, hard cash just doesn't work. You need to be able to write checks or more likely, swipe some plastic to pay for things. So, these fearful folks are turning to smaller local and regional banks and credit unions and the like.
These banks are small enough that during the housing boom, what mortgage business they may have originated, they later probably sold that debt to a superbank eager to have it. So, the small local banks have the cleanest balance sheets.
With such fearful depositors streaming over, we are now and will continue to see depository capital moving away from the superbanks and into the locals. There the increased reserves will mean credit for business and individuals will be frozen, rather it will just come from a different bank.
You could make the case that this might be better. Your local bank is probably more likely to know who you are personally, and know about your business. Risk can be more appropriately judged.
So...all this fear-mongering of the past couple of weeks has, for me, become a side-show. I am now more convinced than ever that this is an effect of the fat-cat folks in Wall St. manipulating their levers of influence to try an engineer a bailout for themselves and their own bad trades, at the expense of us all.
Keep the pressure on your representatives, and use the article linked up top and musings like my own to justify your position. If you get pushback, get your representative to justify his or her view in a way that makes sense to you at least.
As the article advocates, the next bill to come up for vote should not be to bailout, but rather to dismantle the faulty government policies and entities which disconnected risk from reward to get us here. And that's all. Free markets were not to blame, because they were being distorted. And as I hope you might be able to see a little bit now, free markets are already beginning to steer us out.
Re: bailout plan. This guy has it right in my view. I've been listening to a lot of folks on the issue. We don't need a bailout, at all. The more the superbanks holding onto "troubled" assets get the notion that the Feds are not going to come to the rescue, the quicker the credit markets will thaw on their own.
The worst unsaavy risk takers (and I'm beginning to think Goldman Sachs has a heavier stake in this than they've let on) will go bankrupt. The article explains why that's actually good. Shareholders in firms going BK will be hammered, and that's good (there are no guarantees in stocks, when you invest, you take on the risk the firm you're buying into might be retarded, and you accept that for the prospect of a nice return). Creditors claim the solvent business units and residual assets.
I think the author is dead right on his point that the freeze is occurring because Wall St. believes a taxpayer-funded rescue is on the way. And of course they'll try to scare the bejezus out of you, me, gov't, and anyone who'll listen, because it means they'll be saved from their bad trades.
If I make a bad trade in my stock portfolio and get wiped out, there's no bailout for me. I knew that going in, and it's top-of-mind when I decide what and how to trade. I want to try and make some money, but I also don't want to be wiped out. So, I try to be careful.
Frozen, because why sell your crap at market prices when you can hold out for the Treasury, who might just buy at 50 to 80 cents on the dollar, rather than settling for 20. Take Treasury off the table, and the market will naturally reliquify.
I'm a big fan of Investors Business Daily. I also generally enjoy CNBC, and I love the can-do optimism of Larry Kudlow, host of Kudlow & Company. He frequently writes in the op-ed pages of IBD and makes a lot of sense to me.
In the 30-SEP-08 issue, page A11, Kudlow makes the case for the bailout plan and urges us and congress to calm down and come back to the table and get it done. Once in place, we'll all be the better for it. By the end of his argument, he calls the idea a, "win-win-win-win," claiming a likely windfall for taxpayers.
I have heard this line of reasoning from a number of folks, not least of all Treasury's Paulson and the Federal Reserve's Bernanke. But I am always left to wonder in plain country-bumpkin logic: If these troubled assets would be such a great thing for taxpayers to finance, likely to yield profit down the line, why isn't private money stepping right up all over the place to buy?
I think the answer is just what the author of the article states. Other sources I've been listening to also warn that we're not just talking about bad mortgages here. Treasury would be buying "mortgage backed securities" and "collateralized debt obligations" (although hashes of the failed bill and of the reformulated bills yet to come to a vote would expand Treasury's power to buy other types of securities than simply the mortgage backed paper defined at the plan's unveiling...sheesh).
I'm learning that a lot of fraud has been going into these securities. The allegation is that lenders would take a helping of junk debt, say auto and consumer loans, credit card debt, etc., and fashion it into a new security, but to make sure the security was rated highly by the investment rating agencies, a couple of mortgages would also be attached.
So we're not only dealing with troubled mortgage debt, but also the types of junk debt that is typically even more risky than mortgages! How likely would the taxpayers be to make back their money on that? I think Wall St. knows how likely, and that's the real reason the market pricing on this paper is so low.
Also developing: The Chicago Mercantile Exchange is hammering out a standardized and regulated exchange for trading credit default swaps, another exotic security tied to this mess.
CDS's "swap" a stream of payments from the buyer of the CDS to the seller, in exchange for a payout of the face-value of the CDS by the seller to the buyer, in the event that a credit default event occurs on the debt to which the CDS is tied. It is like a form of insurance that a firm can purchase to hedge exposure to risky debt.
These have become very popular among the superbanks issuing all this crap mortgage paper. However, unlike stocks and bonds and commodities, which trade on exchanges with explicit rules and standards, CDS's trade between parties "over-the-counter". The parties basically just negotiate a CDS contract and deal. But, because of the economic downturn, a problem has developed. Some firms having written and sold a lot of CDS's to debt holders looking for protection, are popping because they can't make good on the payouts. The chance that a party with whom you trade doesn't hold up his end of the bargain is called counter-party risk. It's booming, and is part of the reason credit markets have frozen.
The CME's new idea of a regulated exchange for CDS's solves this problem. Strict standards would screen parties to insure parties will abide by their obligations. Once screened and approved for trading, the exchange becomes the counter-party to all trades. This adds confidence. By acting as "seller to all buyers" and "buyer to all sellers", the traders of CDS's would have security in the knowledge that their trading partner has been vetted and approved, like they, and in the rare event a party did fail to deliver (necessarily so because the CME wants to stay in business and limit its own risk, ergo the strict standards to be approved for trading) the CME would make good for the counter-party.
Hey! This is the market fixing its own problems! Another reason to keep gov't on the sidelines. We need to give private enterprise the space to work out solutions like this.
Coming back to Larry Kudlow and CNBC in general: their anchors have made so much hay about pushing this bailout through that I'm starting to wonder if there isn't an agenda behind it all. It may only be a rather subconscious result of the workplace culture. It is GE who owns the NBC empire and is responsible for all their jobs, and GE had spread into banking and finance big time over the last few years. Heck, I used to offer GE credit cards to every customer I did business with at my last retail job. GE likely has skin in this game. For some of the anchors and hosts, it's come down almost to the level of insulting the intelligence of anyone who has appeared on the channel with a dissenting view of the bailout.
Finally, I'll close up this post by touching on the safety of your own checking and savings accounts. Much fear-mongering has been made about this as well. Jim Cramer's said that if this doesn't get done, we're headed for Great Depression II, and you'll one day head over to your neighborhood ATM and it won't have any cash.
Even President Bush had made similar comments about the availability of your checking and savings funds at your local bank during his address on prime time TV last week. You know, I thought our top leaders' jobs were partly to offer calm and confident leadership during crisis events. But I found Bush's comments truly scary! You mean, I will walk up to my bank soon and my money might be gone?!
For shame! Put the gun down. Stop pointing it at us, we're the ones you're supposed to be concerned about protecting!
The truth is, our everyday checking and savings accounts are perfectly safe. They're of course insured by the FDIC to $100,000 (if you're fortunate enough to have more, don't be silly and make sure it's spread around). What bank failures (and I'm talking about depository banks here) we have seen so far have been largely triggered by fear on the part of the depositors. WaMu was the most recent notable example. They were shaky and likely would have failed anyway, but depositors' money was never in danger. The mass exodus of depositors' funds just helped speed up the process. Those caught unawares experienced only a name-change as the deposits were later bought up by JPMorgan Chase. After a weekend of important paperwork, it's business as usual. The ATM still has cash to give you.
The rise of large corporations has led to a consolidation of banking. Espcially in the larger cities, you might have your everyday accounts at a superbank with national and even global exposure. These have turned out to be the riskiest banks because their large size meant they could do more toxic subprime mortgage business.
Those folks who are or were scared about their money and pulled it from a superbank, what are they now doing with it? In today's modern economy, hard cash just doesn't work. You need to be able to write checks or more likely, swipe some plastic to pay for things. So, these fearful folks are turning to smaller local and regional banks and credit unions and the like.
These banks are small enough that during the housing boom, what mortgage business they may have originated, they later probably sold that debt to a superbank eager to have it. So, the small local banks have the cleanest balance sheets.
With such fearful depositors streaming over, we are now and will continue to see depository capital moving away from the superbanks and into the locals. There the increased reserves will mean credit for business and individuals will be frozen, rather it will just come from a different bank.
You could make the case that this might be better. Your local bank is probably more likely to know who you are personally, and know about your business. Risk can be more appropriately judged.
So...all this fear-mongering of the past couple of weeks has, for me, become a side-show. I am now more convinced than ever that this is an effect of the fat-cat folks in Wall St. manipulating their levers of influence to try an engineer a bailout for themselves and their own bad trades, at the expense of us all.
Keep the pressure on your representatives, and use the article linked up top and musings like my own to justify your position. If you get pushback, get your representative to justify his or her view in a way that makes sense to you at least.
As the article advocates, the next bill to come up for vote should not be to bailout, but rather to dismantle the faulty government policies and entities which disconnected risk from reward to get us here. And that's all. Free markets were not to blame, because they were being distorted. And as I hope you might be able to see a little bit now, free markets are already beginning to steer us out.
Tuesday, September 23, 2008
The Bailout Plan - Fleshing out some Detail
I dropped in on the TV coverage of Senate Banking Cmte. hearing with Treasury's Paulson, Fed. Reserve's Bernanke, SEC's Cox, and OFHEO's Lockhart. The dialogue concerned the administration's bailout/stabilization plan and its details, effects, benefits, pitfalls.
I previously spoke out vehemently against this type of action, feeling it to be an unjust socialization of the risks taken by entities almost completely beyond taxpayers' influence, and an affront to free market capitalism.
While my foundational opinion hasn't changed, paying close attention to the hearing, the discussion has brought me to understand how the plan might help. There exists a crucial linchpin in this that will determine if this risk socialization effort ultimately becomes a taxpayer burden: the fundamental value of various securitized assets backed by mortgage debt and the requirement that these exotic securities be market-to-market.
Before I start a wordy train of infinite digression, I've heared some financial pundits talk about simple spension of the mark-to-market requirement for valuing these exotic securities as a relief from this crisis. Bernanke's argument is that this will not enhance, but likely erode confidence in their true worth.
I cannot say if a solution involving suspension of mark-to-market requirements would be better or worse in the end, but my inclination is that it would only be of help on a very short timeframe. But since housing is not likely to bottom soon, Bernanke's notion sounds logical to me. It could be at the heart of why no formal exchange was ever created to trade these exotic products in a standardized way. Late stage in the boom there was likely a desire to conceal risk.
The overall scope of this issue is truly vast, but I feel like I now have a grasp of it in toto.
The bailout plan is only one portion of the total issue, and centers around the problem of asset valuation really in a system which grew more clever (innovative) than its mechanisms of regulation could comprehend and feedback into. The real "innovation" was the disconnection of risk from reward, and I feel that while government policy was not directly responsible for the market's action, its policy ultimately distorted the market, and from their the market behaved perfectly normally, in its own self-interest.
As I understand it many of the big Wall St. firms presently under fire hold vast quantities of complex securities whose value is ultimately tied for the most part to real estate.
As the credit boom neared its apex, to keep the wheels turning and make more credit available to the real estate speculators and the general public, firms began to take their debt piles and issue security shares backed by the future value of their pile of debt. As time went by, firms purchasing those securities began lumping them all together and issuing their own securities backed by the value of the securities they had bought. This process of abstracting the original debt fed on itself for many levels and caused leverage by holders to expand, while at each step turning the window on the the original debt and its condition increasingly opaque.
The securities became too abstract to value directly (a clear warning), but with an understanding that they were ultimately backed by real estate (going gangbusters) investors were willing to assent to their represented worth without question.
A modest economic slowdown just slows the growth of real-estate early-on, but this is enough to trigger some minor mortgage delinquencies, and some begin to wonder if the securities they hold will pay off as promised, since payoff is predicated on the boom continuing.
The financial firms holding the securities need to value them on their balance sheets so we all can know the total value of the firms' assets. This is a normal and critical part of determining how much firms can lend, or their ability to make good on their own debt to other firms, or to secure new credit.
In a case like that of AIG, as an insurance company claims are paid by company assets and a certain minimum ratio must be maintained to assure that ability.
If AIG had spent too much of its revenue from premiums on exotic debt securities (in the hopes of gaining a high return and higher net worth) and those securities are now in doubt, would it still be able to make good on policy claims?
With the housing slowdown, the market for the exotic securities dried up as buyers began to realize they might not be buying sure things and their true value was too opaque to assess.
When demand dries up, prices must fall. This is bad for the affected firms, which have to mark-to-market these pieces of paper of increasingly unknown real worth. If firms marked-to-market, the balance sheets would accordingly show a now much lower worth. This would affect operations as it is this worth which guarantees their obligations to others. An effective margin-call is the result.
The Federal Reserve earlier pumped money into these firms in direct and indirect ways, shoring up their balance sheets for the short term and preventing a need to mark-to-market until liquidity returned.
The hope was that housing would rapidly turn back around, and the implied values of the exotic securities would be sufficient to bring back buyers (like soverign wealth funds and hedge funds).
With bids in the market to mark against, balance sheets would reinflate, short-term Fed debt could be repaid, and life would again be grand.
This did not happen, because housing continued to fall and begain causing trickle effects in the broader economy (as too many of us unwisely overspend against the over-appraised value of our homes).
The bailout plan then seeks to create a somewhat contrived market for the exotic securities. To work, it must buy these things off firms above present "fire-sale" prices. This is so because the fire-sale price is what firms have to mark-to-market against now, and is too little to prevent insolvency for too many firms.
Bernanke today spoke of a "hold-to-maturity" price for the exotics. This price would be the true value when all the debt backing the security is paid and foreclosed losses deducted. This value will remain in flux as it is still unclear how much foreclosure will ultimately occurr, and how many folks will dutifully pay their mortgage.
His idea that current fire-sale prices clearly don't reflect the exotics' intrinsic worth, but are a result of the difficulty in discovering their present valueas they are too abstracted from the original debt.
By using some mechanism to pay a middle price (TBD, but a reverse auction, in which firms wanting to sell submit bids and Treasury sweeps all at a specified bid, has been suggested), a market will spring into existence with a fair price to mark against. Balance sheets re-inflate for all those firms not selling, and the solvency problem is eased. In the Treasury, a buyer for the exotics is always at hand if a firm should encounter a need to sell to raise cash later.
The novel hope is by doing this the Treasury will cause a secondary market to soon be spurred for these exotics, whereupon further future sellers can get a better price. Fast forward and as the debt underlying the exotics matures and default risk eases, this market for these exotics will be liquid enough that private buyers will want to purchase the exotics which Treasury has accumulated.
Treasury trickles them back out, and the gov't pockets any profits on the sales (which if present, will certainly fund gov't programs and not be used to reduce the tax burden on the public).
However... all this presumes that the slowing in the underlying real economy and specifically housing begin to level off soon.
My previous comments still stand on the measure, however. The Treasury would, in setting up a contrived market to buy these exotics, make us all stakeholders in essentially a huge new hedge fund. Much money would be spent to buy the exotics. A fair buy means that it would all come back to the Treasury later, and taxpayers would be out nothing. We could possibly even see a gain.
But, if Treasury pays too much (and this price is so very hard to know, again due to the opaque nature of these securities), we are all on the hook for the losses. Tax hikes could result, but more likely in my view, the Federal Reserve would just print sufficient money to make up the difference, depressing the value of the dollar and its buying power.
The resulting additional inflation would be the tax on me and you for your neighbor who fancied himself a big-shot property speculator, or simply made some bad choices and bought a home he couldn't really afford in the first place. Would that make you feel good? Risk was transferred from the dealmakers to you.
The counterargument is that doing nothing at this stage would be far worse. Too many financial firms bought up too much exotic mortgage derived securities and the failure of these firms would translate into an inability to lend to even legitimate business and personal interests, bringing the economy to a halt...period. Jim Cramer even suggests that failure to act as the administration now has, would have meant your local Bank's ATM wouldn't spit out any cash when you slide your card to access your savings or checking.
Excesses beget these exotic mortgage-backed securities. They were inherently less liquid and more risky because no ordered market existed on which to foster their transparent exchange.
*Sigh*
I'm listening to these points. But I remain skeptically open-minded about it. This doomsday scenario could be accurate (and sad if so), in which case what real choice do we have but to go along and hope for the best in the execution of the bailout.
I do not believe the characterization, however, that this problem was a showcase of the failure of free markets. An argument for something "less-free" for the good of all of us.
Freedom and risk go hand-in-hand. The most freedom entails the highest risk, but the greatest opportunity for the greatest reward. The principle that free markets are self regulating stems from the notion that fear of too much risk will keep decisions in some rational bounds.
This crisis did not result from a free, deregulated, market. The housing industry is at the core of all this, and at the core of housing is Fannie Mae and Freddie Mac. Through the practices of these two government-backed entities, risk became disconnected from reward. As housing became frothy in the bubble's final stages, folks entered into deals to continue to lend aggressively to ever lower-income and higher-risk buyers at ever lower rates, with the notion that if it all went south, the government would back them up. The scope of the problem became "too big to fail."
Conservative pundits will blame liberal Democrat policies for the mismanagement of Fannie and Freddie and also for the overabundance of cash generated by a Federal Reserve under Alan Greenspan which kept interest rates too low for too long. I believe there is stock in these arguments, but blame does not rest solely there.
The Bush administration also deserves some blame for its part in also leaning on Fannie and Freddie to keep the cash flowing to lenders. The President himself has spoken about his great desire to great an "ownership society" and promoting expansion of low-rate mortgage options to help more Americans get credit to buy homes.
These housing markets were not free to begin with, but manipulated with considered government policy. Some may argue to great benefit: making homes affordable to more Americans through the greater availability of credit. Bzzt! Wrong. Homes were not made more affordable. The policy manipulation only caused more credit availability, which lowered monthly payments enough to get risky people to buy in. Homes only became more expensive, inflated, as these extra risky buyers (and well-heeled speculators) drove up demand. All fueled and driven by easy access to credit.
In believing in a government backstop, risk became blunted by policy, leading to outsized risks being taken, and it's that which we are reeling from now. Capitalism, hijacked.
In a free market, Adam Smith style, risk and reward are closely linked. You only take on as much as you can handle, because you know there is no safety net for you, no government backstop. The risky low-income home seeker earning $30K annually probably cannot afford a $250,000 home. As a financial firm, if I cannot afford the consequences of his default, I judge him too risky and don't make the loan.
But in our manipulated market, Fannie and Freddie, spurred on by Clinton and Bush, and also by their management (keen on inflating revenue figures to secure bonus pay) was always there to buy the shaky loans in exchange for cash now for more lending. Originating lenders turned into mere brokers for Fannie and Freddie, profitting on the deal getting done, rather than on the future value of the loan. This is one element of how the risk became disconnected.
Just keep this in mind when you evaluate your government leadership. Subsidy, whether outright, through a well-intentioned government program, or in the form of a special deal for a favor, distorts free markets.
Free markets do work. Distorted markets do not. Socialism creates the most distorted of all markets by moving the majority of wealth to the government for patronage according to its own self-interest. In so doing, it can not only disconnect the risk-reward relationship, it also removes the fundamental incentive to productive work. Why try harder, why risk, if your reward will be confiscated and distributed amongst those who haven't risked?
In needing regulation, what we really need are standards which are enforced. Government regulation reduces efficiency and capital will naturally flow toward the most efficient market. But standardization can foster efficiency by creating a level playing field in which all the actors know what to expect and can have assurance in the parties which whom they trade.
Any regulation to come out of this crisis should be viewed in this respect. We need to remove the levers of subsidy which distort an otherwise free market, and then foster standards which promote confidence among the parties, and assure a measure of smooth and efficient trade. That's all.
If you're still reading... *whew*
-Andrew
I previously spoke out vehemently against this type of action, feeling it to be an unjust socialization of the risks taken by entities almost completely beyond taxpayers' influence, and an affront to free market capitalism.
While my foundational opinion hasn't changed, paying close attention to the hearing, the discussion has brought me to understand how the plan might help. There exists a crucial linchpin in this that will determine if this risk socialization effort ultimately becomes a taxpayer burden: the fundamental value of various securitized assets backed by mortgage debt and the requirement that these exotic securities be market-to-market.
Before I start a wordy train of infinite digression, I've heared some financial pundits talk about simple spension of the mark-to-market requirement for valuing these exotic securities as a relief from this crisis. Bernanke's argument is that this will not enhance, but likely erode confidence in their true worth.
I cannot say if a solution involving suspension of mark-to-market requirements would be better or worse in the end, but my inclination is that it would only be of help on a very short timeframe. But since housing is not likely to bottom soon, Bernanke's notion sounds logical to me. It could be at the heart of why no formal exchange was ever created to trade these exotic products in a standardized way. Late stage in the boom there was likely a desire to conceal risk.
The overall scope of this issue is truly vast, but I feel like I now have a grasp of it in toto.
The bailout plan is only one portion of the total issue, and centers around the problem of asset valuation really in a system which grew more clever (innovative) than its mechanisms of regulation could comprehend and feedback into. The real "innovation" was the disconnection of risk from reward, and I feel that while government policy was not directly responsible for the market's action, its policy ultimately distorted the market, and from their the market behaved perfectly normally, in its own self-interest.
As I understand it many of the big Wall St. firms presently under fire hold vast quantities of complex securities whose value is ultimately tied for the most part to real estate.
As the credit boom neared its apex, to keep the wheels turning and make more credit available to the real estate speculators and the general public, firms began to take their debt piles and issue security shares backed by the future value of their pile of debt. As time went by, firms purchasing those securities began lumping them all together and issuing their own securities backed by the value of the securities they had bought. This process of abstracting the original debt fed on itself for many levels and caused leverage by holders to expand, while at each step turning the window on the the original debt and its condition increasingly opaque.
The securities became too abstract to value directly (a clear warning), but with an understanding that they were ultimately backed by real estate (going gangbusters) investors were willing to assent to their represented worth without question.
A modest economic slowdown just slows the growth of real-estate early-on, but this is enough to trigger some minor mortgage delinquencies, and some begin to wonder if the securities they hold will pay off as promised, since payoff is predicated on the boom continuing.
The financial firms holding the securities need to value them on their balance sheets so we all can know the total value of the firms' assets. This is a normal and critical part of determining how much firms can lend, or their ability to make good on their own debt to other firms, or to secure new credit.
In a case like that of AIG, as an insurance company claims are paid by company assets and a certain minimum ratio must be maintained to assure that ability.
If AIG had spent too much of its revenue from premiums on exotic debt securities (in the hopes of gaining a high return and higher net worth) and those securities are now in doubt, would it still be able to make good on policy claims?
With the housing slowdown, the market for the exotic securities dried up as buyers began to realize they might not be buying sure things and their true value was too opaque to assess.
When demand dries up, prices must fall. This is bad for the affected firms, which have to mark-to-market these pieces of paper of increasingly unknown real worth. If firms marked-to-market, the balance sheets would accordingly show a now much lower worth. This would affect operations as it is this worth which guarantees their obligations to others. An effective margin-call is the result.
The Federal Reserve earlier pumped money into these firms in direct and indirect ways, shoring up their balance sheets for the short term and preventing a need to mark-to-market until liquidity returned.
The hope was that housing would rapidly turn back around, and the implied values of the exotic securities would be sufficient to bring back buyers (like soverign wealth funds and hedge funds).
With bids in the market to mark against, balance sheets would reinflate, short-term Fed debt could be repaid, and life would again be grand.
This did not happen, because housing continued to fall and begain causing trickle effects in the broader economy (as too many of us unwisely overspend against the over-appraised value of our homes).
The bailout plan then seeks to create a somewhat contrived market for the exotic securities. To work, it must buy these things off firms above present "fire-sale" prices. This is so because the fire-sale price is what firms have to mark-to-market against now, and is too little to prevent insolvency for too many firms.
Bernanke today spoke of a "hold-to-maturity" price for the exotics. This price would be the true value when all the debt backing the security is paid and foreclosed losses deducted. This value will remain in flux as it is still unclear how much foreclosure will ultimately occurr, and how many folks will dutifully pay their mortgage.
His idea that current fire-sale prices clearly don't reflect the exotics' intrinsic worth, but are a result of the difficulty in discovering their present valueas they are too abstracted from the original debt.
By using some mechanism to pay a middle price (TBD, but a reverse auction, in which firms wanting to sell submit bids and Treasury sweeps all at a specified bid, has been suggested), a market will spring into existence with a fair price to mark against. Balance sheets re-inflate for all those firms not selling, and the solvency problem is eased. In the Treasury, a buyer for the exotics is always at hand if a firm should encounter a need to sell to raise cash later.
The novel hope is by doing this the Treasury will cause a secondary market to soon be spurred for these exotics, whereupon further future sellers can get a better price. Fast forward and as the debt underlying the exotics matures and default risk eases, this market for these exotics will be liquid enough that private buyers will want to purchase the exotics which Treasury has accumulated.
Treasury trickles them back out, and the gov't pockets any profits on the sales (which if present, will certainly fund gov't programs and not be used to reduce the tax burden on the public).
However... all this presumes that the slowing in the underlying real economy and specifically housing begin to level off soon.
My previous comments still stand on the measure, however. The Treasury would, in setting up a contrived market to buy these exotics, make us all stakeholders in essentially a huge new hedge fund. Much money would be spent to buy the exotics. A fair buy means that it would all come back to the Treasury later, and taxpayers would be out nothing. We could possibly even see a gain.
But, if Treasury pays too much (and this price is so very hard to know, again due to the opaque nature of these securities), we are all on the hook for the losses. Tax hikes could result, but more likely in my view, the Federal Reserve would just print sufficient money to make up the difference, depressing the value of the dollar and its buying power.
The resulting additional inflation would be the tax on me and you for your neighbor who fancied himself a big-shot property speculator, or simply made some bad choices and bought a home he couldn't really afford in the first place. Would that make you feel good? Risk was transferred from the dealmakers to you.
The counterargument is that doing nothing at this stage would be far worse. Too many financial firms bought up too much exotic mortgage derived securities and the failure of these firms would translate into an inability to lend to even legitimate business and personal interests, bringing the economy to a halt...period. Jim Cramer even suggests that failure to act as the administration now has, would have meant your local Bank's ATM wouldn't spit out any cash when you slide your card to access your savings or checking.
Excesses beget these exotic mortgage-backed securities. They were inherently less liquid and more risky because no ordered market existed on which to foster their transparent exchange.
*Sigh*
I'm listening to these points. But I remain skeptically open-minded about it. This doomsday scenario could be accurate (and sad if so), in which case what real choice do we have but to go along and hope for the best in the execution of the bailout.
I do not believe the characterization, however, that this problem was a showcase of the failure of free markets. An argument for something "less-free" for the good of all of us.
Freedom and risk go hand-in-hand. The most freedom entails the highest risk, but the greatest opportunity for the greatest reward. The principle that free markets are self regulating stems from the notion that fear of too much risk will keep decisions in some rational bounds.
This crisis did not result from a free, deregulated, market. The housing industry is at the core of all this, and at the core of housing is Fannie Mae and Freddie Mac. Through the practices of these two government-backed entities, risk became disconnected from reward. As housing became frothy in the bubble's final stages, folks entered into deals to continue to lend aggressively to ever lower-income and higher-risk buyers at ever lower rates, with the notion that if it all went south, the government would back them up. The scope of the problem became "too big to fail."
Conservative pundits will blame liberal Democrat policies for the mismanagement of Fannie and Freddie and also for the overabundance of cash generated by a Federal Reserve under Alan Greenspan which kept interest rates too low for too long. I believe there is stock in these arguments, but blame does not rest solely there.
The Bush administration also deserves some blame for its part in also leaning on Fannie and Freddie to keep the cash flowing to lenders. The President himself has spoken about his great desire to great an "ownership society" and promoting expansion of low-rate mortgage options to help more Americans get credit to buy homes.
These housing markets were not free to begin with, but manipulated with considered government policy. Some may argue to great benefit: making homes affordable to more Americans through the greater availability of credit. Bzzt! Wrong. Homes were not made more affordable. The policy manipulation only caused more credit availability, which lowered monthly payments enough to get risky people to buy in. Homes only became more expensive, inflated, as these extra risky buyers (and well-heeled speculators) drove up demand. All fueled and driven by easy access to credit.
In believing in a government backstop, risk became blunted by policy, leading to outsized risks being taken, and it's that which we are reeling from now. Capitalism, hijacked.
In a free market, Adam Smith style, risk and reward are closely linked. You only take on as much as you can handle, because you know there is no safety net for you, no government backstop. The risky low-income home seeker earning $30K annually probably cannot afford a $250,000 home. As a financial firm, if I cannot afford the consequences of his default, I judge him too risky and don't make the loan.
But in our manipulated market, Fannie and Freddie, spurred on by Clinton and Bush, and also by their management (keen on inflating revenue figures to secure bonus pay) was always there to buy the shaky loans in exchange for cash now for more lending. Originating lenders turned into mere brokers for Fannie and Freddie, profitting on the deal getting done, rather than on the future value of the loan. This is one element of how the risk became disconnected.
Just keep this in mind when you evaluate your government leadership. Subsidy, whether outright, through a well-intentioned government program, or in the form of a special deal for a favor, distorts free markets.
Free markets do work. Distorted markets do not. Socialism creates the most distorted of all markets by moving the majority of wealth to the government for patronage according to its own self-interest. In so doing, it can not only disconnect the risk-reward relationship, it also removes the fundamental incentive to productive work. Why try harder, why risk, if your reward will be confiscated and distributed amongst those who haven't risked?
In needing regulation, what we really need are standards which are enforced. Government regulation reduces efficiency and capital will naturally flow toward the most efficient market. But standardization can foster efficiency by creating a level playing field in which all the actors know what to expect and can have assurance in the parties which whom they trade.
Any regulation to come out of this crisis should be viewed in this respect. We need to remove the levers of subsidy which distort an otherwise free market, and then foster standards which promote confidence among the parties, and assure a measure of smooth and efficient trade. That's all.
If you're still reading... *whew*
-Andrew
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