Good Reading on the Financial Crisis
I agree with Slacktivist on this, and I expect that many readers, from across the political spectrum will also agree:
I’ll gladly concede that Paulson knows more about the world’s rapidly collapsing finance system than I do. That doesn’t matter. Paulson’s request violates an inviolable principle, namely, to repeat, that if a public official demands $700 billion by week’s end, no strings attached, with no democratic or judicial review of that official’s unfettered discretion to spend that $700 billion as he chooses, then you say, “No.”
“No” is the only possible answer a free person can give to that request.
If you don’t answer “No,” then you have to answer “Yes, Your Majesty, screw that whole experiment-with-democracy thing, we think you’ll make a fine sovereign and king and please take our money as tribute from your loyal, unquestioning subjects.” I prefer the former answer, and not just because it’s shorter.
…snip…
Fortunately, crowning King Henry and doing nothing at all aren’t our only options. The events of the past week seem to prove that the American financial sector is in a full-blown panic. The Bush administration is now insisting that we fight panic with panic. That won’t work.
It may, in fact, be the case that something huge and unprecedented and Very, Very Expensive will be required to save the republic. But if we can’t manage to do that democratically — with accountability, oversight and the full participation of the people’s representatives — then the thing we are saving will no longer be a republic.
September 23rd, 2008 at 5:51 pm
Hmmm.
The problem I have with the bailout is that it defies logic.
A. Market has a problem in pricing mortgage backed securities and so cannot sell them.
B. Government is better than Wall St. at pricing these things?
C. Completely illogical.
September 23rd, 2008 at 6:20 pm
I think Megan McArdle and Tyler Cowen’s coverage of this crisis has been exceptional.
September 23rd, 2008 at 6:45 pm
memo,
The real problem isn’t that we can’t accurately price them so much as it is that whatever price they are worth isn’t a much as what they already have in them.
That is to say if I have $100mm invested in a security it doesn’t much matter if the real price is $40mm or $50mm. I’m fantastically upside down either way.
September 23rd, 2008 at 6:47 pm
And I don’t really agree that pushing through major spending with minimal debate heralds the end of the Republic, but I do think it’s a really stupid idea.
September 23rd, 2008 at 9:22 pm
Heads should roll. Lets start with any and all who though it was a good iea for the government to “encourge” lenders to give home loans to people who wouldn’t pass a simple credit check.
September 23rd, 2008 at 10:34 pm
And; isn?t’ this really just another income redistribution scheme– buying houses for those who can’t afford them, at the expense of the American taxpayer? Surely it was hatched years ago exclusively by the leftist kleptocrats (by that I mean leftist kleptocrat Republicans in cooperation with the even more leftist and kleptocratic Democrats). Shouldn’t they be taking all the heat? We didn’t ask for this. I know I didn’t call my senator and tell him to make sure people got loans who could not possibly pay for them.
Could Islamic jihadists have done more damage to America? Should the Bush Doctrine not apply here– hunt them down and destroy them before they have a chance to do more damage? Instead we’re comtemplating giving them even more power and money (or more accurately, we’re letting them take more power and money). I think another wing should be built down in Guitmo for these people, only this time with real torture, you know, depriving them of satellite TV and soccer balls.
September 24th, 2008 at 12:19 am
Something to finally bring the country together: saying no to government!
September 24th, 2008 at 8:27 am
Hmmmm.
Saying “no” to Barney Frank and Chris Dodd.
What amazes me is that the same idiots who engineered this situation are the ones in charge of the cleanup.
So “no” I don’t have any confidence whatsoever in the bailout.
September 24th, 2008 at 8:53 am
Lyle, if this really was a socialist-style income redistribution scheme, i might actually support it. but it isn’t. it’s the exact opposite; taking money from us taxpayers to give to wall street fat cats who already have plenty.
this is stealing from the poor in order to give to the rich, with no apparent quid pro quo in the “plans” i’ve seen so far. i’m at a loss to think of a political party, platform, or philosophy that could be used to support it, or whose supporters ought to be cheering this on.
September 24th, 2008 at 9:20 am
Gonna have to disagree here. The problem is government-created: mortgage backed securities (of which there are about $5 TRILLION) were created in mixed tranches containing both high quality (prime) and low quality (subprime) mortgages; as the mortgage failure processes of fraudulent subprimes and inverted primes increased, the market refused to buy the tranches of securities anymore, as they were impossible to evaluate for content. That $5 TRILLION now on asset sheets suddenly went from stable assets to “bad debt” and (through “mark to market” rules) was essentially valued at $0 for a MBS portfolio previously worth billions per company.
Suddenly the financial giants found themselves unable to borrow money and also susceptible to hedge fund short selling, both legal and illegal (“naked” shorting, where a short trade occurred without initially holding the stock). Suddenly the mortgage industry found itself revising lending practices, back to reality where loans were only given to low risk borrowers. Suddenly financials were unable to lend to businesses, as their leverage dried up. Suddenly financials found themselves unable to borrow short term to fund continuing operations. Suddenly McDonalds could not borrow to expand businesses. Suddenly Bear, Lehmans, Fannie, Freddie, AIG were caught in liquidity propblems requiring them to go bankrupt and cease operations. While the world can live without iced coffee from McDonalds and even without high risk mortgages, having no investment brokers, no mortgages, no insurance would cause a complete destruction of the US financial system, followed by the rest of the world.
Yes, this was caused by the government changing rules (from the Carter 1977 Community Reinvestment Act, to Clinton change in how banks are scored for permission to open new branches, to the Bush SEC cancellation of the short-trading uptick rule, to failure of the SEC to police naked short sales, to mortgage brokers making lots of fraudulent mortgages and securities firms marketing mixed tranches of good and bad mortgages that never could be valued realistically, to home buyers thinking a 50 year interest-only mortgage in CA or FL was a good idea during housing bubbles….
But in the end, if you don’t want to lose $5 TRILLION of valued securities worldwide, while closing perhaps another $10 TRILLION of businesses overnight, while destroying 20% of the US jobs overnight, and throwing us into a depression worldwide with the likely world war that would follow as failing countries lashed out for survival, then perhaps strong government action is indicated.
The interesting thing is that if done properly, the US government can make money on this deal, just like it will on the Bear-Stearns loan support, the Lehman deal, the Freddie, Fannie, and AIG deal (which as an example loans money at LIBOR + 8.5% and gains the feds an 80% stake in the company, which will be resold to the public at a profit later). That private equity would not step up to do this (other than a few sovereign wealth funds that bought large amounts of equity in some financials without being able to fix the underlying problems) is obvious, and obviously because the underlying problems were caused by the nature of the regulation and oversight of the financials by the feds.
The feds are finally in the process of cleaning up the mess they caused. It will cost money up front, in an inflationary manner, but will produce a profit at the end, and will result in a more sound US economy than we have had for the past year, as about 25% of the value of our econonomy has evaporated.
September 24th, 2008 at 9:32 am
As an example of how the mortgage mess will be cleaned up, Wachovia is breaking down its mortgage-backed securities by detailed info on Zip Code, credit scores of borrowers, payment history, and so on, to allow detailed pricing based on the actual value of the securities. They can sell them on the open market, or to whatever auction the feds set up. With the bad debt off their books, hopefully before the end of the 4th quarter this year, Wachovia will have a bad quarterly report and move on with their banking business, their business intact, rather than go into a death spiral to bankruptcy as short sellers make money on their business failure.
September 24th, 2008 at 9:35 am
Mikee:
I agree that government action of some sort, probably on a massive scale, is going to be necessary to fix the problem. I just don’t think doing it in a rush, and without oversight, is a good idea.
September 24th, 2008 at 10:15 am
I tend to agree with tgirsch — The government needs to do something. Even the libertarian economists are saying that. But not this plan.
September 24th, 2008 at 10:47 am
Yea, nothing like something important to bring the libertarians to support the largest give away to wall street in history… The real libertarian economists do not support it – http://www.mises.org, nor to the liberal ones – economistsview.typepad.com.
I guess only the fascist bush-backing boot lickers do…
September 24th, 2008 at 1:13 pm
In one of his duller moments, I did notice a Bush quote in the newspaper that we had to “show the world we can act quickly,” or something to that effect. What about working intelligently, or proactively, or responsibly, or , or, or….
Nope, “quickly.”
I have no contempt for the man, but he could have chosen some better words there, for certain.