Monday, September 29, 2008

Let's do nothing

Tyler posts about Brad DeLong and the gang who are arguing for nationalization:
Now it's time to go back to three principles. There are three

* Do nothing.
* Bailout (a la Paulson)
* Nationalization (a la Sweden 1992)

Do nothing was last tried in 1929-1932. The result was called the Great Depression. Let's not do that again. Let's decide between bailout and nationalization. Nationalization has the best chance of avoiding large losses and possibly even making money for the taxpayer. And it is the best way to deal with the moral hazard problem.

Except Hoover didn't do nothing. In January 1932 he bailed out the banks:

Consider what happened during the 1930s. In the fall of 1931, the Hoover administration realized that financial institutions no longer held the trust of depositors, investors, businessmen or each other. These organizations were losing deposits so rapidly that the financial system faced complete collapse. These organizations needed to cleanse their balance sheets of assets, which under current conditions, had little immediate value and could not be used to raise cash.

In January 1932, the Hoover administration created the Reconstruction Finance Corp., an entity authorized to extend loans to all depository institutions in the nation. The RFC could accept as collateral a broad array of assets, including those deemed to be of little immediate worth but of potential long-term value. During its first year, the RFC lent nearly $1.5 billion and acquired equity stakes in thousands of financial institutions. As a share of the capital of the financial industry, this lending would be the equivalent of roughly $100 billion today. During its second and third years, the RFC extended loans to banks and acquired equity positions in financial institutions amounting to more than $3 billion dollars, equal to roughly $200 billion today.

The financial crisis slowed temporarily, but the bleeding continued. Bankers restricted lending to entrepreneurs, consumers and each other. Industrial production plummeted. Unemployment skyrocketed. The financial meltdown resumed, forcing the president to declare a national “banking holiday.”

It’s worth reiterating the theme of this historical analogy in stark terms. In the past, we faced a similar situation and employed similar policies. The policies marked a deepening of the downturn, not an end to the agony. The policies signaled the demise of the financial system and the need to construct new institutions.

It's time to let creative destruction run its course.

Sunday, September 28, 2008

OK, just blame the Democrats

Vernon Smith, writing in 2007, blamed Bill Clinton:

The joint housing and mortgage-market crisis once again reminds us that all financial implosions stem from the same cause: borrowing short and lending long without enough equity to weather periodic storms in the gap between.

But this bubble was different. Besides being fueled by housing purchases and repackaged loans, each with inadequate equity -- doubling down with other people's money -- at the end of the capital-gains rainbow was the right to take up to $500,000 of profit, tax free.

Thank you President Bill Clinton for your 1997 action, applauded by the banks, the realtors and all citizens in search of half-millionaire status from an investment they could understand and self deceptively believe to be low risk; thank you for fueling the mother of all housing bubbles; thank you for enabling so many of us who bought second or third homes, and homes before construction began, which we then sold to someone else who dreamed of riches from owning homes long enough to sell to another fool.

Once again, try as we might and in spite of our political rhetoric, we have failed to help the poor in applauding government action intended to help ourselves.

Read the whole thing in the WSJ. He even brings in a little Adam Smith.

Thursday, September 25, 2008

How Democrats and Republicans created the financial crisis

My mom alerts me to this article by Kevin Hassett, who blames the Democrats:

It is easy to identify the historical turning point that marked the beginning of the end.

Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even "on the page'' of allowable interpretations.

Then legislative momentum emerged for an attempt to create a "world-class regulator'' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.

The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie "continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. "We are placing the total financial system of the future at a substantial risk.''

What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.

That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: "It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''

OK, that's pretty convincing. But what was Bush doing? He was cheerleading the bubble with his calls for an "ownership society," a phrase which he failed to mention last night in his explanation of the causes. I think on balance Democrats deserve more of the blame, because they fundamentally believe more in government intervention. However, too many Republicans, including Bush and McCain, don't understand the market, and so cannot defend it against the inevitable and relentless calls for government intervention.

Tuesday, September 23, 2008

Like Adam Smith, Russ Roberts keeps it simple

The turmoil in the housing market and the resulting financial crisis is just the latest example of political failure. Politicians wanted more home ownership than the market produces on its own, especially among low-income families. To encourage this politically popular goal, Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ) were allowed to privatize their profits and socialize their losses. At the same time, Housing and Urban Development (HUD) required them to expand their commitment to affordable housing. Freddie and Fannie achieved this goal by buying bundles of subprime mortgages.

Both presidential candidates will promise a risk-free world with high returns. But peddling that fantasy is the cause of the current crisis. We treat our children this way--we do our best to insulate them from harm and still allow them to grow. I'd like politicians to treat me as an adult, paying the price for my recklessness and reaping a reward when I am prudent. Returning to that world, the world of markets, is the beginning of a return to stability.

Read the rest here in Forbes. So this is simple, right? Then why do most people not get it? Clearly that's more complex, but simply put I think we've produced a monster with our social democracy, and it thrives on the weaknesses of human nature, not just stupidity, but laziness, greed, and deceiptfulness.

Thursday, September 18, 2008

Nationalists, Socialists, and Wall Street's just desserts

A friend asked me to comment on Meyerson's op-ed in today's WaPo:

Someone needs to invest in the United States of America. For the past decade and, in a broader sense, for the entire duration of the Reagan era, both government and Wall Street have opted not to. Should Barack Obama win, the era of neglectfulgovernment will probably come to an end. No matter who wins, Wall Street is vanishing before our eyes. And by the measure of their contribution to America's economic strength and well being, both Reagan-age government and Wall Street's investment banks plainly deserve to die.

Here's what I wrote him:

Meyerson here is quite right that investment has decreased in America, and increased in the rest of the world. But he seems to think this is a real bad thing, because we're Americans damn it and we deserve to be richer than everyone else? This guy is both nationalistic and socialistic, a wonderful combination of sentiments, which has been tried before, it's called National Socialism, aka Nazism.

A more fruitful question is why are investors bailing on America? I have some ideas, like out of control government no longer limited by the Constitution so that we're pretty much no longer such a special place. But I'd love to hear the candidates weigh in on this, rather than scapegoating.

Wednesday, September 17, 2008

The long goodbye

If Chrysler had collapsed, he argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions. “If Chrysler goes belly up,” he says, “it also might have forced some deep introspection at Ford and G.M. and might have changed their attitude toward fuel efficiency and manufacturing quality.” Some of the bailout’s opponents — from free-market conservatives to Senator Gary Hart, then a rising Democrat — were making similar arguments three decades ago.

Instead, the bailout and import quotas fooled the automakers into thinking they could keep doing business as usual. In 1980, Detroit sold about 80 percent of all new vehicles in this country, according to Autodata. Today, it sells just 45 percent.

That's from the NY Times. Hope you're invested in other countries!

Sunday, September 14, 2008

Bum strategy

George, a lanky man who pedals a bicycle around town and sleeps on a building roof, said paparazzi and parking valets can be a problem when he panhandles outside celebrity haunts. But being close to wealth can lead to $100 handouts, or finds such as gold jewelry, video cameras and an Armani suit.

He was so thrilled with the suit that he wore it panhandling until he noticed he wasn't doing too well.

"You have to have a certain look to get sympathy — dirty, kind of stupid, not aware," he said.

He also knows an opportunity when he sees one. For a couple months, he hung out in a vacant house, lounging by the pool drinking up the liquor he found in a cabinet until the owner walked in on him. He managed to flee.

"I was just using the facilities," George said. "I wasn't robbing no one."

Read the rest here.

Thursday, September 11, 2008

National service as therapy

I'm watching CNN's national service forum. Obama and McCain seem to agree national service is the way to go. If you're feeling selfish, lazy, or pathetic, serve the nation. If you're otherwise just down in the dumps, serve the nation. If you want to be social and connect with others, serve the nation. If you want to be helpful and charitable, serve the nation. If you want to kick some aaaaaass, serve the nation. If you want to do something greater than yourself, you need to serve the nation, fool. (Mr. T for president!)

Interestingly, one of the interviewers (not Judy Woodruff) brought up Touqueville's observation that American's are crazy about voluntary associations. Then the interviewer asked if national service crowds out voluntary service. Obama: "No. Those are old arguments. ... Part of my job is to make government cool again." I guess Hitler, Stalin and Mao kinda gave it a bad name?

OK, Obama would say that's extreme, instead the problem is the special interests. I agree, so how the fuck are you going to keep special interests out of the national service racket?

Thursday, September 4, 2008

So she's hot, and she gives a great speech

But Sarah Palin adds little more than stage presence to the ticket (Did you see the contrast when McCain walked on stage? He looked like he was in pain.) Of course, that's pretty much all that matters in politics. That and finding a good scape goat. For Republicans, there are the foreigners-cum-terrorists, and to a lesser extent the elites in the media, academia, and politics. For Democrats there are the Americans who are uneducated, religious, and xenophobic, i.e. Republicans, and of course business, profits, and capitalism generally.

I wish it were different, but just listen for the lines that get the biggest applause.

No wonder the stock market is down today.

Tuesday, September 2, 2008

News from my home state

Alabama is rolling out a creative but controversial program that will subject its 37,527 state employees to possibly humiliating at-work weigh-ins and fat tests. If they tip the scales, they'll be given a choice: slim down or pay up.

I don't know if creative is the word. They're simply more willing to face facts: it's the second fattest state in the union.

Read the rest here.