Tuesday, September 30, 2008

Pregnant Thoughts

I've been traveling and too preoccupied with personal affairs to post, but arriving back at home I am pregnant with comments stemming from the sheer quantity of misinformed anger, vitriolic hyperbole, and near-lunacy from all corners of the polity regarding The Financial Crisis, The Credit Crunch, and The Bailout.

First the divide between the guilty and the honest. Indeed some are more directly responsible for neglect, fraud, incompetence. But Americans will remain in denial until they realize it is complex and that nearly ALL AMERICANS (except perhaps my late granny) and some Asians are culpable in one way or an another for how we arrived here. First Americans voted in this administration....TWICE! Not everyone. Maybe not even the majority. But those that apathetically didn't vote against them are guilty. They benefited directly and indirectly from the tax cuts, lack of energy policy, and the war expenditure by gaining employment and income they wouldn't otherwise have had. They benefited from low rates and easy money and lax regulation to buy homes and watched the value of those homes rise dramatically. They removed equity via refi and HELOCs at unprecedented rates, including my late mother who eschewed debt. It was too good a deal to pass up. Few invested it wisely or banked it. Most spent it. On new cars, or kitchen renovations, a Caribbean cruise or stainless-steel appliances. The consumption orgy was obvious to anyone who desired to look, and it touched everyone's lives - directly or indirectly. Few countenanced matching revenues with expendtitures, and most decried the idea by not electing fiscally sober souls to Congress or the Senate. America borrowed from the future to fund the present in all ways, whether via fiscal policy, monetary policy, people's pension funds, corporate balance sheets, or household asset values and expenditures. But now they [the American people] are incensed when the bill has arrived. They have no recollection, nor amazingly can they make the connection between the prior faux-prosperity and the current crisis. Perhaps this results from the fact that while real wages have been falling due to pressures from globalization, this plunge was ameliorated by the past decade. No they don't fly private, or dress their women in Armani garb, or drive leased Aston-Martins, but IMHO is undeniable that they were (until 2008) less-worse-off than they otherwise would have been had the Admin and Fed let things naturally recess in 2001, throttled subsequent credit and policed unbridled extension of credit by the shadow banking system. Someone, however, must explain this to them, so that capital can be extended to the financial system (in whatever the most appropriate, effective and just form) to restore confidence. Even a policy whereby authorities will in effect "insure" their jurisdictional terrain of the interbank market until deleveraging runs it course will in all likelihood be less expensive to the taxpayer than encouraging Mellon-like liquidation. But political and financial ignorance runs deep in this land and it would be ironic if it is precisely this populist ignorance that with hindsight will be viewed as the cause of a new depression, one that might have been ameliorated by wholesale intervention and recapitalisation.

Second. People should stop rueing the controls upon of short-selling. I realise that this is intensely unpopular view in my field, but with the likes of Mssr Hendry extolling the saintliness of his ilk, it needs some tempering. By way of disclosure, I have been an active (and at times aggressive) short-seller for more than seventeen years. There are disingenuous people who will have you believe it is both noble and right to sell short, maybe even god-given. Or that because its risky, or conveying information (however flawed it might be) it earns its rightful place. It has no such moral rectitude. At the best of times, it [short-sellers] may help ferret out fraud, or simply have no effect. But in the current environment, I believe the bans are correct for herd-like front-running of sales by eventual owners are in essence de facto collusion with the same as effect. Yes, it would have been better (as I've been a proponent) to have sustainable policies that would have avoided the asset price rises, over-leveraging, and subsequent revulsion. But we're here, not there, so get over it. Massive short-selling financials (whether deserved or undeserved) eats to the core of systemic confidence. It is of course not alone in compromising systemic integrity. Nor even primary. But these institutions are exceptional. And authorities are right and correct to do what they can do for the impact is the equivalent of whittling away at the systemic foundations and as a result accidentally having the building fall. The flip side is that because banks are exceptional, they should behave that way, not have been allowed to lever-up as they did. They should be repositories of sobriety, and prudent risk-management, NOT places for coin-flipping agents to shoot the moon in order to maximize short-term gain by gaming the Treasury put.

Third, the media has been pathetic and perhaps inflamed both the panic and sense of outrage at authorities acting as (IMHO sensible) liquidity provider of last resort. They have not tried to explain the truths of ultimate culpability to temper the misconstrued outrage. They can slay the easy targets, but educating people on the history of the credit bubble, and of course, their knowing or unknowing participation, would be a great public service. For Americans (and Brits too) never could something-for-nothing, the deal too good to be true, systemically flawed as it might be. Everyone want to eat their cake, and have it too.

Finally, the perils and absurdity of unbridled leveraged financial speculation (as widely practiced) has been demonstrated, with the fallout from hedge funds still to come. The result will be an eventual return to making things and stuff, both tangible and intangible, rather than mere money with money. American zaitech is dead. This will be wholly good thing in the longer run, though the shorter term pain it will inflict upon asset prices as leverage is further reduced will be significant, and will reveal - for those with capital, unleveraged and unencumbered - tremendous opportunity - particularly from the liquidation that will certainly ensue over the coming Q4.

19 comments:

Up said...

Re: the first part of your post
(can't really quibble one way or another on the second).

The rest of the world has certainly been culpable in enabling this show
(and by now freak-show) to evolve.

Using the dollar, and using English, as the reserve currency /global Latin of our age, has been an incredible resource, an incomparable competitive advantage, for the US.

Unfortunately, as with natural resources, it takes great wisdom so that your great advantage doesn't strangle the rest of your economy.
It's become something of a "dutch disease" thing, draining out all alternative use of talent and capital.

Besides, using the "exorbiant privilege" to the max, US. politicans managed to levitate above concerns of those from other countries. And you don't have to know a lot to give away borrowed money.

Sally said...

"The result will be an eventual return to making things and stuff, both tangible and intangible, rather than mere money with money."

Shocking. Oh, at last.

Anonymous said...

Up - I agree that the rest of the world has culpability and have ranted extensively on the role of Asian mercantilists in enabling it, and the free-riding of the Europeans that prevented them speaking up with greater force. I have not tried to rank-order blame.

That said, the mercantilists (outside of the odd increduluous remark from this or that official) are not standing in the way of America's attempt to finally tackle/solve/socialize its problems (at least the problems that are at the center of the seizing-up of interbank markets). Flawed as it may be in the detail, the timbre of the opposition to The Man With The Plan strikes me as Rip Van Winkle-ish, as if these people have been asleep, and upon waking are confused and angry at the state of the world and how it's changed for the worse during their snoooze. I find this hypocritical. I will grant the possibility that perhaps these opponents are "the worthy people", who didn't take out floaters, who didn't Refi and extract equity or take out a HELOC against buoyant values; who voted against the repubs in the last two elections; who never invested in "enhanced money market accounts", whose income was wholly disassociated from links and benefits derived from lower taxes, consumption beyonfd the national means, burgeoning trade-deficits, or war, or who have not benfitted from lower-than-OECD-avg gas and electricity prices, or the multitude of other benefits in chain of dependencies. Yes it's possible such innocents exist - but not in sufficient number to rile their reps.

By contrast, just yesterday the head of the UK Tories, David Cameron, admitted de facto that taxes would probably have to rise to pay for it. America has not reached that level of realpolitikal-economy. Perhaps Americans' response to the Man And His Plan is inevitable in a place where the cult of the individual remains so strong, they do not, cannot see the connection between the individual and the society economic history and the economic system to which - for better or worse - they belong and are integral.

-C-

martin said...

Bingo

dex 77 said...

The assymetrical participation in GDP since 1982 by the middle/lower class (say $75k and lower), and the upper class, means that the middle/lower class may well be rational in rejecting the Paulson bailout/handout. In terms of proportional fairness, they may well be bear more of the bill for prior excesses than they indulged in. In terms of maximizing self-interest, they may be better off footing the bill through deflation instead of a bailout/handout paid for through a combo of inflation and taxes.

The debt bubbles in the US since 1982 have disproportionately benefited persons in the top ten percentiles of income. Working class wages have been stagnant, and since 2000, median and interquartile wages have been too. Meanwhile, corporate profits has reached record highs as a percentage of GDP, and so have income and wealth of the top 10th, 5th, and 1st percentiles.

It is unreasonable to expect wage earners below the 75th, much less 50th, percentiles to foot the bill for unwinding the economic and financial imbalances. They did not share proportionately in the debt and asset bubbles.

Since most in the bottom 50th percentile have relatively little in the way of investment assets, they might be better if the debt/asset bubble was unwound with inflation devaluing the US dollar -- provided their purchasing power keeps up with the fall of the dollar. On the other hand, if their purchasing power won't keep up, they might be better off with deflation.

If the public prefers to foot the bill through inflation, then Congress has it wrong, since it should do the bailout and then run the printing press to inflate away the debt. However, if the public prefers deflation over inflation, then Congress was right to reject the Paulson bailout/handout, and let asset prices fall through deflation.

Anonymous said...

I like the short version better than the use of eloquent words:

In America and around the globe, corporations, citizens and government allowed this greedy financial orgy to take place over the last 13 years. The bill has come due, yes. It's not the responsibility of the US taxpayer to pay this bill. Period. If the result of the taxpayers not bearing responsibility to pay towards the bill that is due means the cost to run the US Government goes up and entities (Corporate, Citizens, etc.) in the US and around the globe lose wealth, than that's fair and just. Each entity needs to take responsibility for their own actions, and if they cannot afford their part of the bill that is due, than they alone need to eat that sh!t sandwich. The first action by the American citizen right now is to tell their reps and government to reinstate transparency laws that would have allowed more citizens to wave the BS flags on this long ago!

OperationNorthwoods said...

Did you have similar thoughts as the last evil empire bit the dust? Were the Soviets as culpable as Americans? They apparently voted for lousy leaders even more often than Americans.

Perhaps I'm wrong, but I see this as more than just an overdue depression. I think it's more like the end of the Anglo-American empire.

"Cassandra" said...

dex - I've mulled the inflation/deflation impacts upon economic strata, and I think that since the lower 50% bear small direct tax burdens, the most profound impact upon them en masse is employment (or lack thereof). From this point of view socializing the cost in whatever manner of plan (I am partial to Roubini's action plan) should grant them palpable benefit (renogotiation of mtgs and lower unemployment than presumably would prevail under a Mellon-liquidation outcome. The middle class would bear a higher burden, but then as a class, they have spent beyond their means and been the most aggressive users of refi and helocs for dubious purpose. The upper class will of course foot most of the bill, both in the form of lower real asset prices (equity and real estate) and higher future marginal tax rates. Where the lower classes will be whacked is when energy policies finally align with the rest of the developed world, for imposed carbon taxes will be regressive.

Anon - Since we are enroute to rip-roaring recession in any event, I think what is "fair and just" is not impoverish wage-earners more than is already deterministic. Philosophically, I do not disagree with accepting responsibility. But practically, wholesale liquidation as you suggest WILL impoverish for more people far more deeply than socializing the cost. There are ways to do what is practically necessary less unfair, rather than encouraging entropy to wreak its havoc.

I have always been a proponent of prudence and allowing recessions to prevent the build-up of excess that becomes so large it threatens the system. This is on the record. But where are here now, and The System should be treated lest we lose something that benefits everyone. The result9ing dislocation and loss of societal wealth is too frightening to countenance.

northwoods - my history is not what it should be, but it is my understanding that The Soviet People's input more or less ended with the putsch that ensconced Stalin. Could one say the same about the arrival of the Bush admin in 2000? Seems the good years of cheap oil were squandered by CLinton, Congress and the American people though the wholesale takeover of the American State by the Huns and Aesopian grasshoppers probably began in earnest with Reagan...

Anonymous said...

Sure Cassandra, all true.

But the cynical exploitation of this crisis is disgusting - and criminal.

People trained to "run the economy" have not only caused the economic problems but now want to profit from them.

It's a kind of fiduciary duty to practice your specialty honestly and in good faith while the rest of us practice our specialties.

So the idea "we are all to blame", while true in many ways, is a gross oversimplification of the immediate crisis and decisions that need to be made.

"Cassandra" said...

I wanted to major in "Economy Running" but couldn't find a suitable course. I guess I should have just majored in "Ayn Rand" and I'd be fully equipped?!?!

The libertarian arguments on socializing this while philosophically seductive in regards to responsibility, suffer IMHO from faults, similar to those that say because some people cheat on welfare, we should not "do" welfare, or because gubmint has ostensibly failed in some things, we shouldn't let the State do healthcare. I actually hate arguing this point on the so-called bailout (in the generic form) because I prefer prudence and responsibility which is how I live. I do believe that in this instance, there is an element of puking one's principles for practical solution producing the lesser evil of economic outcomes. "Utilitarian backsliding" is what it could be called.

Anonymous said...

Paulson clearly thinks he has a PhD in Economy Running.

You need to make credit available for the entire economy, not just to traders in toxic waste derivatives. And you need to enforce transparency in balance sheets.

What you absolutely don't need is more money feeding the derivatives beast while doing nothing to increase transparency.

Of course there is a "good plan" somewhere in the Platonic ether. I don't think anyone in Congress is qualified to decide what that is.

"Cassandra" said...

Anon - We have reached the point of violent agreement. Thanks for comments.

Anonymous said...

No, thank you.

LJR said...

Glad you're back!

Particularly liked your take on short selling.

dex 77 said...

C "I've mulled the inflation/deflation impacts upon economic strata, and I think that since the lower 50% bear small direct tax burdens, the most profound impact upon them en masse is employment (or lack thereof). ... The middle class would bear a higher burden, but then as a class, they have spent beyond their means and been the most aggressive users of refi and helocs for dubious purpose."

The lower strata bears substantial employment taxes, on their income which is largely wages, and since money is fungible you might as well count their employment taxes as income taxes. The middle strata of income earners had stagnant wages since 2000, so they didn't really benefit either.

The people that benefited from the economic boom in the US were people in the top quintile of income, and more and more, the higher one goes up the food chain. So in terms of fairness, it is pretty easy for the lower and middle strata to say "drop dead" to wall street.

Moreover, in terms of self-interest, the Paulson plan seems to do a lot more for the upper strata by benefiting owners of stock and debt, who are disproportionately in the upper income of society, at the expense of the lower strata through inflation and taxes. If I were representing the lower and middle strata, I'd bargain for a better deal.

Especially since people in the lower strata derive happiness from increasing their status relative to higher strata, even if it is simply by reducing the absolute wealth/income of the higher strata.

tooearly said...

your comments might be misconstrued as being supportive of the plan that the Senate just passed, but i doubt that is true. Say it aint so...

Anonymous said...

Is doing anything the same as doing something?

Methinks not and methinks Cassandra does not either.

Or did turning 3 pages into 400 and embedding a few wooden arrows make achieve transubstantiation?

Anonymous said...

I have a daughter who is willful beyond comprehension. She ignores well-intentioned advice, and must do things her way, and find out the the hard way that she in fact can learn from others who've done the same before her, and made mistakes and that there is no dishonor in ceding so for the sake of avoiding costly mistakes and making better decisions. Why the administration (and hence US Congress) went down this path and not the path employed in other countries in the past (effectively) is a testament to parochial greed, willfulness peppered with ignorance and legislative ADD.....

-C-

dex 77 said...

C: "I have a daughter who is willful beyond comprehension. She ignores well-intentioned advice, and must do things her way, and find out the the hard way that she in fact can learn from others who've done the same before her, and made mistakes and that there is no dishonor in ceding so for the sake of avoiding costly mistakes and making better decisions. Why the administration (and hence US Congress) went down this path and not the path employed in other countries in the past (effectively) is a testament to parochial greed, willfulness peppered with ignorance and legislative ADD....."

I agree that Congress is motivated by greed/ambition, ignorance and short-sightedness. However, I think willfullness isn't much motivating anyone. The only wilfullness I see is wilfull ignorance. Many Congress persons refuse to understand -- or at least admit to understanding -- many economic/financial problems the US faces because that would undercut the agendas of many special interest groups that finance Congressional campaigns, and would hurt politicians' reelection odds because voters like politicians who make unrealistic promises.

And don't be so quick to think kids are irrational for disregarding their parents' advice. Many parents have a circle of competence that is quite small and are always seeking to give advice outside it.