I believe there is a problem with the lexicon describing our current sad state of economic affairs. Terms like "Bailout", and "Rescue" are simply inadequate, making it sound as if the collective "we" have somehow been gypped – now forced to shell out for something collectively we’ve never obtained. Even respectable media organizations are guilty of fanning the proverbial flames of linguistic indignation and its implied recriminations through mindless repetitive use. All which reminds me of a July afternoon in early 1980s when I was commiserating with one of my best mates at the LSE who had just obtained his examination results from the papers he sat for the first-year of his law degree. Head in his hands (when he wasn't shaking it to and fro'), he was utterly dejected, for he had failed each and every one, possibly obtaining the lowest aggregate score ever in the long history of the Law department. "I can't believe it!...I can't fucking believe it..." he kept repeating.Now this particular year was a grim one economically and socially speaking in the UK. Toxeth and Brixton riots were still fresh in peoples minds; Arthur Scargill was agitating on behalf of the miners; almost everyone possessed a Billy Bragg LP, "gentrification" and "buy-to-let" were hitherto unknown phrases in the prevailing English dictionary, and there were, to the best of my knowledge, no celebrity chefs or Michelin-starred establishments on said shores. But they were glory years as a student evidenced by 20-pound-a-week rents and 35p-per-pint at "The Three Tuns" not to mention parity exchange rates for my USDs. My friend, armed with a keen wit and intellect and the gift of blarney, his guitar, strong voice and a long repertoire, was a sought-after bard at Pubs, bars, and parties both inside and outside student circles. He partied longer, harder, and more frequently effortlessly whiling away the hours, days, weeks and months with nary-a-thought of consequence. Until that sullen July.
What use are friends if not honest? So I cleared my throat, and said "Matey...yes it's a pain in the arse. You'll need to spend the summer revising and re-sit the papers in Autumn. But you've little reason for regret. You’ve objectively had a smashing year! You played with some of the best, met interesting people, slept with more-than-a-few attractive women, and made friends you'll have for life. I mean...it's not as if you studied and failed....THAT would be disappointing! THAT would be a more worrying failure!! You made choices, and have something to show for it, even if "that" proves ephemeral...no one can take it away" He thought about what I’d just said, and didn't fight me. He knew I was right, and his broad smile returned. "Fancy a pint?"...
Returning to the present, pejorative talk of "bailouts" and undeserved “rescues” just misses the point. Focusing upon bent bankers, snake-oil securities, or inept analysts, which were but symptoms, is somewhat misplaced since hey are not the root causes, and, as such, these facile recriminations however satisfying and apt, trivialize the breadth of culpability, and near-universal benefit of The People over the past two decades. For what we are witnessing is the arrival of the bill, getting around, as it were, to coming to fathoming the scale of it AFTER a long long long collective night out. We’ve HAD the fun (and I use the "we" in the broadest and most encompassing of terms). GDP, employment, consumption, wages, all were substantially higher than they otherwise would have been. Everyone earned more and everyone had work who desired it. Enjoyable trips were taken, and attractive shades periwinkle now adorn what might otherwise have been walls and ceilings of cracked and peeling fomerly-white paint. Purchasing power was buoyed by a dollar that was stronger than it ought to have been had nations lived on a balanced and current basis. Taxes too were collectively lower further buoying PCE. Yes, everyone benefited, though as is always the case, some more than others. Securitizations of cars, homes, CC receivables, Refi with equity withdrawal and HELOCs all were but more rounds on the tab to be (or not, as the may prove to be) paid for in the future. Homes were built, enlarged and landscaped. Offices multiplied like spring mushrooms. Nations were wired in fiber. Previously incurable diseases, cured by overly-flush investors. Yet other entire nations emerged (if only temporarily). A Wii now sits in every house, and a recent version of Windows on every desktop. Does anyone still use a CRT?? Everyone has several handsets despite the amusing antiquated cumbersomeness of those with a vintage of more than a few years. This happened not just in a year (or two) but over a decade, perhaps two, or even three so the comparison of the cost must surely be kept in perspective by comparing it to a decade (or more) of GDP - not the annual figure - to get a true sense of perspective. Yes, our binge was mostly about consumption, though this itself drove massive capex and investment (mostly elsewhere), by those wrongly extrapolating that our thirst would need to be quenched similarly and persistently, longer into the future than has been manifested by events.
So I propose that we need a new, more accurate linguistic to reflect what this is called since. “Bailout”, package, rescue, are inadequate insofar as they don't describe more precisely in its historical context what it is we are witnessing, and fail to address the universal nature of the benefits and, I would add, the culpability that descends throughout the polity. It IS a pity that thoughts of prudence, resilience, and sustainability were demagogically dismissed when these thoughts would have provided a tether to reality. But we can, at least being anew by calling it what it IS, and as such, I’d be happier with merely “The Bill”, “L’addition” "Il Conto", or more succinctly, "The Tab" - which for the sake of the avoidance of doubt, should include the more historical detail than less. But let’s stop the narrowly-focused pejoratives or value-charged labels (correct as they may parochially be) and take a moment to reflect on our past collective tangible and ephemeral revelries. Once there, understanding everyone has a piece if of political or economic shit on their shoe, one may begin to let go of the anger and accept that socialization of The Tab is not wholly unjust, and that the time for anger and incredulity in opposition (i.e. all those numerous political and economic forks to settle up before) has long since passed.
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37 comments:
Well said!
1981 Huh? It was £3 a week rent in South Kensington twenty five years earlier, and a bob a pint in The Three Tuns, with I suspect a refreshingly lower class of people. Anyhow like you we had fun then, and some later. But the recent years of insane consumerism may have delivered goods, but not a lot of fun, and a great deal of a lot of aggro, cost, and confusion.
Perfect. Your best post so far.
All the sturm and drang now is over who is going to pay the tab. The rich are sidling towards the exit, but may not get away scot-free.
I agree that the current events are about the bill coming due. But this is, alas, probably your worst post.
Consider:
"GDP, employment, consumption, wages, all were substantially higher than they otherwise would have been. Everyone earned more and everyone had work who desired it."
I kind of get your drift, the tools to game the economy in the short run were relentlessly employed. But to say what you have said implies that we have unquestionable positive knowledge about the sources of prosperity. Hogwash!
In the industrialized word, the three decades preceeding 1981 saw more radical changes in peoples' opportunity set than the three decades following 1981 did. Which brings me to main point. There are many A+ financial bloggers out there, but strangely they all are no better than C+ as policy analysts.
So, you are saying that we are doing the right thing by bailing out financial black holes such as GM and AIG. When does it stop? Do you give a kidney to a man with AIDS in a coma and heart palpitations? And then regardless of whether any recipients of these massive bailouts "deserve" the money, is it wise to fight debt by creating more debt?
The fact is this: Many, many people never had the opportunity to run up the tab in the last few decades; they will however foot the bill. These are the poor, the young, and the stupid (and I don't mean stupid as in "stupid bankers", I mean those who have little education due either to access issues or lack of wealth).
Few of these have the latest handsets, new paint on their rentals or any of the trappings of middle class wealth.. With all due respect, how out of touch are we with the averages?
The issue today is exactly as put by the media: it is a bailout of the rich by the poor. There is every reason for most people to feel angry.. If you recall, the study of history, macro-economics, and policy were not on the agenda for "productive workers" as specified by the universities, businesses and news media. Hard work, heads-down and self-interest for dollars was the mantra. I don't see how one could possibly have resisted these forces and spent the last two decades with any amount of sanity.
Other than that, great blog.
Mean Mister Mustard - Forgive my apparent lack of clarity, but I am asserting nothing of the kind. My main point stripped the awkward phrases and the run-ons is: The causes are numerous and mostly political; true culpability lies beyond the pale of this group or that group; the benefits were (with the attendant exceptions) - in general - universally distributed and widely consumed; ergo, while moral outrage may be useful in constructing the policy lattice-work for the future, socialization of The Tab seems hardly unfair or unjust. Your final point may or may not be valid, and while I DO have an opinion on the subject, I believe it is not of relevant concern to this post.
Jana von Alpha - Had we sat together for a Campari perhaps a decade or two ago, we would have agreed on the policy and systemic boundaries that would have prevented the scale of our current situation. I will spot-weld my opinions onto your two examples and then expand: I have no problem taking GM (temporarily) onto the national balance sheet. The French did a fine job stewarding their motor-vehicle industry, and what one man can do, another can do. As for AIG, there is reasonable cause to believe that disorderly liquidation of AIG would have caused systemic liquidation, so it is NOT AIG that is being bailed, but her counterparties, and in turn, the financial system.
So rather than the "right thing", I believe (at present) it is the "only thing". Some will see the system as a lost cause, and undoubtedly Austrians favour Mellon-esque liquidation. I believe they underestimate unecessary damage and chaos of the unfettered systemic liquidation. I believe that the overshoot is inconceivable to any humane person. I believe it would be catastrophic because each liquidation would drive yet further and otherwise solvent institutions into insolvency forcing yet further asset sales. This is a deterministic outcome and while eventually finding an equilibrium, it brings us no closer to efficiency than the upside overshoot we've just witnessed. I think your analogy is incorrect. I believe the correct analogy resembles some thing more like: What is nuclear missiles were launched in a countdown sequence, and giving that kidney, irrespective of whether he was terminal would allow you to cancel the deterministic launch sequence, in the absence of which, sure as the sun will rise, the missiles will be launched and much will tragically be destroyed.
YNOT - My suggestion is unpopular. And it is clear the asset-owning Park Avenue and Greenwich sets benefitted vastly [albeit temporarily] from the asset price run-ups. But I would argue that the poor would have been poorer. American working poor and ghettoes while relatively tragic places in comparison to American eddy's of wealth, and European poor, just cannot be compared to the world's true poor (and you can pick your examples here). Real American wages would have been lower had unemployment been higher had the last twenty years unfolded differently (and without the social policies of Europe). America more closely resemble Brazil than Canada. The gradations of improvement in well-being over the past twenty years I am not measuring against what might have been possible in a more sustainable alternative reality (call it the European model), but in an alternative reality of American design WITHOUT the credit boom. With this in mind, the benefits were distributed across society in relative similar proportions to perhaps existing socioeconomic status, but delivered widely and broadly nonetheless. I am NOT saying it was delivered fairly - the rich took the lion's share. But IF you took the bill and divvied it up according to taxpaying position, the rich (and those that benefitted) as the dominant taxpayers and asset owners will inevitably shoulder most of the cost. This is as it should be. The rub for the lower middle and working poor is that VAT or some regressive consumption tax is almost inevitable, as are higher (and regressive) energy taxes. These mightn't have been necessary to the extent they will be, had we witnessed more sustainable policy in the past.
I take your points, but I note a couple of them are worthy of skepticism:
The idea that "The rich took the lion's share", suggests that a share was left over after the rich gorged. This is contentious and misleading.
Not long ago, the looming issue of the poor and middle classes getting poorer (in real terms) was all the rage just before the credit crunch. It was argued, quite tenably, that the "non-rich" hadn't benefitted at all from income expansion since the 60's. The debt that bought all those gadgets, in fact, used to be wages. The debt-burden of the non-rich is not being wiped away or restructured on a scale approaching the relief provided to businesses and banks. So the poor will have to pay their debts, and taxes, albeit with incomes that were only suitable when credit was widely available. Not so with the rich, I think.
Which brings me to this: "the rich (and those that benefitted) ... will inevitably shoulder most of the cost."
You may be familiar with the one-hour "wealth parade" concept that has circulated for awhile now. It has undergone revisions to accomodate the fact the number of dwarfs have increased and the giants are starting to bump their heads on the moon. Income tax rates do not start at zero, nor do they escalate to 100%, so where do we obtain confidence that a mechanism even exists to have the rich and their various yeoman shoulder the huge cost of the bailout? Following that, as you say, we might turn to the problem with VATs.
Those well-schooled in economics surely deserve the lion's share of the chiding, but there are real boundaries to respect, and we should not blithely withdraw concern about economic policies that "socialize losses". This is a mistake, perhaps symptomatic of capitalist arrogance, but also dangerous enough to worsen prospects of recovery were it to be repeated aloud to those doing the digging.
The average citizen did not benefit from the past boom to anywhere near the extent that Franklin Raines, Chris Dodd or many in the financial or economics profession did. To then suppose that they are all equally at fault strikes me as a novel form of communism .
Identifying the individual culprits of this economic failure is useful insofar as we can identify the false theories and ideas they held that caused and/or enabled the crash.
Classically (biblically ?) when bad things happen you try to find out why. When the bad things are caused by human action you try to find out who. This is not the scientific thing to do, it's the logical thing to do. It is the same subservience to logic (reason)
that causes Austrians to favor Mellonesque liquidation . Economic logic demands that when an enterprise goes bad it's assets are liquidated because were the assets were being utilized profitably (in a way that benefited society) there would have been no failure)
There may be a substantial cost to
liquidating failing institutions but the recent crash shows that there is a substantial cost to leaving economic management in the hands of an priesthood whose economic theories don't pretend to be logical but are proudly "scientific". It has resulted in economic policies that are as comprehensible to the average citizen (and perhaps their proponents) as quantum physics; Not at all .
If we are going to be a republic or a democracy we must have an economic system which can be ( and hopefully is) fully and completely explained in high school or earlier to a student of average intelligence.
I do not disagree that the politically expedient route will be to change our institutions and ideas as little as possible . But we are ideas more than we are flesh , so we can only be a realists for so long before reality intrudes.
Although too many, the number of actors involved in collapsing the economy are finite and can be identified. Those who confuse financial engineering resulting in Ponzi bridges to nowhere with true engineering that result in Wii and non-CRT screens, keep putting the hard earned wealth of society in the wrong places, their side bets serve no productive end.
Well I did, as evidently did you, have THE FUN over the last 30 years.
Realizing now I should have had less FUN does nothing to solve the problem.
The Tab must be settled, the piper paid, and so on, and the quicker we collectively acknowledge same the better.
Based on these comments, we all are at different stages of economic grieving.
I see denial and anger, some bargaining and depression, and, perhaps, for you and me, now, acceptance.
It is what it is and The Tab must be paid.
And you are correct, the "rich" will pay, and likely in many ways of which but a few are monetary.
Sorry for the whiff, but I will accept socialization of the "tab" only when my trusty old CRT croaks.
ただし (honor)
It doesn't exist in any truly recognizable form anymore...
Fancy a pint?
Probably the only logical solution to the four stages of grief.
Arigatai mistress Cassandra!
Anon 8:26
Thank you for finishing this missive for me. I somehow missed tying it all back together with those three words ;^)
Greg, it is your patriotic duty to dump it (at the recycling center of course) and buy a new LCD. I hesitate to think how much power my old NEC Multi-synch behemoths consumed.
Anecdotal Econ - Thanks! You get it.
Mark Abrams - At this stage, the ratio of barn-door closing recrimination relative to coordinated anti-system meltdown-ism should be rather low. "Never again" could be a mantra applied to may things, but since the government will end up owning many banks sooner or later, and since there is at long last an adult in the white house, there is plenty to do the witch hunt later which will provide good entertainment for the unemployed...
Cass- you cite the worst case of a hands-off liquidation. How about the worst case scenario for an unlimited bailout? How about comparing with _managed_ liquidation in which unwinding is done as sensibly as circumstances allow?
You also imply, methinks, that the folks currently running the bailout (yes, it is what it is) are competent and/or acting in good faith. The evidence appears to me to point to the contrary.
Nearly a year since Bear Stearns, we still have no visibility into the apparent gordian knot that various and sundry derivatives sellers (many of whom are still collecting large bonuses) created. I don't know about you, but that doesn't inspire confidence in me.
When you consider that all indications are that humpty dumpty simply cannot be put back together, I think it at least verges on criminal to impose on all of us the cost of a willy nilly bailout, the difficult-to-imagine price of which could very well bankrupt those of us least able to withstand that while at least somewhat protecting those most responsible for the mess, who also profited the most along the way.
Anonymous 1:52 -
You're points are valid and not lost upon me. Yet I suggest NOT unlimited "bailout", a word you continue to use often, and one I wish to eschew, and that better policy response will yield invalid. To me, warehousing the assets sooner which, in the event authorities digest the banks, they will warehouse anyway seems a far cry from "unlimited bailout".
Evidence to date is less that they don't know what they are doing as much as an historical unwllingness to embrace the likelihood (initially) that this was THE BIG ONE. I do not want to be an apologist for idiocy and incompetence, but I understand that hindsight is typically better than foresight. Practically, is there really much difference between liquidity IVs to support banks funding and capital now, via Fed actions, and eventually taking them Swedish-style onto the national domain (e.g. 1 or 2 years hence)? Doesn't what they'll have ponied-up reduce what they'll have to throw at it later - less potentially the boated salaries and bonuses and contractual obligations they'll continue to live by in the event protection/conservatorship what have you is not triggered. I do not believe there is much difference, unless one subscribes to the belief that these institutions are being looted wholesale by managers in the interim, though I accept that Thain & Merrill's actions give such an appearance to the contrary.
While Humpty-Dumpty (as you say) may never be the same) the size and scale of the solvency issue (as John Hempton has skillfully explored) can be known, and once resources committed to warehousing, restructuring and liquidating in an orderly fashion, will some semblance of confidence return.
Playing around with public market stakes in various forms of equity-like capital structures may work for shoring up confidence in essentially sound and solvent institutions, but too haphazard for my liking and generates as much uncertainty as it defuses. A policy of standing ready to take any and everyone on-board, with annihilation of equity and preferred obligations, and possible small marginal haircuts in some subordinated debt would go the farthest to establishing order and proper socialization. The half-assed outright purchase of assets at greater than market value to my sensibility creates conflicts of interests between private capital and the public interest. But that is unrelated to my opinion that the Public's responsibility is broad and deep and should and will foot The Tab. Who gets strung up and hung out are sideshows, and a proper protection of The Public's Interest should insure this is maximized - something I believe Mellon-esque liquidation doesn't accomplish - either in the short or long run since it neither achieves justice or efficiency.
Just awesome. As you concede in the comments above your opinion is unpopular - in my experience universally so - but it is one I share! Maybe those few of us on the planet who see general social culpability for the bubble and eschew the self-righteous hunt for the "evildoers" could get together and share a pint...
I'll buy. I don't expect there will be that many of us.
Cass -
"...Yet I suggest NOT unlimited "bailout", a word you continue to use often, and one I wish to eschew..."
Fair enough. May I suggest your use of "Mellonist liquidation" is an unnecessary straw-man as well? I haven't advocated it.
There is no doubt that there will be high costs all around for whatever we do. That's why I think it needs to be an actively managed and transparent process. It's not just looting-via-bonus I'm concerned about, it's also pouring huge amounts of money in derivative-lined black holes (via AIG at least, probably more in the future, if allowed.)
Much of that money may be a complete waste from a societal point of view - maybe worse than waste if it encourages further looting - and it is money we will certainly need to ameliorate damage that is inevitable with any approach.
Even Bernanke, in public testimony, as justification for his approach, repeatedly raised the issue that there is currently no orderly resolution regime for the Behemoths (as there is for commercial banks) and yet he hasn't suggested that Congress undertake to create one with considerable urgency.
You correctly note that many in the public have benefited from the party. Under the best of circumstances, they and even those that didn't (or did negligibly) will bear a heavy burden in the aftermath, to repeat.
With the drip-drip opaque approach we don't know where the money is going and Bernanke, Geithner and Obama, have all but said (or maybe said outright) that they will continue to do "whatever it takes." That sounds to me like a prospectively unlimited bailout that may very well bankrupt us. That seems to me much scarier than an actively managed unwinding. We may not get a second chance.
Anon 5:21
Were not the Germans who didn't rise up o speak out to oppose the Nazis culpable?? The buy-in was huge. I think the buy-in both overt and through tacit inaction was similarly huge in our case. I defer to smarter people who've thought through the details on the set of actions and policies that protect the Public's Interest in the broadest sense, and that willful neglect based on ideological or moral outrage grounds, that satisfies narrow moral constraints at the expense of the large public interest of longer-term stability, public order, property rights, credible public finance, etc. should be challenged and called-out.
Our institutions and institutionally accepted theories of economics have lead us to an a place we don't want to be . It is not "witch-hunting" or "barn-door closing recrimination" to try to find out what specifically went wrong. Since ideas are acted upon by individuals it is not ridiculous to determine who enabled/enacted policies which caused our troubles so as to determine why they did so (what ideas need to be changed, what institutions altered) . You seem to be saying our system and ideas are perfect, so change nothing, pay the price and hope this doesn't happen again. That is a defensible position even if I think it is completely wrong.
But "there is at long last an adult in the white house" so now everything will be OK is not at all defensible . Hugo Chavez is 54 .
The same forces that brought us the financial crisis have also brought cheap consumer goods...of both the discretionary AND staple variety. To suggest that it is only "the rich" who have benefited from this arrangement is to suggest, quite literally, that it is these same "rich" who have been swelling Wal Mart's coffers all these years with their relentless demand for Chinese goods.
Cassie, we don't agree on much politically, but it seems as if we concur that in the current desperate situation, a highly imperfect plan is better than no plan at all.
(as an aside, it is factually incorrect to state that the middle and lower classes will be left "footing the bill" for the Tab. They have historically contributed a very, very small minority of the total tax take; given the likely changes to the tax code, that tiny percentage is likely to shrink further.)
Here's the irony:
Those who invented the wii and non-CRT LCD probably lost a serious chunk of their invested (real, in the real as a doorknob sense) earnings, to a much smaller bunch of con artists...
It's as if the hooligans took everyone's beer and guzzled it, then left before the tab.
Everyone did not get to drink a pint, by a long shot. The Tab should be pinned on those who drunk it....
macro man - it is questionable that the tab for this will paid throught taxes. Inflation seems more likely to me. Then middle class and especially the poor will suffer the most.
I'm with Anonymous . There are culprits (they are still making policy). There are failed institutions (they are getting bigger) .There are bad ideas (they are still being spouted). They all need to be excised .
http://www.aynrand.org/site/PageServer?pagename=reg_ls_financial_crisis
I have only one question: how many people who believe in "general social culpability for the bubble" are involved in the finance industry? Hands up.
My point is that this posting smells of rationalisation (IMHO this is your worst post yet. Sorry Cassandra. From a long time fan).
Those of us who haven't been living on planet finance will disagree strongly with the statement "we've HAD the fun". A housing bubble is no fun when you are trying to get on the ladder; when real wages are going nowhere.
Yes, a real and conscious effort must be made to punish the guilty. And likewise a real and conscious effort must be made to protect those who were not guilty. I realise that precisely the opposite is the most likely outcome seeing as who gets to push the levers. But still this doesn't make your post right.
Gee mark ii...until recently the savings rate in the US (and the UK) was negative. Was that the financiers' fault?
While it is certainly the case that every Joe Sixpack did NOT live beyond their means, it is equally that case that every finance pro did NOT make a poor decision leading to the financial crisis.
Ultimately, pointing fingers does nothing to solve the crisis, nor does cutting off one's head to cure a headache. Such, at least, is my interpretation of Cassie's post, and it seems to make eminent sense to me. If you think that qualifies as a "worst ever"...well, I think you're wrong.
krams,you had better hope that inflation pays the cost for this crisis. Because the poor will be considerably worse off if the endgame to this involves the opposite....
I agree that "blame" can be allocated liberally across a broad cross section of society. However, as a practical matter, it is beyond our abilities to consciously identify and punish each and every economic actor, in a quantum directly proportionate to their malfeasance. Rather, capitalism is based on the principle that by bearing economic responsibility for one's action, the invisible hand will sort out culpability, and will reward and punish accordingly. It is a system free of human judgement and emotion.
When we interfere in this process, by deliberately choosing to support some economic actors over others, we are by that action exercising moral judgement that is subject to the imperfections of human knowledge and emotion. Every time we intervene, we precipitate more and more second, third, and fourth order effects that have unanticipated consequences. Are we truly forestalling doom, or just delaying a more destructive end-state?
My concern is that we are cavalierly tossing some very important principles over the side of the life boat, and this is going to come back to haunt us. In particular, I refer to the principle that economic actors should be economically responsible for their actions. Citi bond holders knew that they were taking the credit risk of Citi. Why shouldn't they be wiped out before the tax payers kick in a single dollar? Same goes for CDS counter-parties to AIG, and stock/bondholders of GM (and management and unions too) et al. Principles matter. They are the most fundamental assumptions upon which we base all of our economic decisions.
Throw out the principles, and the foundation upon we base capitalism starts to crumble. The question shouldn't be what is most expedient today. Rather, it is what principles are more important than others? What are the fundamental principles that have to be upheld, AT ALL COSTS, because their abrogation changes the fundamental nature of our capitalist system.
Capitalism might not be perfect, but it is the least bad of all of the economic methods of organization known to man. We should strive to improve it, but must be careful that we don't destroy those elements that are so critical that it can no longer effectively function.
Forcing chapter 11 style haircuts of bondholders is fair and just. Funding it with taxes is not. Due to disproprotionate sharing in the tax burden and benfits by reference to income percentile and by reference to age cohort. Restructuring in chapter 11 where the US government provides DIP financing is not liquidationist, and calling it is slanderous.
The bulk of taxes are paid by people in the top quintile of income earners. However, they did not participate in the benefits of the baby boomer asset bubbles to the same extent as the top 1 percent of income earners.
US debt will be paid for many years by younger cohorts that may not have participated in any of the baby boomer asset bubbles or even have parents that participated in them.
If businesses can restructure their debts in chapter 11 with the US government providing DIP financing, this preserves the goodwill/going concern value of the business to benefit employees, customers, and suppliers, and even enhances the claims of creditors compared to what they'd get in chapter 1. Restructuring in this way preserves value for the benefit of all. Suggesting that bankruptcies are all liquidationist is slanderous, and an attempt by creditors to claim more than they are entitled to under law or morality.
Giving handouts to creditors with net worths of over 5M is scandalous. And further allowing these people to do negative basis trades where they intentionally torpedo debtors plans to restructure in bankruptcy undercuts the fresh start and pro-debtor policies of bankruptcy, and needs to be outlawed as bad economics and worse morality.
I enjoy this blog generally, but this column is silly and wrong. Yes, I have two CRT telivisions, and no flat panels. I've never used a car loan, and never-refinanced my house. Work was available before the great Chinese and petro-dollar cash bubbles. The false prosperity of leverage was extended to many who could not afford it. That was bad enough, and obvious (the credit card rate legislation made it painfully clear years ago). Now, though, you all think I should pay higher taxes and bear vast debt so you can fix the bankers who generated the whole thing, and the creditors who bought their bonds? Bull. The game was "lend trillions to people who can't afford the cards, cars, and houses... then we'll get paid by the taxpayer." Not with my dime you won't. It didn't help me. I didn't indulge. I didn't want a boom-and-bust life. You who did, you can pay for it, and your kids can pay for it.
I was staying up late trying to figure out what mysterious bank bondholders the DC/NY cabal is so desperately trying to protect without admitting it. The Saudis? Chinese? Ultra-rich?
Well, probably them too. But it is, ta-daaaa...insurance companies.
The Haircut of Doom would crack up many insurance companies who were 'rate hogs' at the bond trough.
I hated finding this answer, because it means that the bland porridge of 'strengthening' that Gaithner and Co. are spooning just won't stop. In their minds it can't. The shattering of the American public's life insurance policies, on top of everything else, is felt to be too much. Besides, what if people got wise and cashed out?
No proper bankruptcies, no true nationalizations, no writeoffs in one swell foop.
No....Bondholder....Haircuts. Read their lips.
Cassandra, if The Policy remains The Policy during The Tab, does that not doom us to a liquidity trap/credit crunch? With a much bleaker macro backdrop than Japan had? Really, I do hate to get to this point in y assessment, so please talk me down (er, up) if you can stand my drivel to begin with.
Maybe we should call it The Hole.
"krams,you had better hope that inflation pays the cost for this crisis. Because the poor will be considerably worse off if the endgame to this involves the opposite...."
Money manipulators and populists have been very successful in convincing the poor and middle class that they will do better under inflation than deflation. For the past twenty years, this even seemed to be the truth. Thankfully guys like Marc Faber are doing a good job of questioning this deceptive orthodoxy.
FIRST - For those eschewing what I am calling socialization of the tab, may I remind you that: it is YOUR money market funds; it is YOUR life and prop -cat insurance coverage; YOUR pension funds, and recursively your Corporations who have similar exposure to the same. Liquidating in pursuit of some perceived sense moral justice or Randian market justice is at once simplistic and disingenuous for it disregards the broad nature of ultimate beneficial distribution of benefit for how these finanicial assets are distributed. Liquidation WILL socialize the costs as one's money-market, insurance coverage, pension, 401k, and jobs and incomes are unilaterally haircut. But the dislocation will be large, and the justice will still be lacking, since many bystanders will be disemboweled in the liquidation onslaught.
SECOND - I have said nothing of haircuts one way or the other. Depending upon the scale of the banking hole, it is likely that bond/note wealth-holders (public, private, corporate, foreign) are collectively poorer than they currently realize. A haircut recognizes this. But the biggest problem again, today, in this environment, is that IF authorities do as The Angry Liquidationists would like, and withdraw support and let the markets chips fall where they may, there again will be mayhem as the market quickly drives perceived more-insolvent borrowers to oblivion, which will be followed by the sale of assets that will drive solvent institutions to the wall. Because it is a catch-22, no one want to have the old maid, no one will wait and find out, and panic will ensue, but this will NOT be an efficient or righteous outcome. Collateral damage will be large, and solvent institutions will likely be denied a life-line they might otherwise deserve. "Give me my tuppence....!! They won't give me my tuppence.." The sensitivity is so high that any whiff of non-support or selective-haircutting will drive that institution to the wall and provoke panic in similar ones.
THIRD - I have no theoretical problems with haircuts, but for the sake of systemic stability, think haircuts on bondholders of nationalized banks should be stated upfront a-priori, and not be of such magntiude that it creates further systemic panic.
More specifcically on comments:
Mark Abrams - I have no problem with lynching (or retospectively taxing) fraudsters, crooks, contrapreneurs. It will provide gainful employment and entertainment for many who will need both. But what I am saying that you seem to miss or ignore is that when one's house is burning , focus upon putting it out before chasing the arsonist (if he even exists).
MacroMan - Thank you. I feel by your words I am being correctly understood. BTW, please email me your mobile. - your old one doesn't work, and I don't have the new one.
Anonymous 11:15 -
"Everyone did not get to drink to pint - not by a longshot"
Most people have difficulty discerning between real and nominal, as well as absolute and relative. It is not that they are hard, it's just that it is not the way most people conceive things. So anonymous, while you are probably correct in absolute terms, and in real terms (which have stagnated and eroded in some income groups) that is in fact the wrong benchmark. The correct benchmark is what those comparisons WOULD have looked like in the absence of the long-term credit bubble. How far might real wages have descended? How high would unemployment be? What would PCE have looked like? How high would marginal tax rates be? Was one able to obtain credit to buy a new house? A new car? Refi their mortgage and extract enough to remodel their kitchen? On this benchmark, beer's were had all around. Note: I am not saying the credit bubble was an unmitigated good (I don;t think it was), and that there weren't an alternative set of policies that would have delivered more sustainable and better outcomes. But there were a great number of positive externalities if one looks that cannot be denied. The true cost-benefit will only be apparent decades later.
Mark Abrams #3 - Nationalization "excises" the institutions which offend you. I think your view of the culprits is terribly parochial. The culprits are those who've espoused the demagoguery that "No Public Interest Is The Best Public Interest", responsible as it were for neutering regulators, deforming the market to achieve social goals, rather than using the State to tackle them directly; The failed institutions are but a microcosm of the system and society. You cannot excise one, without the other. They reflect the society and couldn't exist without it.
Mark ii and MacroMan - MM has articulated my reply in my absence, and I have little to add. I understand it is provocative, but sadly it's provocativeness causes a seemingly reflex reaction to the contrary. My view is not driven by an ideological perspective (though we are all slaves to some beliefs or another), but many of the negative reactions to my provocation seem to be ideologicallly-driven.
Pietro Paolo - You have articulated the case for Financial Calvinism (my philosophy) extremely well. Anyone who has been reading Cassandra (or drinking with me) knows this to be true. But, as I suggest in the Coda of the post, the time for this voice was in 1985, in 1994, in 1996, in 1999, in 2002, in 2004 and so one. It is in fact, too late now. Now, these principles - noble as they are - will incinerate the remainders of the system as I repetitively suggest. Few people with first-hand experience in markets, are suggesting this will come to any good. At this stage, they are ideals to subscribe to the next time around.
Anonymous 5:25 - Your comments are sensible. But I feel you leave out the economic and systemic ramifications in your calculations of justice. My thoughts on haircuts at the beginning address this directly.
Anonymous 5:41 - You ascribe a conspiracy and forethought where none exists. Had there been, most of the Bear, Lehman ML BAC, JPM, and AIG execs would have long ago, presciently sold their stocks. In fact, few did. Most believed their own bullshit. Hubris yes, conspiracy (as you describe), no. Borderline criminal? yes! But even here, few believed or saw it would torpedo the system. With folks like that in the saddle, it is a mistake to attribute the kind of conspiratorial cunning that you ascribe.
Jim MN - My FIRST point above at the beginning of this comment was addressed to you. It is recursive. Yes there are people on the tails who are so indigent or so wealthy, generalizations are not helpful, but for the very large majority, stretch your
minds and you'll begin to think of how one has directly or indirectly benefitted. But be careful to avoid "self-attribution bias" where one ascribes one's situation (e.g. Randian success) entirely to one's bold and creative powers and above-average intelligence.
Anonymous 930pm - greenspan's confusion of mild natural deflation resulting from globalization and technical progress with pernicious deflation of deleveraging was important in creating the conditions for the denoument. As a saver, I prefer mild deflation, but there are valid arguments (mostly behavioural - but valid nonetheless) for why mild inflation is more advanatgeous than deflation. I still prefer the latter. I do not recall "populists" or "money manipulators" arguments for inflation or mild inflation, but I'd be grateful for some examples.
Cassandra . you say:
"But what I am saying that you seem to miss or ignore is that when one's house is burning , focus upon putting it out before chasing the arsonist (if he even exists)."
What you seem to ignore is that it matters HOW and WHY your house came to be on fire. If you try to fight the fire by employing exactly the same methods that caused the fire initially you are unlikely to have much success saving the house. If you employ those who stated the fire (professional arsonists) to combat the blaze you are unlikely to save the house.
I don't want to lynch anyone and I certainly don't want the government to control even more resources of the economy (nationalization). I do want the malinvestment liquidated . I want what could be productive capital to escape the clutches of zombie institutions , brain dead regulators and those in thrall to obviously wrong theories of risk . I want that capital to go to those who can employ it PROFITABLY. We need that capital working to grow. I want the ridiculous theories and assumptions that caused this mess to be ridiculed . I want the institutions these theories and assumptions engendered (Freddie,Fannie etc.) to be liquidated .I want the proponents of these ideas to be cast from on high .
By any measure macro economics has FAILED. Sanity demands that we look elsewhere for our solutions .
http://blogs.ft.com/maverecon/2009/03/the-unfortunate-uselessness-of-most-state-of-the-art-academic-monetary-economics/#more-667
You say: "The failed institutions are but a microcosm of the system and society. You cannot excise one, without the other. They reflect the society and couldn't exist without it."
You cant be serious . Society existed without Freddie and before that it existed without Fannie.
Do we want private banks that know the mortgagee and property and hold the mortgages they originate or do we want originators with no interest in the outcome of the mortgage who take their fee and then sell to Freddie and/or Fannie. We can't have both (because Freddie/Fannie have lower cost of capital than banks do) . Either way institutions that reflect society will vanish .
Am I unfair in understanding you to hold that : our current understanding of economics is perfect and our existing institutions optimal ?
Absolute tripe. Could only have been written by a capital markets person, for whom money is not an illusion but the only reality.
Cassandra - pardonnez moi, my comment was unnecessarily strident.
Suffice it to say I don't buy the analogy (from this you may infer that I spent much of the past twenty-five years living on a less-than-median household income, living within my means, didn't really partake of the boom, don't have the toys and don't feel the need for atonement...whether this is true or not, you get the picture).
Cheers,
Benign
So, if I was reading the Daily Reckoning for these past five years and telling anyone who would listen I thought the housing-bubble-mortgage-equity party would someday end badly, may I excuse myself from The Tab?
Sadly, no.
It sucks, yes, but short of expatriating to, say The Falklands, you (and I) along with a reasonable, but small minority, are, as they say - buggered. On the bright-side, you;re buggered along with everyone else.
Cassandra:
You can't stop the house from burning while the arsonists are still setting torches.
The devil is always in the details. Details matter. There is a huge gap between having good intentions for the general welfare and coming up with practical policy solutions to promote that welfare. Simply saying the details bore you so your going to leave it up to the authorities is a cop out, an especially ironic one after you've already resorted to a Nazi reference. If you want to trust Larry Summers and Co. to get it right then your responsible for all of his actions (Obama is too for trusting him). Don't be surprised if you regret that trust a few years down the line.
The current rescue plans are called "bailouts" because that is what they are. They are throwing money into a financial system wholeheartedly incapable of channeling it productively. Not only might it be ineffective, but it may actually harm society. Heads I win tails you lose on steroids is almost certain to lead to even great gambling and distortion. There is a huge difference between prudent nationalization now and panic nationalization later, things can get a lot worse. We should call current plans what they are. They are bad plans would should end up in the trash so we can come up with better ones.
Lastly, reform and rescue go hand in hand. A bad rescue means bad reform. GS is a great example. They funneled themselves billions through AIG which they now want to use to repay the TARP and through off its yoke so they can get back to their old ways. Our best bet for reform is now, while the financial industry is weak. If we give them a few trillion and they don't need it us anymore its right back to lobbying and back scratching. Which is sad because we need to come out of this with a smaller financial sector, which in fact means some of these companies getting broken up and going under.
All the good intentions in the world are pretty meaningless unless your willing to get down in the shit of policy making and accomplish things.
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