NPR
interviewed an economist from the AEI, and even he couldn't deny that
European austerity hurt growth and what they needed instead was
Keynesian stimulus.
This is no big news to those who have been following this
issue, but it's good to see almost universal agreement that austerity
was the main driver of Europe's double-dip and likely deeper current
recession. Only head-in-the-sand EU officials are saying that austerity
was necessary to "stabilize the financial markets" and give investors
confidence to buy PIIGS bonds. But that is insincere, as it was likely
the ECB's concurrent quantitative easing measures and "whatever it
takes" declaration (after years of indecision and deliberation) that
calmed the markets.
Showing posts with label debt. Show all posts
Showing posts with label debt. Show all posts
Friday, May 31, 2013
European austerity has been an utter failure
Thursday, April 25, 2013
Elite Harvard debt-hawk econ profs sunk by a public school grad student down the street
A seminal academic paper by Reinhardt & Rogoff has been
used by conservative central bankers, politicians, and pundits from here
to the EU to justify austerity cuts (because their analysis showed that
higher sovereign debt levels result in low or even negative GDP growth). So we
have to cut in order to have growth. But it turns out that they were
wrong (either deliberately or not).
A UMass Amherst econ grad student was trying to reproduce
their results, and R&R were kind enough to give him their original
spreadsheet. Well it turned out that there were "coding errors,
selective exclusion of available data, and unconventional weighting of
summary statistics", and after those were rectified, then their original
conclusions were invalidated. Now it looks like countries with even
>90% debt/GDP can still have 2.2% GDP growth (wouldn't we love to
have that much growth, and our carried debt is about 100% GDP). 
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Yeah, this whole episode has been pretty illuminating.
The
paper was pretty clearly shenanigans from day one. The question is the
link between slower growth and higher debt. It's fairly obvious that
slower growth can cause higher debt: if you make less money than you
expect, your debt will generally be higher. R-R were attempting to prove
causality in the opposite direction, that having more debt causes
slower growth. That would be an interesting result. But you can't just
demonstrate it by showing there's a correlation between debt and growth,
because correlation doesn't tell us in which direction the causation
runs, and we've got a plausible theoretical story for why it should run
from slow growth to higher debt. So even if their math were tip top,
they still wouldn't have proven what the austerians wanted them to have
proven.
The so-called "coding error" actually
isn't a big factor. Of the overall error, from R-R's -0.1 to the
corrected 2.2, roughly 0.1 of that is the "coding error." The rest is
their selective picking of the data and their weird weightings (they
took the average growth rate for each "episode" and averaged those all
together, ignoring duration, so a 10-year span of 2% growth in one
country and a 1-year span of -4% growth in another country averaged to
-1%). But the "coding error" is so easy to explain and so asinine that
it makes for great TV. Honestly, if they hadn't made that error, this
probably wouldn't have been nearly as big a story, even though that was a
tiny error, and it's clearly an honest mistake where the others smack
of cherry-picking your data and methodology to fit pre-selected
conclusions.
Also, I think it's sad that this
gets called a "coding error." The issue is that they had an Excel
formula which should have been "AVG(E30:E49)", and instead they put
"AVG(E30:E44)" (44 instead of 49). That's not "coding." It's data entry.
A "formula error" at best. But it's not math or computer science that
we're talking about here. They just typed the wrong number into the
cell.
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I didn't read the original R&R paper and haven't followed their story, but as you said - it seems pretty ridiculous that they could make a counter-intuitive causation argument while only armed with heavily massaged archival data that happened to show a correlation. Yeah, I've seen plenty of that data cherry-picking and massaging until the result is pleasing (I have unfortunately participated in it too).
LOL, "coding" sounds cooler than "typo", and technically Excel is a programming language - albeit a very graphical, limited one. :) Most Americans can't perform a square root without Google. Frankly I have rarely seen old folks (and esp. profs) who are competent in Excel - I wonder if R&R actually made the goof themselves, or one of their student slaves instead and it wasn't detected?
I guess the lesson is: don't base sweeping policy on a single controversial source, even if it's from famous authors. Try to get a 2nd or 3rd validation, and even better - research all the counter-arguments to see if they have merit. But I guess that would be too rigorous and "fair and balanced" for ideologues.
Well another lesson is - NEVER give out your data analysis files except under subpoena! And then you might want to wipe your hard drive first and say it was "user error". :)
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Agreed. I think for all peer-reviewed academic publications (and
for-the-public gov't studies too), all the raw data and analyses should
be made available. Let enthusiasts pour over it at their leisure, and if
the authors did their work properly, they should have nothing to hide.
To err is human, to leave errors undetected to cause harm day after day
is American.
But I think the debt-GDP growth connection is clearly not
open-and-shut (even when that paper was published, otherwise all
nations should have adopted austerity), and case-specific factors can
affect things. Japan has been at or near the top in terms of debt/GDP
for some time. They also had a lost generation and a decade-long
"recession", arguably because the gov't didn't spend ENOUGH on Keynesian
stimuli. But Japan's sovereign debt was mostly internal (Japan owed its
people, not China like us) and at very low interest rates, so the
"burden of debt" was not as risky and crippling as say Greece, where
Germany is charging blood money rates (maybe for good reason since they
are a higher default risk, but I think their repayment terms are more
punitive than prudent). I guess using a company as an analogy, leveraging to the hilt is not a problem as long as you use the money on "smart" projects that give you returns well in excess of your borrowing costs. But as we saw, leverage can blow up at times when interest rates go up or income declines (then you need to take out new, worse loans to pay off your old loans that are coming due). But that is the case that J described: lower growth/revenue leads to more debt, not the other way around.
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First, china owns a very small amount of our debt. Strong majority is govt or us public owned.
Also, low revenue causes debt just as much as it causes
austerity. Lower revenue means you either spend less to compensate or
dont but it need not cause debt.
Of course the reality is the us is functionally incapable of significantly reducing spending so sort of a moot point.
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Well if you look at new borrowing over the last 10 years, I
think China and the Middle East hold more share than domestic buyers
(recession caused flight to perceived safety and higher demand for US
Treasuries, which drove down yields). But overall, yes the biggest investor of US debt is Social Security.
I agree, if we lack the political will to cut spending
(meaning the big drivers of spending, like Medicare and defense), it is a
challenge - but then there is always the revenue side of things. Though
there seems to be just as little will to tackle tax reforms too. I forget which journalist/historian it was, but he was saying that Athens and Rome's declines exhibited some of the same features: heavy military spending with little strategic gains, political corruption and gridlock, and social apathy to hold leaders to account.
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Thursday, April 11, 2013
David Stockman on the debt, Fed, etc.
http://www.huffingtonpost.com/
Clearly our financial and monetary woes are not a Democrat or Republican problem. They are an American problem (to borrow an Obam-ism). Both parties are now in love with irrational tax cuts and loopholes as the best way to bribe voters (especially rich voters). Both parties think that we need to spend as much on defense as the Pentagon asks for (like asking your kid the open ended question "What do you want for Xmas?" and being surprised when they say "Unicorn!!"), even though our military is built to fight threats that do no exist. Also, a moral hazard associated with a bloated military is the fact that we may feel more inclined to use it because we paid for it. If we had a scaled-down military on par with Scandinavia and such, then it would have been obvious that we couldn't occupy Afghanistan or Iraq. In that case, we would have devised more feasible, economical solutions to fight terrorism. And probably they would have been just as effective if not more so.
--------
I think Stockman is basically wrong. If you're concerned about the
long-term health of the nation, what you need to be worried about is
getting us out of this recession and repairing the damage done. There
was a recent paper looking at the job health of the long-term
unemployed, and the basic answer is that being out of work for 6+ months
doesn't just mean you lose that time. It impacts you essentially for
the rest of your career. There's an understandable stigma about hiring
people who've been out of work for long periods, which makes it harder
to get back into the workforce, when you come back it's at a lower role,
etc. This is a big deal for recent college grads as well: young people
who graduated in the last 3-5 years have been screwed, big-time, by our
economy, and may never get back on track. This idea that reducing the
deficit is "for the benefit of young people" is shenanigans.
On Social Security …
Legally,
the Social Security Trust Fund is a separate organization from the
federal government. It has its own dedicated revenue (payroll tax) and
expenses. For a long time it ran a surplus, bringing in more revenue
than it paid out. It invested that surplus prudently, in the world's
safest and most liquid asset class: US Treasury Bonds. Anyone who calls a
US Treasury Bond an IOU, like we're talking about a 10-year old's
lemonade stand borrowing money for sugar, is deeply misinformed or
trying to scam you. These are the highest-quality assets in the world.
Now,
it's possible that the US government could choose to default on those
bonds, causing Social Security to lose its trust fund. But a default on
US Treasuries would be catastrophic. The debt ceiling threat was over a
short-term, technical default, with every understanding that the debt
would eventually be paid, and even that roiled financial markets. A
decision to default on the US debt would, with very little hyperbole,
end the world financial system. Every bank, hedge fund, money market
fund, etc, would be insolvent.
Moreover, the
folks who talk about Treasuries as IOUs describe this as being specific
to Social Security, so now you're talking about a selective default on
just the debt held by the Social Security Trust Fund. That is, the
government (I think it's under Sec-Treasury, so executive branch) would
have to decide to default only on debt to US seniors, while continuing
to pay the Treasuries owned by China, by investment banks, etc. Can you
imagine the political fallout, from deciding to stiff just seniors? That
President's political party would likely become a swear word (if
seniors swore).
Social Security has money to
pay all projected benefits through 2037, at which point the oldest of
the boomers would be 92. Beyond that, it's projected to be able to pay
80% of projected benefits through the end of the CBO's 75 year scoring
window (nevermind that a 75 year economic projection is usually
shenanigans - imagine someone in 1938 projecting US revenue in 2013). By
law it cannot impact the US debt when it runs out of money. Now,
Congress could decide to make up the shortfall out of general spending,
but that's a choice they'd have to make (and political coalition they'd
have to build).
Social Security is fine. If you
want to talk about long-term US government debt problems, it's
basically a story of rising healthcare costs.
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Yeah I find that narrative more believable and realistic than what the typical conservatives are claiming. As you said, there is no political or legal way that the US gov't could default just on Treasuries held by SS and keep its commitments to the other holders. That is good to know that SS is independent of the debt.
But I think Stockman's other point was regarding working people and the payroll tax that funds SS. It is the largest single tax item the typical young-to-mid career American has to pay, and does reduce purchasing power and ability to save/invest. Personally, I don't think that anyone with a household net worth of like >$500K (excluding primary residence and trusts) at age 65 should get any SS benefits unless they encounter severe financial distress later. They paid into the system, but now others need it more and they will probably be fine. Call it patriotic sacrifice. That way the "truly poor" seniors can get increased benefits (SS has fallen behind on COLA adjustments, and most seniors can't live "securely" on $1,100/month minus garnishing for Medicare premiums). The wealthy seniors will be OK, the poorer seniors will be more secure (lowering the burden of care on their progeny too), and the working people will have lower payroll taxes - which should stimulate growth.
Also agreed that pretty much the entire conservative agenda isn't designed to help future generations and often screws them, so I doubt their debt ideas are so forward thinking.
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The problem with means testing is that it doesn't really save much money, unless you set the threshold very low. SS benefits cap out pretty quick, so cutting off benefits for the top 1% only saves you 1-1.5% of the benefits.
The "is it Boomers" question is
actually pretty interesting. It's always fun asking people why we're
just talking about SS running out of money now, when the Baby Boom would
have been obvious to anyone in a maternity ward starting about 1946
(the standard answer is "government can't get anything done"). But
actually back in the 80s we solved the SS-demographic problem. Reagan
convened a blue-ribbon council with a big complicated name, which most
people knew as the Greenspan Commission after its head (before his Fed
days). They were supposed to figure out how to make SS handle the baby
boom demographic shift, they recommended a payroll tax increase, their
recommendations were accepted, and the problem was solved. Say what you
will about Greenspan, but the dude can do math.
So
why do we have this problem? The liberal answer is that it has to do
with income inequality. Through the 1970s, GDP growth was broadly
shared; post-80s most of the growth happened at the top of the income
spectrum. This impacts SS because it means that in Greenspan's
projections, GDP growth would occur for people below the SS payroll tax
cap, and get taxed. In fact, the additional income happened above the
cap, so it didn't get taxed. I don't know what the conservative
explanation is.
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Pardon my means testing ignorance. LOL the conservative explanation is "blame the liberals and takers". In a sense they are right, but they have the wrong takers.
“When [Social Security] was developed, 50 percent of seniors lived in poverty. Today, poverty among seniors is too high, but that number is ten percent. Social Security has done exactly what it was designed to do!” - Bernie Sanders
If it's the case that only 10% of seniors are poor these days, then means testing should save a lot more, right?
http://thinkprogress.org/
As you said, raise or do away with the cap to get the system more in line with Greenspan's projections. In 2012, 4.2% of a worker's first $110K of wages went to FICA taxes. Let's say the avg. salary of the top 5% of workers is $250K (that may not be very accurate, but the 95th percentile of wages was $100K in 2006) and the US labor force is 150M. At a 4.2% payroll tax rate and a $110K cap, we are missing out on $44.1B per year. Total SS+Medicare revenue to the gov't was $800B in 2011. Subtracting Medicare and employer contributions, the employee portion of SS revenue is about $268B (SS is about 2/3 of the $800B, and employer-employee split is about 50/50). So lifting the wage cap would make SS employee revenue increase 16%.
The tax is very unprogressive. I would rather have employers and employees contribute only 1 or 2% of their first $40K of wages towards SS, and then the % grows above that like income taxes. 4% for $40-100K, 10% from $100-200K, 20% above that. Not that harsh IMO, but of course it is not going to happen. A worker pays AT MOST $7K to SS in a year. That is ludicrous for people making $200K+. The wage cap has gone up about 3-5% yearly (it was static during the recession), yet income for the top 1% have growth a lot more than 3-5% per annum. It doesn't make sense to economically burden the most productive members of society to subsidize the elderly who often have higher net worth. If you let the younger generations prosper, they won't need to depend on SS as much in the future. But as J said, the much bigger problem is Medicare. I also would advocate a progressive Medicare tax and much reduced benefits for seniors in higher wealth brackets (Obama is proposing this I think, but I'm sure it's meager).
http://en.wikipedia.org/wiki/
http://www.financialsense.com/
http://www.heritage.org/
http://www.ehow.com/how_
Wednesday, November 9, 2011
How the Greek elites contributed to the crisis
Sadly, it's a familiar story. The most powerful 30 or so families in Greece have drastically augmented their wealth in the last couple decades. Due to deregulation and whatnot, they bought up most of the nation's mass media in order to influence the mainstream population into supporting their agenda. In addition, they of course bought politicians, especially from Papandreou's opposition: the more conservative New Democracy party. Papandreou's PASOK socialist party is also infiltrated with pro-rich stooges, who along with the conservatives have fought Papandreou's tax reform efforts to curtail evasion by the rich (twisting the issue as Papandreou wanting to put the squeeze on all Greeks). And as Papandreou is now trying to do right for the country and not just serving the oligarchs or EU powers, he will soon be out of a job and probably replaced by a company man.
As with the US deficit debate, a Greek solution has to include some cuts and some new revenues. In both nations, the rich are waging a propaganda war to block tax reform, claiming the usual nonsense that it will "kill jobs and hurt the hard-working small business owner," when really they're just looking after their own finances at the expense of the 99%. But if the rich in Greece paid their fair share, LITERALLY they would not have a fiscal crisis in the long term. Though as we've discussed, it's a structural problem and they've dug such a hole for themselves now that it's probably too late to avoid default, even if evasion was magically eradicated.
Bottom line, the riots aren't the problem, and "bloated public sector pay & services" isn't either. They are red herrings of the underlying breakdown in the social contract between citizens and government. Some say you can't blame the rich for all our problems, but in Greece's case it's fairly accurate. If the rich believed in good government, they have to power to put the people in place to make it happen. But they prosper from dysfunction, injustice, and lack of accountability, so that's what the people get. The Greek case should be a major warning to Americans, but unfortunately many Americans can't locate Greece on a map (I admit that I've been following only recently). We keep hearing from US leaders and pundits that "we're not Greece," implying that we exhibit some of their problems but we're inherently better able to solve them, because we're Americans. I'm not so sure anymore. It most certainly is class warfare there and here, except it's the rich who have declared war on the rest, and they're winning and pressing their advantage. Knowing this, who's crazier: the folks rioting in the streets, or those who stay home and just accept it?
Monday, November 7, 2011
Whom to blame for the Greek crisis: lazy Greeks or greedy Goldman?
It is very ignorant and bigoted for people to knee-jerk blame the Greek crisis on the Greek people. If Greeks were somehow predisposed to be lazy, foolish, and profligate, then this crisis would have happened much earlier, and more often, to them. I don't know Greek economic history, but I doubt that is the case (and probably the boom-bust cycle has been worse on the average American since 1900). On the other hand, Argentina had a recent debt crisis, and now they are prospering (amazingly, mostly due to soybean exports to China). Industrial titans like Japan and Korea did too (and Japan still hasn't come out of its funk) - do we think of them as lazy? Despite our assumptions, even the US has defaulted in the past. Check out the below list of sovereign defaults over history - in fact the Greeks are far from being the worst culprits. It's ironic that France-Germany (who now tsk-tsk Greece as they hold the EU purse-strings) have had more defaults than Greece, probably due to their higher propensities to wage war.
http://en.wikipedia.org/wiki/
The common denominators in recent sovereign debt crises were deregulation (as a part of overall lax gov't oversight and risky growth) plus greedy-as-hell foreign investment banks. The average honest people had nothing to do with it, just like the US subprime crisis. Sure they were complicit in it and didn't have the foresight to stop it, but neither did most PhD economists, gov't ministers, and big-time investors, until it was too late. Blaming the common people is a shameful cop-out, like blaming the victims of Katrina. The ordinary Greeks will suffer unfairly and terribly from the proposed austerity measures, paying for the sins of their leaders and offering their pound of flesh to satisfy the foreign banks' bottom lines. And as we well know by now, austerity is just about the worst thing you can impose on a fragile, recessionary economy - unless you just want to restructure (read: blow up the system) and start anew with a leaner model.
Markets are getting saturated, and it's harder for these big banks to exploit inefficiencies and reap easy profits from "traditional investing", since it's become more transparent, computerized, and global. So they had to "innovate" and get into new markets like pay-day loans, student, and sovereign debt. Now aggregate student debt in the US is even larger than credit card debt! Sharks like Goldman don't ignore such untapped opportunities. For sovereign debt, the Greek crisis is only news because the risk got spread to so many key players (via CDS's) that it is threatening the EU and global economy. But "vulture funds" (and even USAID) have been raping the Third World for years, and some still are with impunity. It's really sick, and the short-sellers are making it even harder to rescue distressed nations.
http://en.wikipedia.org/wiki/
http://en.wikipedia.org/wiki/
Also, here is an interview of Michael Lewis' new book about the Greek crisis and the "new Third World" emerging:
http://www.npr.org/2011/10/04/
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Definitely not to defend Goldman Sachs in this case (they are pretty much guilty as charged), but Greece has spent about 50% of the time since 1800 in a state of default (i.e. not repaying its debts in full). That number puts it about in banana republic territory: http://blogs.reuters.com/the-
I think what this global crisis has taught us is that financial "innovation" and deregulation has allowed previously self-contained types of problems (locally overvalued housing markets, sovereign defaults of small states) to spread like wildfire as banks that would have previously had no exposure to these events are now hopelessly intertwined (and are often the same as!) with over-leveraged players making all-in bets on the outcomes of these seemingly minor economic events.
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To add to that the link that shows the US and many other western nations defaulting was based from a paper on domestic debt. The unique thing here is the interconnectedness of Greece's, and really, the worlds debt. No first world nation has defaulted on its debt since about WW1 and they reduced their domestic debt.
additionally...
http://en.wikipedia.org/wiki/
http://en.wikipedia.org/wiki/
from the tax evasion link...in 2005 it was estimated that evasion was at 49%. 2012 tax revenue is expected to be 52.7 billion. Their predicted debt in 2012 will be ~ 350 billion. So...if there evasion is in the range of 40-50% we are talking about their annually losing the ability to pay off 10% or more of their TOTAL debt. This is based ONLY on tax evasion. They are certainly not lazy but they are apparently unwilling to personally pay for the government benefits they are rioting in the streets to keep.
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More from here: http://www.theatlantic.com/
I think M (and the article above) are basically right, that there is a broken social compact between the people and the state. I think the reasons are more complex than the article states - Greece has been beset by a long history of conflict between the extreme left and the extreme right (and foreign intervention on top of it), so there is probably less unity-we are all in this together and more of we don't trust the government/other side than in most other European countries.
However, Greece and other countries have been down this road before (see T's account of the history of sovereign defaults) - getting Greece back to sustainable debt levels requires writing off about the same amount of debt the US had to write off for the S&L scandal 20 years ago (some $100 billion dollars) - not chump change in the slightest but it should be digestible to the world financial system.
The problem is that this time, the banks that hold the debt are so undercapitalized that writing off the debt might mean that they fail, and if BNP Paribas or some other major Euro bank were to fail, that might be the start of Lehman: Euro Edition. It's a typical story in this financial crises - banks getting bigger that their failure would be a systemic risk, yet at the same time they got bigger, they grew more heavily leveraged and *less* capitalized.
So now the question is who pays. Greece, as amply noted, can't pay it's current debt load even if it implemented the Euro Central Bank's dream austerity package. The Euro banks that hold most of the Greek notes can't afford to pay by writing off the debts. The French and German taxpayers, probably the only ones that can really afford to put up the money to cover Greek debt, definitely don't want to pay. No one can force any of the other parties to actually pay, so you have this continual kicking of the can down the road as each party slowly accepts bits of responsibility for taking the hit.
The blame here, as with the case of most of the financial crisis, is largely diffuse. Of course the Greeks shouldn't have been so profligate in their spending, but who's the bigger sucker - the irresponsible spender or the fool that lent him the money? The banks shoulder a lot of the blame, as they should be secure enough to suffer the (relatively) modest kind of hit that this default brings on. On the other hand, it's tough for a bank to be capitalized enough to survive a major world financial crisis and then a major developed European economy lying for years about its credit worthiness (i.e. Greece was lying about its debt levels for years).
Mostly, though, I think this is an indictment of the political failings of the EU as an institution. The S&L crisis forced the US taxpayer to intervene and eat a lot of bad debts, but the US did it and the financial system survived. The buck has to stop somewhere and now that the disaster has occurred you need resolute leadership that can save the system first and sort out who to prosecute/blame later. The EU lacks this, and hence why you have a major run on the other PIIGS, as investors are getting nervous that if the EU can't deal with the relatively small case of Greece, if Italy or Spain were to get in trouble you really would get a major financial meltdown in Europe.
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Thanks, Gents. I agree that Greece isn't a model of fiscal responsibility, but the mistake was the EC's lack of due diligence before granting them EU membership. The guy who bets on the Clippers to win the championship doesn't get to blame the Clippers when they predictably fall short. Not that I'm accusing you of this, but blanket blame of "the Greek people" is ridiculous (and much more negative media coverage of Greek rioters vs. their stupid creditors is a form of implicit blame I think). Sure the Greeks don't have the reputation of being efficiency freaks like the Germans or workaholics like Americans/Koreans, but they are not a bunch of freeloaders on welfare either. And even if they were, that shouldn't be enough to compromise the entire EU and send global markets reeling at the mention of a referendum vote.
http://finance.yahoo.com/
Yes, tax evasion is a problem - and it is a problem in many stronger economies besides Greece. Tax evasion in the US (mostly by businesses and the rich of course) costs us about $3T/year. And that is on top of the very generous and misplaced tax deductions and other perks that are 100% legal. US federal tax revenue in recent history is about 20% GDP, so if US GDP was $14.7T in 2010, that means we collected about $2.94T in taxes. So America's evasion % is similar to that of Greece! Bottom line, people will pay less if they can get away with it. Poorly structured tax laws and incentive programs have led to the behavior we're witnessing, either in the US or Greece. And like here, the majority of the Greek evasions is from the upper class parking their earnings in Swiss banks and whatnot. The people rioting in the streets are not the big culprits. So for sure, Greece is getting assaulted from outside creditors now, but their own elites have been screwing them for decades, with their dysfunctional gov't complicit most of the time. But no one held a gun to Soc Gen's head to make them loan Greece money (just like Countrywide approving a $400K mortgage to a part-time janitor). They should have known better, but the incentives and controls were all out of whack.
"[Greeks] are apparently unwilling to personally pay for the government benefits they are rioting in the streets to keep." Maybe true, but they are definitely not the only ones. Again, if the rich paid "their fair share", a lot of these problems wouldn't be as severe. But the elites and big financial institutions pushed gov't around and ultimately got their way at the expense of "the 99%". Like the Colonial Era, I find it so maddening that the big powers (used to be empires, now are financial institutions) are engaged in this global rivalry, where they don't care how many nations and peoples they destroy just to win the game. An honest Greek won't be able to retire in security, or a disabled American won't be able to get a caretaker, just because some asshole banker met his insane quarterly returns target and expects his big bonus.
Here's a Stanford study ranking nations for sov. fiscal responsibility:
http://www.scribd.com/doc/
Greece is #34 of the 34 OECD+BRIC nations analyzed, while the US is #28 (if we fully implement the Fiscal Commission's debt reduction plans, we'll jump to #8 according to them). The best nations are AUS, NZ, EST, SWE, CHINA, and LUX. But those nations are not like fundamentally more budget-savvy or anything. Some of it was lucky timing. AUS, NZ, and EST all had fiscal issues a decade or two ago during a worldwide growth economy, so they restructured during generally fat years (when we didn't have a shortage of credit, capitalized banks, and economic confidence) and are now better positioned to weather the current storm. CHINA is a singular case protected by surplus from their exports. LUX is just a small, rich country filled with rich people, so they don't need much gov't spending. SWE has very high tax rates and is one of the most high-functioning societies in history. Turn back the clock and give Greece some of these favorable conditions, and maybe we'd have a much different result. And in a couple decades, this list is probably going to look very different.
But like A said, if tiny Greece is causing this much disruption to the EU, I wonder how they will handle the rest of PIIGS and their almost certain default issues in the near future. Or maybe if we're glass-half-full types, the lessons the EU learned from the Greece crisis (assuming a positive outcome) will allow them to better handle the future ones? But I worry that after the US S&L crisis, the financial players and their gov't minions took notice, and then set about to do everything they could to avoid a repeat. Their behavior only grew riskier, but now they have structurally insulated themselves from punishment (either legal or financial), in general.
Wednesday, October 5, 2011
Battle of the billionaires
It's cool when the rich go to war against each other, though of course I'm rooting for the smart one who doesn't hack cell phones of victims' families. The Economist agreed with Buffett that the US tax code needs to be fundamentally reformed by ending most deductions (that mostly benefit the rich) and taxing cap. gains heavier than wages. That way real labor and productivity won't be penalized, but speculation and excessive trading will (that benefits few and may put the entire economy at risk). Can anyone give me a cogent argument why hedge fund managers' compensation (not their own investments, but pay from their firm) deserves to be considered cap. gains? Bush-enomics. It's probably true that taxing the rich won't help our deficit situation much, but it signals a strong message to the market so the dysfunctional incentives structure still widespread in Wall St. and upper America may change.
It's interesting how quickly the rich mobilize their media and political minions the minute anyone of import barely raises the issue of tax hikes. That reveals their defensiveness/awareness of the preferential treatment they're getting, and how they know it's a scam that can't last, no matter how gullible they think we are.
http://www.economist.com/
Monday, August 8, 2011
Shooting down the GOP argument against taxes
http://www.kqed.org/a/forum/R201108050900
The economists on the program (not liberal wackos) pretty much obliterate the GOP argument against any new revenue generation as part of a bigger plan to reduce national debt and put us on a better economic trajectory. The "educated people's" general strategy for economic recovery is like the opposite of the Tea Party's: increase short-term gov't spending (for infrastructure and other helpful investments), increase exports, and reform taxes (which will pay for that spending and also cut into our debt). And of course Warren Buffet, the poster child of all the positives of our free market, thinks taxes on high earners are too low as well. Taxing the incomes of the rich may discourage hard work and innovation to some extent (but not like the USSR), though there's little evidence that it's a net loss for society, especially considering all the good we could do with the extra revenue (even in the hands of inefficient Uncle Sam). It's true that the rich currently pay a disproportionate % of total income taxes, but that's how it's supposed to be. They also hold a disproportionate % of total national wealth, and that % is growing a lot faster than their tax outlays.
I don't know what is the deal with the GOP and taxes. They pay their country club fees, their PTA dues, and AMEX black memberships, don't they? We have to pay for the services and benefits we enjoy, right? Even if their vision of small gov't materializes, some private (profit seeking) firms will have to step in to meet the social demand for safety, conveniences, etc. If the rich aren't paying gov't for that stuff, then they'll have to pay Acme Corp. that may not have the customer's best interests at heart. Based on the track record, I would mostly prefer public service providers. The USDA and NPS have screwed over far fewer Americans over the years than Enron and Countrywide. We can't expect to live in a first world nation funded at third world levels.
Apart from raising some income taxes, ending some tax deductions is crucial. The mortgage interest deduction is the biggest culprit. I regret that I use it, but I wouldn't mind to see it disappear in a package of smart reforms. The interest deduction (and most itemized deductions in fact) just benefits select industries, political interests, and the rich at the expense of other national needs. The wealthy can hire accountants to best exploit the tax laws, and the more they spend, the more they get back (which encourages frivolous over-consumption and bubble creation). Many lower earning, less educated Americans are ignorant on some ways they could reduce their tax burden, and have trouble navigating our ridiculously complex tax code.
Does it make sense that the federal limit on full interest deduction for a married-filing-jointly couple is a mortgage of $1M? That's nuts, especially when the US median home price in 2010 was $185K. And you can even deduct on a second home that isn't heavily rented out. Those folks don't need a tax break. In general, affordable home ownership is good for our society, but of course it's not for everyone's budget. I could accept a meager interest deduction scaled vs. one's adjusted gross income and local median home price, but no way for entire jumbo loans, withdrawing equity to play the market, and any high earner. The rich are the last people who need rewards for purchasing stuff. Otherwise it incentivizes over-leveraging and buying too much real estate for one's budget. If the rich want a sweet crib, then why not pay more cash down rather than getting a reward for borrowing a huge sum? And now interest rates are very low (if your FICO score grants you access to credit), so it's not like interest is killing the average fixed-rate homeowner (assuming old mortgages can re-fi). The mortgage interest deduction is costing the US (that means you and I) about $90B/year. That's pretty much the size of spending cuts over 10 years that Obama-Boehner agreed to last week. Sure the real estate and banking industries would take a hit from this change, and maybe home prices would dip, but all that extra revenue could keep more people working/spending, and investments in infrastructure will yield future returns for everyone. It's better than a hand-out to upper-middle-class and rich homeowners.
http://www.irs.gov/publications/p936/ar02.html
http://www.washingtonpost.com/wp-dyn/content/article/2011/01/21/AR2011012102256.html
Unfortunately a lot of schedule A deductions follow this pattern: a net loss for America. This is also somewhat true for educational incentives. America just doesn't get the most bang for buck by helping people attend college, sorry Dems. It's something people are going to do anyway, so why encourage it? And for those who aren't ready for college but get suckered in by shady Univ. Phoenix recruiters, they are going to drop out saddled with tuition debt, which hurts everyone but Phoenix. I know education is an investment and cultural priority, but probably our K-12 system needs the help more. Yes colleges are getting pricier and more competitive, but why credit families making more than $100K/year? If they care about their kids' futures, they will save money for school instead of taking another trip to Maui. As you can see, the poor aren't the only ones depending on "gov't handouts". I fully believe that the qualified poor should get education assistance to help climb the ladder, but deductions for the middle class are not the best use of funds (though mortgage interest is still way worse than this).
And maybe we as a country are just consuming too much, and should save better to take pressure off some gov't services. China's economy is growing like gangbusters, yet the gov't:consumer spending ratio is much higher than ours. This won't last forever, and of course China is an exports economy, but it just shows that it's possible. Taxes always lower total economic efficiency ("deadweight loss"), but some revenues are necessary so we can have a civilization. And some taxes hurt more than others. We should be taxing consumption, not production. Many economists feel that the value-added tax is the best way to go. It's not that different, and theoretically generates the same revenue as sales tax, but creates less distortion in incentives. Firms only pay tax on the gross margin or "added value" of their output (sales minus costs of production) and get tax breaks on exports, while the end-user pays VAT on the purchase price of the goods/services. So the system doesn't unfairly punish producers, and encourages consumers to buy more responsibly. It is not perfect, and there are some regressive elements to it, but maybe the poor (who still need to buy some stuff) could be compensated by lower income taxes and subsidies on essentials.
http://en.wikipedia.org/wiki/Value_added_tax
But the problem is, all these tax arguments can make perfect logical and economic sense (and be fully constitutional), but if they conflict with the conservative ideology of the role of taxes in our culture, then they are political non-starters. Obama has mentioned tax reform in his speech today and during his 2011 SOU address, but we probably won't do anything about it. It's like racism, seriously. You can date the nicest, cutest, smartest, most honorable black man in the world, but your parents still won't approve when you bring him home. Heck a racist could be trapped in a burning building, and refuse to be saved by a black firefighter. That's what the GOP is like, totally irrational. It just doesn't make sense to unconditionally reject something that can be good (or at least necessary) for our survival.
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Sorry, just had to add this:
Check out these idiotic news headlines (attachment). The press is suggesting (maybe inadvertently) that Monday's terrible stock losses are totally due to the S&P downgrade. This is ridiculous for several reasons, but I'm sure the deficit-hawks in the GOP will jump all over this crap and twist its meaning. First, if US debt is somehow less safe now, then why has the yield dropped again as investors are dumping stocks in favor of US bonds (and gold)? That shows the people with the money don't care about what S&P did. Second, Moody's and Fitch didn't agree with S&P's rating (and neither did Warren Buffet), so it's possible that S&P are flat wrong. Third, no credible entity should care how the ratings agencies score them anyway (who the hell cares if we are AAA or AA+, especially when those ratings aren't quantitative and both are still very good?). Ratings are less and less important as pension funds and other big investors rely on their own research. Lastly, this S&P downgrade was not a surprise. They were pretty much "threatening" to do this weeks ago unless the gov't could agree on $4T in cuts (which is a tall order). So why didn't the markets react then?
http://finance.yahoo.com/news/Dow-plunges-more-than-634-apf-1960115615.html?x=0
"The market is under a lot of stress that really has little to do with the downgrade." - $20B bond fund manager
If this is so, then Yahoo! picked horribly misleading headlines, and unfortunately headlines may be all that some readers see.
Correlation doesn't prove causation. The markets were headed down today even if S&P did nothing. The downgrade surely didn't help make anyone feel better, but it's our stalled economic recovery and worries about Europe that are fueling most of the losses. Probably investors are more concerned about Washington's inability to enact changes and react constructively and swiftly to crises more than our actual debt numbers.
So the Tea Party should think about that too if they truly love this country. Or do you think the GOP obstructionism and ultimatums are deliberately designed to tank the US economy leading up to the 2012 election? Then they will try to pin our troubles on the Dems and retake the WH. Because our economy will eventually improve of course, and they don't want to allow Obama to take credit (it's bad enough that the guy took down Osama). So if Obama isn't an idiot, he has to stop playing nice and call out the GOP on this, and I think many sensible voters will side with him. If GOPers are scared to raise taxes and face voter anger, they should also fear losing their jobs if they fail to accomplish anything, or worse block efforts to help the American people.
I know this theory sounds horrible, but it wouldn't be the first time. There was an investigation into whether the Reagan campaign worked with the Pentagon to delay the Iran hostage crisis resolution until after he beat Carter in the 1980 election, so Jimmy couldn't get credit for it. A gov't investigation later refuted the claim, but many high-level people still believe it, and the facts of the case are quite intriguing.
http://en.wikipedia.org/wiki/October_surprise_conspiracy_theory
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http://fivethirtyeight.blogs.nytimes.com/2011/08/08/why-s-p-s-ratings-are-substandard-and-porous/?hp
Clearly the S&P rating has SOMETHING to do with the market. There are plenty of non savvy investors in the marketplace to make that effect happen.
Also I take issue with this housing tax break allowance. Of course i own an expensive home so this is near and dear to me but as a rich person who works for my income i essentially have 1 tax break which is my home. Without the interest writeoff I would be claiming zero and paying extra every month to avoid a fine for not putting enough away for taxes. Champagne problems maybe but in an area whose average housing cost is somewhere between 300k - 500k is getting the total jumbo loan as a write off a crime?
On a somewhat separate note, how can you eliminate that writeoff without screwing the people who already own homes? The price of a home has priced in the fact that people get a discount on mortgages and if a lack of writeoffs makes homes less affordable prices will reflect that by dropping. So folks with mortgages would be less able to pay for them and go underwater as a result. So implementation would certainly be an issue.
I do understand this is a writeoff that mostly benefits the rich but this is one of those things where certain areas of the country (read LA/NYC/MIA/ETC) have plenty of "rich" people who couldn't be homeowners near their place of employment otherwise.
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Regarding the S&P downgrade and the market drop, sure there were some knee-jerk, ignorant investors who got spooked by the news, but I'm not sure how much they contributed to the overall decline. Maybe US debt is less attractive now, but it's still the best game in town, so people were more worried about stocks/overall economy and fled to bonds/gold. So maybe S&P warned us that the well water has some bacteria in it, but we're thirsty as hell and it's better than drinking piss.
It's funny how the blogger is saying it may be profitable to bet against S&P over its sovereign debt ratings. Historically, when S&P downgraded sov. debt from AAA to AA+, the yields on those 10-yr bonds tended to go down over the next month (as we saw with the US yesterday). This may be due to other economic events coinciding with a country under debt stress, but no industrialized nation downgraded by S&P has ever defaulted afterward, and investors seemed to pay no heed to the lower ratings.
http://www.businessinsider.com/average-yield-impact-of-a-lost-aaa-rating-2011-7
The link below describes how 90% of subprime securities that Moody's/S&P rated AAA pre-bust were later shifted to junk status. Is anyone in MLB batting .100 and keeping their job? Some of the big banks are being investigated for pressuring the ratings agencies to raise the grades of some of their securities. In some cases, bank execs called into those agencies to complain, and after some wrangling/bribes/threats, the agencies made exceptions to their risk assessment standards so the securities could be rated higher. That's like Michael Bay calling into Rogert Ebert's office and wiring him some cash to sweeten his nasty review of the latest Transformers slop. Maybe instead of relying on the big 3 agencies tainted by conflict of interest, we could have a crowd-sourced service from vetted financially-savvy contributors, similar to a Wikipedia or Yelp? I know there is plenty of independent investment advice out there, but something a little more official and trustworthy could help. Maybe it already exists?
http://www.bloomberg.com/news/2011-04-13/moody-s-s-p-caved-to-mortgage-pressure-by-goldman-ubs-levin-report-says.html
Regarding the mortgage interest deduction, sorry I didn't clarify before but any changes wouldn't be retroactive to existing mortgages. They would have to be grandfathered in or have the deduction withdrawn gradually. I know how you feel though. We obey the law, work hard, and haven't withdrawn much from the system (we haven't taken any unemployment, welfare, disability, etc.). Where's our damn reward for being good soldiers? But that's the thing, in a compassionate society the able have to sacrifice more for the less able. Is it "fair"? Well that's another discussion, but people like us really don't need any tax handouts, even if we're not living large and many of our neighbors seem to be doing a lot better (in their cases, even less justification to help them). I'd rather a handicapped person still get her home care, or a veteran get his physical therapy, instead of me getting a deduction. Of course I'd rather all the normal people get more help and the rich pay more into the system, so I'd fight harder for Bush tax cuts repeal before I fight for mortgage interest deduction repeal. Also, if we reformed other aspects of the tax code and labor market, you wouldn't need the extra money from deductions anyway.
The interest deduction is supposedly meant to make home-ownership more affordable and encourage people to do it. You and I bought during a time of really low rates, and even fed/state tax credits for first-timers. If interest deduction is the last bit of help a person needs to get over the hump and afford a mortgage, then maybe that person isn't ready to own. For your family and mine, we wanted a place of our own and our lifestyles/finances permitted it, so we would probably buy with or without the tax break. It's like Cash for Clunkers - the wealthy mostly took advantage of it, and in fact the program unintentionally put upward price pressure on the used car market (by destroying some supply), which hurt poor people who can only afford bad used cars. Like I said though, I could support a partial interest deduction adjusted for income/location, but not as generous as the current program. The bigger problem is expensive real-estate in the big coastal markets as you said, but that is a whole other can of worms that I don't know how to address.
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Yes! MY point for the last 30 years with regards to 401Ks, etc. I HAVE NO IDEA what to do with my money, but ever since that asshole reagan came along with the 'you know best how to invest your money' line of bullshit, I've HAD to put my money into the market. the ones who convinced us that this was for the best, certainly knew what to do with our pensions-line their own pockets with OUR savings. They then burned me on the 401K bullshit, too. So, now, once again, it's my fault for not knowing what to do. I'm with the folks in the streets in london at this point. burn, baby burn.
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Yes I'm frustrated and pissed off too. Our money is going poof (not that I had much to begin with). We can't compete with the resources and power of Wall Street investors, and we're not rich enough to hire them. So unless we have a crystal ball, the best we can do is diversify and let it sit. A mix of industries, company types, funds, bonds, commodities, and some liquid cash for quick emergencies. But others on this list know much more about finance and investing than I do, so please chime in and help us.
In general, the US stock market has been a very good and safe bet since WWII, and T-bonds even better. There will be shitty days and scams of course, but in the long run our investments should appreciate better than real estate or CDs (unless the 21st Century economy is vastly different than history). But of course an individual has to tailor his or her investments for their risk tolerance, values, and life circumstances.
I don't know about all the circumstances going on in England now, but it seems like the Rodney King riots. I just think it's sad when trouble-makers destroy property and wreak havoc only in poor neighborhoods. People have every right to protest and show their anger. So if they want to break the law, torch Harrod's and 10 Downing Street, not the poor immigrant flats of people on the margins who never did wrong to anyone. And Harrod's is insured anyway, though of course it is more protected by security forces than the slums.
Tuesday, August 2, 2011
Obama surrendered to the GOP on the debt issue
http://www.kqed.org/a/forum/R201108020900
This debt bill doesn't have much to celebrate, but it's especially repugnant for progressives. There isn't a single cent of revenue generation, not even closing the corporate jet tax loophole (that Obama mocked in his debt speech) which would have just netted a few million/year and affected a tiny fraction of our population. He couldn't even get that. I know politically Obama is weakened and the debt issue is not all his fault. We're still paying off Reagan and Bush borrowing, and the stimulus was necessary to avoid a depression, yet the conservatives only want to tighten the belt now, when the economy is quite fragile and dependent on a healthy consumer sector (and gov't spending for that matter). While economists predict that these spending cuts (which won't take effect until 2013) won't hurt the economy much, it does lower consumer-investor confidence, and the rest of the world is wondering what the hell is wrong with Washington (and let's not underestimate what this ding to our reputation will cost us in the future, see Iraq). All that will impair an already sluggish recovery, and won't help create jobs.
Like his caving on the Bush Tax Cuts, Obama was in a tough situation though - the GOP knows that the buck stops with him and he doesn't want to preside over a gov't default. The GOP and especially the TP don't care if they wreck DC (and by extension, the US people whom they claim to represent). So it's like a parent bargaining with her child holding a family heirloom watch over the toilet bowl. The watch means a lot to the parent and nothing to the child. He is giggling and thinks it's a fun game to see the parent (an authority figure) panic and plead. The parent is at a major negotiating disadvantage. And yes, Biden was right, technically it's terrorism. When you control something precious to the other side, and threaten to harm it unless you get what you want, what else do you call that? I suppose Wall Street calls it "business as usual." But that worries me - will this become business as usual? We don't negotiate with (Islamic) terrorists because we don't want to send the message that their brutal methods will actually work to accomplish their goals. But now that Obama has caved on several occasions, the ultra-right/TP are only getting bolder with their demands. They see it works, and now every damn budget/spending debate from now on will probably involve this type of ludicrous brinksmanship, posturing, and blackmail (at least until the Dems lose the White House).
Some pissed off liberals think that Obama should have let the nation default, to show the people what the GOP wants and let them take the heat for America's suffering. But like the bank bailouts, he chose the lesser of two evils (moral hazard vs. financial freeze). He is a risk-averse president, and would rather compromise with the GOP than put the nation under unnecessary stress. Maybe that is a prudent decision, but at some point we have to put our foot down. He can't lead the nation being on the defensive all the time. Obama may have avoided a catastrophe this week, but it's not helping his re-election chances and it was a betrayal to his party's philosophy.
Instead, Obama could have raised the debt limit without Congressional involvement (as Bill Clinton recommended) and let the GOP try to take the issue to court. At least the gov't would still run and we'd be paying off our obligations in the meantime. All the panic about debt Armageddon was kind of misleading; sure it would be catastrophic if the US defaults, but that wouldn't happen. We have the funds to pay off our obligations, maybe at the expense of other federal spending, but we won't be deadbeats. As sad as it is, our debt/GDP ratio is still pretty comfortable (lower than France's and the UK's). Italy is one of the biggest economies in the world and their ratio is double ours (http://en.wikipedia.org/wiki/List_of_sovereign_states_by_public_debt). US debt is still one of the safest investments in history, so who cares if S&P threatens to downgrade us? Those were the same morons that gave sub-prime mortgage securities AAA ratings. The Euro has bigger problems, Japan's economy is gloomy, China isn't trustworthy, the stock market and commercial paper can be volatile, and some commodities have issues too. Where would you put your millions for safety? During this big debt debate, what happened to the yield on the 10-year T-bond? It actually went down (to ~2% now), meaning that investors are finding it more desirable vs. other similar investments. Demand for US debt is increasing, so the world is still very confident in us. In comparison, Greek 10-year bonds are paying out around 25% if you dare to sink your money there.
This bill creates a Congressional commission to decide how to make the remaining $1.5T cuts over the next few years. But how can we expect that such a group would show more cooperation than what we've seen? What if that group doesn't come to an agreement? An across-the-board gov't spending cut (not sure the %), including entitlements. I guess that is exactly what the GOP is hoping for, so the conservatives on the commission really have no incentive to compromise on any liberal initiatives. They now have the luxury to wait out the Dems because they are not scared of the fallback plan. Either they get everything they want, or they still get a pretty good outcome if the talks fail. No harm can come to them, except from possible voter ire in 2012, but there's plenty of that for the Dems too. I can't believe Obama agreed to all this.
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Obama's actions here are only surprising if you think he's a liberal. He isn't. He's a moderate conservative. He gives liberal-sounding speeches to establish his credentials, but his actions are moderately conservative. He's largely continued W's wars, and started a few of his own. He kept W's defense secretary and a bunch of the economic advisers (imagine FDR keeping Andrew Mellon). Gitmo. His health care plan rejected single payer and instead followed the template you can trace back through Romneycare to the Heritage Foundation's initial 1989 mandate + subsidies solution. He's gone after whistleblowers even harder than W. His opening offer in the manufactured debt ceiling crisis included big cuts to social security and medicare (which for a long time have been how you identify that someone is a Democrat at all).
And he's on track to raise a billion dollars, mostly from rich businessmen. Do you think they'd be paying huge amounts of money if they thought he was failing? He's doing exactly what he's supposed to do. Even early on he was telling people that the long-term goal was to cut social security - his aides explained this to David Brooks back in March 09: http://www.nytimes.com/2009/03/06/opinion/06brooks.html ("He is extremely committed to entitlement reform and is plotting politically feasible ways to reduce Social Security as well as health spending."). He's looking to be a sort of reverse "Nixon goes to China": the ostensibly indisputable liberal who because of those liberal credentials can be trusted to negotiate a fair deal to cut the left's core programs, and thus becomes the transformational politician who brings left and right together to do what's needed. In these debt negotiations he's not getting out-maneuvered, he's Br'er Rabbit saying "please don't throw me into the briar patch!"
The only real hope for the left is a solid primary challenge, to force a change in the dialogue, because the Bachmann bogey-man will guarantee no third party candidate affects the outcome. The current hope-and-prayer is Elizabeth Warren, even though no one seems to know where she stands on anything other than the economy.
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Obama is one of them. This is what he wanted, too. Get over it.
Try this on:
http://www.yourownhealthandfitness.org/blogs/?p=288
There is no debt crisis. We've been gutted like a flounder.
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Thanks, friends. Yes it may be true that Obama is not a liberal, but how the F did he convince the Dem Senate majority and at least a few dozen Dems in the House to approve this bill? What were Reid and Pelosi's roles in this? Apparently Obama's horrible at persuading conservatives, but great at keeping the Dems in line. The liberal wing of the House may have revolted but were powerless to stop it, though you'd think a few committed senators could have filibustered? Or they don't want to take the blame for missing the deadline?
Obama has clearly picked his backers (or vice versa), but what if he doesn't win? Despite lining Obama's coffers, corporate interests would prefer a GOP in the White House (even if there's not much difference with an Obama admin.), and they are ready to sign new checks for whoever emerges out of the GOP primary. By making deals with the devil, doesn't Obama worry he may get screwed? I'm not so confident about his re-election chances after all this, and there are more budget battles to come before next Nov. The US public doesn't seem to be very sympathetic to Obama over these shameful impasses, so what the hell is he getting out of all these concessions, politically?
Look, I understand the TP attitude. They think DC has overstepped its mandate and is spending out of control. They feel the need to block Dem initiatives tooth & nail, and hopefully they can roll back some gov't expansions for our own good. Forget their economic ignorance and political inflexibility, but I can understand why they would be motivated to subvert the gov't to serve their own interests and save the country. If I was a congressman during the W Bush years, I would feel the same way. It would be like de-funding the Iraq War to protest the immorality-irresponsibility of it. Dems would have been skewered for attemtping such a move in 2005, yet this debt blackmail is somehow OK? And stopping Iraq would save lives, but freezing the gov't is costing lives.
Obama was elected by a pretty big margin because America thought he could bring people together. Well he hasn't, and it's probably gotten worse. It's not all his fault, but if he is failing precisely in the area that he was supposed to excel in, what are the voters (especially Dems) to do about it in 2012? You think anyone would dare to challenge him from the left? Maybe the hopey-changey stuff was all BS, and he's not interested in forging relations and working with others. But he's not dumb; after a few months on the job he should have seen that the GOP and others weren't willing to work with him either on most of his "official agenda." Maybe he needed to play nice to get (minimal) health care reform passed, but that's a pretty crappy legacy to hang one's hat on. Why did he invest so much in that area, and totally fold on other critical issues like jobs and revenue?
Why the hell does he still try to work with the right after 2+ years? It's a divided gov't now and the Dems may take more of a beating in 2012. Why not try to get as much stuff done while you can? He's still the freaking president. Use executive orders and circumvent the checks and balances like Bush did. But as you said, I guess he's not interested in that. Though you'd think Pelosi and Reid wouldn't just sit idly by while Obama pisses away the rest of his term. Reid almost lost (to a total joke candidate) last election. They have a lot riding on this next year, what the hell? What is the Dems' strategy?
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Pelosi is the only reason things weren't worse, and she's clearly not
a big Obama fan at this point. In fact, Obama would have backed off of
that watered-down healthcare bill without her. These are trying times
for the "left," but it would be a good idea to invest in a few more
behind-the-scenes operators (even though she plays the good soldier in
public) like her.
http://www.thedailybeast.com/
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Thx, S. The Prodigal Son has returned! That's interesting about Pelosi and Obama's desire to distance himself from her to not be perceived as a liberal. But these days, only FNC is accusing Obama of being one of those. I guess the best thing for Pelosi's career is to be a good soldier, help Obama get re-elected, and reclaim the House so she can become Speaker again. If she led a revolt from the left over the debt and other issues, I don't know what that would do to the country and the Dems, but it probably wouldn't help them in 2012. Though the TP is forcing the mainstream GOP to change, so why can't the progressive wing put pressure on Obama? If the GOP alternatives weren't so damn scary, I would hope for Obama to lose so he learns his lesson about picking the right backers and mistreating allies. And I do appreciate Pelosi putting her foot down on some issues so the debt package wasn't worse. She should bring that stuff to light so Americans can see that some people in DC are still trying to fight for them. A tell-all book 3 years later won't help.
J's link to the Brooks piece is pretty depressing too. I know centrists win the presidency, and a big chunk of Obama's support in 2008 was from middle-of-the-road or slightly-right folks. But if his agenda all along was to cut entitlements, benefits, and worker's rights, then what's the point of running for the goddam Democratic ticket? Some cutting may be necessary, but not right now, and especially with so many sources of untapped, fair revenue. And of course when you cut that spending in a recession, it has a magnifying effect in our consumer economy. Aid recipients have less money to inject back into the system, and we're talking about food and rent here, not Vuitton purses and shares of Apple. How do more broke, desperate people help our country recover? And they were some of the most marginalized, vulnerable Americans to begin with, which is why they were getting help. Sure there is some abuse going on, but it pales in comparison to tax cheating by the rich. Though it's easier to demonize the "welfare mom" than Ford.
Of course a black man has no chance to win the GOP primary, but why the hell did Obama declare himself a Dem? He voted like a Dem when he was in the Senate at least, maybe just to make powerful friends like Reid and Biden? I just don't get what Obama wants out of all this. He was young and a Senate baby when he ran for president, it's not like there was urgency. Unlike the Clintons, he was already rich upon entering the WH. Sure there's always the lust for power, but why go through all the pain of the office when you're just going to be Mr. Status Quo and Don't Rock the Boat? Dozens of politicians can do that already - he was supposed to be the "game changer." His hair went gray like his predecessors, so clearly he's working hard on something. Just wish the non-rich American people had more to show for it.
L's link sends a powerful message, and it's what we were discussing here in the past. We know how big-business libertarians are bankrolling the TP, and the Dems are dumping labor in favor of corporate campaign support. We know about the great wealth divergence since the Carter admin. We know that the rich were barely scathed in the recent recession, while the poor-to-middle have given back much of their gains from the bubble '90s. The labor market is horrible. In the 1930s, we had the New Deal to jump-start the economy, but many critics say the Obama stimulus was actually too small to be effective. The Supreme Court is the most business-friendly in generations. The US worker is now pushed harder than his/her peers in all other developed nations maybe besides South Korea (and their economy is booming compared to ours). Now the US worker is so fearful for his/her economic future and with very little leverage in the market, that he/she will put up with just about anything to keep the paycheck coming. That's looking closer and closer to the Industrial Revolution, minus the black-lung and child labor.
Tuesday, September 23, 2008
The financial crisis and bailout
WHEN DOES A COMPANY QUALIFY FOR A BAILOUT?
http://www.newsweek.com/id/158615
Wall Street is consumed with the subject of bailouts. As analysts chewed over the implications of the government's decision to assume the debt of ailing mortgage giants Fannie Mae and Freddie Mac, traders (and their real-estate brokers) wondered whether erstwhile titans Lehman Brothers and Washington Mutual would be next in line for government assistance. Meanwhile, lobbyists for the big three automakers were refining their pitches for $25 billion in loan guarantees. It is sure to be another long weekend for Treasury Secretary Henry Paulson.
Bailouts—the government's stepping in and providing financial assistance or credit guarantees to private-sector companies—are a highly confusing subject. As policymakers hasten to save some companies from the ravages of creative destruction, they leave others to fail. Some 5,644 businesses went bankrupt in July, up 80 percent from July 2007. So are there some objective criteria we can use to determine whether the government will toss a lifeline to a particular company?
It's a truism that the bigger you are, and the more you owe, the more forbearance you're likely to get. In 1984, when Continential Illinois, whose reckless lending practices had catapulted it into the ranks of the nation's 10 largest banks, ran into trouble, the government bought some of its loans and provided extraordinary compensation to depositors. "We have a new kind of bank," complained Fernand St. Germain, a congressman from Rhode Island, "It is called too big to fail." (St. Germain, who shepherded the bill that deregulated the savings-and-loan industry, would be blamed in part for the record-setting bailout of S&Ls later that decade).
But these days, size alone doesn't matter. Earlier this decade, Enron, WorldCom, and Global Crossing, three gargantuan companies, went bust while the government looked the other way. Of course, when the aforementioned companies filed for Chapter 11, nobody lost electricity or was unable to make a phone call. "But if the government envisions that a failure will have a serious adverse consequence on the economy, it's going to step in," said Benton Gup, a professor of banking at the University of Alabama and editor of the collection Too Big To Fail: Policies and Practices in Government Bailouts.
For that reason, certain types of financial institutions are much more likely to be helped than others. A bank that lends to people with dodgy credit in California doesn't pose much of a threat to the Davos crowd. But financial intermediaries like Bear Stearns and the FM twins function like the heart of the global financial system. If they go into cardiac arrest, the whole body is in danger. Since Bear Stearns was a counterparty to (and guarantor of) trades and financial arrangements with the world's major financial players, its failure would have triggered a cascade of losses. In the same vein, huge quantities of the $5.4 trillion in debt issued and insured by Fannie Mae and Freddie Mac sit on the balance sheets of central banks and financial institutions around the globe. For the U.S. government simply to let this debt—which it had been implicitly backing for decades—go bad would have meant inflicting severe damage on America's most significant diplomatic and trading partners. Fannie Mae wasn't too big to fail, one Wall Street wag told me this week. It was too Chinese to fail.
To be eligible for a bailout, firms must also demonstrate a particular genius for screwing up. Before it went bust, Bear Stearns had a monstrous $33 of debt for every dollar of capital, and hedge funds it owned destroyed hundreds of millions of dollars of clients' cash. It got a bailout. Lehman Brothers, which has taken painful measures to reduce its risk, is perversely less likely to get direct government help. "The worst Lehman can do is destroy the firm," said Barry Ritholtz, CEO of Wall Street research firm FusionIQ and author of the forthcoming Bailout Nation. "Bear Stearns, on the other hand, set up the firm so that if they screwed up, they could threaten the entire financial system." That may explain why Treasury Secretary Paulson has thus far resisted providing federal succor to Lehman.
Finally, companies seeking the tender mercies of the taxpayer must have good timing. Nearly all the great corporate bailouts of modern times have come in election years. Congress enacted loan guarantees for Chrysler in January 1980, ensuring that a company that employed about 130,000 people, many of them in the swing state of Michigan, would not go bust on the eve of primary season. So, if your company is in trouble, what should you do? Double down. Establish links to other firms. Export your products with abandon. And hustle. There are only seven more weeks until the election.
PERSONAL NARRATIVES AND EMOTIONS IN ELECTION PSYCHOLOGY
http://www.newsweek.com/id/158749
Narratives have been used to attract voters at least since Lincoln's campaign managers cast him as the rugged rail-splitter from the country's frontier, not the prosperous railroad lawyer and sophisticated writer he was, notes historian Michael Beschloss: voters are drawn to someone they can relate to, and the way to make that happen is by offering them stories. (The human brain is wired so that we can follow a chain of events that have people doing things in chronological order more easily than we can follow abstractions.) But the power of the narrative has grown as party identification has weakened—putting more voters in play—and as the culture has changed. Television has made voters expect to, and think they can, "see into people's souls to take their measure," says Beschloss. To do that, "they need clues," and there are few clues so potent as the challenges a person has faced and how he or she has met them. "The feeling that we need to know who these people are has become so enormous that a good part of Sarah Palin's appeal is her life history, the choices she made, things that let voters form a bond with her," says Beschloss.
The outsized power of the personal narrative today compared with even a generation ago (in 1980, Ronald Reagan ran not on personal narrative, but on hope and the promise of change) reflects something that has become almost a cliché in political analysis—namely, that emotions, more than a dispassionate and rational analysis of candidates' records and positions, determine many voters' choice on election day. The emotion can be hope or fear, pride or disgust. And don't be too quick to pat yourself on the back for thinking you cast your vote based on a logical parsing of a candidate's positions. For all but the most wonkish wonks, what matters is how the prospect of pulling out of Iraq or expanding oil drilling or any other policy makes you feel, and not a pro-and-con analysis of its pluses and minuses, which few people can figure out.
All of this has been true for decades. What's new is that the circumstances of this election have conspired to push people away from the reason- and knowledge-based system of decision-making and more down the competing emotion-based one. The latter is more ancient and has, throughout the course of human evolution, "assured our survival and brought us to where we are," says neuroscientist Antonio Damasio of the University of Southern California, a pioneer in the study of human emotions and decision-making. ...One of the most salient circumstances of this campaign is the sheer amount of information voters are bombarded with, says Damasio. You can barely pass a screen (TV or computer) or overhear a radio without being pummeled with the latest brouhaha over lipstick-wearing pigs or which candidate was cozier with lobbyists for the failed mortgage giants. When FDR was making radio addresses, "people had the time needed for reflection, to mix emotion with facts and reason," says Damasio. "But now, with 24-hour cable news and the Web, you have a climate in which you don't have time to reflect. The amount and speed of information, combined with less time to analyze every new development, pushes us toward the emotion-based decision pathway." And not even emotions such as hope. Voters are being driven "by pure like and dislike, comfort or discomfort with a personality," says Damasio. "And voters judge that by a candidate's narrative."
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The bailout article is interesting, but to me that's mostly because it shows how shamelessly the media is fanning the flames here. The article implies a substantial moral hazard in finance - that management/employees are rewarded (get money) for doing the wrong thing (blowing up the economy). There's certainly some of that, primarily in compensation paid during the boom and liquidated (i.e. not kept in company stock). That's very hard to resolve post-facto (it would be illegal for the g't to take back money already paid, though they can regulate for future booms). But it's not nearly as bad as the article implies.
The bailouts we've seen this year have not been soft landings for the companies involved. They haven't been quite as "Old Testament" as I'd have liked, but they have done a pretty good job of wiping out management, employee and shareholder value. In the year preceding Fannie Mae's "bailout", the stock lost ~90% of its value (from mid-60's to ~6), and since the g't stepped in it's lost another ~95% (to 0.43); that blows up a lot of the moral hazard, particularly given how much company stock was owned by employees and management. Management was fired (and it's not like people are going to be lining up to hire those folks). AIG's stock took a similar path (from mid-60's a year ago to 2.3 today), management was fired, and the money the g't is loaning them is at 850 basis points over the LIBOR (which is to say, borderline usury). Nobody is intentionally going to drive their firm into the rocks in order to lose 99% of its value and get fired.
In terms of the value of the company and assets, the difference between bankruptcy and bailout seems semantic - I mean, that's roughly what happened to Lehman. The article suggests that companies would somehow *want* to set up their company to be so big and entangled that they would get a bailout. The results when they fail seem pretty similar, though. And the big difference is that Lehman had a much better chance of surviving, exactly because they worked to get untangled. Merrill took a similar approach, and managed to get bought, albeit at firesale prices - not an ideal situation, certainly, but better than either bankruptcy or bailout.
The other bit that seems totally over the top is the assertion that the GSE's were bailed out to help Chinese investors. In calendar year 2008, Fannie Mae and Freddie Mac financed 80% of new mortgage issues. If those two companies suddenly evaporated, it would be dramatically harder for people to get new mortgages ... which means fewer home sales, increased mortgage rates, lower housing prices, and generally a steel-toed kick in the balls for the whole housing market. China benefits as well, but the main beneficiary was the American homeowner. Again, I'm not thrilled about it - it's essentially a generational transfer of wealth, as our parents' generation gets bailed out and mails the bill to you and me 20 years from now, in the form of debt.
I mean, I'm not suggesting things are working well. I think the government should have gone further in fully nationalizing the GSE's and then made clear they were going to be completely dismantled and sold for parts. I think the government should also be more transparent in making these determinations. And I think Wall Street compensation should have a large component of long-term results so some of those financial profits could be pulled out of those folks' pockets as we discover years later just how they earned their money (being leveraged 33 times over, for example). At the same time, Paulson and Bernanke have an incredibly hard job which would be challenging to do even if they could see the future.
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Well, I don't think the article was suggesting that these companies deliberately screwed up huge in order to "merit" a bailout. I think the author was being facetious to say that ironically, the biggest greedy morons get more help than those who admitted fault and really tried to help themselves. Like the Prodigal's Son story.
I'm not quite sure what you mean by: They haven't been quite as "Old Testament" as I'd have liked, but they have done a pretty good job of wiping out management, employee and shareholder value.
Definitely upper management played a large role in the crisis, and they should be punished accordingly. Maybe they lost a lot of their assets when the stock's value tanked, but they have plenty of diversified savings left and will recover from this mess, much better than their underlings at least. They will also get hired again, despite this black mark on their CV (maybe not as officers, but definitely into powerful positions). There is plenty of historical precedent for that. But for the ordinary workers, this is a killer, like the telecom and energy trading meltdowns before. Especially because it wasn't really their fault, unless they could have "blown the whistle" to alert others to the unwise business practices taking place, but no one was listening anyway during the housing boom when people were blind with greed. As you said, their savings in company stock has evaporated, and it will be hard to get re-hired quickly, because competing companies are in similar messes, and suddenly thousands of desperate, qualified workers have just entered the job pool. 100,000 financial sector jobs have been lost (maybe only 5-10% of that is management?), so that's 1/6 of total US new unemployment in 2008. So yeah, it wasn't any leader's intent to destroy his or her company, but their decisions contributed to the crisis so they should be held accountable. I don't think companies structure their business plans to make them more desirable for bailout (I hope not at least). But like in law enforcement, it's more efficient and socially preferrable if we can discourage bad behavior before we have to punish it after the damage was done. I don't know how DC can do that effectively though, without major political-economic backlash and accusations of interference in the free market.
How do we mitigate problems so they don't have to reach the bankruptcy/bailout stage? In America, people and companies are free to succeed or fail. Companies can, do, and must fail at times. Even dominant companies like Standard Oil, AOL, and PanAm were destroyed, either by the government, world/economic events, or their own mistakes. So when is a company "too important" to fail? I agree with you that Fannie & Freddie qualify - without them the housing sector grinds to a halt. The American Dream was made possible to millions over the years because of the 30-year-fixed, which no other nation can provide to the masses (so then why the hell did so many people take variable-rate loans instead!?!). However, maybe America doesn't have to have a mortgage-based home ownership system. Other modern nations like South Korea don't give home loans. People pay for apartments and homes with cash. It's a huge upfront cost, but then it's your asset 100% and no more hassles. But America is a borrow & spend culture, so probably we could never accept a change.
Maybe it's in the government's interests to prevent companies in critical sectors from qualifying to be too big to fail. It's horrible precedent to bail out companies with tax dollars, or force rivals to "take one for the team" and absorb another company's debt. Freddie was only created to give Fannie some competition. So maybe more competition/customer choice will keep these companies more honest and risk conservative? There are 5 major i-banks (well, 2 now). Is that too many or too few? Who knows, but I'm leaning towards too few. Other industries like wireless, oil, and airlines are heading down that path with merger-mania.
Regarding the China comments, of course Washington doesn't base its bail-out decisions chiefly on foreign considerations. But at the same time, economic turmoil abroad hurts us at home in this globalized commercial system. It would be bad for everyone if our mortage/financial crisis spread to other continents, and it already has (Asian markets down 5% this week, Europe 3%). The housing bubble also burst in Spain and the UK. European banks have folded or needed rescue too (UK's biggest mortgage bank was just bailed out this week), since they bought up so many American SIVs too. Foreigners must be pissed at us because through no fault of their own, their savings have shrunk because too many dumb Yanks and dumb banks engaged in bad loans.
So a large, troubled American company with significant foreign investment is probably more qualifying of assistance than one without. I think it makes sense. Countrywide wasn't bailed out (unless BofA was "persuaded" to do so by the Feds), and neither were smaller, more regional mortgage banks like IndyMac.
Yeah I agree with you that Paulson, Bernanke, and president 44 will have a hell of a time cleaning up this mess. You really need balls of steel for those jobs, and as you said, even a crystal ball may not save you. That's why it's so idiotic and repugnant for the presidential candidates to claim that they "understand" the economy and know how to "fix" it.
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I guess the problem, is, though, how do you legislate that? Being incompetent isn't (generally) a crime - it's only clear that they were incompetent post-facto (as in, after they were awarded their bonuses, which is an incentive problem I wrote at earlier), so by what mechanism do you decide to take their money away? And how can you make it so that they can't get a well-paying job again? By throwing them in jail?
I think the government did about the best it could, in wiping out nearly 90-95% of many of these company executives' personal wealth, without getting into punishments that would deviate from due-process and legal-based actions. I think it's a generalized problem of American life where well-connected people "fail-upward," as President Bush did, but no amount of legislating, unfortunately, is ever going to stop that problem (short of a total makeover of how society works). It's the same reason that all these political retreads get cushy jobs as political commentators spouting stuff that any idiot on the internet could come up with.
But I think that we do need to come up with, as Obama put it, a way to help out people on Main Street as well as Wall Street. A package that extends unemployment benefits, increases availability of food stamps, extends COBRA programs for those who recently lost their jobs, etc. Krugman and other economists have made the point that average citizens generally aren't as susceptible to the moral hazard problem - after all, most people only buy a few houses in their lifetime and bailing them out once isn't going to radically change their behavior, as it might with banks.
So I hope that the new rescue plan put forward is sufficiently draconian on companies and their executives; some people are actually speculating that the government might make money off of all of this (because no one has the money to buy these assets, many of them have fallen well below their long-term price. So the government, with a good source of capital, can now snatch them up). Hopefully they can use that money to repay the costs of helping out those on Mainstreet...
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Thanks for the comments A, and I agree it's a sticky situation for the government to decide how much to intervene on these economic matters. As you said, it's difficult and controversial for a government to punish business incompetence after the fact, and probably a company's own board is better equipped to punish poorly performing executives instead (unless the executives appointed the board). What do you mean by the government took away 90-95% of the executives' wealth? Because they lost their bonuses and the value of the company stock tanked? Can the government revoke private sector pay for poor performance?
In terms of helping out Main Street, it's clear that economic stimulus checks aren't the long-term answer. Bush's recent effort had only a minor impact for about 2 months at best; a drop in the bucket at the cost of billions borrowed. Unemployment assistance is a good step, but I think Senate Republicans and Bush, while he's around, may try to block it at every turn (they said it was excessive spending, yet they spend 100s of billions on Wall Street "welfare"?). Finally the Dems had to attach unemployment assistance to a war supplemental for Bush to accept it. But maybe now the situation has gotten more dire, and with the election approaching, the GOP should try to shed the stereotype that they don't care about the troubles of the Average Joe (unless it's true).
http://seattletimes.nwsource.com/html/politics/2004469503_apjoblessbenefits.html
http://www.military.com/news/article/bush-threatens-veto-over-gi-bill-adds.html
Unemployment insurance, COBRA, etc. can keep some people afloat for a few more months, but I don't know how we can go about creating over 1M new jobs in the next 12 months (what would be needed to bring unemployment back down to 5%). And minimum-wage service jobs with scant benefits won't cut it. The new jobs from the "green economy" won't materialize as long as this recession persists, lending is tight, and government spending is curtailed by the wars and tax cuts. Gas and food will not get significantly cheaper, even if there is a global economic slowdown (which causes other problems too). GM and some airlines are so deep in the red they might ask for bailouts too (but won't get them). The dollar's gains in int'l money markets may mean that exports slow somewhat. Even China is showing signs of economic cool-off. I don't know how we can get people back to work quickly. It seems like companies are laying low, besides the financial sector snatching up bargains of course, as you said of government takeovers too (that raises another interesting question - what will the Feds do with these companies once they start becoming profitable again?). Everyone is waiting for peak foreclosures to pass and home prices to adjust to rock-bottom (for this cycle at least), so the growth curve can re-commence with restored lending fluidity and market confidence. But who knows when that will be? 6, 12, 24 months or longer?
I agree that citizens are not exposed to the moral hazard like company officers, but nevertheless they can and do make decisions to hurt themselves. In many cases, predatory lenders didn't even need to persuade customers to enter into suicidal mortgages. And some of the same people who didn't learn their lesson after the dot-bomb made the same greedy mistakes in the housing bubble. And they will F up again during the next boom/bust. It's endemic in this greedy society to a certain extent. Some people are just predisposed to gambling, ignoring warnings, and screwing themselves. What do we do about them? I know we can enact some laws to protect citizens from themselves, but how do we do that without adding a new layer of bureaucracy to the already unjust and convoluted lending industry? And it's not like Washington has had a good track record of regulating anything intelligently. What completely sucks is that some speculators obviously got away with it if their timing was right. And the people who played it safe and played by the rules still get screwed by the reckless to some degree, yet they are the ones who get the least reward/assistance for their good behavior, because their situations may not be as dire as the gamblers. Well, I guess "being good" is its own reward, and I doubt they would want to trade places with the desperate.
http://www.newsweek.com/id/158615
Wall Street is consumed with the subject of bailouts. As analysts chewed over the implications of the government's decision to assume the debt of ailing mortgage giants Fannie Mae and Freddie Mac, traders (and their real-estate brokers) wondered whether erstwhile titans Lehman Brothers and Washington Mutual would be next in line for government assistance. Meanwhile, lobbyists for the big three automakers were refining their pitches for $25 billion in loan guarantees. It is sure to be another long weekend for Treasury Secretary Henry Paulson.
Bailouts—the government's stepping in and providing financial assistance or credit guarantees to private-sector companies—are a highly confusing subject. As policymakers hasten to save some companies from the ravages of creative destruction, they leave others to fail. Some 5,644 businesses went bankrupt in July, up 80 percent from July 2007. So are there some objective criteria we can use to determine whether the government will toss a lifeline to a particular company?
It's a truism that the bigger you are, and the more you owe, the more forbearance you're likely to get. In 1984, when Continential Illinois, whose reckless lending practices had catapulted it into the ranks of the nation's 10 largest banks, ran into trouble, the government bought some of its loans and provided extraordinary compensation to depositors. "We have a new kind of bank," complained Fernand St. Germain, a congressman from Rhode Island, "It is called too big to fail." (St. Germain, who shepherded the bill that deregulated the savings-and-loan industry, would be blamed in part for the record-setting bailout of S&Ls later that decade).
But these days, size alone doesn't matter. Earlier this decade, Enron, WorldCom, and Global Crossing, three gargantuan companies, went bust while the government looked the other way. Of course, when the aforementioned companies filed for Chapter 11, nobody lost electricity or was unable to make a phone call. "But if the government envisions that a failure will have a serious adverse consequence on the economy, it's going to step in," said Benton Gup, a professor of banking at the University of Alabama and editor of the collection Too Big To Fail: Policies and Practices in Government Bailouts.
For that reason, certain types of financial institutions are much more likely to be helped than others. A bank that lends to people with dodgy credit in California doesn't pose much of a threat to the Davos crowd. But financial intermediaries like Bear Stearns and the FM twins function like the heart of the global financial system. If they go into cardiac arrest, the whole body is in danger. Since Bear Stearns was a counterparty to (and guarantor of) trades and financial arrangements with the world's major financial players, its failure would have triggered a cascade of losses. In the same vein, huge quantities of the $5.4 trillion in debt issued and insured by Fannie Mae and Freddie Mac sit on the balance sheets of central banks and financial institutions around the globe. For the U.S. government simply to let this debt—which it had been implicitly backing for decades—go bad would have meant inflicting severe damage on America's most significant diplomatic and trading partners. Fannie Mae wasn't too big to fail, one Wall Street wag told me this week. It was too Chinese to fail.
To be eligible for a bailout, firms must also demonstrate a particular genius for screwing up. Before it went bust, Bear Stearns had a monstrous $33 of debt for every dollar of capital, and hedge funds it owned destroyed hundreds of millions of dollars of clients' cash. It got a bailout. Lehman Brothers, which has taken painful measures to reduce its risk, is perversely less likely to get direct government help. "The worst Lehman can do is destroy the firm," said Barry Ritholtz, CEO of Wall Street research firm FusionIQ and author of the forthcoming Bailout Nation. "Bear Stearns, on the other hand, set up the firm so that if they screwed up, they could threaten the entire financial system." That may explain why Treasury Secretary Paulson has thus far resisted providing federal succor to Lehman.
Finally, companies seeking the tender mercies of the taxpayer must have good timing. Nearly all the great corporate bailouts of modern times have come in election years. Congress enacted loan guarantees for Chrysler in January 1980, ensuring that a company that employed about 130,000 people, many of them in the swing state of Michigan, would not go bust on the eve of primary season. So, if your company is in trouble, what should you do? Double down. Establish links to other firms. Export your products with abandon. And hustle. There are only seven more weeks until the election.
PERSONAL NARRATIVES AND EMOTIONS IN ELECTION PSYCHOLOGY
http://www.newsweek.com/id/158749
Narratives have been used to attract voters at least since Lincoln's campaign managers cast him as the rugged rail-splitter from the country's frontier, not the prosperous railroad lawyer and sophisticated writer he was, notes historian Michael Beschloss: voters are drawn to someone they can relate to, and the way to make that happen is by offering them stories. (The human brain is wired so that we can follow a chain of events that have people doing things in chronological order more easily than we can follow abstractions.) But the power of the narrative has grown as party identification has weakened—putting more voters in play—and as the culture has changed. Television has made voters expect to, and think they can, "see into people's souls to take their measure," says Beschloss. To do that, "they need clues," and there are few clues so potent as the challenges a person has faced and how he or she has met them. "The feeling that we need to know who these people are has become so enormous that a good part of Sarah Palin's appeal is her life history, the choices she made, things that let voters form a bond with her," says Beschloss.
The outsized power of the personal narrative today compared with even a generation ago (in 1980, Ronald Reagan ran not on personal narrative, but on hope and the promise of change) reflects something that has become almost a cliché in political analysis—namely, that emotions, more than a dispassionate and rational analysis of candidates' records and positions, determine many voters' choice on election day. The emotion can be hope or fear, pride or disgust. And don't be too quick to pat yourself on the back for thinking you cast your vote based on a logical parsing of a candidate's positions. For all but the most wonkish wonks, what matters is how the prospect of pulling out of Iraq or expanding oil drilling or any other policy makes you feel, and not a pro-and-con analysis of its pluses and minuses, which few people can figure out.
All of this has been true for decades. What's new is that the circumstances of this election have conspired to push people away from the reason- and knowledge-based system of decision-making and more down the competing emotion-based one. The latter is more ancient and has, throughout the course of human evolution, "assured our survival and brought us to where we are," says neuroscientist Antonio Damasio of the University of Southern California, a pioneer in the study of human emotions and decision-making. ...One of the most salient circumstances of this campaign is the sheer amount of information voters are bombarded with, says Damasio. You can barely pass a screen (TV or computer) or overhear a radio without being pummeled with the latest brouhaha over lipstick-wearing pigs or which candidate was cozier with lobbyists for the failed mortgage giants. When FDR was making radio addresses, "people had the time needed for reflection, to mix emotion with facts and reason," says Damasio. "But now, with 24-hour cable news and the Web, you have a climate in which you don't have time to reflect. The amount and speed of information, combined with less time to analyze every new development, pushes us toward the emotion-based decision pathway." And not even emotions such as hope. Voters are being driven "by pure like and dislike, comfort or discomfort with a personality," says Damasio. "And voters judge that by a candidate's narrative."
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The bailout article is interesting, but to me that's mostly because it shows how shamelessly the media is fanning the flames here. The article implies a substantial moral hazard in finance - that management/employees are rewarded (get money) for doing the wrong thing (blowing up the economy). There's certainly some of that, primarily in compensation paid during the boom and liquidated (i.e. not kept in company stock). That's very hard to resolve post-facto (it would be illegal for the g't to take back money already paid, though they can regulate for future booms). But it's not nearly as bad as the article implies.
The bailouts we've seen this year have not been soft landings for the companies involved. They haven't been quite as "Old Testament" as I'd have liked, but they have done a pretty good job of wiping out management, employee and shareholder value. In the year preceding Fannie Mae's "bailout", the stock lost ~90% of its value (from mid-60's to ~6), and since the g't stepped in it's lost another ~95% (to 0.43); that blows up a lot of the moral hazard, particularly given how much company stock was owned by employees and management. Management was fired (and it's not like people are going to be lining up to hire those folks). AIG's stock took a similar path (from mid-60's a year ago to 2.3 today), management was fired, and the money the g't is loaning them is at 850 basis points over the LIBOR (which is to say, borderline usury). Nobody is intentionally going to drive their firm into the rocks in order to lose 99% of its value and get fired.
In terms of the value of the company and assets, the difference between bankruptcy and bailout seems semantic - I mean, that's roughly what happened to Lehman. The article suggests that companies would somehow *want* to set up their company to be so big and entangled that they would get a bailout. The results when they fail seem pretty similar, though. And the big difference is that Lehman had a much better chance of surviving, exactly because they worked to get untangled. Merrill took a similar approach, and managed to get bought, albeit at firesale prices - not an ideal situation, certainly, but better than either bankruptcy or bailout.
The other bit that seems totally over the top is the assertion that the GSE's were bailed out to help Chinese investors. In calendar year 2008, Fannie Mae and Freddie Mac financed 80% of new mortgage issues. If those two companies suddenly evaporated, it would be dramatically harder for people to get new mortgages ... which means fewer home sales, increased mortgage rates, lower housing prices, and generally a steel-toed kick in the balls for the whole housing market. China benefits as well, but the main beneficiary was the American homeowner. Again, I'm not thrilled about it - it's essentially a generational transfer of wealth, as our parents' generation gets bailed out and mails the bill to you and me 20 years from now, in the form of debt.
I mean, I'm not suggesting things are working well. I think the government should have gone further in fully nationalizing the GSE's and then made clear they were going to be completely dismantled and sold for parts. I think the government should also be more transparent in making these determinations. And I think Wall Street compensation should have a large component of long-term results so some of those financial profits could be pulled out of those folks' pockets as we discover years later just how they earned their money (being leveraged 33 times over, for example). At the same time, Paulson and Bernanke have an incredibly hard job which would be challenging to do even if they could see the future.
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Well, I don't think the article was suggesting that these companies deliberately screwed up huge in order to "merit" a bailout. I think the author was being facetious to say that ironically, the biggest greedy morons get more help than those who admitted fault and really tried to help themselves. Like the Prodigal's Son story.
I'm not quite sure what you mean by: They haven't been quite as "Old Testament" as I'd have liked, but they have done a pretty good job of wiping out management, employee and shareholder value.
Definitely upper management played a large role in the crisis, and they should be punished accordingly. Maybe they lost a lot of their assets when the stock's value tanked, but they have plenty of diversified savings left and will recover from this mess, much better than their underlings at least. They will also get hired again, despite this black mark on their CV (maybe not as officers, but definitely into powerful positions). There is plenty of historical precedent for that. But for the ordinary workers, this is a killer, like the telecom and energy trading meltdowns before. Especially because it wasn't really their fault, unless they could have "blown the whistle" to alert others to the unwise business practices taking place, but no one was listening anyway during the housing boom when people were blind with greed. As you said, their savings in company stock has evaporated, and it will be hard to get re-hired quickly, because competing companies are in similar messes, and suddenly thousands of desperate, qualified workers have just entered the job pool. 100,000 financial sector jobs have been lost (maybe only 5-10% of that is management?), so that's 1/6 of total US new unemployment in 2008. So yeah, it wasn't any leader's intent to destroy his or her company, but their decisions contributed to the crisis so they should be held accountable. I don't think companies structure their business plans to make them more desirable for bailout (I hope not at least). But like in law enforcement, it's more efficient and socially preferrable if we can discourage bad behavior before we have to punish it after the damage was done. I don't know how DC can do that effectively though, without major political-economic backlash and accusations of interference in the free market.
How do we mitigate problems so they don't have to reach the bankruptcy/bailout stage? In America, people and companies are free to succeed or fail. Companies can, do, and must fail at times. Even dominant companies like Standard Oil, AOL, and PanAm were destroyed, either by the government, world/economic events, or their own mistakes. So when is a company "too important" to fail? I agree with you that Fannie & Freddie qualify - without them the housing sector grinds to a halt. The American Dream was made possible to millions over the years because of the 30-year-fixed, which no other nation can provide to the masses (so then why the hell did so many people take variable-rate loans instead!?!). However, maybe America doesn't have to have a mortgage-based home ownership system. Other modern nations like South Korea don't give home loans. People pay for apartments and homes with cash. It's a huge upfront cost, but then it's your asset 100% and no more hassles. But America is a borrow & spend culture, so probably we could never accept a change.
Maybe it's in the government's interests to prevent companies in critical sectors from qualifying to be too big to fail. It's horrible precedent to bail out companies with tax dollars, or force rivals to "take one for the team" and absorb another company's debt. Freddie was only created to give Fannie some competition. So maybe more competition/customer choice will keep these companies more honest and risk conservative? There are 5 major i-banks (well, 2 now). Is that too many or too few? Who knows, but I'm leaning towards too few. Other industries like wireless, oil, and airlines are heading down that path with merger-mania.
Regarding the China comments, of course Washington doesn't base its bail-out decisions chiefly on foreign considerations. But at the same time, economic turmoil abroad hurts us at home in this globalized commercial system. It would be bad for everyone if our mortage/financial crisis spread to other continents, and it already has (Asian markets down 5% this week, Europe 3%). The housing bubble also burst in Spain and the UK. European banks have folded or needed rescue too (UK's biggest mortgage bank was just bailed out this week), since they bought up so many American SIVs too. Foreigners must be pissed at us because through no fault of their own, their savings have shrunk because too many dumb Yanks and dumb banks engaged in bad loans.
So a large, troubled American company with significant foreign investment is probably more qualifying of assistance than one without. I think it makes sense. Countrywide wasn't bailed out (unless BofA was "persuaded" to do so by the Feds), and neither were smaller, more regional mortgage banks like IndyMac.
Yeah I agree with you that Paulson, Bernanke, and president 44 will have a hell of a time cleaning up this mess. You really need balls of steel for those jobs, and as you said, even a crystal ball may not save you. That's why it's so idiotic and repugnant for the presidential candidates to claim that they "understand" the economy and know how to "fix" it.
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I guess the problem, is, though, how do you legislate that? Being incompetent isn't (generally) a crime - it's only clear that they were incompetent post-facto (as in, after they were awarded their bonuses, which is an incentive problem I wrote at earlier), so by what mechanism do you decide to take their money away? And how can you make it so that they can't get a well-paying job again? By throwing them in jail?
I think the government did about the best it could, in wiping out nearly 90-95% of many of these company executives' personal wealth, without getting into punishments that would deviate from due-process and legal-based actions. I think it's a generalized problem of American life where well-connected people "fail-upward," as President Bush did, but no amount of legislating, unfortunately, is ever going to stop that problem (short of a total makeover of how society works). It's the same reason that all these political retreads get cushy jobs as political commentators spouting stuff that any idiot on the internet could come up with.
But I think that we do need to come up with, as Obama put it, a way to help out people on Main Street as well as Wall Street. A package that extends unemployment benefits, increases availability of food stamps, extends COBRA programs for those who recently lost their jobs, etc. Krugman and other economists have made the point that average citizens generally aren't as susceptible to the moral hazard problem - after all, most people only buy a few houses in their lifetime and bailing them out once isn't going to radically change their behavior, as it might with banks.
So I hope that the new rescue plan put forward is sufficiently draconian on companies and their executives; some people are actually speculating that the government might make money off of all of this (because no one has the money to buy these assets, many of them have fallen well below their long-term price. So the government, with a good source of capital, can now snatch them up). Hopefully they can use that money to repay the costs of helping out those on Mainstreet...
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Thanks for the comments A, and I agree it's a sticky situation for the government to decide how much to intervene on these economic matters. As you said, it's difficult and controversial for a government to punish business incompetence after the fact, and probably a company's own board is better equipped to punish poorly performing executives instead (unless the executives appointed the board). What do you mean by the government took away 90-95% of the executives' wealth? Because they lost their bonuses and the value of the company stock tanked? Can the government revoke private sector pay for poor performance?
In terms of helping out Main Street, it's clear that economic stimulus checks aren't the long-term answer. Bush's recent effort had only a minor impact for about 2 months at best; a drop in the bucket at the cost of billions borrowed. Unemployment assistance is a good step, but I think Senate Republicans and Bush, while he's around, may try to block it at every turn (they said it was excessive spending, yet they spend 100s of billions on Wall Street "welfare"?). Finally the Dems had to attach unemployment assistance to a war supplemental for Bush to accept it. But maybe now the situation has gotten more dire, and with the election approaching, the GOP should try to shed the stereotype that they don't care about the troubles of the Average Joe (unless it's true).
http://seattletimes.nwsource.com/html/politics/2004469503_apjoblessbenefits.html
http://www.military.com/news/article/bush-threatens-veto-over-gi-bill-adds.html
Unemployment insurance, COBRA, etc. can keep some people afloat for a few more months, but I don't know how we can go about creating over 1M new jobs in the next 12 months (what would be needed to bring unemployment back down to 5%). And minimum-wage service jobs with scant benefits won't cut it. The new jobs from the "green economy" won't materialize as long as this recession persists, lending is tight, and government spending is curtailed by the wars and tax cuts. Gas and food will not get significantly cheaper, even if there is a global economic slowdown (which causes other problems too). GM and some airlines are so deep in the red they might ask for bailouts too (but won't get them). The dollar's gains in int'l money markets may mean that exports slow somewhat. Even China is showing signs of economic cool-off. I don't know how we can get people back to work quickly. It seems like companies are laying low, besides the financial sector snatching up bargains of course, as you said of government takeovers too (that raises another interesting question - what will the Feds do with these companies once they start becoming profitable again?). Everyone is waiting for peak foreclosures to pass and home prices to adjust to rock-bottom (for this cycle at least), so the growth curve can re-commence with restored lending fluidity and market confidence. But who knows when that will be? 6, 12, 24 months or longer?
I agree that citizens are not exposed to the moral hazard like company officers, but nevertheless they can and do make decisions to hurt themselves. In many cases, predatory lenders didn't even need to persuade customers to enter into suicidal mortgages. And some of the same people who didn't learn their lesson after the dot-bomb made the same greedy mistakes in the housing bubble. And they will F up again during the next boom/bust. It's endemic in this greedy society to a certain extent. Some people are just predisposed to gambling, ignoring warnings, and screwing themselves. What do we do about them? I know we can enact some laws to protect citizens from themselves, but how do we do that without adding a new layer of bureaucracy to the already unjust and convoluted lending industry? And it's not like Washington has had a good track record of regulating anything intelligently. What completely sucks is that some speculators obviously got away with it if their timing was right. And the people who played it safe and played by the rules still get screwed by the reckless to some degree, yet they are the ones who get the least reward/assistance for their good behavior, because their situations may not be as dire as the gamblers. Well, I guess "being good" is its own reward, and I doubt they would want to trade places with the desperate.
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