The Watchtower of Destruction: The Ferrett's Journal - Bear Vs. Stearns
[Recent Entries][Archive][Friends][User Info]
|
10:25 am
[Link] |
Bear Vs. Stearns
People like the idea of personal responsibility and morality. Nobody likes having to create laws, and it'd be a lot easier if everyone got the memo "Hey, guys, stealing is bad, don't do it, mmmkay?" and then just did the right thing. Unfortunately, if you break down society, generally it looks something like this:- 20% of people get the gist of what you're trying to do and will follow the intent of the law because they believe in it;
- 20% of people actively oppose what you're trying to do, and will fuck folks over because they want to make a buck;
- 60% of the people don't care much one way or the other, and will do whatever's most convenient/profitable for them.
Which is why, when I think in terms of creating social policy, I think about incentives. Specifically, "If I were a guy who didn't give a crap one way or the other about the greater good of society, what would this make me more likely to do?"
As an example, let's look at my friend Josh, whose family tends to The Lusty Wrench, the eco-conscious car repair shop, voted the Best Mechanic in Cleveland several times in a row. They're all die-hard socialists who believe firmly in the environment, and they will go to extreme lengths to, say, find a recyclable part and take a little less profit on it. Furthermore, since they believe in socialism, they don't mind paying high taxes, because they think that's what all right-thinking people should do - give money to the government to help out the less fortunate.
The Lusty Wrench doesn't care that America has high taxes on small business owners. For them, "making less money" isn't a disincentive, because they're part of that 20% that's on board.
Joe Average Business owner, however, is not on-board with this. He's part of that 60%. And from his perspective, all he sees is that he's going to leave the current stability of his job, losing his insurance and 401k and other benefits, and go to an enterprise that might well fail... And even if he jumps through all the hoops and succeeds, he's going to have to hand a large portion of his profits over to someone else.
Why the hell should he bother taking that risk, then? He'll probably just stay at his day job.
Because I believe that small businesses are where a lot of America's innovation comes from, I'm mostly for reducing the taxes on small businesses. Given that there are a lot of disincentives to start a small business already, I don't want more of them. I want to give people as many reasons as I can to start up their own, so I support lowering those taxes. That's a very Republican sentiment, right up until you realize that one of the main reasons I want socialized health care in this country is because I think the Terror Of No Insurance is an even bigger disincentive for going out on your own, and a major reason why large corporations (which can bludgeon and cajole for better insurance) can steal away small business employees.
So what I wind up with is often a mixture of things that I think will ultimately nudge the uncommitted in the right direction. That's why I'm for hiring more police, because I think that ultimately passing laws and not enforcing them leads to people taking the law less seriously. But I'm also for much greater control over the police, because I think whenever a cop beats someone and bypasses the whole Constitution to take the law into his own nightstick, it also leads to people not respecting the law.
Got it? For me, it's all about what's going to incent neutral or evil people to do what's best for society. Because I don't believe that most people have society's best interests at heart.
Now let's talk Bear Stearns.
The gummint recently bailed Bear Stearns out because, well, they'd chosen to serve as a sort of warehouse for a ton of crappy loans, and as it turns out the loans were worth pretty much jack shit because all sorts of scumbags were aggressively selling loans to people who didn't know any better. Said scumbags knew that they were selling to people who couldn't possibly pay for their home loans, but they didn't care because all their profit was made on the front end of the loan deal. They made their money, then handed off the IOU to someone else, and skedaddled, leaving tons of toxic loans hanging about.
And before you start in on "People should have known better," please may I remind you that my wife is a bankruptcy lawyer. Every day she returns home shaking her head, telling me the stories of how poor people without much knowledge of finances were flat-out lied to about what would happen. And I mean "lied to," not "misled."
Yes, I know that the only thing that counts in a loan is the signed contract and everything else is dross, but why do I know that? Because I have upper middle-class parents who were good enough to tell me this, and I was lucky enough to be born into a society where this sort of financial stuff was common knowledge. This is not the case among the poor, who don't frequently have to negotiate contracts. Expecting them to understand that the man from the bank (as they understand it) is not just going to give them a bad deal, but actively screw them, is a little much. Responsibility must fall on the shoulders of those who sought out the gullible to exploit.
In any case, there was the danger of a bank run. Remember, banks don't actually have Scrooge McDuck's millions stashed away - most of their cash is forever out on loan to others, being circulated through the economy like haemoglobin through blood vessels. The fact that Bear Stearns might turn out to be worth zippo concerned the government, because it might lead others to believe that their bank was worth nothing, which could lead to the bank runs that caught on during the depression.
If we all ran to our banks right away to withdraw our money, we'd discover they don't actually have it. And if we all tried to do it, the financial system would collapse. And Bear Stearns was being rumored to be insolvent, which was causing panic, so the government walked in and poured billions of dollars down the throat of Bear Stearns to rescuscitate it and save us all from ruin.
The problems here are twofold: First, as ![[info]](http://l-stat.livejournal.com/img/userinfo.gif) bonerici has noted, if the government was handling out money to save people, it probably would have been a much nicer idea to say, "Okay, rather than giving money to the corporation, we'll instead give the money back to all these poor folks who owe debt on the loans that Bear Stearns holds." Because if you had $250,000 in loans to Bear Stearns, the government just spent several billion to keep them in business so you can continue to owe them money.
It would have been a lot nicer to say, "Okay, here's $250,000, tax-free. You can only use this money to pay back Bear Stearns. Now you're out of debt, they're out of debt, it's even." As it is, if you had a home loan with them, you can thank your government for still having it.
But even leaving that aside, I have an issue with the incentive here. Yes, I understand what a bank loan would mean, and how terrible it would be (darlox has a writeup on it that I think outlines it well.) On the other hand, from an incentive perspective, the lesson to greedy financiers who operate at the edge of (or outside) regulation is loud and clear - and it is this:
It doesn't matter how badly you screw up, the government will bail you out.
Which means, effectively, that we're telling financial companies, "Go fuck up. Badly. We're here to protect you, because we're terrified of what happens if you fail." And I do have an issue with that, because I haven't really seen evidence that years of funding to Detroit has saved American cars. I think once you effectively give people a big blank check to go, "We'll fix it," you encourage people to do really sloppy work.
The problem with capitalism is that it's not really a stable system. It tends towards system-crushing monopolies unless you fight it tooth and claw with regulations, and it tends towards an ugly swell-and-fall whenever there's some sort of vast sea change. And though I certainly understand the reasons why we'd want to avoid something as large and terrible as a bank run, I'm not certain that avoiding them at all costs is the healthiest thing ever, either.
darlox thinks that what we need is clearly better regulations and transparency to make the system work - if Bear Stearns had to have their assets fully revealed, this wouldn't have gotten bad - but I find it ironic that a man who dislikes government and constantly tells me how it doesn't work thinks that "more regulation" is the answer. I think, unfortunately, that the guys at Wall Street are very smart, and have constantly found new and wonderful ways to dodge government regulation for years. The incentive for "more regulation" is not "be more open," but instead is rather "find some way to get around this stupid government rule so we can make money."
This would be an excellent place to wrap up with a clear and clever solution, but sadly I don't have an easy answer. Bank runs are bad. But at the same time, capitalism works only because it's a Darwinistic system where the least competent fail and are purged, and having a system that says, "Well, if you screw up, we'll keep you in the game," makes for something that, I think, will cause a lot more constant problems in the long run. We've told Wall Street that hey, you're really critical, leave the morals to other people - you just try to fuck people over for money. And if you're sufficiently important, we'll bail you out.
From an incentive? I'm not really happy about that, either.
|
|
| |
It doesn't matter how badly you screw up, the government will bail you out.
Actually, it does matter. You have to screw up something REALLY BIG to get a government bailout.
![[User Picture]](http://l-userpic.livejournal.com/63653561/291983) | | From: | perich |
|---|
| Date: | April 28th, 2008 02:33 pm (UTC) |
|---|
| | | (Link) |
|
The free-trade anarchist endorses this post.
I wonder what it would take for the government to declare all the loans held by the failing company to be held by a different, not-failing company, and give that not-failing company equivalent bailout, and let the failing company just fail. That would make some incentive to not fail, if your competitors would get your business and a grant.
I second this. Government bailouts of large corporations never fail to piss me off. I don't pay taxes so some asshole who probably inherited his wealth can be coddled with them. Fuck him.
![[User Picture]](http://l-userpic.livejournal.com/76878151/3059856) | | From: | kiji_kat |
|---|
| Date: | April 28th, 2008 02:57 pm (UTC) |
|---|
| | Totally not on topic of the post in general, but... | (Link) |
|
...do your friends at the Lusty Wrench happen to know of any other eco-friendly car repair shops, preferably in the Ann Arbor area? My car doesn't need serviced now, but when I need the oil changed (and when the time comes that I do need my car tuned up), I'd like very much to patronize a place like that. If I was still in the area, I'd give LW the business, but if I can help promote the general philosophy, it's the next best thing.
![[User Picture]](http://l-userpic.livejournal.com/2866866/711176) | | From: | theferrett |
|---|
| Date: | April 28th, 2008 03:10 pm (UTC) |
|---|
| | Re: Totally not on topic of the post in general, but... | (Link) |
|
I've asked him. We'll see; I know he's been busy lately.
![[User Picture]](http://l-userpic.livejournal.com/88771980/11033953) | | From: | vrax |
|---|
| Date: | April 28th, 2008 06:43 pm (UTC) |
|---|
| | Hi, this is Josh from Lusty Wrench | (Link) |
|
Thanks for the shout out! A couple of the better ways to find a good shop are Angie's List and the Mechan-X Files, found on the Car Talk website. If you click the Mechan-X link you will see the result of searching in 48106. I would first look for shops that have more than 1 or 2 reviews. And then spend a minute browsing them. On that result page I found places like Tru Tech and Main Street Motors getting good reviews. I don't personally know these shops but it seems like they'd be good places to at least call. Ask them about their environmental policies, get a feel for how they view the issues, and of course make sure they work on the kind of car you drive. If you like them, give them a try for a routine service. The Mechan-X Files is a free service and all you have to do is type in your zip code. www.cartalk.com Good Luck!
well, we could always bail out the company but then firing squad the top 1% of decision makers..
After all, it's the company that's important not the people...
and bullets are cheap and plentiful!
I've long said that if corporations are to be considered a single person for purposes of businesses, then the death sentence is also something to be considered.
It'd probably be hell to do properly, if you could do it at all (and not just kill the dopes who got handed the bag), and the corporations would go broke fighting it, but if done it would be a strong incentive.
![[User Picture]](http://l-userpic.livejournal.com/12773613/982076) | | From: | tybuc |
|---|
| Date: | April 28th, 2008 03:25 pm (UTC) |
|---|
| | | (Link) |
|
if Bear Stearns had to have their assets fully revealed, this wouldn't have gotten bad - but I find it ironic that a man who dislikes government and constantly tells me how it doesn't work thinks that "more regulation" is the answer. More regulation isn't the answer. Or at least not a permanent answer. Organizations like Fannie Mae exist as a loophole to the highly regulated commerce banks that have to at least a fractional percentage of cash reserves on hand to lend money. Their whole basis is a high risk high reward platform that is supposed to exist "outside of the system" and not bound to federal standards or is supposed to be insured by federal funds. Let's not forget that without the low interest rates the Fed spurred for years which allowed liquidity and prices to go haywire, the subprime crisis would not nearly have been as catastophic either, and I don't think anyone's saying the Fed is underregulated. The only thing I disagree with what is an excellently thought out post is that capitalism favors soul crushing monopolies. Yes, in certain cases when there is a barrier to entry (say a resource that only exists on one piece of property or something like a phone network that needs an incredibly expensive infrastructure to begin to provide service) or a non-optional consumer base (say for water), then it indeed becomes profitable to monopolitize. But for the vast majority of goods and services overregulations and laws tailored to specific industries to provide comparative advantages to larger companies are the reasons why smaller businesses don't thrive like they should or used to.
![[User Picture]](http://l-userpic.livejournal.com/64464230/349053) | | From: | bhagwan |
|---|
| Date: | April 28th, 2008 03:49 pm (UTC) |
|---|
| | | (Link) |
|
you make an excellent point. Most laws are not of the simple "don't steal" variety. Most laws, rather, are crafted to subtly shift power, incentive, and advantage to some interest or another. The legal codes are a labyrinth of such laws. Some laws push one way, and then another law pushes the other.
Soul-crushing monopolies are not the antithesis of regulation, they depend on government regulation to stifle competition and create barriers to entry. Without artificial legal contructs to stand in the way, some competitor would always be ready to step up and challenge the market leader.
A good example if this is patents. While patents encourage innovation, they discourage competition. Everyone agrees that both of those things are important, but it's not a simple balance to strike. There is a lot of room for reasonable people to disagree about just where that balance point is placed. Wherever you place that bar of fairness, someone is going to benefit from a competitive advantage while someone else suffers disadvantage. Every law passed carries that same burden: in no case does a law serve everyone equally. Someone gets richer and someone gets poorer. That's what politics is all about.
![[User Picture]](http://l-userpic.livejournal.com/37718801/445887) | | From: | streon |
|---|
| Date: | April 28th, 2008 03:30 pm (UTC) |
|---|
| | | (Link) |
|
I think it's ultimately a bigger problem, which is that the whole stock market/trading system focuses on immediate problems. Companies regularly have to go before their stockholders and justify their continued existence, and that justification is based solely on their performance that year/quarter/whatever. It wouldn't matter if they made the stockholders $1 million last year and are geared up to make $1.5 next year, if they only made $900k this year, the price is gonna fall.
We need to encourage everyone to start thinking more long-term, but I don't see how that's going to happen.
separate the economy into 5 pieces, not just GDP and sales:
Infrastructure (+20 years)
Financial (Banking, Finance)
Noosphere (Intellectual property, algorithms, software, inventions)
Consumables
Services
Give a tax rate based on sales & valuation of each is one way. Simply acknowledging the difference will make a distinction between balance sheets and "health" of a company will be more visible to investors. Of course, most companies have 3 different sets of books. Internal Version, IRS Version, Investor Version. Accounting in the US is the art of lying with numbers.
There was an episode of NPR's Fresh Air that covered this recently. One of the really big problems is the continued deregulation of the financial market. It is really a shadow market. The financial laws of the United States have basically been written by the lobbyists of the big banks and hedge funds. And those lobbyists have said "This stuff is too complicated for normal Americans to understand. Transparency won't help them. Leave it to us. We have M.B.A.s and impressive spending accounts." And Congress basically rolled over and said yes because most people probably now see a stint in Congress for a few years as a good stepping stone to well-paying jobs in the private sector as lobbyists, not a calling.
The big issue in the subprime crisis (and I think it is going to get a lot worse before it gets better) is how the banks make their money. From what I understand, lots of the banks essentially made a bad bet like their might be an office pool on who is going to win the World Series or the Final Four. The bet in this case was are people going to pay off their loans or not. And places like Bear Sterns bet "Yes. People would pay-off their loans because even if they did not have the cash to do so, the growing housing boom meant their houses would be worth more than the original purchase price." But the real estate boom ended and people ended up not being able to pay back their loans and defaulting and then you get a situation like Bear Sterns.
I think the government needed to bail Bear Sterns out. Partially out of cronyism and partially out of sheer necessity. The U.S. government and politicians (usually Republicans) likes to maintain a very hypocritical stances towards government bailouts. It loves to be the stern parent with the individuals and small businesses. The message to those people seems to be "You took a risk and failed. Suffer the consequences and get lost." It's very cold. But too a big corporation, the U.S. government tries to help as much as possible.
The cronyism is that civil servants and pols hope to get cushy jobs after quitting public service. The sheer necessity is how inter-connected all the banks and financial institutions are. If the government decided to let Bear Sterns fall without any aide, I think many other big banks would quickly follow suit. The banks and financial institutions are not in real competition. They do everything together.
And just a note on the police. The problem is that the United States is too jail crazy. We jail for things that should not be a crime in the first place and for things that should be crimes but would not get jail time in other countries (like writing a bad check.) We already have a prison shortage (and the solution is not building more prisons.) Imagine if the United States decided to go after everyone who was in possession of marijuana and jail them for five to fifteen years depending on how much they had in possession. How many people would that be? And smoking dope is probably the most serious crimes, the greater majority of these potheads commit. It would create sheer chaos to jail what I am guessing is probably between 20-40 million people. All governments understand that a certain amount of tolerance for some lawbreaking is necessary. Oral sex is probably still a crime in most places because no one has bothered to update the old morality laws to fit the times.
Subprime is done for now. There are two more ARM resets. Liar loans have only been nibbled at. Derivatives market > $1,000,000,000,000 loss. Read Mish Global Economic Analysis.
All of this other stuff is crap data, and they are only showing you the icing on the cake and claiming the whole thing is chocolate frosting.
![[User Picture]](http://l-userpic.livejournal.com/43770174/2965164) | | From: | icewolf010 |
|---|
| Date: | April 28th, 2008 03:44 pm (UTC) |
|---|
| | More relevant to what you've written than its headline would have you believe.. | (Link) |
|
![[User Picture]](http://l-userpic.livejournal.com/88809513/6858158) | | From: | suzieboz |
|---|
| Date: | April 28th, 2008 03:46 pm (UTC) |
|---|
| | Being flat out lied to | (Link) |
|
That is a small to moderate percentage of the failing mortgages. I have a problem bailing out someone who was and is making 60K a year and has a million dollar mortgage, that falls right into the "should have known better" bracket; the same as I put someone who buys a 70K land cruiser on a salary of 15K a year, YOU JUST DON'T DO IT. Like my friend who took the "interest only" mortgage, I'm sure that the broker told her a crock of crap but she I put in the "you idiot" box because I know that she knew better after being bailed out of her condo loan 3 times by her mom.
![[User Picture]](http://l-userpic.livejournal.com/29976863/4772813) | | | Re: Being flat out lied to | (Link) |
|
I think another part of the issue is that the U.S. government has placed a large importance on home ownership and how great it was. And lots of people were faced with a kind of Hobson's Choice or no choice at all. Maybe these 60K people could not find afforable housing with a good commute to and from work.
I agree that people making 60K should not be buying million dollar houses (and I don't think most of them were.) But there need to be options it can't just be "have a four-hour commute everyday" or "buy a house you really can't afford." And I think that could have happened a lot.
Do you remember the S&L scandal? Do you remember that we bailed out all those banks who had made bad loans? Do you know that the companies who ended up with those S&L assets at pennies on the dollar found themselves later with assets that were worth 99cents for every original dollar value? I wouldn't mind the bailout so much if the people being bailed out wouldn't make out like bandits on the taxpayers' dollar in the end. If those assets that the government just paid for would at least end up owned by the government, instead of owned by the same set of bastards, who make money coming & going.
Seventh paragraph from the bottom, second sentence: you say "bank loan" where I think you mean "bank run."
Not to be That Guy, but it took me out of the essay for a while until I figured it out, so now I share.
![[User Picture]](http://l-userpic.livejournal.com/2921468/755753) | | | Some thoughts, not in any good order | (Link) |
|
- I think that it's important to look at things from both an incentive _and_ a dis-incentive side. I firmly believe that if people _knew_ they wouldn't be able to get away with immorality, they wouldn't try anwhere near as much. Example: Take every car, hook the speedometer to a GPS that knows the speed limit of whatever road your on. Let the whole system debit straight from your bank account any applicable fines. How many people would exceed the speed limit? (The idea of full accountability is explored fairly thoroughly in Halpern's The Truth Machine)
- I can't for the life of me remember who said it, but he made the comment about some of the broken-ness of our economic structure:
There is an inverse relationship between the level of taxation of something and the amount of that something. That is to say: The more you tax something, the less of it there will be. This is incredibly simplistic, of course, but generally true. So - why are we taxing income? Don't we want more of that? Why are we NOT taxing things we _don't_ want, like pollution?
This fits into what you're saying about small businesses - tax them less so there will be more of them.
-After the last big East Coast power outage, some analysts pointed out something that should have been obvious: if you build a system where the only failures can be of the catastrophic variety... you pretty much guarantee catastrophic failure, at some point. Having a system which allows for some... gentle venting isn't necessarily a bad thing. (They were comparing the Canadian/US power system to the Mexican one, where you get more brownouts but almost no total failures).
![[User Picture]](http://l-userpic.livejournal.com/6276731/1193457) | | From: | daraknor |
|---|
| Date: | April 29th, 2008 12:45 am (UTC) |
|---|
| | Re: Some thoughts, not in any good order | (Link) |
|
ooo.. interested in a discussion with you but i don't want to repeat most of what i said in this thread making everyone read stuff multiple times. Please read and maybe respond to my comments.
I think people would be more on-board with taxes if they knew their money would be used effectively and efficiently.
I *do* have a good answer, but it won't happen in the US because of stigma. Also, the entire policy must be adopted to work. Background before I start: Watch the Money Masters, Read Mish's Global Economic Analysis. (google video and google blog respectively.)
Way to fix the US: Abolish the Fed. Money Masters says how to do it gently and easily, the difficulty is that this a political not an economic issue.
Way to make a decent system: Circulate debt free currency based on the value of economic resources. I like real estate backed currency (not mortgage backed, but real estate backed and there is a world of difference) which is then *never loaned* only invested for a % of returns. Standardize the contracts, using bidirectional rating systems.
In terms of socialism, I have an opinion that differs too much from both camps to be phrased in terms of either. #1 Centralize certain infrastructure: water purification, electricity, telecommunications access, health care databases #2 Only provide social support for cost effective behaviors (Cancer from smoking? Too bad. Broken arm? Here's a $20 fix and we will pick up the bill.) Note this doesn't mean 'cheap' it means that increase in money paid means you need an increase in effectiveness. We tend to pay more for less in many areas, especially cancer treatment.
Now I do believe bank runs over the entire economy is bad. I have only met a few people who actually understand what money is, and one of my expertise is working as a money trader. We're supposed to understand this, and most of my cohorts don't know what $1 means. First of all, money is worth what you buy with it. Secondly, how money is released changes its availability which changes how it is used. On a fundamental level, the US Dollar is invented through mortgages. That pays construction workers, contractors, real estate agents, mortgage brokers, etc. The Fed determines how much money is available, the prime banks get first swing and the secondary banks push it into society. The US CAN NOT function if we have trade balance, the USD is the main export.
There are going to be 3 global economies: Chinese Yuan, Eurodollar, US Dollar. That spells YES in money btw (good meme!) The US has enjoyed a mandated monopoly on intl commerce since the Bretton-Woods agreement after WW2. That has change. The American economy will go through drastic and long term changes due to a breaking of the monopoly. Europe is now the #1 economy in the world (exchange rate * previous GDP) and the world will continue to change. BANKS SHOULD FAIL. HEDGE FUNDS SHOULD FAIL. The coming 'accounting reconciliation' will be at least $1 Trillion. I'm not paying for it.
RE: social support for cost effective behaviours
As much as I like the idea, it has two problems: 1) who defines "cost-effective behaviours" (because if what I know of American health insurance providers is any indication, it's not something that has worked well so far); 2) who figures out when cost-effective behaviours are happening? Taking your examples above: While there is a statistical correlation between smoking and lung cancer, do you really want to base life-saving/ending decisions on that correlation? And what if the broken arm was as a result of un-provable dumb?
If you're interested in creative economic solutions, Kim Stanley Robinson's Mars series has a number of fun ideas...
![[User Picture]](http://l-userpic.livejournal.com/29177458/6855989) | | From: | cathy_n |
|---|
| Date: | April 29th, 2008 05:32 am (UTC) |
|---|
| | It's not just the poor... | (Link) |
|
The media seems to have cultivated this image of the mortgage crisis as being a result of adjustable-rate mortgages. What about the mortgages commonly called "liar's loans", where not one shred of documentation about your financial status has to be submitted? You just write down something bogus about your income and you can buy that house you wanted. Since a large percentage of loans in some markets were liar's loans, this really inflated the prices on houses in those markets, resulting in more people lying about their income in order to secure mortgages for real estate, resulting in house prices spiraling up. Then house prices stopped going up and corrected themselves. Oops. It's not just rate resets that are causing problems. It's loans given where there was no reason to believe that the person taking out the mortgage could ever pay it back. What's just as ethically disgusting as misleading a homebuyer into an ARM or interest-only mortgage? Giving out loans of all sizes to all comers, regardless of ability to pay, collecting your paycheck, and letting the shit hit the fan for somebody else. This is a decent piece talking about liar's loans. http://www.slate.com/id/2189576/
| From: | (Anonymous) |
|---|
| Date: | April 29th, 2008 06:43 am (UTC) |
|---|
| | Bear Vs. Stearns | (Link) |
|
The article says that people mostly like the idea of personal responsibility and morality. They don't like any type of Laws. But I'm also for much greater control over the police, because I think whenever a cop beats someone and bypasses the whole Constitution to take the law into his own nightstick, it also leads to people not respecting the law.
It's doesn't matter how badly you be cheated the government will bail you out.
Lastly, it says that if you are really important for them, they'll bail you
out.
![[User Picture]](http://l-userpic.livejournal.com/8998562/1520447) | | From: | darlox |
|---|
| Date: | April 30th, 2008 05:09 pm (UTC) |
|---|
| | | (Link) |
|
Only thing I'll disagree with is the assertion that the behavior boils down to:
"It doesn't matter how badly you screw up, the government will bail you out."
If there is a vested national interest in the continued health of a business or industry, then yes, you will get help once. But history has definitely proven that the US Government (unlike many European governments) will generally only do it that once. The airline industry is another great example here. They built a house of cards, the downturn after Sept 11 happened and they all headed for the rocks, they got a bailout. Now, oil is $100+ a barrel, they're hemorrhaging billions, and the government has basically said: "hey, this is your own problem now. You had time to deal with this particular crisis." 3 smaller airlines have completely collapsed in the past 3 months.
I would expect that the securities industry just got its mulligan. The structure that will arise from the ashes will be more diversified, and if/when it crashes, I find it exceptionally unlikely that there would ever be another gov't bailout. The Savings and Loan crisis in the 80's is an example of this. The solution was regulations to ensure responsible behavior of federally chartered S&Ls, and punish malfeasance. While some have suggested that the bail-out is the very REASON why banks were willing to make incredibly high-risk loans in the current cycle, that argument seems tenuous at best. The 80's saw blind, blanket deregulation combined with active mismanagement and malfeasance as the drivers behind the core problems -- failure was inevitable regardless of what the market did. In the current cycle, the catalyst for failure was market forces (energy prices, swelling foreign demand, etc) well beyond the control of the entities who took the first hits. The behavior was poor, but it was at least based on a set of _reasonable_ assumptions, which simply didn't hold.
I'm just suggesting that there's a difference between guiding regulation and punitive regulation. There is a major difference, and even the most staunch conservatives rarely have a problem with regulation that prevents stupid behavior. Only the sort that _punishes_ behavior that someone doesn't like, or likewise disincentivises creativity by making it prohibitively expensive.
With all of that said, I think you've over-stated the 20/20/60 scenario too. While outfits like Josh's family auto shop are very noble and mean exceptionally well in their behaviors, the bottom line is that in times of crisis, trying to help _everyone_ is futile. GOOD business owners do everything they can to provide for and protect their employees. I know not everyone likes the reality of "haves" versus "have nots", but hey... Unemployment is only 5%. Being generous and adding in another 20% of people who are employed in awful jobs, that still means that 3/4 of the citizens of this country are provided for, while 25% have very little. It's difficult to say that's worse than a country where 100% of the people have slightly-more-than-very-little...
Jeez.
First: Bear Stearns was experiencing a classic bank run. People were pulling money out, and the other banks were too unsure about their own portfolios to lend. BS goes to the Federal Reserve, created by the Uncle Sam as "the lender of last resort." But BS is an investment house, not a commercial bank. Originally, the two were often the same, but we are living in the immediate-post-Glass-Steagle era.
The Fed pulled out a loophole for "extraordinary measures", went through BS's books, and offered them a loan.
The market went apeshit. The news of the loan (which Bear Stearns asked for) dropped BS stock even further. In the end, the Fed managed to sell BS for $2 a share (from a high of $140, and $70 only a month before the end) to JP Morgan (which was underwritten for $30 billion against any losses it might suffer in taking over BS).
An investment house which owns a $1 billion office building in NYC was sold for $236 million dollars. That's not a bailout. That's a fire sale, a bankruptcy at light speed.
40% of that stock, may I note, was owned by Bear Stearns employees. You can bet the CEO was holding a ton of it when the disaster struck.
So every quasi-socialist comment in this thread about Bear Stearns and bailouts is, pretty much, false from the first premises.
As for the imminent disaster from the subprime crisis (and how the media loves that word, "crisis"), I haven't seen the Dow Jones or Nasdaq spiraling into a smoking hole in the ground. The banks and houses have their feet under them, again. |
|
![[info]](http://l-stat.livejournal.com/img/openid-profile.gif){kind=small}