Interdependence and This Crisis 17 comments
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At times like these, when history hits the fast-forward button, it's important to step back and take a broader view of what's happening and why.
With the federal government's latest and biggest intervention in a state of flux (see here and here), and unfolding in the hothouse atmosphere of a hard-fought presidential election, let's put some larger context around the events of the last few days.
First, contrary to the half-informed pronouncements of so many anchors, reporters, and editors, the nearly 130-point move from intraday lows to highs in the S&P 500 wasn't so much an expression of enthusiasm for the bailout package as it was one of the great short squeezes of all time -- and not just in the financials directly affected by the temporary (we hope) ban on short-selling. Who knows where today's trading will end, but the action isn't exactly the kind of follow-through the bulls would like to see to confirm a sustainable move higher in equity prices.
Second, as Hank Paulson said yesterday on This Week and Meet the Press, the real action is in the credit markets, not the stock market per se. They're related, of course, but the system-imperiling conditions were and are in the credit markets.
Third, and most importantly, there's one fact of life that distinguishes our time from all earlier times: Interdependence. The dawning realization of interdependence, economic, ecological, and otherwise, gave rise to the regulatory innovations of the 20th century, from the Federal Reserve itself to the Environmental Protection Agency.
Beginning in the progressive era of the 1900s and 1910s, surging in the New Deal period, and reaching full flower in the late 1960s and early 1970s, old constitutional tropes about interstate commerce and limits to federal power were swept away by the widespread recognition that what happened in one place mattered for people, institutions, and systems in lots of other places. Developments in technology, transportation, and culture were, of course, the underlying causes of the rise of interdependence, but they can all be subsumed in that broad category. When dollars, debts, diseases, things, people, and ideas can move around the planet with sudden speed, what happens on Wall Street affects Main Street, what happens on one part of Wall Street affects every other part of Wall Street, and and what happens on Main Street affects Wall Street. And, of course, what happens on Wall Street affects London, Tokyo, Nairobi, Istanbul, and Sydney.
Reasonable people can disagree about the details of the latest intervention. Indeed, reasonable people should disagree about them. We think it's more important to get the policy right than it is to get it done yesterday.
But whatever the details might be, the fact of interdependence - -the fact that, alas, Main Street needs a "bailout" of certain players on Wall Street who made enormous mistakes for which we're all paying dearly -- dictates that we shed ideological dogma in favor of pragmatic imperatives.* The alternative -- the freezing of credit for households and small and big businesses alike -- is entirely unacceptable.
As we move forward, however, Main Street has every right and plenty of reason to insist, through the coercive power of the state, that sobriety return to Wall Street. After all, as Warren Buffet put it so well, "the hangover is commensurate with the binge."
* To clarify: Those pragmatic imperatives may well--indeed, probably definitely do--include things that reach beyond making appropriations and granting more or less unchecked power to Hank Paulson and future Secretaries of the Treasury...which worries us, not as a personal matter, but as an institutional one.
Sources
John Helyar, Alison Fitzgerald, Mark Pittman, and Serena Saitto, "Ten Days Changed Wall Street as Bernanke Saw 'Massive Failures,'" Bloomberg, September 22, 2008
Roger Runningen, "Bush Urges Quick Action on Financial Rescue Package," Bloomberg, September 22, 2008
Dawn Kopecki and James Rowley, "Dodd Proposes Giving U.S. Equity Stake for Bad Debt," Bloomberg, September 22, 2008
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Blah, blah... just more drivel from another statist.
But when you do a bit more calculations one easily observes we will have about 900+ more toxic debt created this year.
I will not explain, you can do your own thinking when you read the next link (look at the one before last column where the combined US financial debt is on the hook):
www.federalreserve.gov...
Have a nice life trying to understand the debt growth...
A bailout is just confirmation of a correction, let it correct and quit being such a socialist.
Giving the keys to the Treasury to financial super-predator Paulson is nauseating.
But whatever the details might be, the fact of interdependence - -the fact that, alas, Main Street needs a "bailout" of certain players on Wall Street who made enormous mistakes for which we're all paying dearly -- dictates that we shed ideological dogma in favor of pragmatic imperatives.* The alternative -- the freezing of credit for households and small and big businesses alike - -is entirely unacceptable.
With all due respect; how can you write that with a straight face? Seriously, are you high? Are you one of the bankers who made the bad loans? How are you profiting from this?
The fact is that banks made greedy and foolish loans and will not "pay dearly" (as you assert they already have). The Feds are essentially taking on the risk that these bankers, with eyes wide open, greedily undertook. Can you imagine the outcry if someone would have asserted that the Feds step in and reap profits when the bubble was inflating? I bet writers like yourself would then be talking about how "risk deserves reward." Isn't it interesting what happens when powerful people stand to lose money?
Unfortunately, we are seeing undeniable proof that what Congress and the Bush Administration are about is the bailout of the wealthiest crust of America. Your assertion that mainstreet needs this bailout is naive at best and possibly deceitful.
I challenge you to have the balls to come back and answer how exactly you justify, in a capitalistic economy, that the tax-payers of America fund the losses incurred by private banks. Seriously, beyond the bull-shit you just wrote give the American public a real answer. I am honestly open to correction, but from your article you look like you have definite vested interest in being "bailed out." Your readers will await your response!
Apparently Paulson went to Congress with a stark message that if the banks were left unchecked in a free-fall state, their may be blood on the street and that it may be theirs. Thus we have the "emergency" bail-out bill that should be passed yesterday. Don't think too much about it Congress, after all I'm Paulson, the smartest guy in the room... Don't think too much! For Congress, based on prior experience, that shouldn't be too much of a problem.
I find it puzzling that the section on the total elimination of Judicial Review for this law (Constitutional?) has had zero scrutiny in the media. Incredibly a professor of law from the state that brought us hanging chads stated the following:
The ban on legal challenges of actions by Treasury is ``distasteful, it's unfortunate and it's bad precedent, but this is an emergency and you have to act,'' said Jerry Markham, a law professor at Florida State University and author of ``A Financial History of the United States.''
``What you don't want happen is to have lawsuits that will slow things down and cause problems,'' he said.
Amazing! We can just do away with the Third Branch of government! After all, these trials for the accused and appeals are just a bother. In the words of John Madison:
"The accumulation of all powers, legislative, executive, and judiciary, in the same hands ... is the definition of tyranny."
As Congress passes off absolute power to the Executive Branch in a law that prohibits Judicial Review, one needs to contemplate where we are headed. Perhaps the pundits I saw on Bloomberg today were right... Get your money out of the U.S. dollar and just get out of the U.S. (literally). It is a sad day for our country, democracy is dead, as is our economy.
Some benefits:
1) Reduces compensation of the Wall street bigwigs without affecting lower level employees.
2) It would sharply lower municipal bond interest rates. State and local governments are in dire straits and need all the help they can.
3) It would help real estate prices, since for people in the highest tax bracket the after-tax mortgage rate would be substantially reduced.
4) Help even out the L-curve and stabilize the system. The top 0.1% has been rapidly taking over an enormous share of national income and wealth to the point where the system has become unstable.
I'm not going to get too deep into the philosophy of all this, but I'll note a few things to try to allay some concerns:
1. We're a small money management shop. We have no particular/direct stake in the proposed bailout. No more, that is, than whatever stake we have as rank-and-file investors interested in seeing a functioning system.
2. We have no interest in artificially/temporari... higher asset prices per se. Indeed, our actively managed portfolio has for months featured--and still retains--a substantial cash position. We do have a very modest long position in Goldman Sachs. I can assure you it's not big enough to affect our perspective, or my writing, on the larger credit crisis.
3. As I wrote in the footnote to the above piece, we're quite concerned about the concentration of power in this or any other administration. The now-infamous section on the Secretary's un-reviewable powers won't survive the legislative process, as well it shouldn't. We're concerned about the interests of the taxpayers as well. Speaking for myself, I sense that the legislative train has slowed a little, and that's good. A deliberate process will surely produce a better outcome than a hurried one.
4. I believe very strongly in market mechanisms. I also think business and government need each other to function properly. That's the point about shedding dogmas of all kinds. Perhaps the process will play out and the "solution" will be a stripped down version of what we've seen to this point. If that's the right answer, that would be great.
5. As relatively small-scale investors a thousand miles from Wall Street, we feel plenty sour toward the masters of the universe who put us all in this position. The point about interdependence is that whatever sorts of recriminations we might want to offer, the fact is that the credit markets stared into the abyss last week. As a pragmatist (or so I'd like to think!), I'm for whatever walks us back from the edge and gets the system functioning again.
I certainly don't pretend to have all the answers, but I doubt the best available answers will conform perfectly to many people's idealized and abstract notions. Including my own!
Last I heard, this thing is a dead duck.
You are prompt! My post was a little heated, I admit. And unfortunately, you became my whipping boy for this bailout plan. I apologize. I am a bit concerned though, that thoughtful folks such as yourself do not seem to be tuned into the long-term implications of an indebted government. I agree with your interdependence philosophy, but why not make the bailout on the borrower's end instead of the banks? Why not provide some sort of legislative power to help homeowners renegotiate their terms and banks break-even or take managed losses on the faulty loans they wrote. Why should we not allow some banks to fail?
I still don't see that in your response. What I do see is someone in the capital market eager to keep the system flowing (which I can understand) but ignoring that the problem is an overly leveraged, indebted, and overvalued American economy that has priced assets (particularly homes) well above their actual real values. A correction has to occur, why waste a trillion dollars of taxpayer money when it is obvious that home values have outpaced actual earnings.
I don't want to ask you an either/or, faulty, straw-man question; but really how does one justify such a bailout. Is it not taking care of the immediate while selling out the long-term? I don't get it.
Once again I apologize to you for my over-the-top and rude post. You didn't deserve that and my emotional reaction to what I deem to be another "bull-shit" payday for the wealthy (from the Bush Administration) got the best of me.
David in D
I totally agree , we have been put on the hook to bail out the elitist bankers in the us . The trillions of dollars that americans have paid into the social security + medicare programs will not be that because those at the top will do whatever they want with the " sheeples" money . Let the Bankers Rot !
i may be completely off the mark here, but if main street hadn't leveraged itself so much- would a large percentage of the "bad debt" still be bad?
aren't we paying dearly for the enormous mistakes main street helped create?
Now as the markets are gripped by the mental paralysis,the new short rule should be expanded to a broader sectors untill concerns are addressed. There is no economic value to a short position as it is reflection of the speculative some times market disruptive reactions.
The Congress should pass the stabilization package without the further waste of time.
The Treasury is quite capable to address the issues quite effectively.
This is not the time to have the intellectual peanut gallery second guess the effectivness of the proposed plan and at the same time basically preach market anarchy .
While ago we have found out that not so mysterious segment of the investment universe was short financial sector and long the commodities.In retrospect ,this strategy is responsible for some of the market upheavals.
It appears that the ban on financial shorts is being circumvented by shorting other sectors and being long commodities(including gold).One more time ,the "stability plan" is effective and will address the issues..Let's pass it and implement it .There is no need for politcs right now.