JohnL

Restoring the Health of the 'Too-Big-to-Fails' Also Restores Them to Power

You are an informed patriot Steve. There are so few.

And the Left blames the free market for monopolies! Once again it is government intervention -- not the free market -- that helps consolidate economic power, along with the political power and corruption that go along with it.

Bernanke Is Right: 'Transparency' Is Important

-- The root of the "problem" that the world financial system is facing right now, and the ultimate cause of this problem, is that neither US GAAP (nor indeed IFRS) can conceive of a valuation of an asset that has two or more radically different "values" at the same time, depending on the purpose of the valuation. --

My eyes always stop scanning when an author identifies the "root cause" of the current financial problem. My question: why has an accounting challenge become so important all of a sudden? Is it not because the severity of the boom elevated asset prices so high in relation to the bust-prices seen now? Accounting valuation differences merely reflect the severity of the boom-bust cycle that swept up so many bankers and investors.

Might we not say that almost any accounting method would be adequate if the cycle was greatly moderated? Thus, I would assign more attention to the credit cycle than to accounting rules. I blame the monetary elasticity of fiat money and fractional-reserve lending for the cycle, but that is a debate for another day.

Obama and Bush: Different Objectives, Same Results

-- President Bush thought common shareholders in financial institutions should be massacred to preserve Darwinistic capitalism. --

What other kind of capitalism is there? I thought that capitalism was a system in which those that are less successful at satisfying customer wants in a profitable manner, lose money, lose business and eventually lose their investment. The resources at their disposal get picked up by someone more successful. I'm confused (again).

The NY Times on Bank Nationalization

--It is a general flaw in the nature of business to require growth, but what happens when you get too big... I think we are experiencing that.--

I disagree that to run a business requires growth. There have been very successful businesses that have been in small for a hundred or more years -- sometimes family businesses passed down from generation to generation. The flaw that I see is government actions which promote growth of big businesses over their smaller competitors. That said, I agree we are experiencing the problem.

The NY Times on Bank Nationalization

--Still I have no problems admitting that while distasteful nationalization is sometimes the best solution...--

I have a problem admitting that (if it involves the use of taxpayer money or government control over private firms). I've not yet heard a compelling case why we can't simply let it be settled in bankruptcy court. Assets get sold, small depositors are protected by the FDIC, shareholders lose everything. If there's anything left for senior creditors, good for them. And stronger, more prudent bankers take over operations and market share from those that proved themselves unworthy.

Bankruptcy happens in every other free-market industry, every working day of our lives. And that system of winners and losers (and creative destruction) has produced the prosperity we enjoy today. Now, if you argue that the banks are too big to fail, then you should agree that they need to be smaller. But every scheme I've seen proposed will use taxpayer money to keep the big banks big.

What we need is a way to get to smaller banks, capitalized only by private individuals and free of government control. And we should do it before they get any bigger. I've not heard of a better way than the bankruptcy process.

Too Big to Bail: Lehman Brothers Is the Model for Fixing the Zombie Banks

"Thus, its not worth the risk to dismantle these banks. If Lewis and Pandit are able to keep their businesses going with a few injections here and there, that is by far the better option."

Who is providing the injections? The bondholders or the taxpayers? Yeah, I thought so. To borrow from the Iron Lady, the problem with bailouts is that you eventually run out of other people's money.

Foreclosure Moratoriums: It's Time to Get Real

Dirk,

Thanks for taking the time to reply. You and I may never agree, but I made one last attempt.

<As I understand the Austrian school, there is a "business cycle" of boom and bust. Opportunity, credit extended, credit overextended, credit defaulted, foreclosure, liquidation, rebirth. I agree it makes some sense when thinking about things like discovering the New World, California Gold Rush, Industrial Revolution, or the Internet.>

No, those events you cited are not what the Austrians are talking about; those are real, exogenous events to which the economy must respond. They force relative prices and output mixes to change, but that would be true regardless of the monetary system.

The "credit cycle" (i.e. the business cycle), on the other hand, is artificial. The economy swings upward, in an unsustainable manner, because credit is made available and cheap via the banking system -- enough to induce the purchase of goods which don't exist and can't be produced at the current level of labor productivity. It looks like good times and much activity is stimulated, but it can't be sustained. The economy is forced to swing back down to sustainable levels when the artificial demand meets the reality of supply. Of course, this phase is really painful and tragic. This cycle doesn't happen on a true gold standard with full-reserve banking since there is no artificial credit to start the boom, but happens frequently with our current banking system.

For example, the recent commodity boom and high energy prices were threatening to cut off all profitability for downstream producers as the price increases could not be passed on to the maxed-out consumer. And the home buying frenzy came to an end when homebuyers simply could not afford the elevated cost of the houses. The economy had moved beyond the Production Possibilities Frontier.

The individual entrepreneur gets tricked by this see-sawing of interest rates and credit availability. One minute an investment looks fine; the next minute he can't afford the credit to finish or maintain his investment. To him, the high interest rates are the problem when, in fact, the high rates are merely the central bankers trying to lower overall spending because goods are becoming scarce. The credit cycle is the enemy of the businessman, and the bankers cause the credit cycle.

As for the gold standard, the supply of gold over many centuries has grown fairly consistently at about 3% per year, which is just about the same as economic output in general. An energy-based money might be an interesting alternative or complement to gold. The keys are the removal of fiat money and fractional-reserve lending that allow phantom "money" to chase very real goods.

Foreclosure Moratoriums: It's Time to Get Real

Dirk,

I appreciate your reply, though I would say I'm not the only one doing a little stampeding into answers. :-)

It seems that you and I essentially disagree on this: you think the output growth, use of credit and asset prices seen in 2004-2006 are more sustainable with lower interest rates, whereas I think those things are only sustainable, albeit at lower levels, with higher interest rates. Thus, you view the interest rate hikes as a mistake whereas I view them as required.

I fully admit that I don't know the "correct" set of interest rates and would contend you don't either; neither is omiscient. We probably both think that setting them incorrectly can cause big problems.

You also apparently agree that the central bankers don't know the correct rates either (though for different reasons). This leads to my true complaint: interest rates, both long and short, are controlled to a large extent by bankers, when they should be set freely in the market. That is, the supply and demand for money should be set freely by many market participants, free of government interference. The only way that can happen is if our money is based on a valuable commodity (e.g. gold and/or silver) and nobody is permitted to create "money" out of thin air via fractional-reserve lending. Only with an honest money system will interest rates reflect the true and correct price of money. And I think all such economic crises will be largely eliminated.

If you haven't already, I would recommend you look into the Austrian school of economics for more of the rationale behind my ideas. If you already have, I would like to get your feedback.

Foreclosure Moratoriums: It's Time to Get Real

<Investors, lenders, and debtors need to have some confidence the system will not blow up on them as it did here.

And it blew up because of 18 Fed rate hikes that created 2-3X increase in company debt service requirements, killing hiring, and 2X increase in ARM rates...>

Or did it blow up because the Fed lowered rates to unsustainably low levels, inducing investors to go out on the risk curve to get yield, inducing consumers to load up on unsustainable debt and driving up asset prices to unsustainable heights? I would argue the "blow up" occurred when everyone had smiles on their faces.

Foreclosure Moratoriums: It's Time to Get Real

<We have all lost sight of the old statements "a sucker is born every minute", "if it is too good to be true, it most likely is." These statement have not come about by the housing crisis, they have existed as long as there have been salepeople.>

If there was fraud, there should be prosecution. But the fact that these statements are so old and so well-known in our culture, is just evidence that these homebuyers can't claim ignorance about snake oil. It still comes back to a really basic question: who should take (financial) responsibility for a person's mistakes? I think it is immoral to forcibly take money from one person's pocket to pay for the mistakes of another. That's the intended purpose of all these bailouts.

Foreclosure Moratoriums: It's Time to Get Real

"It was hard to foresee the mess that came. Does a mistake or a miscalculation or a decision made of necessity remove their right to a little help now to survive the storm so that we don't have to deal with the fallout later when the market turns around?"

I made a huge mistake on some stocks I bought in 1999. Do I have a "right" to get some help from you? I can provide you with my bank routing number whenever you're ready to make the transfer.

Adults used to take responsibility for their actions and when good people were down, their family, friends, congregation and neighbors voluntarily pitched in. That system worked fine for thousands of years from what I can tell. Today, people think they have a right to their fellow taxpayers' wealth whenever they mess up. It's incredibly immoral, and it should be illegal.

Nationalizing the U.S. Banking Sector: There's No Choice

"The good news is this: most policymakers agree that letting the banks fail is an unacceptable outcome."

You know we've arrived in Wonderland when it's good news that failed capitalists will be made whole, at the expense of their competitors and the taxpayers. It's sad commentary on how dishonest and immoral this "free market" has become.

What's the Point of the FHLBs?

"What is the point of the FHLB ?"

The money and credit of the U.S. taxpayer is channeled to certain homebuyers by subsidizing and guaranteeing their home mortgage. The point is to take money from some taxpayers and give it to others deemed more needy. It's called a wealth transfer -- just another form of socialism.

"Regulation are needed when laws are not followed."

No, the laws need to be enforced and the guilty need to be punished. More regulations are not needed. I would have a lot more faith in these government programs if the government proved capable of enforcing the laws already on the books.

Backroom Bear Stearns Deal Exposed

The Fed is heroic, huh? The arsonist shows up and puts out the fire. When are people going to stop and ask: why is this happening? You don't have a "loss of confidence" unless the money is worthless paper and the loans form an illiquid pyramid. As long as our "financial system" is based on fiat money and fractional-reserve lending, the problems and the bailouts will continue. And taxpayers will keep picking up the tab for the bad bets made by the financial "elite."