matthutch

Allen Stanford, Ponzi Operator

"Please explain how CDO's laden with high risk mortgages garner AAA ratings. No amount of accounting subterfuge with complex statistical models can make it true . It is crooked."

first of all, the ratings agencies are a federally-imposed oligopoly. that whole system needs to be overhauled.

second, my comment was in response to the idea that people who "concocted every kind of derivative" are crooks. again, coming up with product ideas is not a crime, nor is it crooked. if that were true, all the people coming up with crazy ideas that never turn into commercial successes would be filling up our prisons. instead, misrepresenting something that is known to be incorrect is fraud. i think you'll have a hard time proving that the rating agencies (who are not investment bankers, by the way, who were the object of the original post) acted in bad faith in putting together their models. i'll assume you know how the cdo's and cmo's were structured and how they justified the ratings. just like everyone else who bought mortgage-backed securities, they underestimated the risk. it's easy to see what the problem was ex post, but it as easy to see them ex ante. of course, there were some who did, but as the saying goes, economists have predicted nine of the last three recessions.

this isn't the first time in the history of mankind it's happened either. it wouldn't be right to say that every time someone underestimates risk and tries to sell something based on that idea they were being deceptive.

Allen Stanford, Ponzi Operator

again, seeing you misunderstood my post, "concocting" something, even if it doesn't work, isn't fraud. people need to buy it before there is a problem. even selling something that doesn't work as well as you thought it would isn't fraud. how many products have all of us bought over the years that broke or didn't work right? was it fraud in every instance? of course not.

by the same notion, not understanding the risks, even if you came up with the product, isn't fraud. there was fraud at the loan origination level. sure. but that requires no derivatives. securitization has been around for awhile and wasn't invented by bankers. tell me what these fraudulent derivatives were.

and no, looking at something post hoc that didn't work doesn't mean it was fraud. fraud requires deception, and the broad use of these derivatives show no indication of fraud. it shows ignorance and stupidity. if it *was* fraud, meaning the bankers knew the risks and misrepresented them to their clients, they forgot to tell the guys on the next floor, b/c they fell for it hook line and sinker from the bankers at competing firms. if they knew about it and deceived those to whom they sold the derivatives, why are bear, lehman, merrill no longer with us and so many other firms on government life support? it's ludicrous to say they fully knew the risks and lied.

and i'll add that the compensation structure is screwed up as well. as long as compensation is measured in relatively small annual increments and the risks of a series of decisions can build up over two or three years, we'll see this again. people will take risks if the consequences of those risks occur a few years into the future and they won't be held financially responsible for assuming those risks (ie forfeited bonuses, etc). enron, for example, had similar problems, where they had people getting paid for future/expected profitability as they brought in deals with no recourse if the deals weren't as profitable as expected.

Allen Stanford, Ponzi Operator

"truly, the REAL crooks are the investment bankers who concocted every kind of oddball derivative imaginable in order to have something that they could make a commission from selling"

how can you call a person who does this a crook? do you ever see infomercials or pass the home shopping network on the way to another station? i see a bunch of pretty oddball stuff for sell, all to help them "make a commission [of sorts] from selling". back in their respective days, cars, radios, tvs, personal computers, cell phones, etc were all fairly oddball such that many people never expected them to catch on commercially. just b/c you don't (and it turns out they and many people who bought them) understand them, doesn't mean they are crooks for coming up with them, even as we look back and see there were problems.

Chrysler: Held Hostage by Cerberus

"The plan is a Hail Mary strategy that might work, but the chances of it working aren’t good enough to put in their own money; but if they can get free money from the government (free in the sense that if Chrysler collapses, Cerberus won’t have to repay the government), they might as well give it a shot."

this is the important line from this article. cerberus didn't invest in chrysler to see it fail -- it planned to make money by making and selling cars. well, that didn't happen. because they do see the company for what it (likely) is, they see an additional investment as a waste of money and contrary to their obligations to their investors.

the only way they see a possibility to make a profit on their investment is to turn to rent-seeking. there's nothing surprising here. companies do this all the time. i think it's disgusting. not that they seek rents (after all, that's a human survival technique to desperately look for help from whomever might give it to you), but that politicians play along. the pols, it seems, seem to buy your analogy of the personification of chrysler as a faultless hostage with a gun to her head. not so. chrysler, like any other business, is a collection of (hopefully) productive assets and the people hired to operate them. if those assets have value, and i presume they do to one degree or another, they will be used to close to their best use, if not in the short run, then in the long run. that might be by chrysler or another company. for government to step in to interfere with this process, in effect allowing the "profit" but not the "loss" if they believe it's too great, is not capitalism. and government officials who give out favors when companies seek a handout or some other kind of political favoritism only perpetuates the problem by indicating that lobbying can pay off.

Stimulus Bill Signed; Now, Will It Work?

the stimulus will probably have an effect on measured gdp in the short run, but does that mean it was worth it? does that mean "the economy" is better off? how are going to measure the extent to which it works? when measured gdp rises, and it will, those who exercise great faith in government action will declare success, because they will look to these crude government statistics as a measure of efficacy. i'm sure with each legislative stone politicians (and their complicit economists) threw into "affordable housing" river, such as mortgage interest deductions, capital gains exclusions, Fannie and Freddie, etc, they all patted each other on the back. After all, they concluded, it didn't cause any harm. well, au contraire mon fraire. we might see some kind of paper recovery, just like we did through the first part of the decade, as government policy encourages people to invest in something we shouldn't (heck, maybe it'll be homes again; politicians seem to somehow "know" what the right price of housing is and we now are below that price so they will incentivize us to invest).

Did 2008's $677 Billion Trade Deficit Cause the Recession?

“To finance the deficit of recent years, Americans have borrowed more than $6.5 trillion from foreign sources”
Americans haven’t borrowed to fund the trade deficit. No debt was created. You can wonder, though, if we’d have as large of a trade deficit if we didn’t require such a large capital surplus to fund our budget deficit. The federal government has borrowed to fund its deficit. And with all the government is about to borrow to fund future deficits, including the stimulus, the capital surplus is about to get a whole lot bigger.
“The Chinese government alone holds about $2 trillion in U.S. and other securities, and these could be used to purchase about 20 percent of the value of publicly-traded U.S. companies.”
I don’t see why this is a concern. What would happen if they decided they wanted to diversify (ie sell what they own and buy something else)? They would significantly impair the assets they’re selling, realizing massive losses, and bid up the assets they’re buying. They would create huge gains for whoever buys the assets they sell and whoever sells the assets they buy. And now your concern is that they will now do something nefarious after they buy up our assets. If they do anything but run them profitably, they will lose on their investment. If SWF’s really wanted to hurt us, they could just shut off the oil or stop buying debt. But why don’t they? Because Americans are their customers and they realize the W in their SWF is inextricably connected with the US.
“The American appetite for inexpensive imported consumer goods and cars is also a huge factor driving up the trade deficit.”
We only buy as much as we do from non-US sources is because it’s cheaper. Why do we buy so much oil? It’s cheaper than alternatives. Not because we’re “addicted”. All consumers have an appetite for relatively inexpensive goods. They make judgments based on quality, price, convenience, and any number of other reasons. Are you arguing they should buy without regard for the value per dollar? You might be able to convince politicians that paying too much for something is a good way to stimulate the economy, but I think you’ll find it much harder to convince anyone who actually spends their own money.
“Dollars spent on imported oil and cars and consumer goods from China cannot be spent on U.S. goods and services, and every dollar that U.S. imports exceed exports negates at least one dollar of federal stimulus spending.”
This isn’t true (if you’re on board with the idea that even if the federal dollar is stimulative in the first place). First, this assumes that every dollar spent on an imported good goes straight to China or the Saudis. In fact, Wal-Mart makes a profit when you buy. They paid the trucking companies to get it there. Often, Wal-Mart bought it from someone else, who makes a profit. There are a lot of people who get a piece of that dollar. Second, again, that dollar we send over there doesn’t do them a bit of good. For them to benefit from that dollar, they need to buy dollar-denominated assets. That might be a dollar-denominated tractor or a dollar denominated treasury note or a dollar-denominated whatever.

Free-Market Healthcare Falling Victim to Recession

I don't understand what was meant by this statement:

"Could it be possible that our free market healthcare system is rationing care just like the socialist systems?"

Any resource with less than an unlimited quantity available for consumption needs to be "rationed" somehow. Healthcare is no exception. The difference between rationing with a market system (usually referred to as allocation) and rationing under socialism is who does the allocating. Under a market, resources are allocated based on prices that people respond to. Socialism allocates by bureaucrats/committee. Our current system of health care in almost no way resembles a market, let alone a free one.

Two Types of Speculation: One Harmful, One Not

"The kind of speculation we should worry about is "bandwagon behavior." This is speculation that is disconnected from fundamentals. For example, suppose that people become convinced that [housing prices could go up indefinitely]. Even though this isn't true, suppose people become convinced that it is true through some sort of misleading information campaign, perhaps abetted by a media more interested in hyping controversy than in informing people of the facts."

His thesis seems to be that because speculation based on incorrect information causes a misallocation of resources, it is bad. OK. Granted. So what? Did I miss his action step conclusion? Does he think this kind of speculation should be banned? Surely not. Who gets to decide what is good information and what is bad information? I hope he doesn’t think that people should be disallowed of an investment/speculation because they disagree with the accurate information police. Or maybe he simply prefers people should only be able to speculate on information that his wisdom deems accurate? This is nothing more than political hackery dressed up as economic analysis.

Bill Gross: The Housing/GSE Bill Is Best Way Out of Credit Crisis

beat me to it, strad. don't you just love how one guy (or maybe a small group of guys at pimco) know that houses are too cheap and need to be "made" to go up? i trust the thousands of people out there buying homes. do you think a couple decades of success has contributed to mr. bill's "fatal conceit"?

Illiinois - Countrywide: Potentially Devastating

this really scares me. i don't like government officials using their leverage to go after politically convenient targets. among the charges is that they relaxed underwriting standards. all this means is that they offered a lower rate than they would have otherwise or allowed them to borrow more than they would have otherwise. would i complain if countrywide lowered their standards for me so i could get a cheaper loan? would any of us complain if our credit card providers lowered their underwriting standards for our benefit? what about auto loan providers?

Defending the Vulture Funds

I read your original blog post awhile back. Generally, I think people are OK with the profit motive unless you aren't "taking advantage" of someone. That could come in the form of "taking advantage" of the fact consumers have to buy gas for their cars (big oil), workers in third world countries need money to buy food to eat ("sweat shops"), and developing governments needed money so they entered into a contract to borrow that money and to eventually pay it back (vultures). They all seem to revolve around the idea that a company/investor has some moral obligation to abide by someone else's value system, regardless of the consequences of doing so.

Drilling in ANWR: What's Not to Like?

i didn't say they all like us (in fact i admitted many don't). i simply said that there's a lot of difference between dislike and wanting them destroyed (and actually going through with the destroying). do you like your boss? a lot of us don't. that doesn't keep us from working for him or her, because we value the economic exchange. It doesn't matter whether or not you like the person on the other side of the exchange. in fact, greater economic integration actually goes a long way toward peace and international stability.

Drilling in ANWR: What's Not to Like?

sorry: THEIR economic livelihood depends on us buying oil from them.

Drilling in ANWR: What's Not to Like?

quick question: if the saudis want us destroyed, why don't they stop selling us oil right now? surely they know that not producing oil would cripple us beyond belief.

another question: if they destroyed us (as well as our allies), who would buy their oil? the truth is, they may not like us terribly, but they know our economic livelihood depends on us buying oil from them. i think that the less we depend on them, the more likely it is that they try to do something to us - the costs are less.

Drilling in ANWR: What's Not to Like?

a few points...

why do we keep talking about our "addition to oil"? as far as i can tell, using the same logic, i'm addicted to all kinds of things: air, milk and bread, concrete and steel (looking out my office window at several buildings 30 stories +), etc. rather, I choose to use oil b/c its cheap.

as far as the effect of drilling on the environment? first of all, we shown that with recent technology, the impact is minimal. second, we effect the environment every time we turn around. so what? so do animals. so does falling water. as far as science tells us, dinosaurs died by some crazy natural phenomenon. beavers build dams - cute; humans build dams - disgusting. why are humans less natural than anything else?

so what if we run out of oil? as we run out, the price of oil will skyrocket. that, and that alone, is all the incentive we need to go to other options. the more expensive oil is, the better other option will be. so why, in the meantime, should we limit the use of our resources? we can see what hoarding of food has done for other countries. we don't need artificially higher priced energy.

as for who benefits when we drill for oil in anwr? how about tax payers? the oil companies don't own the land right now. the land will be leased. and maybe we charge by the barrel for extraction. any money the treasury receives from selling the rights to extract is less money taxpayers will have to pay. (that of course assumes you think government will lower taxes; i personally think they'll simply spend more.)

why so we need some kind of "race to the moon" type government-funded program? why are we as a society better off because we went to the moon? no one lives there. no one's close to living there. we don't vacation there. the government decided we needed to go there, so we spent a lot of money doing it. i'm sure there was some rocket or satelite technologies that were discovered in the process, but was it worth the cost? i'm skeptical that it was. i can't think of many (any?) technological directions the government has chosen for us that have been better at the process than the market.

and to make a short list of our future energy sources and say "that's it" is ludicrous and shortsighted. how in the world can any of us predict the direction of energy? we can't predict what the market will do next week. energy innovation in 20 yrs? forget about it. didn't you see "back to the future"? using banana peels and beer cans was imaginary, but you can count on innovation. which speaks to one persons comments about t. boone pickens thoughts about the efficiency of wind. my belief is that you can't base the efficiency of an energy source right now on someone's investment. he's betting, just like al gore and others, that we will either 1) be mandated by government to use at energy (you don't think they aren't funding the green lobby, do you?) or 2) seriously run out of other energy sources at which time the relative efficiency of these energy sources will increase dramatically.

sorry for the long post.