Chris B

Bring in the Antitrust Division (on Banking)

"The Department of Justice’s Antitrust Division should be called in..."
----------------------...
If we rely on the judgement of bureaucrats to determine when Goldman has become a monopoly, and then wait a dozen more years for the lawsuits to be cleared up, we will already be living in a new Guilded Age, with national finances dominated by one corrupt company similar to the situation with JP Morgan 100 years ago.

Here's a better alternative. Reinstate the Glass-Steagal Act. Isolate commercial banking, which facilitates economic activity, from investment banking, which facilitates asset trading. Heavily regulate commercial banks and step in with the FDIC to protect depositors when needed. Then we could let the investment banks fail without having to worry about reducing the availability of commercial and consumer credit. Require strict mark-to-market accounting for investment banks and strict mark-to-present value of cash flow accounting for commercial banks.

Basically, reset the bank regulatory structure to what it was prior to 1999.

The pre-1999 model of national financial regulation has over 60 years of banking stability and world-leading economic growth to it's credit. The idea of combining investment banking and commercial banking, on the other hand, has been tried twice. Once in the 1920's and once in the 2000's. Each attempt resulted in a nationwide financial crisis and massive unemployment.

I fear that the administration will try to get through this crisis without reinstating this basic, vital reform. I fear that they will declare victory in the short term with a brief spurt of economic growth, but leave the flawed system in place. The results of such a mistake are predictable.

Bring in the Antitrust Division (on Banking)

Goldman is obviously taking advantage of its position to gain market share here. Now that the taxpayer has ensured their survival, they want to jump on their weaker rivals, buy out their top employees and their accounts, and achieve monopoly status.

Also I wouldn't be surprised if these claims of fine health were accompanied with profitable trading activity on Goldman's part.

How Much Risk is the Treasury Really Assuming from Financial Institutions?

Aw heck... too much thinking. Let's just let the banks fail and start the next depression. How much would that cost the government in lost revenue? $50 Trillion over 10 years? That's not so bad, is it?

FASB Changes Perpetuate Fair Value Lying

Something tells me this guy has never even taken an accounting or economics class. Such cheerleaders appear in every bubble.

Do you really think "runtogold.com" would become "runfromgold.com" if the price of gold became too high or inflation expectations subsided? Nope. This is pure ideology (see his inverted pyramid graphic, ha!). Just consider how ridiculous it would be if I started a website called "runtowheatfutures.com."

How quickly people forget all the here-today, gone tomorrow sites that promoted real estate or tech stocks as the new can't-lose investment! Just do your kids a favor and keep their college funds in bank CD's.

Added Debt Won't Rescue the Great American Ponzi Scheme

That's why the internet can be a crappy source of information. People can spout off whatever cheap lowbrow populist slogans they want... often anonymously or with a pseudonym, so as not to embarass oneself - which makes the internet the absolute bottom on the accountability scale. 90% of the brainiacs who are advocating a repeat of the great depression because that it morally right or something put twice as much thought into what color shirt to wear each day.


On Mar 24 05:50 AM zagnzig wrote:

> He writes: “Consequently, solutions to date have not only failed
> to “fix” anything, they have made the problem worse.” How obviously
> wrong can anyone be? People, please do not forget the consequences
> and the scale of the crisis.
>
> Imagine the “solution” this author proposes: C, BAC, WFC, MS, AIG,
> FNM, FRE, JPM…all failing? What sort of solution would that be? Any
> suggestion that letting them fail would be better than our current
> predicament is nonsense! What grocery store would remain; would you
> still have your job? How would you feed your family or keep them
> warm?
>
> Violent civil unrest would ensue. The nation would be blown to pieces.
>
>
> Reading the comments here makes me wonder if the people who think
> bank failures are the cure are not honestly considering the final
> consequences of their decisions.

Added Debt Won't Rescue the Great American Ponzi Scheme

"the only “solution” to this crisis is price discovery, to allow asset prices to fall to whatever level they need to in order for markets to clear. This is bad news for over-levered balance sheets, but there’s nothing else to be done."
----------------------...
You're channeling Andrew Mellon now: "Liquidate, liquidate, liquidate..." The consequences of such policies have been established by history.

The problem with a liquidationist attitude is not just that companies with over-levered balance sheets will go under. It is that healthy, responsible companies will go under or be forced to shrink too. That means layoffs even for the people who did everything right, which only further shrinks demand for the remaining companies. Andrew Mellon's and Herbert Hoover's policies led to a downward spiral of unemployment and poverty that affected everyone.



"The great Ponzi scheme that is the Western World’s economy has grown so big there’s simply no “fixing” it."
----------------------...
A rising consumer savings rate, back to the historical norm of around 10%, will certainly whack GDP (an increase from 0-10% would in itself knock roughly 7% off GDP). However, was life really that bad in the 80's and early 90's when consumer savings were double what they are today? The third-world-country predictions are a bit emotional I think. Just 1-2 years of high savings would do wonders for reducing consumer debt, and capitalism can self-correct, as it has during every recession. Maybe in the future blue-collar laborers won't commute from McMansions 50 miles to work in $40k Tahoes. Oh well.

Regarding government debt, I would agree that the public needs to quit supporting the whole "kick the can down the road" attitude. I wonder how popular the $3 Trillion Iraq/Afghanistan projects would have been if we were actually paying for it in extra taxes instead of invisible debt? I suspect there would be riots! Yet, the time to balance budgets is in the good times. I would support a balanced budget amendment, with borrowing allowed only in times of emergency - as declared by a board of non-politicians such as the Supreme Court. Right now, however, we are in just such an emergency and we risk a depression if we repeat the mistakes and inaction of the 1930's.



"It’s long past time we took our own medicine. If we don’t take it voluntarily, the bond market will stuff it down our throat anyway."
----------------------...
The market for US treasuries has demonstrated very little weakness, despite below-zero real interest rates. Your statement makes for a neat slogan, but does it agree with the facts?

For Airplane Makers, The Sky Is Falling

Good point oldman. Will people be flying in airplanes 5, 10, or 15 years from now? Yes. Is air travel still increasing in Latin America, Asia, and the Middle East? Yes. Does lack of financing mean a lack of market demand? No, it just creates a backlog.

The risk is that one or several of these companies will go under in the short term due to cancelled orders or bankrupt customers. There's also the risk that they will all emerge from this financially crippled and the new Chinese aviation companies will be the only ones with capital.


On Mar 19 10:31 AM oldman wrote:

> this is a short term issue and an opportunity.

Bonus Backlash Is Upon Us, But a Well Structured Plan Benefits Shareholders

Think multi-million dollar bonuses encourage good performance? Compare the performance of Warren Buffet's companies with the following:

Bear Stearns
Lehman
AIG
Citi
GE
BAC
Fannie Mae
Freddie Mac
Goldman Sachs
Home Depot

I think you'll conclude that overcompensation in the form of massive bonuses and stock options is a good predictor of failure, rather than success. Among short-timer corporate leaders, who are only likely to be in place for 1-3 years, it creates a "take the money and run" mentality that leads to imprudent risk taking, overleverage, and financial statement manipulation.

Experience shows that companies rarely get better leadership because they paid more for it. That's a cultural myth. Companies don't "compete" on how high their executive compensation is, they compete on products & services, sales & marketing. These hotshot CEO's who claim they're worth $50,000 per day should be laughed out the door, just as I would be if I told my boss I was worth $1,000 / day and threatened to leave.

Compensation should be rewarding and it should be in the form of cash. Options, if any, should be dated so that they can only be executed 10 years down the road, not the following quarter. Until then, shareholders will be taken advantage of.

Insurance Industry in 2009: Race for Survival

I wish I had acted on this article when it came out.

AIG Bonuses: The Tipping Point Toward Decisive Action?

1) Where were the private shareholders? These bonuses had been paid for years without significant shareholder activism, but when the shareholders put on their taxpayer hats, the same corrupt self-dealing suddenly becomes a problem. Within a few months of the government taking a major stake, everybody is acting like corrupt excessive compensation is a new phenomenon. Experience has shown that excessive compensation does nothing to improve performance and may have the opposite effect by creating a "take the money and run" short-timer attitude. One of Bear Stearns' last acts was to make sure everybody got their bonus check. Same with Lehman. Citigroup, BAC, JPM, Home Depot - all failures for investors, with CEO's earning tens of millions.

2) The uproar over AIG's bonuses will not motivate decisive action, it will motivate inaction. The public will increasingly take a "let our banks fail, and damn the consequences" attitude. The administration will increasingly see bailouts as political landmines. Perhaps another Lehman-type failure is in our future.

3) The actual impact to taxpayers from the bonuses is actually hard to quantify. A careful analysis might have revealed that if these derivitive traders had quit and left the place in shambles, the losses and expenses to AIG might have been even higher than the cost of the bonues. After all, $165M is won or lost every day in the derivitives business. If that was the case, was it right or wrong to pay the bonuses? For better or worse, when the government has a choice between doing something morally outrageous and doing something in its own best interest, it usually choses the later.

Why AIG Wasn't Allowed to Fail

"And the web of connections between the thousands of counterparties in the CDS market is so complex that no one really has a clue who would have ended up holding the multi-billion-dollar bag"
----------------------...
A situation that could easily be fixed:

Require institutions with CDS exposure to provide up-to-the-second updates online, viewable by all. Counterparty risk could then be exactly calculated by customers, creditors, and investors. Radical transparency would solve this, but probably reduce the CDS market.

How to Not Pay the AIG Bonuses

Just have Congress pass a law that sets a 99% retroactive tax on bonuses paid by companies that are dependent on taxpayer funds.

Obvious flaw: they would just increase the size of the bonuses 100X to get the same amount of cash in their pockets. These guys are clearly in free-for-all liquidate-the-taxpayer mode.

Looting Goes Mainstream: The Trouble with Government-Backed Risk

1)There is a conflict of interest when risks can be passed on to others. Aggressive managers can take risks that drive a bank to insolvency, costing investors and taxpayers billions, and still walk away with tens of millions of dollars in "performance incentives." This is where rules are supposed to exist to prevent risks from being passed on to others, while benefits are accrued for oneself. As those regulations (a dirty word, I know) were reduced or went intentionally unenforced, we saw more of this looting behavior, as we should have expected. The repeal of The Glass-Steagal Act in 1999 is my favorite example.

2) If executives have engaged in looting, taxpayers AND shareholders have been the victims. Ask anyone who bought Citigroup at $25. Of course, it is not the responsibility of taxpayers to reimburse shareholders, who got ripped off by their executives. Any assistance from taxpayers should come at the price of dilutive equity, which can later be sold to reimburse the taxpayers. If taxpayers can assure the bank's survival, they should be able to get their money back by selling their equity, probably at a profit. These revenues should then be applied directly to the national debt.

3) The "too big to fail" phenomenon is real. Andrew Mellon thought that the economy would do just fine if all the country's big banks went under. Wrong. The result was the great depression. Ten years of depression would cost a lot more than buying bank stocks and bonds to prop them up and guarantee their success. Those are the lessons of experience.

Rethinking Subsidized Finance

Excellent discussion JohnL and Aristophanes. A rare example of Austirans and non-Austrians having a smart, civil discussion on SA!

Rethinking Subsidized Finance

"The constitutional and Austrian solution: end fractional-reserve lending and fiat money. Most all of the problems you cite go away as booms and busts are all but eliminated. Your thoughts?"
----------------------...

Fractional-reserve lending is borrowing from one person (e.g. $100) to lend to another person at a higher interest rate ($90) while holding only a fraction of the original liability in cash ($10). In a non-fractional reserve system, the person with $100 would have to just directly lend it out. The difference would be that having a third party to arrange loans would be illegal. It is unclear to me exactly how people would finance the purchases of cars, houses, or businesses in a system of individuals making loans. I also have doubts about how efficient or safe such a system would be compared to having professional third parties doing the lending on behalf of investors/depositors. It sounds a lot like the system in many 3rd world countries where there is no lending available to entrepreneurs. They may not have booms, but they have a constant bust.

Regarding fiat money, the free-market price of gold has always been more volatile than the free-market price of fiat dollars. When the dollar was pegged to gold, its value was also more volatile, and impossible to control compared to the value of things like food, other commodities, housing, services, etc. The 19th century featured multiple sharp waves of inflation/deflation that wiped out farmers, industries, and lenders alike. The economic rise of the US from a subsistence farming economy to world leader coincided with the gradual introduction of a more stable fiat dollar.

Overall, economics is an evolutionary process. More successful systems end up with a larger percentage of global GDP and systems based on failed ideas end up with a smaller percentage (For example, communism). The rise of the US was not accidental - it was the result of successful ideas. In the last 10 yrs we've reversed course on many of the reforms, incentives, and yes, regulations and government actions that drove our economy to world leading growth for the previous 60 yrs. We abandoned the winning formula, sort of like Coke II in the 80's!

If a non-fractional reserve, commodity based currency economy would lead to higher economic growth and better stability, why hasn't a country with such a system ever outgrown the US?