9 comments:

George E. Blair said...

that post shows a fundamental misunderstanding of what is actually occurring within our financial markets and the potential (in many ways realized) risk that is posed to average americans. The dead assets held by many financial firms, banks, mutual funds, 401ks, and other institutions at the moment are generally worthless assets that have to be marked down as a loss by the firms under current mark-to-market rules. In order to absorb these losses banks must raise capital in order to continue operations (such as lending, buying assets, selling assets, underwriting stock and debt auctions, mergers, etc.). There is currently no market for these assets, specifically sub-prime/alt-a mortgage backed securities, collateralized debt obligations, and other asset backed classes, making them essentially worth 0 cents on the dollar. This situation has forced banks to raise capital to hedge losses, but the capital isn't there because those with the funds to lend do not have faith in the financial market. At its extreme this situation could cause a failure in small businesses and large businesses alike to make payroll, it could prevent the issue of student loans by sallie mae, also a sharp decline in the ability for capital investment by corporations due to the ever increasing rate of interest due to systemic economic risk which will lead to higher rates of unemployment, etc. etc. This all effects the average american. Enter the federal government as a potential lender of last resort who could jumpstart a market for these assets in a reverse auction for cents on the dollar, providing liquidity and recapitalizing the markets. The government would not only incentivize investors to re-invest in the market, but can also hold these securities and loans to keep people on 'mainstreet' in their homes and ultimately sell the assets later for a profit. The heavy amount of losses these assets have taken are due to debtors on 'main street' who were unqualified to be loaned funds in the first place. As culpable as wall street is in producing and selling these assets, it only fed upon the desire and uncanny ability of the american people to spend beyond their means. In many ways it was a hazard of the american dream, this theory exemplified with laws passed in congress making it mandatory for banks and wholesale loan companies to provide mortgages to people with bad credit (again, 'mainstreet') only exacerbated the problem. From my perspective as a student who is going to work for an investment bank, and who is also a lifelong conservative those 228 members of the house who voted against this bill, have proven that they are unfit to govern, and it is incumbent upon voters to relieve them of their service to the american people when given the chance. The idea that republicans have suddenly had a road to Damascus conversion and found their ideology which lead them to oppose the bill 'in principle' is fatuous. They were motivated by their incompetent constituents and a desire to remain in office. This is not only bad for america, but politically it is disastrous for John McCain who will now almost certainly lose the election. If Republicans put Country First, instead of their own egoist impulses, """ideals""", and yes, their uneducated constituents, this crisis could be at the end of its beginning. It is no wonder why one would not like to discuss finance issues, especially if one does not know what they are talking about.

5:48 PM

Bill F. said...

George:

I won't endorse some of his frankly populist rhetoric, but Pat wasn't arguing that the choices of ordinary people ("main street"--what an odious metaphor) had nothing to do with this financial crisis. Nor was he arguing that its potential consequences won't be wide-ranging and severe. He may believe these things, but he didn't say them.

Rather, he was arguing that the financial cruicible might be worth it, if only to ensure that "what comes out" in the end is a system of political economy in which risk goes unsubsidized (as it should) and corporations are weened off the Federal tit.

Your argument misses the point when confronted with people willing to swallow the adverse consequences of a cathartic financial crisis in order to avoid establishing yet another precedent for massive government intervention in the economy.

I'm only saddened by the fact that it took a potential bill of $350-700 billion to wake up the ire of these representatives.

6:51 PM

George E. Blair said...

I would agree under normal circumstances that risk shouldn't be socialized, but these aren't normal circumstances. The market has failed on a massive scale and the only other choice is economic recession or even depression. My criticism is that these 228 representatives both democrat and republican have injected politics into this when there shouldn't be, the longer they wait and stall the more damage that will be done to the economy over all. The paulson plan wasn't ideal, but the process of policy is not pure rationalism, its muddling through, and his proposal albeit not perfect or fundamentally "conservative" will get the job done.

Regulation reform is imminent with the coming of the next administration, that is guaranteed, but this crisis must be resolved, and the government acting as a buyer of last resort for these securities is the only way of reassuring the markets and injecting liquidity into our system. The real truth is that this is too important to be left to these political animals, but we have no other choice.

8:04 PM

Patrick J. Ford said...

"Pat wasn't arguing that the choices of ordinary people ("main street"--what an odious metaphor) had nothing to do with this financial crisis. Nor was he arguing that its potential consequences won't be wide-ranging and severe."

Thanks Bill. I was not arguing that point at all. You seem to have understood my point, which still has yet to be addressed.

As for my "frankly populist" rhetoric, I see nothing wrong with a little Locofoco populism now and again.

8:36 PM

Anonymous said...

George seems to have a fundamental misunderstanding, at least as the situation stands now (and a complete lack of understanding of business cycles). Currently, inter-bank lending and securities markets are where the liquidity crunch is concentrated. As of RIGHT NOW, commercial and consumer lending have been relatively untouched by "The Economic Crisis of the Century." The rate of bank consolidation may make any comparisons to 1990s Japan... non-comparisons (sorry, CNBCtards). Oh, and the financial sector needed to shrink anyways (again, sorry, CNBCtards).

Investment banks have been riding high on the tech bubble and then the real estate bubble for going on 15 years. It's time to bring these "financial wizards" crashing back to reality. In the market, winners are rewarded and losers are punished. Stupid investment bankers who thought they were untouchable are the losers this time around. Tough fucking shit. Markets are inherently less stable (again, B-U-S-I-N-E-S-S C-Y-C-L-E-S!) than socialism, but the long-run gains are far greater.

This isn't to say that this won't "trickle down." It will. Society, in the short-run, will face economic decline. But that's what's supposed to happen.

And no one seems to care about our international debt position...

11:38 PM

Bill F. said...

Wait...there are still trees in New Jersey?

10:04 AM

Patrick J. Ford said...

Good one! New Jersey jokes never get old!

2:04 PM

Bill F. said...

Actually, you'll have to forgive me, because I had never heard a New Jersey joke until I came to GW (and even then, only rarely). For me, they're almost all fresh.

This is probably because Virginia puts so much effort into its massive, cliche-ridden repertoire of West Virginia jokes.

3:25 PM

Joseph said...

Great analysis. Let investors be free to invest as they see fit and responsible for the risk of those investment.

4:11 PM