Sunday, September 21, 2008

Waiting for The End of The World

With apologies to Elvis Costello. I just read a Wall Street Journal questioning if either presidential candidate is up to the job of dealing with the imploding financial sector. Yes, all this scares me immensely.

I give points to Obama just because he is smarter than a whip, but more importantly than this is the idea that either will be our savior. Saw a movie earlier this week called Gabriel Over The White House. So maybe I have the idea of us wanting a man on white horse to save us too much on my mind.

American government is not set up this way. The President cannot save us because he does not run the government alone (regardless of the ideas of the neo-cons and their unitary executive principle and the whole of the Bush Administration). It will take a president who can work with Congress.I think that Obama gets the points on being able to do this, too.

Not feeling much better after reading Paul Krugman's blog, Conscience of a Liberal. Got a lot of technical stuff that needs read, but this really caught my eye:

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

For all the Republican propaganda about business people being better politicians, I have never seen anything from Bush that makes me think he understands how to make a good business deal. At least not for the general public. Again, I think we are getting screwed. Read all of No deal and pray the final Treasury plan is not the one read by Krugman.

Update, 9/21/08. Sebastian Mallaby in today's Washington Post generaly supports Krugman's worries (and mine):

Within hours of the Treasury announcement Friday, economists had proposed preferable alternatives. Their core insight is that it is better to boost the banking system by increasing its capital than by reducing its loans. Given a fatter capital cushion, banks would have time to dispose of the bad loans in an orderly fashion. Taxpayers would be spared the experience of wandering into a bad-loan bazaar and being ripped off by every merchant.

Raghuram Rajan and Luigi Zingales of the University of Chicago suggest ways to force the banks to raise capital without tapping the taxpayers. First, the government should tell banks to cancel all dividend payments. Banks don't do that on their own because it would signal weakness; if everyone knows the dividend has been canceled because of a government rule, the signaling issue would be removed. Second, the government should tell all healthy banks to issue new equity. Again, banks resist doing this because they don't want to signal weakness and they don't want to dilute existing shareholders. A government order could cut through these obstacles.

Meanwhile, Charles Calomiris of Columbia University and Douglas Elmendorf of the Brookings Institution have offered versions of another idea. The government should help not by buying banks' bad loans but by buying equity stakes in the banks themselves. Whereas it's horribly complicated to value bad loans, banks have share prices you can look up in seconds, so government could inject capital into banks quickly and at a fair level. The share prices of banks that recovered would rise, compensating taxpayers for losses on their stakes in the banks that eventually went under.

Congress and the administration may not like the sound of these ideas. Taking bad loans off the shoulders of the banks seems like a merciful rescue; ordering banks to raise capital or buying equity stakes in them sounds like big-government meddling. But we are in the midst of a crisis, and it shouldn't matter how things sound. The Treasury plan outlined on Friday involves vast risks to taxpayers, huge complexity and no guarantee of success. There are better ways forward.

Today's Chicago Tribune's Bailout tab hits $700B ends with this:

Robert Litan, a Treasury official with the Clinton administration who is a senior analyst with the Brookings Institution, said the new plan seemed to invite banks and securities companies to dump their very worst assets on the government with no clear way to get rid of them.

"What they're going to get is the financial equivalent of radioactive waste," he warned.

Scotland's Sunday Herald has a three part essay on our mess (which is now everyone's mess thanks to globalization):
The prophets of greed:
The wonder of this current financial holocaust is that anyone is surprised by it. This has been the most predictable financial crisis in history, even more so than the Wall Street crash. Believing that house prices could rise forever is the economic equivalent of believing in magic, yet that's apparently what most of us believed. My curry-house capitalist, our politicians, bankers, buy-to-letters and home buyers decided, in an act of collective will, to suspend reason and believe the laws of economic gravity could be abolished - "an end to boom and bust" as Gordon Brown put it, in a phrase that will be carved on his political tombstone.

And make no mistake: this is about house prices, the Daily Mail wasn't all wrong. The reason mighty Wall Street institutions have been falling like dominoes is because they created an industry out of buying and selling bits of paper based largely on residential mortgage debt, which they postulated had a secure value that could never fall.
HBOS: The crash landing:
Brown basically seems to have invoked the "national interest" to keep watchdogs such as the Office of Fair Trading and Competition Commission off the merged bank's back. To some observers this is surprising, given the dominant position the new "superbank" will have in UK retail banking (35% of current accounts, 29% of mortgages and a quarter of the market in both savings and personal loans).

On analyst said: "This deal definitively re-establishes the banking oligopoly, and pricing power will only grow for the banks, with Lloyds the biggest beneficiary."
By pricing power, the analyst means the ability of banks to push up interest rates for mortgage holders and other borrowers, to pay lower interest rates to depositors and possibly boost charges as well. Arguably, the deal, although probably necessary for the short-term stability of the UK's financial system, is going to be harmful to consumers' interests in the long run.
(And does that not sound familiar by now?)

Put less politely: America's investment banks - and much else - are in meltdown, in intensive care.
Making ends meet in the real world after the crash of flash from the same paper has something to say to us here:

ALL OVER public transport last week, a rarity erupted through the newspaper-reading nation: very few, for once, were drinking in the showbiz pages like their daily elixir of life, looking for the latest sight of Amy Winehouse's escalating transformation into a troll under a bridge in a very Grimm fairytale, but were head-down engrossed, for possibly the first time ever, in even the smallest print of the financial news and its bewildering foreign language.

The questions were big: were we all doomed, and was this really the new Great Depression, and should I move my lifetime's savings to "hidden under the fern in the flowerpot on the bathroom sill"? Most of us, of course, are as expert in the workings of global economics as in the workings of the Large Hadron Collider, and all we have to go on is what the experts decide to tell us. And the experts never agree. One banking expert's "we're on the brink of global catastrophe affecting everyone" has been another corporate banking expert's "all it means is one bottle of wine at lunch instead of two".

***

As the defining name for an era goes, the golden age of flash will do for now as we watch, aghast, at this latest update on the bonfire of the vanities. And if the golden age of flash is finally all over it means a new era is being ushered in, surely promising a considerably less flash, more real way of life, perhaps one we'll know as the golden age of Green Flash, as in, you know, Dunlop Green Flash trainers from Woolies for £29.95 instead of Zoom Drive Sprint Max Challenge state-of-the-art Nikes like miniature bubble cars for £169. There'll be no market any more for children aged three in a swamp in Indonesia sewing sequins in the shape of dolphins on a dress costing £15 because we'll have to wear the clothes we have for more than one week, suddenly dusting off grandma's button box and declaring "make do and mend". Perhaps the obesity crisis will finally be resolved, a nation suddenly learning to cook from scratch with a thimble of lentils while planting tatties in our window boxes and "digging for victory", like the winners we were back in the good old days of, er, the second world war. There'll be no excess cash any more for boob jobs, Botox, nuclear teeth or any other non-essential trifle, so we'll finally revert to looking fairly normal, which is to say a bit of a state, as our current levels of paranoia, neuroses and physical self-loathing finally begin to abate. And we'll have to survive, of course, with just the one gigantic television the size of a garage wall, possibly in an actual garage itself, because that's where we're now living as the house was repossessed months ago following five redundancies in a single family in a week.

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