This morning’s (September 23) on-line version of The Wall Street Journal has an article entitled, Paulson, Bernanke Tell Lawmakers Urgent Action Needed on Treasury Plan.
Maybe we’re too removed from it, but we don’t see the immediate need for a bailout even if it means that other financial firms will fail. We’re not being callous; instead, we’re trying to protect our interests as a taxpayer and the integrity of our relatively free-market economy.
Based upon interest rates, we see no shortage of liquidity in the domestic or global economy, and would be surprised if businesses and consumers were totally shut-out of borrowing opportunities. For example, we see no let up in the number of balance transfer opportunities e-mailed to us each week or in the number of unsolicited credit card applications sent by several of our nation’s largest financial institutions.
Clearly, there is and will be a marginal, negative effect on the overall economy. So, while we would agree with the direction, we don’t agree with the magnitude. For other examples, an opinion column, ‘Wall Street’ No Longer Exists, by Alan Reynolds in today’s WSJ provides some useful facts. Consider that commercial and industrial loans are up about 25% or $300 billion in the last year; real estate loans are up around $200 billion to about $3.6 trillion; and consumer loans are up about $108 billion to about $847 billion. As Mr. Reynolds puts out, credit standards are tighter, but interest rates have stayed low for the credit-worthy. Clearly, there is a danger that we may have a problem of induction, i.e., we can’t extrapolate the recent past, but we don’t see our friends and acquaintances changing their behavior because a concentrated group of firms and individuals unknowingly (or cynically) took excessive risks.
In addition, one should consider the negative effects of implementing such a bailout plan, and they seem to be completely ignored by policy makers. For example, while we try not to fall for narrative fallacies, yesterday’s increase in oil and gold prices and increase in long Treasury rates, could be taken as evidence of increased inflation expectations due to the proposed bailout.
Moreover as both Mr Reynolds mentions and the team of Charles Calomaris and Peter Wallison mention in their jointly-authored commentary immediately above Mr. Reynolds’ piece, Blame Fannie Mae and Congress for the Credit Mess, why would anyone think that more regulation or congressional meddling–err, we meant “oversight”–would prevent, rather than exacerbate, such problems in the future?
This morning, in his testimony to Congress, Mr. Bernanke said: “Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy.”
Perhaps sitting in the exurbs of Western Pennsylvania, we are too far removed from the situation. Our Black Sunday involved the loss of electrical power for five days. However, we view this distance as an advantage, rather than a as disadvantage because it permits a broader perspective than those fixated on a small set of (large) financial firms. We think it is the difference between the world truly falling apart and and the projection of the entire world falling apart because one’s own world is crumbling. So, we wonder about the probability of his “could be” being realized? Is it 98% or 0.98% or someplace in between?
We’ve known individuals who almost continuously scan their Bloomberg terminals for minute-by-minute changes in the 10-year Treasury yields, and they weren’t traders nor did they have any profit or loss responsibility; it was a habit and a comfortable frame of reference. The problem with such myopia is, by definition, the immediate focus eliminates that necessary broader perspective, where for the myopic everything else becomes blurry and ill-defined–kind of like the Midwest when considered from either of the coasts.
For that reason, we ask Mr. Bernanke and Mr. Paulson–especially Mr. Paulson, who seems to have spent his adult life on Wall Street–to step back from their relatively insular lives and consider that beyond their small groups of friends, lifelong acquaintances, and former co-workers there are another 300 million of us in the country to whom they bear a sworn responsibility. As we’ve mentioned many times in the past, we would prefer that their sworn oath be a version of the Hippocratic Oath, where they promise–first and foremost–to do no harm. (Economists could note that, in some sense, it is the medical analog of the notion of Pareto Optimality.)
In their rush to “save the financial system” from possible (not probable or likely?) ruin, we’d ask those gentlemen to consider whether the nation’s or world’s financial system is truly at stake or just the relative financial well-being of their personal worlds’ associates and neighbors and aquaintances.
We’ll have more to say on this matter because we are beginning to think that if these products were tangible, then most folks would have less sympathetic than they now show. (We already think that part of the sympathy is false and stems from desire of many to avoid admitting that the don’t understand the nature of the products in question.)
To be clear, we certainly don’t think and have never written that all securizations and re-securizations are defective. Instead, we view the poorly-designed and poorly-performing instruments to be little different than autos from certain domestic manufacturers. Should their poor performance be subsidized? Should Wall Street’s? There already are many other places to buy cars, get loans, and invest wealth. Shouldn’t those firms know that if they don’t perform efficiently they will cease to exist, too?
