Spero Consulting

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?