Spero Consulting

Posts Tagged ‘Henry Paulson’

FWIW: we say no to a sec­ond term.

This week­end there are many reports and com­men­taries regard­ing the U.S. Sen­ate vote to con­firm Ben Bernanke to a sec­ond term as the Chair­man of the Fed­eral Reserve. For exam­ple, see the arti­cle Back­ers Rally to Bernanke in The Wall Street Jour­nal.

Mr. Bernanke nei­ther deserves a sec­ond term nor can we, as a nation and econ­omy, afford it.

Don’t Blame Him for any Bubbles

Many com­men­ta­tors, ana­lysts, and econ­o­mists blame Mr. Bernanke’s (and his pre­de­ces­sor, Alan Greenspan’s) easy money poli­cies for cre­at­ing a sequence of bubbles.

We don’t. As far as we can tell, prior to 2008, Mr. Bernanke did not force a sin­gle per­son or firm to bor­row an addi­tional dol­lar or invest in assets and secu­ri­ties that they did not under­stand. See our post The Low Inter­est Rates Made Us Do It: Oh, How Lame! from August, 2008. Note that Com­mu­nity Rein­vest­ment Account (CRA) poli­cies were not his dik­tat. In fact, their ini­tial imple­men­ta­tion in 1977 far pre­cede his involve­ment at the Fed.

His Flawed Poli­cies Aren’t Disqualifying

In addi­tion, as much as we dis­like his sta­tist pol­icy pre­scrip­tions to end the liq­uid­ity cri­sis that began in the Fall of 2008, we don’t think that alone is rea­son to deny his confirmation.

How­ever, every TARP-​addled, self-​congratulatory politi­cian, bureau­crat, and reg­u­la­tor wish­ing to take credit for staving off a new depres­sion, should note that dur­ing the “The Great Depres­sion,” the Dow Jones Indus­trial Aver­age gained 63.74% in 1932. HOWEVER, it took an addi­tional 20 years – that’s 20 years – for the Dow to reach its pre-​crash highs of 1929.

Thus, if you, dear reader, con­fi­dently “know” or strongly believe that because the Dow has ral­lied since last March, that nec­es­sar­ily means that the cri­sis has ended with lit­tle or no chance of return­ing, then you are, indeed, a short-​sighted fool (with lit­tle aware­ness of history).

So, if (1) we don’t blame him for the con­sumer and investor behav­ior that led to the mort­gage débâ­cle that led to the liq­uid­ity cri­sis and (2) we don’t think that his pol­icy response to the cri­sis, in and of itself, is dis­qual­i­fy­ing, then what is it?

His Panic & Ter­ror Were Unconscionable

It was his pan­icked response to the mort­gage débâ­cle that helped turn it into a liq­uid­ity cri­sis and severe reces­sion. It wasn’t his pol­icy pre­scrip­tions, it was the way he tried to sell them. He wasn’t alone. For­mer Pres­i­dent Bush, Con­gres­sional lead­ers, and ex-​Treasury Sec­re­tary Hank Paul­son also deserve much of the blame, and we gave it to them, but he should have known bet­ter. (See, for exam­ple, Well, This Is a Fine Mess You’ve Got­ten Us into.… or just about any­thing else that we wrote from Sep­tem­ber — Decem­ber, 2008.)

Dur­ing the spring and sum­mer of 2008, we asked on sev­eral occa­sions: why are the losses so con­cen­trated this time? See, for exam­ple, this search or this tag or this one. (There’s some overlap.)

The rather con­cen­trated mort­gage débâ­cle informed investors and cred­i­tors that bank man­agers were far less capa­ble than had been believed. As con­fi­dence in the banks shrank, our pub­lic ser­vants pan­icked and eeked and squeaked like lit­tle girls.

Their col­lec­tive panic and ter­ror destroyed pub­lic con­fi­dence – not just in the banks – that was jus­ti­fi­able – but in the econ­omy as a whole. Their threats and over­state­ments became self-​fulfilling, and per­mit­ted cyn­i­cal man­age­ments at non-​financial cor­po­ra­tions to lay-​off employ­ees. Those actions imme­di­ately deep­ened the down­turn and destroyed con­sumer and investor con­fi­dence. It still has not recov­ered. (By the way, by non-​financial, we don’t mean that hope­less and hap­less auto man­u­fac­tur­ers. Given their pre­car­i­ous states, they were doomed to fail when­ever a reces­sion occurred.)

Per­haps by 2008, he had spent too much time in Wash­ing­ton and had for­got­ten that words and state­ments have real impli­ca­tions. There are sound rea­sons why it is ille­gal to shouts “Fire!” in a crowded the­ater (and risk a pub­lic cat­a­stro­phe). In our mind, that’s what Mr. Bernanke and his cronies did. Words are not merely “throw-​away” rhetoric used to attempt to influ­ence unde­cided sen­a­tors and rep­re­sen­ta­tives to sup­port a hastily-​composed bill, espe­cially when done publicly.

Clearly, we don’t believe that “if you don’t have any­thing nice to say you shouldn’t say any­thing at all.” If we did, we would have pub­lished a total of about fif­teen posts since we started writ­ing on April 1, 2008.

We do, how­ever, think that if one have a posi­tion of respon­si­bil­ity, then one should act and speak respon­si­bly, and Mr. Bernanke did not do so when it mat­tered the most. We can for­give such behav­ior, but we can’t for­get it, so we don’t trust him. So, for what it’s worth, we rec­om­mend that Mr. Bernanke not be reconfirmed.

On a Lighter Note

Now, this is mostly in jest, but the Obama administration’s ongo­ing mis­han­dling of the Bush’s administration’s “harsh” inter­ro­ga­tion tech­niques of political/​religious ter­ror­ists coin­cid­ing with rev­e­la­tions from Andrew Cuomo’s inves­ti­ga­tion of Paul­son and Bernanke and “forced” merger of the Bank of Amer­ica and Mer­rill Lynch make us wonder.

To what extent will Mr. Cuomo go to get the truth? And would any­one com­plain if any of the par­ties were exposed to harsh inter­ro­ga­tion meth­ods, includ­ing, say, water­board­ing or con­trolled head-​slamming? (Despite what we wrote in What a Civ­i­lized Coun­try!, we’re sure that quite a few lib­eral investors in Mr. Madoff’s funds might for­sake their sen­si­tiv­i­ties and prin­ci­ples and opt for thumb­screws if given the choice.)

Speak­ing of lost prin­ci­ples, it is nice to see The Wall Street Jour­nal edi­to­r­ial page call the government’s response to the mort­gage débâ­cle last autumn “panic.” (See Bust­ing Bank of Amer­ica.) It would be still nicer if the edi­to­r­ial board would acknowl­edge its mis­takes in encour­ag­ing gov­ern­ment inter­ven­tion back in late Sep­tem­ber and early Octo­ber that cre­ated and extended the larger finan­cial cri­sis. We crit­i­cized the edi­tors sev­eral times, includ­ing in A Bet­ter Solu­tion (than a gov­ern­ment takeover) and Prin­ci­ples Lost and More, in which we noted the staff’s aban­don­ment of free mar­ket prin­ci­ples dur­ing its fit of hys­te­ria. Per­haps they did admit to their errors, and we didn’t see it.

We very much like James Freeman’s brief col­umn, Fight­ing Gei­th­ner­ism, in today’s (Sat­ur­day, March 28) edi­tion of The Wall Street Jour­nal.

In it, he sum­ma­rizes Richard Breeden’s Con­gres­sional tes­ti­mony, par­tic­u­larly his crit­i­cism of Trea­sury Sec­re­tary Geithner’s pro­posed changes in reg­u­la­tions and over­sight of finan­cial firms.

We liked it very much, because Mr. Bree­den sounds so much like…well, like us, as it turns out.

In early Feb­ru­ary, we wrote Sys­temic Risk Reg­u­la­tion and Irony , which we sub­ti­tled, “Or Cen­tral Plan­ning as a Mar­ket Solu­tion,” and we strongly encour­age inter­ested par­ties to read it.

Some­how the thought of a sin­gle agency “con­trol­ling” sys­temic risk reminds us of that arcade game whack-​a-​mole. Of course, in whack-​a-​mole – and unlike in real-​life – the lit­tle ver­min can only pop-​up from a cer­tain, known num­ber of loca­tions, but real-​life isn’t so well-​specified. (That’s also the rea­son we refer to the field as uncer­tainty man­age­ment, rather than risk man­age­ment.) In fact, it’s that impos­si­bil­ity of iden­ti­fy­ing poten­tial holes (and the size of the moles) that makes the task futile and the cal­cu­la­tion of cer­tain prob­a­bil­i­ties senseless.

Mr. Bree­den refers to the Soviet Union, as we did in this para­graph: “By far, the eas­i­est way — and the historically-​proven way — to con­trol sys­temic risk would be to destroy the economy. That would cer­tainly elim­i­nate vari­a­tions — the ups and down — because the ups would be gone: kind of like the for­mer Soviet Union or modern-​day Cuba.”

He also notes that given the reg­u­la­tory agen­cies’ per­for­mance prior and dur­ing the mort­gage débâ­cle and the liq­uid­ity cri­sis, he sees no rea­son to reward any of them with addi­tional responsibility.

In late Novem­ber, we wrote about a related topic in Good Luck with that: Get­ting Bank Exam­in­ers to Act. In that post we equated reg­u­la­tors with the “three wise mon­keys” (see no evil, hear no evil, speak no evil), and described how mis­aligned incen­tives among reg­u­la­tors would keep neg­a­tive infor­ma­tion hidden.

In addi­tion, we writ­ten sev­eral times about how when decision-​making becomes cen­tral­ized, the “idio­syn­cratic” become sys­tem­atic. For exam­ple, see these three arti­cles from late September-​early Octo­ber: Forced Merg­ers? Big­ger Is Not Nec­es­sar­ily Bet­ter, Big­ger Is Not Nec­es­sar­ily Bet­ter, and Idio­syn­cratic and Con­cen­tra­tion Risk, Again. That is, cen­tral­iz­ing decision-​making in one per­son or in small group of peo­ple, each with their own flaws, beliefs, and biases, and per­mit­ting them to (1) allo­cate a large per­cent­age of the economy’s assets or (2) reg­u­late or gov­ern the econ­omy cre­ates addi­tional sys­temic risk – that they can’t see – that is to the detri­ment of all.

In that third of those three posts, we also made the same point that Mr. Bree­den made in his tes­ti­mony regard­ing moral haz­ard. No one should think that they are too big to fail, and no counter-​party should think that their trad­ing part­ner is too big too fail. Both impres­sions sup­press due dili­gence and increase the prob­a­bil­ity and the costs asso­ci­ated with fail­ure, i.e., mar­ket crashes and breakdowns.

The stock mar­ket may have ral­lied this week in antic­i­pa­tion of the mas­sive wealth trans­fer from tax pay­ers to finan­cial insti­tu­tions, but Mr Geithner’s solu­tions, like Mr. Paulson’s before him, are worse than the prob­lems they are try­ing fix.

We think the cur­rent gov­ern­ment and indus­try strat­egy of attempt­ing to prop-​up the dead as a way to re-​energize the party and stay alive (or rel­e­vant) is bound to fail. In reminds us of the plot from the 1989 com­edy, Week­end at Bernie’s. Is TARP II noth­ing more than a remake of the 1993 sequel?

We read in The Wall Street Jour­nal today that Bank of Amer­ica to Get Bil­lions in U.S. Aid, and as usual we won­der whether it is necessary.

We doubted the neces­sity of TARP the first time our money was wasted, and con­tinue to do so now. Well, we did more than doubt the neces­sity, we pre­dicted that the government’s plan – and, again, plan is too strong, too “orga­nized,” of a word to describe the sequence of actions – would exac­er­bate and elon­gate the crisis. 

And three months later…well, here we are. The weather is colder, but lit­tle else has changed – much as we predicted.

Accord­ing to today’s arti­cle, last month Mr. Paul­son, in another – and hope­fully final – fit of panic, promised our tax dol­lars to B of A to com­plete its merger with Mer­rill Lynch. Per­haps, we should say “to sur­vive its merger with Mer­rill Lynch,” because sur­prise, sur­prise, the arti­cle men­tions that Mer­rill lost even more than it had pre­vi­ously guessed.

Now the reg­u­lar reader may ask: why do we con­tinue to crit­i­cize this cor­po­rate wel­fare and crony-​capitalism? For all of the same rea­sons we’ve used in the past, but also with a new one, too.

Despite the con­tin­u­ing volatil­ity and losses – as we write, the DJIA is near 8,000, again – the finan­cial world is a dif­fer­ent place today than it was a mere three months ago. Either out of sheer panic or self-​preservation, many orga­ni­za­tions have reigned in their trad­ing oper­a­tions and have attempted to limit or elim­i­nate their counter-​party credit risk. (Uh, that’s the nature of a liq­uid­ity cri­sis, which we’ve joked is the psy­cho­log­i­cal pro­jec­tion of finan­cial state­ments; see the top two posts.)

So, we doubt that the demise of Mer­rill in late Decem­ber or the demise of other firms today would have been as “harm­ful” as the demise of Lehman, AND we seri­ously doubt that the demise of Lehman was as harm­ful as our pan­icky policy-​makers and cor­po­rate pro­pa­gan­dists and blame-​shifters would like to have oth­ers believe. 

For exam­ple, in another arti­cle in today’s paper, Deutsche Bank Warns of Loss, Blam­ing Its Trad­ing Mis­fires, it is men­tioned three times that Lehman was the cause of much of Deutsche’s trou­bles. (That thrice-​repetition reminds us of ancient Greek lit­er­a­ture and Bible pas­sages. As we’ve been told by both edu­ca­tors and priest, when you see it in threes, then you should know that it must be impor­tant! Ha!)

We’re sure that Lehman’s demise caused sub­stan­tial pain to many firms and indi­vid­u­als. But all the pain? No, much of that pain should be attrib­uted to lax con­trols, includ­ing poorly designed incen­tive schemes, and lax risk man­age­ment. We view much of the blame cur­rently put upon Lehman to be a school of red her­rings (either of the top two def­i­n­i­tions will suffice).

How­ever, we’ll use those con­ve­nient excuses to turn the argu­ment against the call for fur­ther bailouts. If Lehman’s demise – whether alone or in con­cert with other events – did cause mar­kets to seize and did cause many orga­ni­za­tions to begin to avoid risk and limit the exten­sion of credit, then it would seem that the fail­ure of another large firm would have less impact today than in Sep­tem­ber. So, what’s the harm.

Of course, as we writ­ten about on numer­ous occa­sions, despite our near Lib­er­tar­ian stance on eco­nomic issues, we’d pre­fer to see the gov­ern­ment nation­al­ize the worst offend­ers as a way to moti­vate the remain­ing firms to ratio­nal­ize their oper­a­tions: wipe-​out exist­ing share­hold­ers, except non-​executive employ­ees; fire the boards and senior man­agers; take 100% own­er­ship; and resell it as soon as possible.

Also, we’d still like to see changes in tax pol­icy to moti­vate the exchange of the moun­tains of cur­rently illiq­uid and deval­ued mort­gage secu­ri­ties: either res­i­den­tial mort­gage invest­ment tax cred­its or the imme­di­ate write-​off of the pur­chase price would suf­fice to pro­vide pur­chasers with a cush­ion against overly-​optimistic val­u­a­tions. (You might as well include com­mer­cial mortgage-​backed secu­ri­ties, too.)

As we wrote in early Octo­ber, the government’s solu­tion will extend the cri­sis because no one knows how to value those secu­ri­ties, and by the government’s own admis­sion, that hasn’t changed.

We think that com­bi­na­tion of moti­vat­ing the sell­ers with sticks and the buy­ers with car­rots, so-​to-​speak, would work.

We chuck­led when we saw this head­line in The Wall Street Jour­nal today, Jan­u­ary 15: Fed Offi­cials Say Ail­ing Banks Require More U.S. Funds.

That’s not really news, and – by the way – it’s tau­to­log­i­cal or true by def­i­n­i­tion. (Uh, oth­er­wise, they wouldn’t be ail­ing now would they, precious.)

Any­way, our point is always the same – we’re con­sis­tent that way. Just because they need the money, doesn’t mean that they deserve the money nor does it mean that they’ll spend it wisely.

In that way, they’re not much dif­fer­ent the the home­less alco­holics who beg for drink­ing money on the Roberto Clemente bridge in the city of Pitts­burgh, and pre­sum­ably – this is just a wild hunch – in other cities around the coun­try, too.

Now, we know that some drug addicts get monthly Social Secu­rity checks from the fed­eral gov­ern­ment because their drug addic­tion tech­ni­cally – or, at least, bureau­crat­i­cally – dis­ables them, but we don’t think that usage is wise gov­ern­men­tal pol­icy, either. Maybe it’s just our nar­row way of think­ing, but such poli­cies not only sub­si­dize but also seem to con­done such unde­sir­able, anti-​social behav­ior, and we, as a soci­ety, end-​up with more of the dys­nfunc­tion­al­ity that we should be try­ing to eliminate.

The only com­pel­ing argu­ment that we’ve ever heard for such sub­si­diza­tion was pre­sented by the aptly named, Alfie Doolit­tle, Eliza’s father, in My Fair Lady. His was a strictly util­i­tar­ian argu­ment. Mr. Doolit­tle didn’t really deserve the £5 he was ask­ing for (her). In his own words, he was unde­serv­ing and planned to con­tinue to be unde­serv­ing, but he’d cer­tainly enjoy spend­ing it on a spree for he and his mis­sus; so, in that sense, the pay­ment would be used to max­i­mize soci­etal wel­fare and cre­ate jobs for those serv­ing him.

We don’t see the valid­ity of that argu­ment in the government’s response to the cur­rent finan­cial cri­sis, and it seems that many other mem­bers of the middle-​class feel the same way.

By the way, in an arti­cle yes­ter­day, U.S. Seeks Rest of Bailout Cash, the reporters Deb­o­rah Solomon and Damian Paletta wrote: “Con­gress rejected Trea­sury Sec­re­tary Henry Paulson’s ini­tial request, send­ing mar­kets tum­bling. A sec­ond ver­sion of the law passed sev­eral days later, allow­ing Trea­sury imme­di­ate access to $350 billion.”

Per­haps those two slept through the wealth destruc­tion that fol­lowed pas­sage of TARP, as they make no men­tion of that drop in equity val­ues. The DJIA was at 10,831 on Sep­tem­ber 30; so, talk about rewrit­ing his­tory! More pre­cisely, talk about an extremely weak argu­ment to waste more of our money!

Per­haps if the ail­ing banks and their reg­u­la­tors were a bit more straight­for­ward and bit more like Alfie Doolit­tle, we’d per­son­ally be a bit more sym­pa­thetic. Until then, we’ll point read­ers to our other posts, includ­ing the last few (What Is Cit­i­group Worth? and When Is Enough Enough?) and our entry from three months ago when we first called for the nation­al­iza­tion of the weak­est banks as a les­son to the remain­ing healthy ones: It’s Time!

So, we con­clude by ask­ing rhetor­i­cally: why sub­si­dize irre­spon­si­ble, anti-​social behav­ior, regard­less of the recip­i­ents’ hygiene, con­nec­tions, or cronies, espe­cially when – unlike Alfie – it and they are not the least bit amusing?

Con­gress is sup­posed to start its review of the SEC today, Jan­u­ary 5.

In the spirit of inquiry, we’re won­der­ing – only half jok­ingly – had Mr. Mad­off admit­ted only to los­ing vast sums of money in Sep­tem­ber, would the gov­ern­ment have pro­vided bailout money to him?

Why not? At the point reg­u­la­tors had inves­ti­gated his firm eight times over 16 years, and pre­sum­ably found very lit­tle that was sus­pi­cious. (Here’s our take on reg­u­la­tors as “wise” mon­keys.)

Were the actions of board and senior man­agers at many of the other firms that sought and received bailouts any less egre­gious? Pos­si­bly less (allegedly) crim­i­nal but less egregious?

The Wall Street Jour­nal reports today that Obama Keeps His Dis­tance From Trea­sury on TARP. It seems the Mr. Obama and his rep­re­sen­ta­tives are not pro­vid­ing the Bush admin­is­tra­tion offi­cials with specifics about their mort­gage and liq­uid­ity crises-​related plans.

We say: what’s wrong with that? 

Whether Mr. Obama and his staff are seri­ously delib­er­at­ing and con­tem­plat­ing spe­cific plans or actions or whether they are just pre­tend­ing to do so, either is fine with us. Both are a vast improve­ment over the panic-​speech of Mr. Paul­son and Mr. Bernanke in the last half of September.

It’s our opin­ion that if those two had kept their mouths shut, took deep breaths and attempted to think, then the finan­cial mar­kets, the world’s economies, and the wel­fare of most the cit­i­zens of the United States would be much bet­ter today – not good, but better.

Fre­quently over the past few months, we’ve posted are own pre­scrip­tions for the two crises and they involve tax incen­tives to mit­i­gate the mort­gage cri­sis, and force­ful expropriation/​nationalization of the very worse large banks to mit­i­gate the con­fi­dence and liq­uid­ity cri­sis that con­tin­ues to loom over the nation and the world. Nation­al­ize not because the gov­ern­ment will oper­ate the finan­cial insti­tu­tion more effi­ciently, but do it because the gov­ern­ment and the peo­ple it rep­re­sents are already the resid­ual claimants. Nation­al­ize to penal­ized the failed boards and man­age­ments of the worst offend­ers, and set exam­ples to moti­vate health­ier firms to act. (Inter­ested par­ties can search our archives for many, many related posts.)

Any­way, had the Bush admin­is­tra­tion and appointees been more delib­er­ate there would still be a mort­gage prob­lem and a liq­uid­ity cri­sis, but the extent and effects of the liq­uid­ity cri­sis would have been muted. Many of their plans would still have been counter-​productive, but those mis­takes would not have been ampli­fied by the panic-​speech and vice versa, and we doubt that we would have seen the stock declines and record volatil­ity that we’ve observed.

So, we cheer for Mr. Obama’s laconic style and hope that his aides con­tinue to emu­late that aspect of his per­son­al­ity dur­ing the tran­si­tion and while in office. That almost seems conservative.

Some­times, less is more, and silence is golden; so, we’ll end here.

If you haven’t read it, For the Vix, 40 Looks Like It’s the New 20 in today’s The Wall Street Jour­nal please know that is a decent column.

We par­tic­u­larly like the paragraph:

“Volatil­ity may not return to its highs, but it isn’t clear when it will get back to nor­mal, either. Volatil­ity breeds fear, which breeds more volatil­ity. There is still too much uncer­tainty about the losses lurk­ing on bank bal­ance sheets and about the depth and breadth of the cur­rent reces­sion to inspire much calm.”

Now, the first sen­tence is true but says absolutely noth­ing. We’re not try­ing to ridicule Mark Gon­gloff the writer of the Ahead of the Tape column; instead, we empathize with the dif­fi­culty he faces writ­ing about mar­kets and uncertainty.

The notion of uncer­tainty about uncer­tainty–and the inabil­ity to mea­sure it in a sim­ple man­ner – tends to make state­ments about the topic either sound overly-​complex and overly-​qualified (by all of the nec­es­sary descrip­tive qual­i­fi­ca­tions to the state­ment) or makes them sound trite. Some­times that’s the writer’s fault, but often it is the reader’s fault, too, espe­cially when the reader incor­rectly pos­sess no uncer­tainty about their own “knowledge.”)

Now, we espe­cially like Mr. Gongloff’s fol­low­ing sen­tences because that’s almost exactly what we’ve writ­ten dur­ing the past sev­eral months – almost three months now.

The mort­gage cri­sis that cre­ated the con­fi­dence and liq­uid­ity cri­sis and the result­ing equity mar­ket volatil­ity all con­tin­ued unabated. Last Wednes­day, in The Mort­gage Cri­sis: Why Not Incen­tivize the Pri­vate Sec­tor? we wrote: “By the way, folks who think this Thanks­giv­ing week’s mini-​rally sig­ni­fies that the worst is over are likely to be sadly mis­taken. We do hope that we’re wrong, but doubt it.” 

While we try not to make much of one-​day changes, even when they are as large as today’s drop of 680 points in the DJIA and the nearly 9% decreases in the S&P 500 and NASDAQ indices, we do believe both the con­tin­u­ing volatil­ity and losses pro­vide evi­dence that the government’s actions to date have not helped instill con­fi­dence. In all like­li­hood have hin­dered econ­omy and finan­cial activ­i­ties by not allow­ing any res­o­lu­tion of the uncer­tainty of the value and via­bil­ity of large finan­cial intermediaries.

We wrote about that in Could a “Bailout” Pro­long the Finan­cial Cri­sis? and The Uncer­tain Value of Mort­gage Secu­ri­ties (among other posts) in late Sep­tem­ber. How­ever, the government’s exe­cu­tion and lack of plan­ning has been even worse than we could have imag­ined, and we had extremely low expec­ta­tions to begin with. 

As we have been men­tion­ing since that time, we wish fed­eral gov­ern­ment would pro­vide tax incen­tives – say, mort­gage invest­ment tax cred­its – to moti­vate pri­vate pur­chases of trou­bled assets. 

We also wish the gov­ern­ment would expro­pri­ate the worst offend­ers – the most poorly cap­i­tal­ized large banks. We know that the Trea­sury can’t run banks any bet­ter than the exist­ing man­age­ments, but that’s not one of our reasons. A main rea­son is to moti­vate other health­ier insti­tu­tions to act. Hav­ing ready buy­ers – moti­vated by such tax cred­its – would cer­tainly help those banks exchange assets for cash, and that lack of trade keeps the analy­ses of each bank’s finan­cial con­di­tional need­lessly opaque, and that’s (by def­i­n­i­tion) no way to resolve uncertainty.

We’re not sure when dur­ing the day, Mr. Paul­son spoke of new pro­grams (Paul­son Says Trea­sury Actively Mulling New Res­cue Pro­grams), but we doubt if that stemmed the (ebbing) tide of sharply decreas­ing equity val­ues. Unfor­tu­nately, there is no rea­son to expect any pos­i­tive news any time soon.

That’s a title we never thought that we would write, but before we chase away our reg­u­lar read­ers who share our polit­i­cal and eco­nomic world-​view, please let us explain: it’s not as bad as it looks.

In Kim­berly Strassel’s WSJ col­umn, Hillary of State, Ms. Strassel describes how the main­stream media have now returned to pro­vid­ing a favor­able opin­ion of Hillary Clinton’s for­eign affairs qual­i­fi­ca­tions (to be Sec­re­tary of State). 

We must admit that that this is the first time in our life that we viewed overly-​favorable cov­er­age of any Clin­ton to be a good thing, or even the pos­si­ble indi­ca­tion of a good thing.

But, again, we cau­tion reg­u­lar read­ers: it’s not as bad as it looks. 

Take that excla­ma­tion both ways: first, we’ve not changed, and sec­ond, we spec­u­late that the econ­omy isn’t as bad as the recent losses in the stock mar­ket sug­gest. Although, we have no doubt that cur­rent gov­ern­ment offi­cials could turn that neg­a­tive per­cep­tion into real­ity, and may have already done so with their extant actions.

So here’s our short argument:

1. Prior to the col­lapse of the stock mar­ket, losses were highly con­cen­trated among finan­cial intermediaries. 
2. Now, words can hurt…the econ­omy. The hyper­bole and/​or out­right pan­icky speech (or some com­bi­na­tion of both) by elected offi­cials and appointees, pri­mar­ily Messrs. Paul­son and Bernanke, helps cre­ate the recent collapse. 
3. Mis­guided actions can be dam­ag­ing, too. The government’s effort to stem the crises, which we believe that they still con­sider to be a sin­gu­lar cri­sis, has been very dam­ag­ing, too.
4. So, equity val­ues have decreased sub­stan­tially and the econ­omy is less sound than it was. There maybe be some­thing close to a depres­sion or not.
5. For­tu­nately, the media’s gen­eral high regard for Mr. Obama, and their desire to help him suc­ceed dur­ing the new administration’s hon­ey­moon period, may gen­er­ate suf­fi­cient good­will to pos­i­tively influ­ence the atti­tudes and per­cep­tions of con­sumers and investors to pre­vent the poten­tial dis­as­ter that we have been talked and erred into by said offi­cials. Ergo, in this instance, media bias may be a good thing if it influ­ences the zeit­geist towards opti­mism and away from eco­nomic devastation.

Now here’s the longer argument.

Con­cen­trated Losses

We very much enjoyed Peggy Noonan’s col­umn this week, Tur­bu­lence Ahead. Much of it deals with the lack of evi­dence for what she abbre­vi­ates as GDII, or Great Depres­sion II.

Despite the eco­nomic slow-​down this autumn and the stock mar­ket crash, we’ll take her obser­va­tions as evi­dence of a phe­nom­e­non that we have writ­ten about exten­sively: the high con­cen­tra­tion of losses in this mort­gage and finan­cial cri­sis com­pared to ear­lier ones. Please con­tinue to ignore the “domes­tic” auto man­u­fac­turer (as most of you have through the many years of buy­ing “for­eign” cars that were made in other coun­tries and in our coun­try). The out­sized pub­lic­ity that the indus­try receives about its prob­lems far over­state its value to the econ­omy. More­over, bank­ruptcy does not imply liq­ui­da­tion; so, there is no rea­son to think that at least two of the three will not survive.[1. Smart Japan­ese or Ger­man man­u­fac­tur­ers might wish to con­sider mov­ing their head­quar­ters to the U.S.A., and becom­ing a lead­ing domes­tic man­u­fac­turer. Think of the good­will such an act would engen­der, includ­ing the invalu­able free publicity.]

While not directly related to this post, Ms. Noo­nan spec­u­lates about the nature of GDII, and her com­ments are wise and con­sis­tent with our obser­va­tions liv­ing in a rel­a­tively depressed region of the coun­try: West­ern Penn­syl­va­nia, dur­ing and after the col­lapse of the steel indus­try. She talks about the grad­ual, almost imper­cep­ti­ble changes that may take years to real­ize. Those who spent their lives here were/​are much less sen­si­tive to the change, whereas hav­ing spent a decade away, we noticed the gen­eral unkempt shab­bi­ness imme­di­ately upon return; one can con­tinue to see it in the peel­ing paint and dirty facades of many small businesses.

Epic Gov­ern­men­tal Mismanagement

See most of what we wrote about the cri­sis since Sep­tem­ber although we might have crit­i­cized Mr. Paul­son before that. This morn­ing, in More Evi­dence of the Lack of Fore­thought that is TARP we sum­ma­rized our crit­i­cism of cer­tain aspects of the government’s response: the words and actions of elected and appointed offi­cials have been extremely dam­ag­ing and their efforts often coun­ter­pro­duc­tive at best.

As we wrote sev­eral months ago, no sin­gle firm could destroy our econ­omy. Such an out­come can only be achieved through gov­ern­ment action.

Like Ms. Noo­nan, we’ve really not seen any panic among con­sumer – whether they are fam­ily, friends, acquain­tances or strangers at the mall. How­ever, the government’s response to the cri­sis has the con­tin­ued poten­tial to (con­tinue to) harm the nation’s eco­nomic psy­che and make bad times worse.

When Will We See the Bottom?

We had a con­ver­sa­tion with friend ear­lier in the week who was much con­cerned about the future (who’s not?). He won­dered if equity mar­kets had reached their nadir and had cited some anec­do­tal evi­dence sug­gest­ing that his acquain­tances were inter­nal­iz­ing their sub­stan­tial loss of wealth. They were not par­a­lyzed with fear but had sur­veyed the eco­nomic envi­ron­ment and their own weak­ened finan­cial con­di­tion and were get­ting on with life.

The Poten­tial Ben­e­fit of Media Bias

Clearly, words do mat­ter, and the media can frame and empha­size issues and perspectives. Directly and indi­rectly those words affect the behav­ior of cit­i­zens, con­sumers, investors, and entrepreneurs. 

If the mass-media’s desires to aid Mr. Obama pos­i­tively affect per­cep­tions and improves the gen­eral eco­nomic out­look of the nation (and there­fore the world), then the prob­a­bil­ity of escap­ing truly dev­as­tat­ing eco­nomic con­di­tions improves.

In that and many other respects, we cer­tainly hope the best for Mr. Obama.¹

So, start­ing today and con­tin­u­ing for a few months, we’re all for left-​wing media bias.

Of course, we ask Obama? BWAMA?

The Wall Street Jour­nal today, Novem­ber 28, reports Res­cue Plan Strained by Lack of Staff.

We’ve crit­i­cized the government’s response to both the domes­tic mort­gage cri­sis and the larger global con­fi­dence cri­sis since it – that which became TARP – was first pro­posed. (We use the sin­gu­lar “it” because we’ve not heard any gov­ern­ment offi­cial decou­ple the prob­lems either in their ini­tial panic or in the inter­ven­ing months.)

Since mid-​September, other than times when we were too busy to write, our crit­i­cism as been con­sis­tent, harsh, and steady: (1) ini­tially the gov­ern­ment offi­cials, led by Trea­sury Sec­re­tary Henry Paul­son, over­re­acted. That hys­te­ria – or maybe it was (indistinguishable) hyperbole – exac­er­bated the sit­u­a­tion and cre­ated real panic and extremely high volatil­ity, which remains. (2) Their solu­tion – which, as Trea­sury offi­cials now implic­itly admit did not meet the def­i­n­i­tion of a plan – was poorly con­structed and des­tined to fail. And (3) as we wrote nearly two months ago, in Even A Per­fect Bailout Will Fail, “What Hope of Suc­cess with Typ­i­cal Bureau­cratic Efficiency?”

The arti­cle cited above pro­vides evi­dence of that “Bureau­cratic Effi­ciency,” by which of course we meant inef­fi­ciency. (We should have included “inef­fec­tive­ness,” too, but it seemed like overkill at the time.) The key line in today’s arti­cle: “The cur­rent Trea­sury has so far strug­gled to keep up with the task of hir­ing enough peo­ple to han­dle the $700 bil­lion finan­cial res­cue package…”

Would any rea­son­able per­son expect any more (or less) from a mas­sive, cen­tral­ized bureau­cracy? In that regard, is the fed­eral government’s response to this dis­as­ter or cat­a­stro­phe any dif­fer­ent than its response to Hur­ri­canes Kat­rina and Ike? (Ike has escaped national atten­tion due to the more destruc­tive finan­cial cri­sis and the recent Pres­i­den­tial election.) 

Thus, our gov­ern­ment seems to be unable to deal with either large-​scale nat­ural or man-​made dis­as­ters. How­ever, while Michael Brown, the Direc­tor of FEMA at the time of Kat­rina, could never be blamed for caus­ing Kat­rina, can the same be said of Mr. Bush’s finan­cial appointees in the cur­rent crisis?

This year – the found­ing year of our var­i­ous inde­pen­dent ven­tures – we are espe­cially grate­ful for all that we have and have experienced.

So, we wish a Happy Thanks­giv­ing to our fam­ily, friends, clients, and acquain­tances (and even to our detrac­tors and ene­mies, who unknow­ingly have pro­vided truly invalu­able assis­tance to us.)

How­ever, we can’t offer Thanks­giv­ing wishes with­out men­tion­ing an excel­lent col­umn that appeared in The Wall Street Jour­nal three years ago this week. It was an excerpt of His­tory of Plimoth Plan­ta­tion, which was writ­ten by colony’s gov­er­nor, William Bradford.

The jour­nal col­umn was enti­tled, How the Pil­grims Made Progress, and as you can see from the hyper­link, it is still freely avail­able on-​line at www​.Opin​ion​Jour​nal​.com. (The entire Ply­mouth his­tory seems to be avail­able at http://​www​.swarth​more​.edu/​S​o​c​S​c​i​/​b​d​o​r​s​e​y​1​/​4​1​d​o​c​s​/​1​4​-​b​r​a​.​h​tml.)

Brad­ford has a short, but fas­ci­nat­ing, account of the Pil­grims’ inabil­ity to gen­er­ate a boun­ti­ful har­vest for the first two years of their colo­nial adventure.

Mr. Brad­ford attrib­uted that fail­ure to the colony’s ini­tial col­lec­tivist men­tal­ity and the shar­ing of prop­erty, effort, and output.

At roughly the same time that Plymouth’s exper­i­ment was pro­vid­ing empir­i­cal evi­dence of the fail­ure of collectivism, the Late Scholas­tic Econ­o­mists – fol­low­ing the tra­di­tion of Saint Thomas Aquinas – were dis­cred­it­ing it the­o­ret­i­cally.¹

The Scholas­tic argu­ment was short but sweet: sup­pose there are two types of peo­ple in the world: good and evil.² It involved two questions.

In a col­lec­tivist soci­ety, who will do the work, i.e., take pro­duc­tive effort on behalf of the com­mon weal? The good or the evil?

In a col­lec­tivist soci­ety, who will attempt to take more than their share of the col­lec­tive out­put? (Sup­pose it is some crop stored in a silo or barn?) The good or the evil?

Thus, on both ends – pro­duc­tion and con­sump­tion – col­lec­tivism sub­si­dizes evil, and that’s not a good thing.

The failed boards and man­age­ments of sev­eral of our largest finan­cial firms are not evil – merely incom­pe­tent and out-​of-​their-​element. (Mr. Paul­son fits seam­lessly with that crowd.)

As we’ve writ­ten exten­sively, we see no rea­son why the masses – nei­ther entirely good nor entirely evil – should sub­si­dize the mis­takes of our pri­vate and pub­lic pol­icy mak­ers. Like Ply­mouth, and with­out reform, it can only lead to the reduced wel­fare expe­ri­enced by Ply­mouth; the for­mer Soviet Union; Cuba; China prior to its loos­en­ing of eco­nomic free­dom; the UK before Thatcher; Poland; etc, etc. 

So among the many things that we are thank­ful for this year, we do thank God that we live in a coun­try where we can freely and harshly crit­i­cize our elected and appointed offi­cials. That is not the case in much of the world: whether mea­sured by pop­u­la­tion or land mass. (So we pray for indi­vid­u­als in those coun­tries that they may one day live in the same free­dom that we enjoy.)

Copy­right © 2008 Spero Consulting.

Bill’s and Bill’s, Bill’s and Bill’s
It’s bailout time, for the Citi
Plead-​a-​ling, hear them sing
To-day, it is our bail-​out day!

Citi side­ways, Wall Street side­ways
Dressed in bank hol-​i-​day style
In the air there’s a feel­ing of Christ­mas
Bankers laugh­ing, taxes pass­ing
Wast­ing pile after pile
And on every street cor­ner you’ll hear…

Trill’s and Trill’s, Trill’s and Trill’s
It’s Christ­mas time for the Citi
Plead-​a-​ling, hear them all sing
“We want our own bail-​out day!”

*With all due respect and apolo­gies to Ray Evans and Jay Liv­ingston and their clas­sic, Sil­ver Bells, and for the truly clue­less, note that we’re abbre­vi­at­ing bil­lions and tril­lions to fit the tune.

Update (01−20−09): now that Mr. Paulson’s term as Trea­sury Sec­re­tary has ended, we must admit that the small bit of opti­mism we exhib­ited in this post was sadly and unfor­tu­nately mis­placed. It was out-​of-​character for us, but we’re a hope­ful pes­imist. He quickly reverted to his behav­ior of Sep­tem­ber and Octo­ber, and for that, the mar­kets, the nation, and the world have and will con­tinue to suffer.

We hope that his ear­lier actions haven’t caused irrepara­ble dam­age, but we’re doubtful.

This is a longish post that cov­ers sev­eral aspects of the ongo­ing finan­cial cri­sis and, for the con­ve­nience of new vis­i­tors, con­tains plenty of ref­er­ence links to ear­lier posts.

In our mind, until last week, the cur­rent Trea­sury Sec­re­tary had an incred­i­bly long and unbro­ken string of wrong deci­sions and actions. Start­ing in March if not ear­lier, and through early Novem­ber, in almost every impor­tant deci­sion, when Mr. Paul­son zigged we would have zagged, and vice versa.

Well, actu­ally, we wouldn’t have zagged or zigged as that requires effort. Instead, we hope our rhetor­i­cal flour­ish illus­trates our oppo­si­tion to many of Mr. Paulson’s deci­sions. We would have done what we have advised all along, and what Mr. Paul­son finally, finally seems to be doing: nothing.

As we advised in Sep­tem­ber, par­tic­u­larly in the posts Over­re­ac­tion and Moral Haz­ard: Now That Will Be a Cri­sis and Pub­lic Bailout? Why Rush or Do It at All? among others, we rec­om­mend Mr. Paul­son to vig­or­ously do noth­ing, and advice Mr. Obama and the next Trea­sury Sec­re­tary do the same: noth­ing or more pre­cisely, noth­ing much. 

We ital­i­cize the “much” because we con­tinue to (1) offer our pri­vate, non-​governmental solu­tion to the mort­gage cri­sis, which the gov­ern­ment has yet to address since TARP become law, and (2) offer advice on the best way to mit­i­gate the big­ger and more wor­ri­some liq­uid­ity cri­sis, and that will require a bit of aggres­sive gov­ern­ment action to moti­vate remain­ing bank man­agers to act or sell. See, we don’t think that the gov­ern­ment should act (much), but we do think that banks and share­hold­ers should.

In gen­eral, we’re strongly in favor of an eco­nomic ver­sion of the Hip­po­cratic Oath: do no harm. Thus, we advise: do very lit­tle for which there will be few unin­tended con­se­quences. (Although we do have two spe­cific rec­om­men­da­tions in mind that we’ll men­tion later.)

So lit­tle time, so many mis­takes: what’s the point?

The Treasury’s ear­lier insid­i­ous approach of get­ting the government’s many, spindly, lit­tle fin­gers on all of its Vishnu-​like arms into hun­dreds of firms will likely have no end, ever. (Our pre­dic­tion: they’ll rene­go­ti­ate rates when tax­pay­ers are sup­posed to reap the ben­e­fit of rate increases.) It was so very dis­ap­point­ing – not sur­pris­ing, but so very dis­ap­point­ing – to see our fed­eral offi­cials act in such rushed and expe­di­ent manners. 

Until last week there didn’t seem to be any thought – even an after­thought – of the havoc they were wreaking. Given shal­low­ness their depth of thought, we would have been con­vinced that Mssrs Paul­son and Bush were teenagers with Prog­e­ria had text-​messaged their inter­views and press releases.

What’s the point: when we taught decision-​making to MBAs we heav­ily empha­sized (1) know­ing the deci­sion cri­te­rion – the objec­tive func­tion – and (2) iden­ti­fy­ing rel­e­vant or incre­men­tal costs and ben­e­fits across alter­na­tive courses of action.

We saw no indi­ca­tion that our government’s lead­ers oper­ated under such a frame­work, par­tic­u­larly in Sep­tem­ber and Octo­ber of this year.

In other words, it should be very clear how to account for the fed­eral government’s deci­sions and actions. One would hope that offi­cials would have some met­ric by which they mea­sure the effect of their actions, but that seems to have been beyond them.

What were Mssrs. Bush, Paul­son, and Bernanke try­ing to accom­plish? What were (or are) the costs and ben­e­fits of their fea­si­ble alter­na­tives? Which cat­e­gories of costs and ben­e­fits seemed to have the most reli­able and firm esti­mates? What deci­sions were most sen­si­tive to under­ly­ing vari­ables and assump­tions? Which deci­sions seemed the most robust across poten­tial changes in the eco­nomic environment?

Dur­ing the both the orig­i­nal mort­gage cri­sis and the larger, ensu­ing and ongo­ing liq­uid­ity cri­sis, has the reader heard any gov­ern­ment offi­cial speak in those terms? Or, until last week, when Mr. Paul­son said, “Nyet,” were their state­ments more like: “Eek! We’ve got to do some­thing! We don’t have time to think?” Yeah, it was a rhetor­i­cal question.

As reg­u­lar read­ers know, we have very seri­ous doubts about the effec­tive­ness of var­i­ous aspects of the government’s plan – although “plan” seems to be too thought­ful and orga­nized a term to describe the government’s response to the cri­sis of 2008. Like­wise, we have even greater doubts about its effi­ciency, or the ratio of ben­e­fits to costs. (Is it not approach­ing zero?) We mean that there are at least two issues to con­sider: (1) will the government’s response ulti­mately be suc­cess­ful? Will it be effec­tive? And (2) If achieved, what will that “suc­cess” cost? Will it be efficient?

Unfor­tu­nately, so far, we’ve not heard a def­i­n­i­tion of success.

However, seven weeks after the approval of TARP, the results don’t look good. In fact, unless “suc­cess” has been defined down­ward, the results look more like fail­ure. The NASDAQ Index sits at roughly half of its twelve-​month high, and has lost as much value since the pas­sage of TARP – about 700 points – as it did in the period from its high last Decem­ber to the end of Sep­tem­ber. Like­wise, the S&P 500 has gone from about 1,524 last Decem­ber to 806 today, with 366 points of that 718 point drop occur­ing since Sep­tem­ber 30. Ditto for the DJIA: down from 13,991 last Decem­ber to today’s close three points below 8,000. It stood at 10,831 on Sep­tem­ber 30. Tril­lions and tril­lions of dol­lars of value destruc­tion – both before and after TARP.

Thus, “suc­cess” how­ever defined, seems doubt­ful. More­over, any claim of suc­cess must be tem­pered by the very heavy cost bourne by tax­pay­ers and investors. So, given those results, we’re very encour­aged by Mr. Paulson’s new­found hes­ti­tancy to act. But is the too lit­tle arriv­ing too late?

Don’t just do something. Stand there.

Given its sim­i­lar­ity to our position, we very much enjoyed the recent opin­ion essay by our for­mer Wash­ing­ton Uni­vesity col­league, Rus­sell Roberts in The Wall Street Jour­nal. It was enti­tled, “Don’t Just Do Something. Stand There.” A month after our post, Out of Their Ele­ments, and weeks after related posts like Well, This Is a Fine Mess You’ve Got­ten Us into…., Mr. Roberts makes sim­i­lar points, and he draws sim­i­lar, dis­cour­ag­ing, and almost depress­ing con­clu­sions about the future. Unfor­tu­nately, that doesn’t give us even a quan­tum of solace.

For­tu­nately, how­ever, it does seem that Mr. Paul­son may have read Mr. Roberts’ col­umn dur­ing the sec­ond week­end of November, internalized it, and vowed swift inac­tion in the tur­bu­lent finan­cial markets.

Finally: doing noth­ing! But why did it take so long?

We write that because last Tues­day, Novem­ber 11, Mr. Paul­son rebuked the automak­ers and their advo­cates seek­ing TARP funds, and news reports both last week and this week note that the Trea­sury have no plans to buy trou­bled assets or imple­ment new schemes. (Last Wednes­day, in response to the news, we wrote Tak­ing the TA out of TARP, and ungra­ciously gloated over the fact that we had cor­rectly pre­dicted the law’s inef­fec­tive­ness and poten­tial harm nearly six weeks earlier.)

Last Mon­day, the day before Mr. Paul­son denied TARP funds to the auto indus­try, we wrote Patience Please! They Just Need More Time!, which noted that the car man­u­fac­tur­ers had 35 years – that’s THIRTY-​FIVE YEARS – since the first oil cri­sis to change their ways. It seems that through the entire time – almost the life expetancy of a Russ­ian male – man­age­ment, the unions, and the deal­er­ships have been locked in an inter­minable game of “chicken” with each wait­ing for the other swerve to avoid col­li­sion and death to reap the pride­ful spoils of victory. 

While in some ways, Chicken seems like an apt metaphor, it ignores the fact that over the past 35 years, with each myopic deci­sion the spoils have become smaller and smaller – and are now almost noth­ing. In that sense, the auto indus­try seems more like a black hole where a mas­sive expanse (of warm sun­shine and fren­zied activity) has shrunken to a cold, shriv­eled, and nearly non-​existent state. Yet, its mass – or more pre­cisely, the mass of its lia­bil­i­ties – seems to warp and dis­tort nearby space as it smoth­ers and destroys every­thing within reach.

Unfor­tu­nately, the self-​destruction of a once-​vital and proud indus­try is not a game or a black­hole mil­lions of ligh years away. It col­lapse is tragic and close and the col­lat­eral dam­age of the col­lec­tive, short-​sighted self­ish­ness – mea­sured in the hun­dreds of bil­lions if not tril­lions of dol­lars and in terms of lives ruined – has been all too real. More­over, the siu­ta­tion is not interminable, but it finite, and the end is near.[1. We admit to being a bit overly harsh as it seems the ill-​advised CAFE stan­dards wouldn’t per­mit the Big Three to lever their com­pete­tive advan­tages with large cars and trucks. At one time, they did make the best large cars in the world (and we still love our Suburban.)]

So, in our mind, ignor­ing GM, Ford, and Chrysler seems to be both the effi­cient and just thing do, and we admire Mr. Paul­son for admit­ting – even if only implic­itly – that his ear­lier actions were mis­takes. Clearly, we wish that he could have been a faster learner. It might have saved all of us hun­dreds of bil­lions of dol­lars of cash and tril­lions of dol­lars of equity value.

It’s our view that The Gov­ern­ment Will Save Us! Not!. Instead, we’d pre­fer that it get out of the way and pro­vide incen­tives to pri­vate enter­prise to act autonomously. In that spirit, we still pro­pose A Bet­ter Solu­tion (than a gov­ern­ment takeover), which involves tax incen­tives for buy­ers of trou­bled assets. Those incen­tives could be imple­mented as invest­ment tax cred­its or as extremely accel­er­ated depre­ci­a­tion, and would pro­vide large (30%-40%) and imme­di­ate tax sav­ings that would cush­ion the down­side risk of uncer­tain val­u­a­tions. (The things are hard to value.)

Make an example: nationalize the worst one(s).

We’re gen­er­ally almost lib­er­tar­ian in our free mar­ket approach to eco­nom­ics, but don’t get us wrong, we con­tinue to urge the gov­ern­ment to nation­al­ize the worst cap­i­tal­ized banks: the very few, not the many. We’d much pre­fer the out­right expro­pri­a­tion of the worst offend­ers both out of a sense of jus­tice and as a warn­ing to other firms to act quickly to save them­selves rather than to wait for gov­ern­ment handouts. 

Just as importantly, with com­plete own­er­ship of a few firms, it is much more likely that there would be many calls from many par­ties, espe­cially com­peti­tors and poten­tial investors, to re-​privatize the nation­al­ized insti­tu­tions ASAP. That polit­i­cal pres­sure would prove to be very ben­e­fi­cial to reduc­ing the government’s influ­ence in finan­cial intermediation.

Imag­ine if the gov­ern­ment would have nation­al­ized AIG, would the out­come have been any worse than what we’ve seen in the past two month? Would it have been any more expen­sive than it has already been? We’d argue – and have argued – that issues with col­lat­eral, includ­ing those related to AIG’s dimin­ished credit rat­ing, would have been mit­i­gated through gov­ern­ment own­er­ship and creditworthiness.

More­over, other than non-​executive employ­ees hold­ing shares, we’d argue that none – not 10% nor 20% – of the old own­er­ship struc­ture should remain. That might induce share­hold­ers in other firms to become a bit more activist and demand stronger and more knowl­edge­able rep­re­sen­ta­tion on their boards of direc­tors. (See our recent: The Fail­ure of Boards to Direct.)

We’d pre­fer the fren­zied, moti­vated efforts of bankers seek­ing cre­ative solu­tions to their most vex­ing prob­lem over the cur­rent sce­nario where hoard­ing of funds and wait­ing seem to be the pre­ferred tac­tics. In that sense we as an econ­omy, a nation, and a soci­ety are in no bet­ter posi­tion today than we were six or seven weeks ago.

We wrote about what has and con­tin­ues to occur in Even A Per­fect Bailout Will Fail and Finan­cial Pro­jec­tion in a Cri­sis among other posts.

Unfor­tu­nately, the biggest dif­fer­ence between now and the end of Sep­tem­ber is that our col­lec­tive equity hold­ings have lost about one third of their value, and new asset classes like CMBS are likely to depre­ci­ate like MBS already has. How­ever, on the upside, it seems that Mr. Paul­son is mov­ing (or more accu­rately not mov­ing) in the right direction.

In all seri­ous­ness, we do pray that our senior gov­ern­ment offi­cials take the right, rea­soned, and thought­ful actions. We hope you’ll join us. Per­haps it’s working.

(This a long post; so, there are prob­a­bly a num­ber of typos, which we’ll cor­rect dur­ing the com­ing days.)