Friday, October 24, 2008
Thursday, October 23, 2008
On the dialogue between blogger and commenter,
Readers tell me of breaking stories, new perspectives, and counterarguments to prevailing assumptions. And this is what blogging, in turn, does to reporting. The traditional method involves a journalist searching for key sources, nurturing them, and sequestering them from his rivals. A blogger splashes gamely into a subject and dares the sources to come to him.
Not all of it is mere information. Much of it is also opinion and scholarship, a knowledge base that exceeds the research department of any newspaper. A good blog is your own private Wikipedia. Indeed, the most pleasant surprise of blogging has been the number of people working in law or government or academia or rearing kids at home who have real literary talent and real knowledge, and who had no outlet—until now.
and on the unique improvisational "vibe" of blogging,
To use an obvious analogy, jazz entered our civilization much later than composed, formal music. But it hasn’t replaced it; and no jazz musician would ever claim that it could. Jazz merely demands a different way of playing and listening, just as blogging requires a different mode of writing and reading. Jazz and blogging are intimate, improvisational, and individual—but also inherently collective. And the audience talks over both.
The reason they talk while listening, and comment or link while reading, is that they understand that this is a kind of music that needs to be engaged rather than merely absorbed. To listen to jazz as one would listen to an aria is to miss the point. Reading at a monitor, at a desk, or on an iPhone provokes a querulous, impatient, distracted attitude, a demand for instant, usable information, that is simply not conducive to opening a novel or a favorite magazine on the couch. Reading on paper evokes a more relaxed and meditative response. The message dictates the medium. And each medium has its place—as long as one is not mistaken for the other.
I try to explain blogging to my friends and colleagues who are not aware of the medium and they usually don't get it. Andrew captures the feeling wonderfully!
Tuesday, October 21, 2008
Anna Schwartz co-authored "A Monetary History of the United States" with Milton Friedman. While the monetarists have their own issues, she gave an interview to the Wall Street Journal this week on the financial crisis, "Bernanke is Fighting the Last War, and it is superb. She made five key points that echoed themes I've been discussing in the past weeks.
First, the current Federal policies are not addressing the fundamental cause of the confidence problem. That cause is distressed balance sheets which can only be fixed by write down and recapitalization.
This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. "The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."
So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."
Second, bank failures are not the end of the world, and in fact are part of the restructuring process that is needed.
In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."
Rather, "firms that made wrong decisions should fail," she says bluntly. "You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich." The trouble is, "that's not the way the world has been going in recent years."
Third, the idea of "systemic risk" as a Doomsday scenario is bogus, and only propagates the "too big to fail" mindset.
Instead, we've been hearing for most of the past year about "systemic risk" -- the notion that allowing one firm to fail will cause a cascade that will take down otherwise healthy companies in its wake.
Ms. Schwartz doesn't buy it. "It's very easy when you're a market participant," she notes with a smile, "to claim that you shouldn't shut down a firm that's in really bad straits because everybody else who has lent to it will be injured. Well, if they lent to a firm that they knew was pretty rocky, that's their responsibility. And if they have to be denied repayment of their loans, well, they wished it on themselves. The [government] doesn't have to save them, just as it didn't save the stockholders and the employees of Bear Stearns. Why should they be worried about the creditors? Creditors are no more worthy of being rescued than ordinary people, who are really innocent of what's been going on."
Fourth, regardless of market forces that reacted during the buildup, one of the underlying causes was loose money policy at the FED. Anna, as a monetarist obviously focuses on this as a primary cause, but I can forgive that. I like this development, not so much for it's errors, but because of the fundamental idea that seemingly unexplainable phenomena are explainable. That mysterious "booms" are not so mysterious.
How did we get into this mess in the first place? As in the 1920s, the current "disturbance" started with a "mania." But manias always have a cause. "If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset.
"The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it's so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses."
And finally, on Alan Greenspan's role in the mess,
The house-price boom began with the very low interest rates in the early years of this decade under former Fed Chairman Alan Greenspan.
"Now, Alan Greenspan has issued an epilogue to his memoir, 'Time of Turbulence,' and it's about what's going on in the credit market," Ms. Schwartz says. "And he says, 'Well, it's true that monetary policy was expansive. But there was nothing that a central bank could do in those circumstances. The market would have been very much displeased, if the Fed had tightened and crushed the boom. They would have felt that it wasn't just the boom in the assets that was being terminated.'" In other words, Mr. Greenspan "absolves himself. There was no way you could really terminate the boom because you'd be doing collateral damage to areas of the economy that you don't really want to damage."
I have an entire post on the revisionist perspective that Alan Greenspan has himself put to his decisions and actions. However, every time I sit to write it, I get too infuriated to finish it. This particular account made my blood boil as it shows in his own thinking the pragmatist and sell-out he has become. And in the end in doing so he's become capitalism's worst detractor.
Thanks Anna for saying what had to be said!
Friday, October 17, 2008
Wednesday, October 15, 2008
The last debate starts in an hour or so. I can't do it, really. I'll be ill if I try. After watching the last several weeks of an incredible resurgence of statism from government intervention in the economy, it really doesn't matter what the candidates say.
I was tempted for a while to vote McCain, just because the economic crisis is so bad, and will potentially be so devastating if mishandled. My hope was that there was some semblance of basic economics somewhere in his camp. However, after reading about what Franklin Roosevelt promised regarding monetary policy and what he actually did after being elected (which you can find in this publication: The Great Myths of the Great Depression) it's clear to me that a vote for a pragmatist who says he's for the free market, and consistently bashes it in word and deed is no vote at all. The Republicans are slaves to religion and a pragmatist like McCain will go wherever his handlers lead him. And a Democratic Legislative / Executive combination can only do no good. There is no choice this year. I'm sitting this one out. I'll use the time to pen a few letters to my congressman, and maybe some Letters to the Editor.
Today I read of the heavy handed tactics used by Treasury on our nine largest banks. I read of force used to take ownership rights in banks in exchange for capital. Forced used on both good banks and bad banks alike, and capital thrust upon good banks that didn't need or want it. You should read some of the account here. It is chilling.
The only difference between Hank Paulson and Hugo Chavez is that Paulson "feels badly" about what he's done. Our American statism takes the unique form of a seemingly concerned, reluctant paternalism. Here, instead of the stern dictator, we have the "reluctant father." Never mind that both have to punish their misbehaving children, in exactly the same fashion.
But I digress. On to the topic at hand.
Megan McCardle almost had me snookered last week, but not this week. She's concerned about something in the market called "systemic risk," and thinks that this is cause for some form of government regulation in the financial markets. For those of you who don't know finance, systemic risk is risk that an entire system is subject to. It is said to be the risk that you cannot eliminate through diversification. This concept however has become the basis for a line of thought which has a parallel in the environmental movement, namely The Doomsday Scenario. Last week this scenario was posited for the commercial paper and money markets.
The idea is that these systemic risks threaten the very existence of the financial markets, and because the markets move so fast it is possible that once they near a certain point, it will be impossible to stop the financial system from imploding. Therefore one needs to regulate the markets in such a way that they are kept away from these systemic "cliffs." While markets do move quickly, and can get themselves into trouble, I think it is fallacious to then posit that the outcome is catastrophic, and that it can be mitigated by government action.
I'm not suggesting that such risk doesn't exist, but I am seriously questioning that idea that one can mitigate it by regulation. Forgetting for a second that governments themselves are subject to systemic risks, that their meddling can in and of itself be a systemic risk through unintended consequences (as is the case in this crisis), and that systemic risks are in part unmitigatable because the are unforseeable (making one wonder how one a priori regulates against them). The argument that caught me off guard was her thought on why governments are uniquely qualified to do the damage control when a crisis hits.
In her discussion on the crisis with Yves Smith of Naked Capitalism (whose blog I have come to rely on for its up to the minute detailed information on this crisis, and who is "gobsmacked" at the Paulson bailout. For her take on why the bailout won't work see her BloggingHeads with McCardle - 18:00. It's quite good.) Megan posits (bold mine),
One of the core issues here, I think what the government is really good at in doing this kind of regulation is first of all it's great at transparency and it's really good at coordination. And so some of the things that people are suggesting, like Luigi Zengales is saying 'look just force people to do an equity transfer' and the reason you want the government to do this is that anyone who does it by themselves sends a bad signal to the market, but if you force everyone to recapitalize at once, then there's no signaling of [balance sheet problems].... But the government is really good at that stuff, when you have a collective action problem in the financial markets which you often do. (passage starts at 38:30, the whole discussion of systemic risk starts at 28:00)
My first response to this was "hmm, ok, yes government can generate broad, unified action." It is of course telling that she uses the word "force" since that is the mechanism by which government accomplishes "unified" action. And it is true that this crisis needs a unified action. I spent a day noodling on that problem, until one of my favorite capitalists, J.P. Morgan, gave me the answer. Back to my post of last week, Morgan's answer to the crisis of 1907 was to bring all bankers together, turn out balance sheets, and restructure them with capital infusions and write-downs.
In a sense the action required here is the same, a unified action, involving all the main banks, restructuring through write-downs and capital infusions. A free market could do this on it's own. Treasury might be able to do it, but it inherently requires nationalization. So why isn't the free market acting? Why is government supposedly better at such action? Because if bank heads do this today, it goes by the term collusion, and it is patently illegal. But it should not be! Government is better at it because it has made the act of doing it illegal for all but itself. Also, for the CEO who has managed his bank poorly, the free market option means he will lose his firm. Such a person, acting pragmatically, would rather hold out for a government bail-out, even if he risks bankruptcy. Implied government action creates that moral hazard that prevents these free-market-led negotiations!
A "collective action" problem is better handled by the free market, but today such action is illegal. It should not be. The truth is that instead of Henry Paulson forcing good banks to accept nationalization, it is the good banks who should be presiding over the recapitalization of their more poorly-run brethren.
Thursday, October 02, 2008
I realized this today. In a follow up to my post on "Why Paulson's Money is No Good" describing why government money can't replace private capital, I forgot one key item, and it's a really good one.
Broad open-ended "emergency" legislation such as the $700b bailout is implemented and interpreted by men. A key feature of the rule of law, and the principle behind the idea the idea of a "government of laws, not men" is that the caliber of people to objectively interpret and benevolently administer law varies. And one feature of a pragmatic approach to public service is that credible men make us think that a government of men is alright. Greenspan, in many times running the FED as if he were a private banker, lulled us into thinking that the FED as legal entity isn't so bad.
Enter Hank Paulson. He's credible as an ex-Wall Street CEO, right? I have many conservative friends who, on that basis alone, are willing to at least entertain the idea that the bail-out money can't be spent that poorly. But civil servants change. New ones come. Sometimes the one we entrust a particular policy to is not the one who actually carries it out, and as a result, they carry it out poorly.
Hank Paulson isn't going to be the one administering this bail-out. In all likelihood, it will be the person selected as Treasury Secretary under President Obama [sic]. Do you know who that is? I certainly don't. Are you willing to trust that person to make good judgements about how to effectively spend this money? I shudder at the thought.
The Bail-out bill continues it's steady march to realization. While the mainstream media and a lot of intelligent people I know continue to advocate for the bail-out, the narrative of the proper causes of the bailout is making it into the mainstream. I don't think it's a majority voice yet, but it is a mainstream voice. Radio commentators like Glenn Beck, Dennis Miller, and even morning radio entertainer Mancow (this morning he identified Fannie/Freddy, the CRA, and government intervention as the key causes of the mess) are openly advocating and identifying root causes properly. Senator DeMint and popular economic commentators are starting to advocate strongly against the bail-out.
The problem however, judging from those I've talked to is that the analysis of the cause and effect seem to be superfluous to the thinking of what to do going forward. I have a whole post brewing on why this is, but I think that we who advocate on the principles of free markets, also have to begin to articulate the concrete free market options, and question the wisdom of the prevailing thinking. That is why I changed my tone on the last letter to my Congressman. I don't think it's necessary that you have a knowledge of economics take this tack. You can also focus on experts in the media who are advocating options, and pointing out problems with the bail-out option.
I have a post brewing on some of what I perceive as the faults in this line of thinking. One aspect is that while many people consider the intended consequences of any advocated action, it is many times the unintended actions that actually can do the damage. Many examples abound, and here are two regarding the crisis.
From a Wall Street Journal Article "Free AIG", it appears as though, in retrospect, the nationalization of AIG a few weeks ago, may not have been a good idea (bold mine).
We don't know if AIG debt deserves a downgrade, but the ratings drama tells us something about the original deal. In fact, the further we get from the New York Fed's takeover of AIG, the worse this transaction appears for both taxpayers and shareholders. In the wake of Lehman's bankruptcy filing, an intervention might have appeared necessary. Now this alleged rescue is even drawing skeptical looks from state insurance regulators, triggering a surreal press release on Monday.
The New York Fed's release had no news, only an assurance that its credit facility was actually intended to help AIG: "This program is designed to stabilize AIG with sufficient liquidity, and to enable AIG to make appropriate dispositions of certain assets over time." (Read full press release here.) Why does the Fed need to convince people that it's helping a company it is lending $85 billion to? Perhaps because shareholders didn't vote for this federal help and might reject it if they could.
There's also downside for taxpayers, because the bizarre structure of this deal encourages the company to put them on the hook for all $85 billion. AIG would have to pay 10.5% this year on the full $85 billion, even if the company didn't borrow a nickel. Taking the money only increases the rate to about 14%. Naturally, the company has already borrowed more than half of the available taxpayer funds.
Once accepted, the onerous terms of this facility force AIG to immediately commence asset sales. Taxpayers might celebrate that the Fed is driving such a hard bargain when owners of a business come to Washington for help, but again, the owners never did. We have found no evidence to suggest that the AIG board, the Treasury or the New York Fed consulted the firm's largest shareholders before striking this deal.
Some shareholders are wondering if a Chapter 11 filing wouldn't have been a better deal. Clearly the word "bankruptcy" in news stories about an insurer can be toxic. Customers begin to flee and state regulators might seek to put even the healthy insurance subsidiaries in conservatorship. But with the company preparing to sell off pieces to satisfy Fed loans, AIG is not exactly in a growth phase now. Shareholders have occasionally prospered when a holding company with a liquidity problem but otherwise healthy business has reorganized under Chapter 11.
Only weeks after the deal, it's unclear that it had any effect that a Chapter 11 filing wouldn't have had. Here's a great example of a free market option that simply wasn't taken, that could have been, and may have been better for the company in the long run.
And on another note, the common belief among many smart but pragmatic advocates of the bail-out today deals with the belief that the short term credit market (commercial paper, and money markets) is too big to fail. This market is used to fund ongoing operations (payroll, accounts receivables, etc) at many companies, and so many CEO's are worried about how to finance these operations, and whether they can raise capital. This is one key aspect addressed Treasury's "sorta" plan. However, some technically knowledgeable people are now considering whether the act of the FED raising $700B in capital by selling Treasury notes won't harm these short term markets rather than help them, simply by sucking cash from them, because of investors seeking safer investments than the currently shaky markets are offering. Think about that. It starts to make everyday common sense. If the problem is one of liquidity (cash flow), where is Treasury going to get the $700B? By sucking it out of the markets that are already illiquid! An unintended consequence. See discussion here, and here.
It is the unintended consequences that will hurt us here, and given that it is highly unclear that government action will improve things and it is very possible that it will make things worse.
These types of arguments are directed at the question "What do we do next?" and they are concrete. I believe that this is what we can start to point out. In essence we argue for more time and consideration, for a rational consideration of the options. Argue it on common sense grounds. Argue to give more time for the voices which are starting to hear raised. Yes, argue in principles, but we also need to make those principles understood by chewing them and giving very easily inducible, concretized arguments that they support. "Capitalism by Induction" if you will.
This letter went to my Representative today (or at least it will as soon as his website isn't so jammed.) I took a little more pragmatic approach in my positioning, only because of where I'm seeing the argument leading among honest individuals these days. More on that in another post. There is still time. Please write your congressman.
As the House now considers a 2nd “Bail out” provision, I again urge you to vote NO on any such provision.
This crisis was caused by extended government intervention in the financial markets, over the course of many years. It is very difficult to see how our government’s ability to understand the unintended consequences of its actions is going to improve by an increasing level of panic, shortened time of execution and far too little consideration of alternatives. It is said that “we cannot afford to stand by and do nothing,” but I would say that when government stands up to “do something” in the economic markets, there is hardly assurance that the cure will not be worse than the illness.
I know that CEO Andrew Liveris of Dow Chemical has come out for the bail-out on the basis that the short term credit market cannot afford to fail. His voice surely makes an impression on you. Yet, even now, many are beginning to worry that in an effort to save the short term credit market, the raising of such large sums of money via Treasury’s issuance of T-bills will in fact make the liquidity crisis worse by pulling money from those markets. It is the unintended consequences of hastily-taken policy moves like this one which will ultimately undo our financial system. (please see: http://www.nakedcapitalism.com/2008/10/more-discussion-of-why-bailout-bill.html )
The Great Depression of the 1930’s was not caused primarily by the stock market crash of ’29, but by a series of actions by government including excessive tarrifs, taxes, and social programs enacted in the subsequent years, which ultimately deepened what could have been a short recession. Congress at that time, was trying to help as well.
Please take this time to think hard that in passing this bill, your vote to “do something” may have unintended consequences that may very well make things worse.
Let the “something” we choose to do be to allow the free markets to work out this crisis, to lower capital gains and income taxes to fuel liquidity and spur growth, and to clear bureaucratic hurdles to allowing speedy recapitalizations of these distressed companies.
Vote NO on any “stimulus” package.
Wednesday, October 01, 2008
Welcome to the October 2, 2008 edition of Objectivist round up. This week we're focusing specifically on the Financial Crisis from an Objectivist perspective. This is a crucial point in our nation's history, and one which illustrates the value of good ideas, and the failure of bad ones. Your voice is necessary in this time of high anxiety. Hopefully, the Objectivists here help make things a little bit clearer. This issue is quite full so let's get right to the substance.
Also, the Ayn Rand Center for Individual Rights has set up a web site dealing specifically with the Financial Crisis and offering insight and analysis on this crisis and capitalism in general. That site is located here.
Financial Crisis - Principles & Analysis
Ari Armstrong presents Capitalism In Two Minutes posted at FreeColorado.com, saying, "While I've posted several other links to good articles against the bailout, I thought this short, pithy piece served as a decent summary of the virtues of capitalism -- and the evils of economic controls."
Edward Cline presents America vs. Congress et al. posted at The Rule of Reason, saying, "There was nothing in the original Constitution that gave the government the power to "improve" the economy, except, implicitly, to let it alone."
Noah Stahl presents Blank-and-effect – The economics of pragmatism posted at The Undercurrent, saying, "Stahl examines the current administration's "flexible” approach to the financial crisis, about which President Bush said, “There will be ample opportunity to discuss the origins of this problems[sic]. Now is the time to solve it.” Why do Bush and Paulson think they can solve the problem with no understanding of how it came about?"
Financial Crisis - What's Next?
C. August presents RIP Bailout... Now What? posted at Titanic Deck Chairs, saying, "The House voted down the bailout. A sigh of relief was followed by dire predictions for what it would do next week. Now it seems that the Senate may beat them to it."
Nicholas Provenzo presents The Financial Panic and the Only Proper Answer to It posted at The Rule of Reason, saying, "We are told that the ruthless self-interest of Wall Street (rather than the "compassionate" gift-giving of the Congress) is the cause of the current financial crisis. Unfortunately, the truth is a little more complex. Perhaps we should examine this truth, that is, before we blithely allow our political leaders to add nearly a trillion dollars to the public debt and give new powers to those who helped bring the disaster along in the first place."
Eric Clayton presents To Defeat the Growth of Government it's Time to Win the War of Ideas posted at Atlantis.
More Objectivist Commentary
Burgess Laughlin presents What can historians study? posted at Making Progress, saying, "This is an ode to the enormous variety of objects--wide and narrow, great and small, abstract and concrete, exalted and mundane--that historians (and their readers) can study."
Peter Cresswell presents Is the phenomenenal disconnected from the noumenal ... ?posted at Not PC, saying, "A little humour for Objectivists this week ... by all appearance the world's most destructive philosopher is alive and well and in business down in Fiji!"
John Drake presents China for a day posted at Try Reason!, saying, "Thomas Friedman, famed author of the book "The World is Flat", is out peddling his latest book "Hot, Flat, and Crowded". In it, he reveals to the world his disdain for individual rights. In my post, I discuss his speech for the Washtenaw Economic Club, delivered at Eastern Michigan University, and how his vision for tomorrow is fundamental wrong."
Ryan Puzycki presents A Stroke of Good Luck posted at The Undercurrent, saying, "Instead of nervously worrying about the declining health of North Korean leader Kim Jong-Il, the U.S. should view it as an opportunity to reevaluate our appeasement of his despotic regime."
The Editors at The Undercurrent presents The Environmentalist Attack on Outdoorsmanship posted at The Undercurrent, saying, "This essay examines the corruption of the conservationist movement, which once sought to conserve nature for human pleasure - not from human beings, as current environmentalists do."
Kristina Saraka presents Protesting Prices posted at The Undercurrent, saying, "Kristina looks at the phenomena of protesting in order to bring about lower or higher prices, and examines what bad premises such protests are based on."
Adam Reed presents Religion is the Marxism of the 21st Century posted at Born to Identify, saying, "The last economic crisis of comparable magnitude led to the Great Depression and the Age of Dictators. What can we learn from the history of ideas about the corresponding risks and threat levels from this one?"
That concludes this edition. Submit your blog article to the next edition of objectivist round up using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.