Comments on: A Favor (For All of Us)1

By: shilum

shilum — Tue, 07 Oct 2008 12:34:11 +0000

it may not be of total relevance in the case discussed here.
but i would invite you to watch “Money as debt” wich resume very well the way the banking system and as a corelary how economy works.
http://www.youtube.com/watch?v=vVkFb26u9g8
PL: Will do. A bit busy right now, but I will get to it.

By: Timmy C

Timmy C — Mon, 06 Oct 2008 14:17:19 +0000

Simply put, great article.
We now live in a nation of sheep addicted to spending cash on lifestyles far beyond their means; a nation of spenders with little to no net worth who have gone into extraordinary personal debt. The fact remains that few Americans are financially literate, let alone have the skill set to understand financial markets and the complex financial products that have helped drive this country to into a ravine. As a people, we like to claim that we are the hardest workers in the world. That is all well and good, except it’s not true. Now you may be sitting there reading this, saying fuck you, I work 40+ hours a week at an honest wage/salary, that isn’t enough? Of course it’s not. Working hard doesn’t get you ahead. You need to work smart. And simply showing up to work and collecting a paycheck doesn’t make you a hard worker, it makes you like the other tens of millions of employees in this country.
The real question to ask is what else can I do to get ahead? Odds are you come home, watch television, cook dinner, jerk off, go to sleep and do it all over again. Unfortunately, you need to do more than that. For example, where were you for the last couple years while banks and mortgage companies were giving away loans to unqualified individuals and families? Where were you as you watched home prices soar into a bubble? Didn’t you read about homes being bought in the morning and sold at a premium in the afternoon in South Florida? Surely you must have thought yourself, this sounds unreasonable, perhaps a bubble is forming. Maybe I should do a little homework about this, no? Will my investments be affected in the next year to five years? If so, how? What will happen to these financial companies who are creating these complex financial tools with little to no oversight? I mean, it wasn’t a secret that Wall Street was doing this. Banks who were “hedging” themselves with other banks’ CMOs and CDOs were simply buying other toxic assets. What did we think was going to happen?
To the people complaining about the current state of affairs, how many went home and said, I’m going to read about financial markets? I want to understand how these giant financial companies are structured and how they make their profits. And most importantly, what are the incentives of those CEO’s and top corporate management teams? Maybe it’s time I look into my investments to see where they are and how they work. What are bonds? How can I protect my nest egg? More over, how can I profit from a downfall of stocks and the financial system? What is shorting? What are options? How can they be used to hedge or even profit from a downturn. No one has stopped you from doing this, yet so many Americans chose not to educate themselves.
Fortunately I feel very lucky that I am only 23 and got to witness the Internet bubble, corporate scandals, and the credit crisis. It only serves to reinforce my investment strategy from those who are looking to make a quick buck while exposing themselves to massive losses in the event of a downturn. Don’t be fooled. Do your homework. Invest in yourself and don’t follow the pack. We have all seen what happens when you do.
8 days until the book, can’t wait!
PL: Simply put, great addendum. I’m not commenting because I don’t have anything to say except “I agree.”

By: Andy

Andy — Sun, 05 Oct 2008 23:10:54 +0000

Thanks for writing this. I’ve given up newspapers and televised news and had been looking for a solid explanation of why it was needed. There’s lots of information on both sides but your piece cut through a lot of the self serving bullshit.
I believe economics is referred to as the dismal science, I’m not so sure about “the dark art”.
Also, just in case you’ve been too busy to keep track of these things, there’s a new edition of the Bob Dylan bootleg series coming out on Tuesday. I was thinking of one of his songs recently in respect to this economic crisis.
From “Ain’t Talkin’” on Modern Times
“The whole world is filled with speculation
The whole wide world which people say is round
They will tear your mind away from contemplation
They will jump on your misfortune when you’re down
They will crush you with wealth and power
Every waking moment you could crack”
But then again, with the depth and breadth of Dylan lyrics, you can usually find a line or two to support any opinion.
PL: “Dark art”… Good call. WTF was I thinking?
Our media’s almost entirely full of shit. Ignore both sides and find a middle ground and that tends to be the most sensible position.
I’m buying the Dylan thing, of course. I have to pick that up along with the new Metallica disc, though I’m wondering if I should buy the Metallica thing from Itunes instead. I hear the mastering on the disc is really bad.

By: Tim

Tim — Sun, 05 Oct 2008 15:44:47 +0000

Thank you for writing this. All of this reference to “main street” and “my daughter will be crushed under the weight of this 700billion” is so idiotic. And then the talk of “well economists I’ve spoken to don’t think this plan is a good idea.” Economists are a bunch of jokes. Talk to a trader. Talk to someone who has to commit capital on a daily basis, take on risk, and weigh all possible outcomes. If the rescue plan hadn’t gone through it would’ve been armageddon. Me and another trader were just staring at the TV blankly on Monday in complete disbelief when it got voted down. I nearly shit a winnebago on Friday when the vote came to the floor. We’re still in pretty dire straights with credit too. We’re gonna need the Fed and ECB to cut rates to try to unlock credit further.
I just wish some politician would get the stones to tell the american people that they are just as culpable as wall street, because of their run away spending habits, massive amounts of debt, and general disregard for fiscal conservatism.
PL: What do they call the study of economics? The “dismal science” or something like that? It’d be better described as the hopeless science. I agree with you. This was a situation where we were offered:
a. Bullet in the head right now; or
b. A running start.
Which do you take?

By: clb

clb — Sun, 05 Oct 2008 11:18:40 +0000

I’m relieved that the bailout bill was passed. I think everyone who disagrees with it “on principle” is underestimating the impact of frozen credit markets. (Or simply doesn’t understand their importance. Unfortunately, while credit markets are critical to our economy there isn’t an easy measure of them–like the Dow or S&P for equity markets–that the public can understand at a glance.) I just hope that, when we find out all the details of the plan, it will be able to do some good.
That being said, I don’t think it’s enough to stave off a global recession. I’ve been hearing that while some of our banks are “too big to fail”, some of Europe’s banks are “too big to save”. I read a research piece a few days ago that calculated the notional value of Deutsche Bank’s liabilities at over 80% of Germany’s GDP. I can’t recall the number for UBS/CSFB in Switzerland, but it’s similar or larger.Europe is going to be a complete mess very shortly, and it doesn’t seem like there’s much they can do about it.
Also, if we’re talking music, I can’t recommend “The Closing of Winterland” from the Grateful Dead highly enough.
PL: We’re heading into a protracted global recession. There is no doubt. This measure was merely an attempt to keep us from spiraling into a panic.
As to what you’ve written about Europe, I have heard some rumors that it’s a disaster eclipsing ours, and the England’s housing boom made our fiasco look tame. I can only hope that Roman Abramovich and a few other oligarchs decide to pool their money and buy, say, all of England, and maybe Germany. Putin’s got what? Forty, fifty billion in personal wealth to throw at the deal?
Perhaps we should sell him back Alaska.
By the way, did you hear Palin comment on Alaska’s wealth fund during her debate? Something like $32 billion? Why don’t they buy stakes in a few of these teetering banks?
Well, perhaps because they’re smart.
You know, I’ve almost bought the Closing of Winterland several times. Don’t know why I haven’t. Thanks.

By: Ryan

Ryan — Sat, 04 Oct 2008 19:33:56 +0000

You’re making one gigantic assumption here: that this plan will actually achieve its stated purpose. I do not wish to get into an argument on the specifics, but there are many smart economists out there that I like and respect who do not support this plan. Most are vehemently opposed and this can be noticed from the U of Chicago letter to congress signed by over 150 economists. There are many problems associated with its implementation which have not yet been fully considered or worked out. How much does Treasury pay for these securities? How is this monopsonistic market to function?
I also do not know why there were no hearings with congress interviewing various experts to get their opinion on the plan. To say that this bill was steamrolled through congress like the iraq war would be a disservice to the lead-up to the war.
I’ll link Arnold Kling, a guy that I’ve read whom I believe to have a very educated and familiar perspective concerning the recent bailouts of AIG, Bear, Fannie/Freddie (he worked at Freddie for a while), and this $700b package.
His blog: http://econlog.econlib.org/
Two interviews featuring him explain the situation from his point of view: http://www.econtalk.org/archives/2008/09/kling_on_freddi.html
http://bloggingheads.tv/diavlogs/14744
To be sure, there are many other sober minds who have written on this bailout. Kling is by no means the definitive authority on all this–no one can be–but I definitely believe his views are worth pondering.
PL: I have nothing but the highest respect for the Cato Institute. Hell, PJ O’Rourke is one of my favorite writers of all time. I also respect Friedman, deeply, and think he’s ultimately right – the market is the only dignified way we can conduct an economy.
But we have never had a real free market. We have massive entitlements and New Deal style programs and govt interferences throughout our society. I’m not shocked the University of Chicago would take absolutist umbrage to the plan on both merits and ideology. But when Kling says things like, “We’ll have crony capitalism,” I’d remind him – We Already Have It. The Iraq War? Our Mercenary/Defense Industry? Bechtel? Kellog Brown & Root? The legions of unfireable seat warmers in govt jobs in this country, getting Cadillac-level benefits and early retirement on our dime?
We’re not a true free market economy. We never have been and frankly, I’m not sure any country ever has been one. We can’t allow one entire industry (the finance services industry supposedly makes up 10% of GDP) to contract by two thirds, particularly when it’s the industry through which we most interface with other countries in the global economy. And most importantly when it’s the industry whose health effects the supply of essential credit flowing into every other sector of the economy. I don’t think this was a time to stand on principle. We had to buy time. I’m not sure it will work, but I know this. It can only make the inevitable crash, should we have that, a little less tremendous.
As Kling admits, we aren’t likely to suffer catastrophic losses on the deal, and as I noted earlier, and I think most pragmatists agree, a modest loss here is a win. We’re buying a future that we can’t predict. If we did nothing we were acquiescing to a horrific continuation and worsening of an already dire present.

By: Millar

Millar — Sat, 04 Oct 2008 00:23:51 +0000

I disagree with your belief that Bob Rubin will take control of the Treasury in an Obama Administration and calm the world markets. While I support Rubinomics, it existed in a vacuum that is no longer there. Clinton was able to balance the budget because he had Newt and a Republican Congress to keep him in line. In addition, Clinton was a centrist while all indications suggest Obama is far to his left. The combination of a leftist president and undivided government will never allow for controlled spending or a balanced budget.
Furthermore, with his support for an increase in the capital gains tax Obama has announced that he will manipulate the economy to pursue social goals, regardless of the cost. This is this type of experimentation, by Congressmen such as Barney Frnak who removed regulation becuase they didn’t like that low income people were not getting mortgages, that enabled the current crisis(I had an econ professor who told us that they don’t let economists test their hypotheses becuase they have real consequences. Too bad that wasn’t extended to politicians). Earlier in the campaign Obama threw economic advisor Austin Goolsbee under the bus for quietly suggesting Obama wouldn’t really revisit NAFTA. What makes you think he would empower a Clinton holdover to run his economic policy?
PL: Obama is a centrist now whether he likes it or not. He’ll be a “progressive,” but any hope of a new “liberal” state is over. Naomi Klein might be right in “The Shock Doctrine.” Bush may have spent the country so far into the floor Big Govt liberalism becomes unrealistic.
There are millions of hyper-stretched middle and upper middle class people in this country. If Obama slaps a substantial tax increase on them I think you will see a silent tax revolt wherein people will stop working. A friend mentioned something interesting me about an article in the New Yorker, I think, titled “Obama’s War on Women” or something like that. The gist of it was that in two earner households where the husband made $200k or so and the woman earned another $100k, women would have little incentive to keep working because most of their salary would be going to Uncle Sam. I think it’s a flawed argument, but it demonstrates a real point – increasing taxes on people causes them to work less, or “treat” their income in certain ways (running more of their expenses through their businesses) to avoid the taxes.
I don’t see a future of high tax increases. I see a future of deep, nasty cuts and some attempt at a new WPA program to shore up infrastructure.
As to globalization, it’s too late to turn that train around, whatever Pat Buchanan thinks.

By: Vladimir Zhirinovsky

Vladimir Zhirinovsky — Fri, 03 Oct 2008 23:57:23 +0000

Jesus. Thank you for writing this. I live and work abroad, so thankfully I don’t have to suffer directly for the stupidity of my very own elected officials, but personally, I’m amazed and thrilled that someone in Bush’s administration has actually opted to take preemptive action to fix something.
At any rate, the quintessentially American shitstorm over who we can blame and/or sue for this hasn’t started yet, but dammed if this one won’t be interesting. So many guilty parties – commercial lenders, investment banks (after all, who could have ever envisioned that a 1:25 capital to leverage ratio might become a problem!?!?), politicians (Garn-St. Germain, anyone?), private equity, ratings agencies…the list goes on and on. And the best part – it was all legal. No investigation required; ladies and gentlemen, what we have here is the result of a perfect storm of market conditions, horribly conceived deregulation, and of course the everlasting abundance of idiots on the demand side. Amazing. I’d almost give my left nut to be in on the conferences between Bernanke, Bush, and Paulson. Watch – this bailout will be a disaster, a poorly-administrated giant dead fucking albatross around the taxpayers’ necks for the next four or five decades; you can be guaranteed Bernanke knows that – but as you said, better than nothing.
Interesting times we live in. Pre-ordered your book, by the way.
PL: Ah yes, the immediate knee-jerk reaction of the Ugliest Americans – LITIGATE!
The fallout in our courts will resemble a bacterial feeding frenzy on the inside of a toilet bowl. Sad, really. Thankfully, there’ll be no money for any of the parasites pointing fingers at each other to grab. One thing I believe is those $700 billion dollars are going to disappear as quickly as they’re handed out.
I disagree, however, on the administration. I think Bernanke and Geithner will shepherd that a lot behind the scenes, and I think they’re better in these waters than Paulson. Paulson has performed admirably under insane circumstances, but he’s starting to look overwhelmed. Of course, if his successor is an idiot, we’re fucked. If he’s crazy enough to keep the job, Obama should keep Paulson on for a while after he takes office. Just to give the appearance of continuity, if nothing else.
Thanks for the pre-order.

By: Joe

Joe — Fri, 03 Oct 2008 14:45:27 +0000

Since the nexus between the greed of lenders both in the banks and on wall street and the borrowers who couldn’t afford any market downturn has already been highlighted, I’ll point out one other thing.
I am a huge Ron Paul fan. Let me start by saying that. I love market theory and, while I am no economist either, I can certainly recognize the effect that Fannie Mae and Freddie Mac have had in foreign investments in these ARMs that were bundled into securities and really guaranteed by the government. That’s the problem. Greed has its place in the markets, but so does shrewd calculation. Anytime governments step in and guarantee large market investments, you are in for trouble because people are going to invest in what they see as a sure thing, and what is more sure than something that’s guaranteed by the U.S. Treasury?
Combine that with the Fed. pumping up the supply of cash (inflation) and trying to lop off the bottom of the business cycle by dropping interest rates every time growth showed signs of slowing, and there you have it, the perfect environment, created by government, for a disaster of this magnitude.
If this bailout goes through, the Fed has to raise rates, or they will be merely prolonging the problem. Also, if the bailout goes through, there needs to be a provision to freeze foreclosures and renegotiate, even if its for Tokyo-style 100 year fixed rate mortgages, or else the bailout isn’t gonna keep people off the street and the middle and lower class still won’t be able to buy things. It might be a better idea to give half the money to corporations and cut checks for the other half to each one of us, to inflate our currency to offset the effect that ARMs have had on real property value, and then outlaw ARMs.
Whatever, but two things are for sure, (1) this couldn’t have happened without the interference of government in the marketplace, acting as a guarantor, and (2) if anyone making under about $150,000 a year in today’s dollars wants to buy a house in the next decade, land values need to come down or the value of the dollar needs to come down.
PL: I think we’ll see 40 and 50 year mortgages down the road. Somebody will find a way to sell those to really young buyers and because we’ll need a new bubble, the regulators will find a way to let it become a growth industry.
As someone twice forced to overpay for a home, I couldn’t agree with your closing points more.

By: FrattyLite

FrattyLite — Fri, 03 Oct 2008 14:45:00 +0000

My last post must have somehow gotten lost in the “series of tubes” that make up the internet (one more cheap shot at a senator today…). Was drafted before the vote….
PL: I figured that. I use old transistor tubes in my interwebs connection, so it tends to run slow.