Archive for September, 2008

The Big Bailout, part II

Tuesday, September 30th, 2008

It was interesting to see how the big bailout vote failed yesterday.テつ The ideological center, moderates of both parties, voted ‘Aye,’ while the ideological wings voted ‘No.’テつ Since the ‘Noes’ were the majority, it’s hard to paint them as fringe or extremists.

From the left, Representatives wanted to see more help for the average taxpayer, and less forgiveness for the financial top dogs.テつ From the right, Representatives wanted less government involvement in private-sector businesses.テつ Both sides wanted a lot more oversight– which also imples more power to control ongoing decisions– over such an unprecedented huge financial allocation.

If the Executive decision makers (Paulson, Bernanke, Geithner, many others, and Cox and Bush, in order of descending importance and relevance,) want to pull more votes in to the center, and make a much better bill, they might consider changes in line with these themes:

  • You broke it, you bought it

The public supposedly indirectly benefited from all the financial wizardry, but the financial industry profited handily while the magic was still working.テつ There is no way in the world the public should be expected to pay for the cleanup.テつ The current assurances that we’ll “probably” get the $700B back is laughably insufficient.テつ The industry, the companies (and yes, their shareholders) need to be required to pay back every last penny they get from us, PLUS interest, PLUS a whopping penalty.テつ If it takes 30 years of renewed operating profit to pay it all back, OK, but it has to get paid back and more.

  • No blank checks

For any expenditure this big, there has to be complete transparency and accountability.テつ That is even more essential when it is public money bailing out irresponsible private enterprises.

  • ‘Fess up

Admit it: the idea that financial markets are regulated best when they’re regulated least is dead.テつ It’s a fantasy, never been demonstrated to be true, and it just blew up in our faces AGAIN.テつ Minsky, Soros, and many others have written about this in detail:テつ financial markets are inherently UNstable and require regulation to prevent national and international disasters.

  • Never again.

Whatever regulations are necessary to prevent this from happening again, make those regulations.テつ Move CDS to a proper futures exchange where counterparty risk can be monitored by professionals using time-tested methods.テつ Similarly, recognize that debt default insurance is insurance:テつ set reserve and capital adequacy rules like those in traditional forms of insurance, and enforce them.テつ Finally, reinvigorate enforcing the rules already on the books, such as the banking regulations that could have prevented some of the worst home lending practices.

  • Don’t reward recklessness.

The executives who drove their companies into this mess should make the first contribution to the cleanup.テつ If their company takes (ergo needs) public money (including the proposed debt sales and government debt insurance) then the executives and Board members who caused the problem should forfeit their existing stock options, restricted stock, anything unvested, deferred compensation, et cetera, et cetera, et cetera in all the glory of modern compensation methods.テつ Performance bonuses going back to at least 2006 (when the worst decisions were being made) need to be clawed back, by lawsuit if necessary.テつ Assuming that the execs are not fired as well, they can try to earn performance bonuses going forward by digging their companies out of the compost pile quickly and carefully.

  • A strong building needs a strong base

Don’t assume that this problem is solely fixable from the top down.テつ $700B in job training programs, mortgage workouts, health care support for all workers, et al., would do wonders to help fix the problem by beefing up the economy from the bottom up.テつ Dedication to (ie, funding, helping) public education would multiply those improvements into the future.


Too Important to Fail

Monday, September 29th, 2008

Even before the $700 billion (at least) extortion request to save the entire financial world as we know it, we (USA taxpayers) were already on the hook for more than $300 billion1 to save for-profit companies that were deemed “Too Important to Fail.”

Try to remain calm as you think about that. テつ “Too Important to Fail.”

What about US public education?テつ The entire combined State, Federal, and local budgets are the same order of magnitude as $300 billion per year.2テつ Many politicians all over the spectrum agree that many schools are failing.テつ That’s the word they use, “fail.”テつ Why is US public education notテつ “Too Important to Fail?”

What about FEMA?3テつ They seem to have done better with Ike in Texas, but for Katrina in Louisiana they damn near said “let the private sector handle it” until the outrage was deafening.テつ Why is FEMA notテつ “Too Important to Fail?”テつ Why is New Orleans not “Too Important to Fail?”

What about health care?テつ $300B would just about cover buying health care for the USA’s uninsured for a year.4テつ Why is health care for America’s working poor not “Too Important to Fail?”

That’s enough.テつ I’m sure you get the picture.

1 SUM($30B for Bear, $200B for Fannie & Freddie, $85B for AIG) not counting FDIC for “normal” failed banks.

2 For 2004-5, US Dept. of Education estimate is $536B <http://www.ed.gov/about/overview/fed/10facts/index.html>.

3 Base budget around $55B for2005.テつ <http://www.whitehouse.gov/news/releases/2004/02/20040202-7.html>.

4 Estimate: $7500 per capita average health spending times 40 million uninsured.


Too Big to Fail

Thursday, September 25th, 2008

Too Big to Fail–テつ means Too Big to Allow.

In our complex society, we have two choices:

1)テつ Cap the size and scope of institutions or systems so that their private blunders could not become our collective catastrophe, or

2) テつ Plan ahead for the orderly breakup of any system that gets dangerously big.

Either have a Plan B, or ban Plan A.

I like to recall the example of the fall of WorldCom.テつ In 2002, they were the USA’s second-largest phone system and ran the backbone data links for the Internet worldwide.テつ When their accounting scandals made failure likely, the cry went up of “Too Big to Fail.”

That turned out not to be the case.テつ WorldCom the company did fail, wiping out the shareholders and most of the bondholders, and even failing to pay some of the trade debt to their suppliers.テつ However, the bits went on.テつ The bankruptcy court put managers and rules– a plan– in place to keep the telecom systems from missing a beat, much less failing.

The only way to keep all the other companies responsible and diligent and prudent is to make sure that the imprudent, careless, or irresponsible companies pay the cost of their failure.テつ ANY other concept will be an explosively self-destructive system of private gain and public loss.

Note that according to the (now tarnished) ideas of un-government-regulated capitalism, the effectiveテつ regulating force is supposed to be the fear of failure among the company’s management, as well as their lenders, suppliers, and even their customers.

Supposedly, it is the vigilance and skepticism of all the interacting players that should keep a company responsible.テつ All those players will only make that effort if they know that they, too, will be hurt by a failure.

Now, just to close the circle:テつ Suppose all those interacting players were to get together, hammer out a set of rules, and set up a separate organization specifically to inspect their business partners and enforce those rules.テつ That would be much more cost-effective than having everyone performing duplicated inspections and enforcing conflicting rules.テつ Sounds good?テつ Just don’t call that mutually-supported organization a ‘government,’ or those mutually-agreed rules ‘regulations,’ or you’ll have the free-market folks screaming at you.


A minor insight

Sunday, September 21st, 2008

It’s dawned on me:テつ one thing a successful blog needs is someone who wants to write frequently.

I’m more of the Mr. Ed type.テつ (Dating myself: “Mister Ed” was a TV show during my childhood.)テつ Part of the theme songテつ went “People yackety-yack” something-something “but Mr. Ed will never talk unless he has something to say.”テつ That’s about right.

If someone asks me a question, I can usually give a pretty coherent answer, impromptu or in writing.テつ Without the external stimulus, though, I almost never feel a sudden urge to express myself.

Knowing that, I’ll see if I can find some mechanism to extract short comments more often.