Tuesday, September 16, 2008


Excuse me? Could we have a little capitalism, please?

So, now the Fed is going to bail out AIG.

Am I missing something? I really do believe in capitalism. Here is how it works: Strong, well-managed companies survive. Poorly-managed ones die. It's like Darwinism for corporations.

We deregulated to "let markets work," but now we won't allow an important part of what markets are supposed to do-- kill off inefficient entities during downturns. Essentially, the rule in financial markets now seems to be that if you are making money, it is your money-- capitalism rules! Low taxes on those capital gains because you took a risk to make that money! But then if you lose money, the risk gets transfered to the public. As some have said, we have abandoned capitalism for a mechanism where profits are deregulated, celebrated, lightly taxed, and private, while losses are addressed through socialism-- that is, by having the public cover it.

What makes it all the more disgusting is that we have largely gotten rid of the safety net for individuals-- the least among us-- while building up a new one for the richest and least responsible corporations.

That's not capitalism. Like Christianity, the real and true practice of capitalism demands sacrifice, pain, and terrible hardships. If you aren't going to accept that, don't pretend that you are a champion of capitalism.

A friend of mine bought a bumper sticker that read, "Where Were You During the Collapse of the Global Capitalist System?"

I told her I was stocking up on, "I told you so!" buttons.

If anything, the current economic recession proves that deregulation is a stellar failure. I was reading Krugman's op-ed piece in the Times this morning; he raises a good point. The traditional depository bank went the wayside as it was replaced by a system of banking built on the American business school theory of capitalism, or sort of meta-market trading, working with assets directly instead of a traditional producer-consumer model. All our big businesses rarely produced any good themselves, or performed a service. Instead, they were in the management business, the investment and trading business, and were working with things in the abstract.

That sort of number manipulation is one of those things that looks good on paper and makes economist Ph.D.s sound smart, but really is unworkable in any real economy.

The thing these companies forgot was that wealth doesn't come from nowhere; it has to be generated from somewhere, and when people, consumers, stop putting money in to their system their profits evaporate, and so now they're looking for the government to bail them out monetarily, but they're not willing to consent to government oversight. Not that I blame them; government (or rather, the public) have different goals than shareholders/Boards of Directors.

I think your idea of the best companies surviving works where (1) consumers are educated and (2) consumers have enough free capital to respond with market pressure to all goods. But for certain things, consumers can't respond with market pressure (like education, health care, food, housing, etc.) and this means that unethical or badly-run companies can survive as long as non-market forces can save them. I call this the Wal-Mart effect: no one likes Wal-Mart. No one thinks Wal-Mart is a good company that treats its employees well, tries to maintain a sustainable balance of the environment, or anything like that. But Wal-Mart still manages to outstrip all competition because it can offer goods with a lower price and convenience to people.

And it's not like Bear Sterns or Lehman were badly managed or suffered from unintelligent people at the helm. Rather, they probably had the best and brightest business minds in the country working for them. It's just the system, the shadow banking system that operates without government oversight and trades in abstractions. There's no real value being passed around, and hence, no real risk. It creates a sense of unreality about business that just isn't a sustainable model.
Bear Stears, actually, made a series of bonehead moves, motivated by greed, that were designed to enrich those making the decisions. It wasn't well-run.
A classmate of mine told me to expect a depression. Jackson did nothing to discourage such thoughts.
I know very little of the topic at hand; however, if we are going into a depression, the presidential choice is more important than ever.

I don't think we've ever strictly held to pure capitalistm ideals for a substantial period of time. The market fluctuates and the government responds (in it's view) accordingly.

My opinion is this: sticking to any economic theory without accounting for the variables is foolish. Sometimes you have to favor the Democrat's approach, other times it is the Republican's approach that makes sense. Since the market fluctuates, we must also.

I think the economy has been questionable, at least, since the rise of gas prices. I think that was the starting point of the downward slope.

I know nothing of this topic because I'm a history major; however, that is my opinion of it.

Gas prices aren't really at the root of the macro problems (though they make things hard for many people)-- the mortgage crisis has spun off a lot of this disaster. In short, lots of institutions bet that housing prices wouldn't go down, and they were wrong, and their bet was large.

I agree that pure capitalism has never been the American way. It just bothers me that some people want it both ways at the same time-- capitalistic profits, socialized losses.
I love it when people listen to corporation propaganda and believed that Capitalism can cure every problem in the world. They forgot (or conveniently forgot) that Capitalism had failed miserably before and it was the war and the New Deal (socialism) that save Capitalism. It was equally amusing when I listen to a farmer who receives subsidy yearly from the government yet lectures about the Republican's free market, and scorns the so called "welfare people". Whenever they make money, it's a private corporation. When they go under, suddenly everyone has to share the pain. The poor slobs who absolutely had no benefit in the good time (because they can never afford to buy or invest) now have to pay for the fat, stupid, greedy, wealthy assholes. Speaking of robbing the poor and giving to the rich. Is this a great country or what?????????????
Gov't bail out--obviously not the capitalism MOST of us seem to advocate. But far from a "Collapse of Global Captialism."

The current crisis is the product of foolish exposure to inordinate financial risk. But how do bad moves on the part of the financial sector implicate mass failure of the entire "service economy" system? I for one am getting tired of this "Economy Y2K" garbage. Next up is more gov't overreaction, more gov't bailouts, and more gov't overregulation without effective regulation.

Read up on the New Deal for a preview of the first Obama administration. Let's see if he tries to pack the courts, too.
PS- I love it when the same guys who don't believe in trickle-down economics act like Wall Street's woes will have us all in the breadlines next week. So the top and bottom segements of the economy are only connected when things go poorly?
*cough* Chrysler! *cough*

A smart man once explained to me how the government is just another part of the game that is real world capitalism. The way I look at this, and the way I look at many aspects of governmental involvement in business, is that the government has its own interest at play (in the abstract, it is almost like another player in the game). For example, when the government decides to bail out a company, for whatever reason, it has decided that it is beneficial to do so.

Maybe it has decided that bailing out AIG will save the economy from some unwanted result (although like Prof. Osler, I think that a little "Darwinism" might be helpful here). Perhaps the government is betting that AIG's current situation is one of circumstance, and that given a second chance it would make good for the tax dollars spent. Either way, I hope they have made a smarter decision this time than they did with Chrysler (at least smart enough to make sure AIG doesn't turn around and sell out to Daimler).

That said, I am generally not for this kind of thing. I think it is possible for the government to make good investments like this, but not very likely. I think that with the same managment, and the same business strategy that got it here (I imagine excessive risk-taking), this buyout is only prolonging the inevitable. Even worse, we could have another "Chrysler" in the making, and AIG may just take its new-found wealth and merge with another company looking to strip that wealth away. Lets at least hope that if they do, the other company will at least have the decency to put that cash back into our economy.

I always like to hear that, in the game of corporate greed, number fudging, and dubious capital management, no real value is ever really transferred, much less created. Of course, if you want a counter-example, take a look at that computer screen you are reading this on. It didn't exist 25 years ago, and even if it did only a select few could afford it. Value creation happens.
It was a mistake to bail out Chrysler, too. Say that hadn't happened-- Ford or GM may have bought Jeep in the breakup, and avoided sinking their other brand's resources so heavily into SUV's, making them much stronger today.

Jesse-- I think Lane has a principled take on things, even though we are on opposite sides of the spectrum. Personally, I think neither trickle-down economics not the bust-up of big financial firms affect working people much.

Trickle-down economics have been thoroughly discredited. As even the CIA says, since the Reagan tax changes and through the Bush cuts, those not in the top 20% of earners have seen no benefit in terms of household income-- the growth of the economy (whether or not it was due to tax cuts), which has been significant, has benefited only the top 20%. The money did not trickle down. Deal with it.

Sometimes it seems like for many people, the fact Ronald Reagan claimed something makes it true in the face of all evidence. The guy was not an economist, and he turned out to be wrong.

As I often recognize, though, Reagan was right about the value of small government (which is where Lane and I diverge). I just wish he had done something about it.
We've never had pure capitalism here in the U.S. and I for one am glad we have not. What we have had since the T. Roosevelt Adminstration and especially the Wilson and FDR administration is a regulatory system on top of a capitalist system. The level of activism and control has ebbed and flowed.

This is not an original thought, mind you, but from what I've read, the AIG bailout, the Freddie and Fannie takeovers and other actions are aggressive attempts by the Fed and by Treasury to avoid the mistakes made by Japan when its economy broke down in the 90's. The Japanese Central Bank and government were slow to react and let a bad situation get worse.

Will any of this work? Don't know. But I'd rather they try something than do nothing.

Does that mean you will also support more regulation after the bailouts, especially in terms of higher reserve requirements? I don't see how you can support government involvement in one but not the other.

Such a stand for principle might, of course, alienate any friends you might have in the "Club for Growth."
Oh, and also IPLG--

Did you know that Robert Gates went to William and Mary? I just found out about that. It's hard to imagine A & M picking a W & M grad...
Time for me to weigh in as a former Wall Street employee in the derivatives sector (1991 to 2001 and 2004-2007).

Let's start with the fact that derivative products (Swaps,Equity Swaps, Credit Default(CDS) products) are off balance sheet items for corporate accounting purposes. The details are disclosed in footnotes in annual reports. There are trillions of dollars of these products out in the market place. Basic swaps were a big problem with the S&L crisis in the late 1980 as interest rates were very out of line and companies had very big differences with the rates on loans versus the rates they paid for deposits (I worked for an S&L prior to Wall Street). They used these products to try and bring these disparities together through off-balance sheet transactions.

CDS are 'synthetic' products. There is no stock or bond certificate that is transferred to the owner. Each of these transactions has a legal contract (generally industry pre-defined with some counterparty (CP) specific details). All of these corporate dealings are further governed by a 'Master' agreements which discusses what happens in the event of default by either CP, changes in their credit ratings and the impact on collateral held, bankrupcy, unwind of these portfolio's, etc...

Please envision a big house of cards or the domino design. If a certain domino is pushed everything will fall around it.

CDS seem to be the big issue with AIG and some other large guarantors in the market place. AIG and others write guarantees on bond and Mtg Bkd Sec (MBS) issues. And when these default they have to pay up. The sub-prime mtg crisis is the culprit in this current crisis.

This product came into the industry in the 2002-2003 range. When I first saw them in 2004, I look at it and said it is an insurance policy. There is a quarterly payment made ~ Party A buys insurance against a defined assets (bond, MBS, etc...) The bond is defined in the contract. If the bond defaults then Party B will receive cash or securities (all unique to each contract).... This is a synthetic transaction and the party that buys the insurance is not necessarily holding the defined security. They are making a bet on some real security they do not have possession of.

Hedge funds were initially big users of this product. I beleive they used them to insure collateral they were holding related to other investments. [It is important to note that Hedge Funds are like giant day traders - everything is short term to them so their positions change constantly and their needs at 9am are different than their needs at 2pm]. The problem is the collateral gets moved in and out of accounts almost daily and they no sooner trade a CDS contract only to assign their CDS position to someone else several days later (they no longer have the collateral).

There are lots of horrid back office issues with this product as we hardly prepare the contract and the other party is already assigned themself out of the position. This then impacts the people handling the 'insurance' payment, etc... The volume of this product alone caused investment banks to significantly increase their back office staffs.

I could go on, but in the end it is necessary to bail out AIG. Having worked in this segment of the industry I have strong feelings that regulatory oversight should be imposed. Sarbanne-Oxley impacted several areas of investment banking with regard to collateral held. It was very difficult for the investment banks to get up and running and required a lot of technology re-tooling. I am not aware of any current regulations impacting derivative products specifically. They have lobbyed strongly over the years to keep regulators out of the products. I have no doubt that the lobbyist will meddle with whatever does get impacted and that members of Congress who enact these regulations will have very little understanding of what they are signing into law and how long it will take for companies to come into compliance.
Chris T.--

It's always good to hear from someone who actually knows a lot about the subject.
Basically, everyone on here is debating the failures of capitalism. Lane is practically throwing a party over the coming socialist revolution. He has hats and everything!!!! He's putting up banners that read, "I'm ready to be a ward of the state!! Guide me government overlords!! I am your puppet to be manipulated!!"

But, we can all concede that at least since, oh, FOREVER, we have not been a true capitalist economy in this country. The founders set economic policy and trade policy in D.C. for the entire country. Certainly since Teddy Roosevelt, Wilson, FDR we haven't even come close. Sure, we are closer than some, but true capitalism we don't have.

That is the problem with Krugman and the nitwit crybabys at the New York Times. Deregulation was tiny in comparison to the 100 years of regulation that came before it. We don't have a deregulated free market capitalist system, we have a slightly less regulated system. Those two things are not the same thing. But, Krugman and his buddies are never above stretching the truth to score a couple of political points.

So, my question is, why aren't we talking about all of this as a failure of regulated economies? Why aren't we saying, "well we know socialism, communism, and other government directed economic systems fail. And we now know that the middle approach we've tried fails. Why don't we actually give this free market a chance to work!!"

Seems simple enough. I'm all for it. I agree with everyone. Our highly regulated (somebody will respond that we have deregulated, but we have only begun that process, our economy remains highly regulated in every sector, and the process of deregulation had much farther to go) has failed us. Instead of calling for more regulation, lets try something truly novel. Lets actually find out what happens when politicians and lawmakers aren't pulling the levers of the economy and we allow the unseen hand of the market to do that work. Lets do it!!

Oh, and I don't think Reagan was an economist. Nor do I think that just because he said it makes it true (for instance, his version of NMD was just plain dumb...brilliant pebbles?? c'mon). I just think he listened to the right economists and that combined with his love of freedom allowed him to do what was right for our economy and for our individual rights.
Jesse- trickle-down economics and Wall Street collapses like AIG and Lehman Bros. are two different things. First, one takes a heck of a lot longer to work, while the other has a pretty immediate impact, since banks don't exactly wait around for money to trickle down to you when you're late on your mortgage payments. Second, the crises are caused by and effecting two different groups of people. Trickle-down economics is a top-down theory of economic wealth redistribution, while the mortgage crisis starts from (arguably) the bottom up, with homeowners at the bottom level not being able to afford the mortgages they took out. So while it's unlikely that they'll end up with us in the breadlines, the mortgage crisis is a lot closer to that ground-level effect than the overarching result of trickle-down economic theory.
Yes, I knew that Robert Gates was a Fellow W&M Grad. He may even be a fellow fraternity brother. If I had more time, I'd look it up, but that sounds right.
America's new motto: Privatize profit, socialize loss.

Originally, It was an industrious and innovative subprime lender called The Money Store which got legislation passed enabling the securitizing of mortgage loans. The prevalence of this type of instrument has spread exponentially. The risk of these securitized loan packages has simply become more and more obscure. Couple this with the relaxed underwriting rules of the past few years for lending on Mortgage loans (because, well everybody has a "right" to own a home, don't they?), and we have an eventual, but predictable, disaster in the credit markets. But, that's OK. This is America after all. We can solve any problem anywhere with our "can do" spirit.

Maybe that was the "can do" spirit of the generation who didn't think they were entitled to anything, but thought that they could accomplish anything through persistence, and hard work, and sacrifice so their kids could have it all. I guess this is what kids who have it all do.
Throw a party? Comrade, I'm helping to organize the glorious revolution of the worker as we throw off the shackles of corporate oppression. Also, you seem to draw a necessary connection between totalitarianism and varieties of Marxism. There is no reason that a Marxist society cannot be freer than a capitalistic one. In fact, I'd argue that capitalist democracies are less free in terms of class mobility and opportunity (unless one is already well off) than societies that accept varying degrees of Marxism.
I'd much rather have freedom of conscience, freedom of belief, and freedom from oppressive despots like Mao, Lennin, Stalin, and Castro.

Personally, I like being able to believe and speak as I would like without having to worry about being dragged out in the street and shot for it. And if that means someone else is going to have more money than me, so be it.
FYI - Did you know that Theo. Roosevelt IV and V both work(ed) for Lehman Brothers? The various business units of Lehman will be bought by other brokerages and investment banks.

rrl said:
That is the problem with Krugman and the nitwit crybabys at the New York Times. Deregulation was tiny in comparison to the 100 years of regulation that came before it. We don't have a deregulated free market capitalist system, we have a slightly less regulated system. Those two things are not the same thing. But, Krugman and his buddies are never above stretching the truth to score a couple of political points.

So, my question is, why aren't we talking about all of this as a failure of regulated economies?


I agree with you that we don't have a deregulated free market capitalist system. It is obvious to me that many businesses require some level of regulation.

I would argue that the derivative segment of the Wall Street business has never been regulated. Because of the contractual nature of the product they were successful in keeping government regulation out. On the other hand the mortgage industry has lots of regulation, but apparently not the 'Mortgage Brokers'. These guys are not banks. They are front men who make the initial loan (no money down except closing fees and points), take their $$$ and then sell the loan to a servicer. The servicers then bundle the loans and they are turned into Mortgage Backed Securites (MBS).

I was out of the banking business before Mortgage Brokers began setting up shops. The theory being that banks and S&Ls made it too difficult for the average joe to get into a home. Mortgage Brokers onthe other hand could set up creative financing arrangements and never deal with the customer again.

With regard to the Derivative business, the 'synthetic' nature of the product exists today so that money can be made by businesses ~ skirting regulated parts of the industry that they can't operate in. The industry has evolved past its original purpose of helping clients manage interest rate volatility by 'swapping' interest rates over a specified length of time. The advent of Hedge Funds changed the nature of most investing and blurred the lines in many cases.
Hey now, I never testified to the effectiveness of trickle down--I only said that the "my socioeconomic model works better than your socioeconomic model" argument only ever seems to go one way.

I do apprecitate the well reasoned responses, though.
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