A poem.

Quote :

Prosecutor's dilemma!
On the left side of the balance sheet there is nothing right,
On the right side of the balance sheet there is nothing left,
Was it a capital flight
Or simply a theft.

- Krzysztof Rybinski on economist.com article comments

Quote :

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. [Emphasis in original.]

Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

--Marriner S. Eccles, Federal Reserve Chairman 1934-1948

There's a distinction to be made here between the 1929 crash and the faceplant we're currently experiencing in agonizing slow-mo...

The corporations of the 20's concentrated their wealth (in many cases) in privately held dynasties. Rockerfeller at one point was financing the US Treasury to float confidence in government securities. In contrast, today's corporations, while large and guilty of very similar investment foolishness, employ thousands of workers and are forced by law to pay them wages nowhere near as exploitative as the robber-baron era. As a consequence, there *is* cash in the system. But right now (as then) nobody is willing to give it to anyone else.

No one is arguing that 1929 and today are the same. 1929 was a liquidity crisis which was exacerbated by the wrong policies by the Hoover administration.

Today is a liquidity crisis which the treasury and fed are reacting to correctly. However, because of the nature of the actual assets involved here, there is far more uncertainty. This leads to banks who thought they were solvent actually being insolvent (or banks accepting that they may very well be unsolvent, but they are not sure). The crisis here is not so much a liquidity crisis (we know how to fix that), it is a solvency crisis due to uncertainty. Usually insolvency of a few banks isn't a big deal -- the market knows how to adapt around a few failures. But, when it is systematic, banks don't know who to trust. THAT is the crisis today. Banks wont lend to each other because they know anyone could be a house of cards. Credit is frozen, despite massive over working of the printing press. Unfortunately, excess liquidity wont make the insolvent banks reveal themselves (and in many cases they are not sure if they are insolvent because they don't know how to price what assets they have -- uncertainty). That is the fundamental difference.

Ideally, we would figure out some mechanism to (a) find the true value of complicated financial instruments, (b) find the bottom of the housing market, (c) from (a) and (b) figure out which banks are insolvent, (d) fix the balance sheets of the insolvent via partial nationalization (ie they issue the gov't prefered, non-voting stocks), (e) provide massive government investment in energy infrastructure and research to increase both productivity and provide stimulus in the short run, (f) once credit markets are sufficiently thawed slowly begin selling of the gov't shares in the previously insolvent banks, (g) ?????, (h) PROFIT! (literally).

At least that's my overgeneralized understanding.

Absorbing $700B in toxic financial instruments hardly seems like a reasonable way to get to (h).

I do not believe that is what they're doing anymore. I think they're adopting the strategy of recapitalizing firms by taking preferred, non-voting stock in them (nationalization without any control). The whole idea is to reduce the asymmetry of socialized loss and private gain. As part of the Bush admin, the treasury had originally wanted to just buy up the toxic instruments (in order to make their fat cat friends as fat as possible), but they soon realized this would be ineffective and are (hopefully, dear god I pray) switching to the we-get-a-stake-in-you-if-you-take-our-money approach. Literally, there is the potential for a profit for the taxpayer if it is implemented quickly and decisively before things keep falling down the rabbit hole.

This is what happened during the Great Depression with the new deal program to buy up houses which were falling in value. They bought them up to help stabilize the market, held them, and then resold them on the upside for a profit.

It is also what the Swedish did during their 1992 banking crisis. They spent about 4% of GDP to recapitalize banks in exchange for partial ownership. In the end, they resold their shares for about 2%, significantly reducing the ultimate cost. Also note that the $700 billion we've budgeted is about 5% of GDP -- we're in a similar ballpark.

Remember, it's not about how much you spend on the banks, it's about reversing the contraction-psychology. Once that is reversed and things grow again, much of the cost (using the Swedish episode as an example, ~50%) can be recouped.

If temporary public ownership of the common stock is the way things are going to be worked out, I guess I'm not -as- against it as I might otherwise be.

I still have a problem with rewarding poor risk management. Houses keep getting built 100 ft from the Galveston coast and always will until it's made illegal. I don't have a problem with people who want to assume that level of risk, but don't cry for government assistance after the fact because no insurance company is stupid enough to sell to you.

Dude anyone stupid enough to live in Texas... I mean, hai guys.

Don't mess with Texas.

Galt wrote:

Don't mess with Texas.

Bless your heart

Kamma wrote:

Dude anyone stupid enough to live in Texas... I mean, hai guys.

Tits or GTFO!



~ Sean

( o )( o )

I love Texas. The only problem with it is that it's full of Texans.

grak wrote:

I love Texas. The only problem with it is that it's full of Texans.

I would probably agree with you. But the fact that Texans are there stops me from trying out Texas. Catch 22 eh.

Quote :

If you all clap, Tinkerbell will live and the market will turn around. You just have to believe!


...




A market crisis? That’s Inconceivable!

...



So I says to her, “That’s totally how they do it Germany.” But she gets all screamy and storms off. Worst $50 I’ve ever spent.

And more at http://sadguysontradingfloors.tumblr.com/

Texas = fucking win.

Quote :

I would probably agree with you. But the fact that Texans are there stops me from trying out Texas. Catch 22 eh.

Try Austin before you write off the whole state. It's an island of sanity in a sea of inanity.

grak wrote:

Austin ... It's an island of sanity