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« Blogging Note | Main | Ideology and the Public Trough »

September 21, 2008

Oppose This Bailout

Friedrich von Blowhard writes:

Dear Blowhards,

The Paulson plan for bailing out the financial sector is extremely dubious. The prospect that it will get rubber-stamped into legislation by a panicked Congress within the week is a distressing, but sadly real, possibility. I strongly urge you to oppose passage of this proposal without – at a minimum – a full and thorough airing of the issues involved. Rushing through a proposal of this magnitude, especially just prior to an election, is foolhardy.

I would detail the weak aspects of this bill, but others have done my work for me.

As David Merkel explains:

The current proposal is proactive. Proactive solutions are expensive, and do not fairly distribute the losses to those who caused them through their shoddy lending practices. The owners of bad assets should risk their equity before taxpayers put up one red cent. The government should not try to prevent financial failure, but prevent financial failure from spreading as a contagion. Common and preferred stockholders of failed institutions should be wiped out. Subordinated debtholders should take a haircut. But depositors and senior debtholders should be guaranteed, in order to protect other financial institutions that invest in those instruments, thus avoiding contagion effects.

Second, the proposed bill is vague, and offers the Treasury a “blank check” to do pretty much what it wants. Section 8 states: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Who are we kidding here? I don’t care how great the emergency may be, the other branches of government should be able to act as needed.

Third, there is nothing to assure that fair market value will be paid for assets. If an investment manager is hired, who could tell if he plays favorites or not? Clever investment firms will take advantage of the government and its agents, and only sell overpriced assets to the government.

Fourth, there is no easily identifiable upside for taxpayers here. If we bail out a firm, it should be painful, as it was for the GSEs and AIG, where most of the equity gets handed over to the government in exchange for a senior loan guarantee.

Fifth, though the name of the Resolution Trust Corporation has been invoked here, this is nothing like the RTC. The RTC only dealt with insolvent S&Ls. It did not try to keep existing S&Ls afloat.

This proposal is an expensive boondoggle and should be opposed by all. As one bit of evidence here, how many noticed that mortgage rates went up on the day the deal was announced?

Yves Smith of Naked Capitalism offers her criticisms:

First, let's focus on the aspect that should get the proposal dinged (or renegotiated) regardless of any possible merit, namely, that it gives the Treasury imperial power with respect to a simply huge amount of funds. $700 billion is comparable to the hard cost of the Iraq war, bigger than the annual Pentagon budget. And mind you, $700 billion is not the maximum that the Treasury may spend, it's the ceiling on the outstandings at any one time. It's a balance sheet number, not an expenditure limit.


There is no regulatory reform as part of the package. This would seem to be a minimum requirement for a donation of this magnitude.

There is no admission that deleveraging is inevitable. This plan seems to be a desperate effort to keep bad debt from being written down. Yet the sorry fact is that a lot of these assets simply will not be repaid.

There appears to be no intention to do triage. The financial services industry, on the back of an explosive growth in debt, has reached an unsustainable size. The industry will have to shrink. Yet the Administration does not address this issue; indeed, it appears it intends to forestall the inevitable.

Heck, even Paul Krugman opposes it:

Here’s the thing: historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets. The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the RTC. The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

I hope I’m wrong about this. But let me say it again: Treasury needs to explain why this is supposed to work — not try to panic Congress into giving it a blank check. Otherwise, no deal.

Richard Kline in a comment onYves Smith’s blog post summed it up best:

There are many options other than Paulson's plan which Congress could enact, even on an emergency basis, and I hope that they see this: They have choices, and the responsibility to make a viable plan. There is no necessity to thumbprint the financial equivalent of a Reichstag fire bail out.

If this troubles you, and I think it should, please contact your Congressman and Senators and tell them they need to think -- and get a variety of informed opinions -- before they reach for their rubber stamps.


Friedrich von Blowhard

P.S. You can contact your senators via this link and your congressmen via this link.

P.P.S. In an update, the very well respected blog Calculated Risk (which has been cited in research papers by Federal Reserve Bank authors) notes two points: here that the proposal allows Secretary Paulson to bail out foreign institutions as well as U.S. ones; and here that the possibility of taxpayers making profits on their 'investment', commonly brought up in news stories on the proposal, is utterly specious.

posted by Friedrich at September 21, 2008


That Section 8 is a doozy, eh? (Aptly numbered, I would think, considering the historical provenance of the phrase "section 8".) I first came across it this morning in an econo-blog that does tend to the hyperbolic and conspiratorial, so I decided I'd better verify elsewhere. But sure enough, there it was.

I believe we've come to this pass because our little class of crony capitalists has looted and battened these last years without any serious rumbling from us fat complacent peons. Short of a citizens' revolt, they'll just keep right on going until the carcass is picked clean. Looks like the little brats are doing some serious "testing their limits" here. Not to sneer at the usefulness of the .gov links you provide, though - shutting down switchboards and mailboxes can be efficacious. And anyway there's always something in watching one's Honorable Congressman wet his pants dithering between his campaign contributors and his unwontedly enraged constituents.

Posted by: Moira Breen on September 21, 2008 12:44 PM

People have been asking me my opinion, and I just didn't know what to tell them. I always have a link for everything! Thanks for being that link in this rather confusing event.

Posted by: Noumenon on September 21, 2008 12:59 PM

I'm still trying to figure how regulation equals Big Government and bailouts somehow does not.

Posted by: JV on September 21, 2008 1:19 PM

I apologize for the bad grammar in my previous comment.

Posted by: JV on September 21, 2008 1:20 PM

This crisis was caused by political corruption on a grand scale by both parties. The Fed created this crisis. Steve Sailer has aptly dubbed this the "Diversity Recession."

Both the Clinton and Bush administrations demanded that the private sector loan to bad risks. This was in response to the liberal notion that "redlining" was the explanation for lending institutions refusing to lend to bad credit risks who just happened to be predominantly black or hispanic. The Fed was fighting bigotry wherever it could find or imagine it. As will happen, the Fed promised to indemnify lenders against making these highly speculative loans.

The result should have been predictable. Indeminfied from risk, lenders handed out money to anybody who wanted it. Sure enough, now that those high risk borrowers are defaulting in huge numbers, the Fed is bailing out the lenders.

All bets are off now. How can the Fed be the solution to a problem that it created? How are we supposed to make sense of this madness? And, as a conservative, I have to say that the left now has damned good reason to argue that such corporate socialism on an immense scale should be matched by equally generous socialism for the middle class and poor.

What excuse now is there for refusing to fund national health insurance? Everything should be free, first class, and no strings attached. Unemployment benefits must be as generous as these handouts to corporate executives. If you are a leftist, now is the time to strike.

Posted by: Shouting Thomas on September 21, 2008 2:11 PM

My guess is that the initial offer was a kind of bluff and the real offer will come later. Anything else would look good. The Democrats and the Republicans are juking around trying to stick the other guy with a hot potato.

When the lobbyists assembled the Republican leaders and said that all they would accept was $700 billion with no strings attached, that was about the nerviest thing I've ever seen. The bankrupt beggars are threatening to play hardball with us, I guess.

Whoever divides up the big pie should be watched every minute for the rest of his life. All his communications should be archived, and in the future he should not be allowed to take certain kinds of jobs and gifts even after the job is done. No million dollar speaking engagements, ever.

Posted by: John Emerson on September 21, 2008 7:16 PM

Paulson was chairman of Goldman Sachs and oversaw many of the financial shenanigans that have bought this mess on. Having him fix it is like asking Osama bin Laden to manage the war on Terror. H.L Mencken was right: democracy is a farce.

I'm not American but I do have a great sympathy and love for your country, I am greatly saddened by what has become of it.

This legislation is plainly bad, no it's fucking evil. There are so many other ways that a bailout could have been organised, this is probably the worst one possible. Paulson wants supreme power without any oversight, even the President doesn't have this power.While it may recapitalise the banks, it does nothing to ameliorate the massive debt burden that overhangs many average Americans, which ultimately is the cause of all these problems.

As a far right wing bastard, I never thought in my wildest dreams that I would be in agreement with Paul Krugman, Obama and the Democrats in general. These are indeed strange times.

Posted by: slumlord on September 21, 2008 7:25 PM

I agree with baron von trapp blowhard about all that.

but if people don't give paulson what he wants, we'll all be flushed down the toilet faster than you can say maria.

All you benjamins appreciate, right?

Posted by: Ramesh on September 21, 2008 9:05 PM

The trouble is that there is *no way* that the 'guilty parties' can suffer without the everybody else suffering horrendously.

The only analogy I can think of is farmers all trying something that vastly increases yield, only to have it boomerang back 10 years down the road. Letting all the farmers go out of business might be just (greedy farmers!), but not eating for a few years is not going to be popular with the electorate either.

Relatively smooth credit is what keeps *everything* working in the American economy, and there's no going back without a 50-60% reduction in the standard of living. And that sort of reduction can mean revolution. (The continuation of the USA in the early 1930's was by no means a sure thing in the minds of those in charge.)

We *have* to keep the machine running, and since confidence is what keeps it moving, you can't afford to have any interruption. Like trouble with an airplane in flight, you can't afford to spend a few days debating what the best move is. And, of course, where confidence is concerned, it's 10 times harder to recover it than it is to lose it in the first place.

All of this is to say that I'm not by any means certain that this is the best plan to get out of the current crisis, but that the amount of time for getting it right is pretty darn limited.

Posted by: Tom West on September 21, 2008 10:00 PM

One further comment - the quoted article about the 'utter specious-ness' of making a profit has one fairly major flaw.

*Nobody* is going to be making a profit quickly. The toxic assets are toxic because no-one knows what they are worth. They could be worth a lot, they could be worth, well, not a lot, and we've run out of gamblers willing to take the bet.

Current market price is pretty much pricing the worst case scenario. If it turns out that not everybody defaults, then there's the potential (over the next 5-10 years) to make quite a handy profit. CR's idea of turning around and selling the winners immediately in order to buy more losers isn't going to happen because there's not going to be any winner or losers for a *long* time. The difference is that the gov't doesn't need these assets to currently have good market value or immediately collapse.

Of course, it may be that pretty much every mortgage in the USA folds up, and no-one will buy any houses in the next 5-10 years, in which case, yes, the government will lose its shirt.

Posted by: Tom West on September 21, 2008 10:21 PM

We have to fight this.

Posted by: David Merkel on September 22, 2008 12:31 AM

Mr. West:

Again we disagree. You, like most supporters (even if reluctant supporters) of this bailout, suppose that current market prices of many securities are out of whack as a result of irrational fear and loathing. Unfortunately, there is a good deal of evidence that the current market prices of many securities are perfectly in whack because of perfectly rational fear and loathing.

There were several articles this past week about how S&P's new rating assumptions about loan losses effectively suggested that the market prices recently observed were quite in line with the "fundamental" values of the securities in question. That is to say, if one bought such securities and didn't care about reselling them, one would pay current market prices for them based on expected cash flows.

Likewise, you noticed all those stories about how savvy, deep pocketed Wall Street investors rushed in to snap up the Lehman Brothers holdings of such securities, knowing that they could be resold in a year or so at a vast profit, right? Oh, you didn't? Gosh, maybe Lehman went down because their toxic waste was, and remains, toxic.

Anyway, don't argue with me, argue with Calculated Risk, who is a genuine expert on this stuff. And he agrees with me.

Posted by: Friedrich von Blowhard on September 22, 2008 1:11 AM

To be honest, I don't think there's any real way of telling what the actual market value of this stuff is for at least 3-5 years, and more like 5-10. Calculated Risk makes some interesting comments, but he's also one expert among many with a lot of different valuations. And to be honest, you don't garner readers by saying "I don't know and won't know for a long time". Sometimes, the truth is boring.

I will say that if the current market values *are* the long term values, then we are *all* hosed - world wide.

A collapsing USA scares me (and sinks me economically) - but nothing compared to how a collapsing China and Russia scare me.

Posted by: Tom West on September 22, 2008 8:04 AM

Is it just that Shouting and I lock horns so often that I'm misreading the gist of his comment? Is he really saying the fault for the financial crisis lies with the Bush and Clinton administration's insistence that financial institutions make loans to blacks and hispanics who are not creditworthy? Presumably the successful lobbying efforts for deregulation by the big financial institutions have little or nothing to do with the crisis. Those "derivatives", those "one stop financial service institutions", those opaque hedge funds aren't the problem. No, the financial crisis is not a result of Wall Street greed run amok; it is the fault of poor people of color buying homes when they can't afford their mortgages. I hope I'm not alone in thinking ol' ST is seriously misguided in offering this take on the meltdown.

Moira and I often lock horns, but it seems she and I agree that Section 8 is a bit crazy. Crazy in exactly the way one might expect from a member of the Bush Cabinet. Welcome to the "unitary executive branch" theory in practice.

Sadly, I do not trust most politicians of either party to be willing or able to stand up in Congress to the demands of the global capitalists who fill their campaign coffers and provide easy, lucrative employment when their terms end. It is so much easier to bail out the elite and let the little guys (90 % of the taxpayers) take the pain.

Posted by: Chris White on September 22, 2008 9:17 AM

The trouble is that there is *no way* that the 'guilty parties' can suffer without the everybody else suffering horrendously.

Tom, anybody who's been paying attention knows we're going to be hurting. What we're witnessing here (and for the last year or so) are the perps maneuvering to make sure as much of the hurtin' as possible (ideally, all of it) gets dumped on the rest of us. Don't you feel even a wee bit of skepticism toward these "trust us, you've got to give us the billions right this very second" people trying to stampede us?

Relatively smooth credit is what keeps *everything* working in the American economy, and there's no going back without a 50-60% reduction in the standard of living.

We *have* to keep the machine running, and since confidence is what keeps it moving, you can't afford to have any interruption. Like trouble with an airplane in flight, you can't afford to spend a few days debating what the best move is.

Credit has to be based on value. Economies, contrary to apparent current widespread belief, cannot be maintained just on "confidence" (and "innovative" financial services). Ponzi schemes cannot be run forever. And if you're on a plane with no fuel or failed engines, you can believe to the bottom of your soul that the machine has to be kept running, panic all you please, and hand over the yoke to those brilliant pilots who got you into the mess in the first place, but you're still gonna crash. I just don't think they should get first dibs on the limited number of parachutes available, or the first places in the triage line, should any improvement on "kaplooie" be effected.

Posted by: Moira Breen on September 22, 2008 9:49 AM

Both the Clinton and Bush administrations demanded that the private sector loan to bad risks. This was in response to the liberal notion that "redlining" was the explanation for lending institutions refusing to lend to bad credit risks who just happened to be predominantly black or hispanic. The Fed was fighting bigotry wherever it could find or imagine it. As will happen, the Fed promised to indemnify lenders against making these highly speculative loans.

This is garbage, real propaganda stuff. The kind of diversity pressures ST is pointing to here is real enough, but it accounts for only a small fraction of the mess we are in. The bulk of this stuff is white middle-class families who can afford a $200,000 house instead living in a $500,000 McMansion. It *is* bipartisan, but it's about the worship of conspicuous consumption by the entire society. The "American dream" becoming a grotesque insistence on material wealth, instead of a balanced and responsible approach to economics and life.

Posted by: MQ on September 22, 2008 12:22 PM

Chris, I didn't say that black and hispanics were at fault. I said that both parties filled their pockets via the diversity agenda, then dumped the bill on you and me.

Go back and read what I said.

This is the part of government social actions that you don't see. Remember, I worked for those awful corporate tax lawyers? They're very clever. No matter what you think you're doing with regulation and legislation, the result ends up being quite different after the lawyers and politicans work their magic.

The diversity agenda served as a pretext for forcing lending institutions to drop their standards because they knew they were indemnified. Yes, the vast majority of poor credit risks were black and hispanic. You and I, Chris, are now going to pay the bill for this great advance in diversity. It turns out that banks weren't engaging in racism by redlining. Banks actually knew which lenders were the greatest risks, i.e., blacks and hispanics.

Obama, if elected, is going to play out the other side of this game... the great "racial profiling" lie. Blacks and hispanics really do commit crime at much higher rates than other groups. Obama's campaign against racial profiling will amount to crippling law enforcement and turning the criminals loose. Lawyers will get rich suing municipalities on behalf of their criminal clients. The residents of those municipalties will have to face the thugs back on the street.

When you try to do good through governmental action, this little hobgoblin always creeps in. The people administering that action start scheming how to fill their own pockets. They've done it admirably in this instance. Hundreds of millions have gone up in smoke (actually into the pockets of the very rich) for a program that was intially ballyhooed as a diversity cure-all.

One of the reasons that people become conservatives as they get older, Chris, is because they become more skeptical about human motivations across the board. I tend to think that all people are sinners and that, given they chance, they'll steal, lie and cheat. Liberals tend to blame this reality on those great root causes of which you are so fond. This is why you are almost always right in a vague, abstract theoretical way, and always completely wrong in the real world.

Posted by: Shouting Thomas on September 22, 2008 1:02 PM

The fact that reform and de-leveraging are not being required on the part of the financial institutions receiving the bailouts means that we have become like Japan in dealing with banking/financial issues. Following the collapse of the bubble in 1991, the Ministry of Finance continued to pump more money into the debt laden banks without requiring them to write off their bad loans. This continued for a decade, with a 12 year recession being the result. A more serious result was that Japan's government finances went from a surplus in 1991 to a debt of 180% of Japan's GDP. All because of a failure to force the banks to deal with their problems from the beginning.

It appears that we going to repeat the same mistakes as the Japanese.

Posted by: kurt9 on September 22, 2008 2:12 PM

Methinks, ST, that you need to re-read what you wrote more than I do. Your complaints are all about the end of "redlining" and how blacks and hispanics who are poor credit risks got loans then defaulted. The financial crisis we now face has very, very little to do with the "Diversity Agenda". It has a great deal to do with the insistence of the financial industry to be as unregulated as possible while getting bailed out with tax dollars whenever their schemes go awry because they are "too big to fail" without bringing the system down around everyone's ears, and with the wealthiest among us who pay as little in taxes as possible. Well, the big companies keep being bailed out and the rich keep having their taxes cut and the system is coming down around our ears. The perps, of course, have shifted the debts to others, including us taxpayers and walked away with their $300,000,000 retirement packages. Safely deposited in some off shore bank, no doubt.

The problem lies with those lobbyists, tax lawyers and politicians who change roles every few years or so, writing and passing regulations designed to snare the little guys while keeping convoluted loopholes for themselves. In this I am certainly as skeptical of human motivations as the next guy. I just tend to figure the ones with all the power and cash are probably the real problems, not the guys at the bottom of the barrel, even if the ones at the bottom are that much more likely to be black or brown instead of lily white.

Perhaps, just perhaps, if we saw a lot less corporate welfare (corporate socialism, if you will) there'd be less need for individual welfare (socialism for the middle and lower class, if you prefer).

Posted by: Chris White on September 22, 2008 3:14 PM

Unfortunately, I align myself with the likes of Chris White on this, with some reservations. Indeed, this was all about making big money off of anybody who came in for a loan. And lots of people were lying and dreaming of becoming rich (without effort), including both the lenders and borrowers. Too bad for the little guy that the system isn't made to make the little guy rich.

As far as Steve Sailer is concerned, he does his job of injecting race into everything, and stirring up racial animosity in the blogoshpere. I agree that the bad things that minorities and AA have done to this country have gotten a pass in the mainstream press, but this thing is just too big to fall on just 30% of the population. Sorry, I ain't buying it, because the numbers don't add up.

There's no need for socialism in the large or small scale--its just as immoral and stupid either way. Chris White once agains shows his hypocrisy by saying that the rich aren't allowed to steal, but its morally okay for the poor. It's no good for anybody.

At what point in time do people finally begin to get the idea that government isn't really stupid, and that the public are being manipulated into a really, really bad form of totalitarianism? Not quite got it yet, I guess.

Posted by: BIOH on September 22, 2008 4:08 PM

You should notice, Chris, that we've arrived at the same conclusion via different routes.

Since both parties have dumped the ideal of a free market to provide the very wealthy with an across the board safety net, there is no longer any argument for denying the same across the board safety net to the middle class and poor.

They got theirs. Where's mine?

Posted by: Shouting Thomas on September 22, 2008 4:23 PM

I'm trying to figure out where BIOH gets the idea that I think stealing is morally acceptable on the part of the poor ... unless one buys into the bumper sticker notion that "all taxes are theft" and therefore any tax dollars used for social services programs are also theft. Rich or poor, theft is theft. I merely think if one is looking for villains in the current crisis it makes sense to follow the cash flow to see who got pink slips, who got foreclosed on and who got multi-million dollar buyout options before the companies they managed tanked.

And ST, I think the "free market" is as much a utopian fantasy as perfected communism or any other theoretical socio-political ideal. The current financial crisis has been caused, in significant part, by deregulation and lax enforcement of the regulations that are in place, in short, by attempting to make markets more free. Perhaps, in some parallel universe, we are all happily living in peace and harmony under self governing anarchy and markets are truly free, but I don't ever expect to see it in this universe.

As ST points out, human nature is such that some will lie, cheat and steal (even if I don't think that this is universal) which is why we adopt rules and regulations and have definitions for what is allowed and what is fraud or theft. Unfortunately, the cops have been on the take.

Posted by: Chris White on September 22, 2008 6:59 PM

My wife worked as a teller at Bank of America for a bit exactly 10 years ago. I remember vividly the day she came home and said they had to start pushing equity loans to their customers. All the tellers were having a hard time with it, because just 10 short years ago, taking a loan out on your home equity was something you did as a last resort.

It's interesting how far we've come.

Posted by: JV on September 22, 2008 7:51 PM

I merely think if one is looking for villains in the current crisis...

I'm highly suspicious of looking for villains at this point. The finance system is incredibly complex, so pointing to one segment and saying: yes, *that's* the problem seems perilous indeed.

It's far more likely that we end up blaming those for whom we have the most compelling narrative for villainy.

If I was to come up with an analogy, I'd again go with agriculture. We've seen a huge move towards mono-culture farming. And with it, we have seen the possibility of tremendous losses that can cause global problems. Should we blame the greedy farmers?

Obviously not. Anyone who *didn't* go for increased yields using mono-culture has long gone bankrupt or been sidelined into irrelevance. The population as a whole demands the efficiency and uniformity of mono-culture, and has destroyed anyone who didn't jump on that bandwagon.

Of course, this is exacerbated by the fact that we're vastly more efficient in transmitting information. Revolutions in agriculture (or in finance) that would have taken decades to wind through the system now take years or months before shareholders and customers are demanding the benefits. It's either join the revolution or get kicked out of the game.

So, who do we blame?

Moira, I do agree there has to be adjustments. There is no way that everyone is coming out of this intact. The question is do we have to descend with a splat (panic that could end with a worthless American dollar) or with a controlled descent.

I will also say that I am assuming good intentions on the part of the government actors, which may mean paying higher than market value for these assets to keep the markets alive, but not enough to avoid a haircut for the finance participants.

Even if the theater is on fire, a lot more people will die in a panic than in an orderly evacuation.

Still, given we haven't got a category 5 crisis today, let's hope there's at least time for a little more debate before a final plan is reached. (I think the AIG bailout may have temporarily calmed the waters for a few days...)

Posted by: Tom West on September 22, 2008 8:29 PM

"All the tellers were having a hard time with [pushing unnecessary home equity loans], because just 10 short years ago [it] was something [people only] did as a last resort."
Yes. Remember the Ghostbusters walking out of the bank?

One thing I want to point out here is that the idea that all the toxic debt is "mortgages" is the MSM version. The root of the problem is the hundreds of trillions in derivatives the investment banks wrote, calling them "investment instruments." Most of it was pure fraud under cover of advanced math.{0186CA73-F5FA-4CF0-885A-B4267FB73A0A}

The hasty conversion this weekend of Goldman Sachs and Morgan Stanley from Investment Banks to "Bank Holding Companies"--by edict of The Federal Reserve, itself a legal cartel of banks--amounted to nationalization of those firms, a way to hide their Enronness from view. The losses will be covered by creating more dollars via mouse clicks at the Fed.

Bottom line is, the dollar is toast. It's been a nice run, though. It was cut loose all the way back in 1971; no other fiat currency ever made it this long, because no other was ever the world's reserve currency.

Posted by: James O. on September 22, 2008 10:29 PM

Tom West – James O. points out the way derivatives (along with other "innovative financial instruments") are at the root of the crisis, not simply mortgage defaults. These were developed for short-term gains by the big boys of Wall Street, all pushing to show huge gains (on paper) this quarter with little care for the long term effects. Lots of wealth has been vacuumed up by the big boys, leaving the general public and the American ... hell, the world ... economy to bear the worst of the pain. There are most certainly villains involved.

And as for the analogy of agriculture, I know the names of as many of the farmers whose produce I buy as possible. I don't blame the farmers; I blame the big corporate agribusiness concerns (Monsanto serves as an excellent example of a villain in this area). There are plenty of farmers who have and continue to resist the push toward big agribusiness and mono-culture, and plenty of consumers looking for alternatives to it as well. While I won't say giant agribusiness didn't come about with good intentions (feeding the world with fewer acres) the distortions that have resulted and the risks inherent in big agribusiness mono-culture are huge. We're just beginning to see some of them. ("Care for a little e coli with your spinach, sir?")

So long as the architects of these debacles are essentially given a free pass, the problems will mount.

Posted by: Chris White on September 23, 2008 10:24 AM

Chris White,

I don't think you get it. Lots of people lied on ther mortgage applications about their income and national status to get "no-doc" home loans. This is not some kind of situation that falls neatly into some kind of marxist analysis. It was lying and greed run amok in all economic classes of the society.

I don't agree with the evil rich/exploited poor worldview. There's plenty of corruption everywhere. Its just that the rich are smarter at pulling it off than the poor, that's all.

Posted by: BIOH on September 23, 2008 12:12 PM

Thomas Jefferson wrote ever so long ago of the need to oppose such government interference. I found a unique petition written using his mighty words. You can sign it at Jefferson's Plea. Sign it. And get others to sign it. We need to go back to Jefferson's america.

Posted by: John Sparsky on September 26, 2008 5:54 PM

BIOH – I don't think you get it. Do individuals lie for their own advantage? Of course they do. Is the financial crisis we currently face the primarily the fault of poorer individuals lying to get mortgages on which they are now defaulting? No.

As I noted in another related thread I was on-line reading about the financial crisis while listening to the news on the radio when there was a great and telling juxtaposition. Former employees have recently accused MBNA, the credit card giant, of an array of predatory practices. One such whistleblower spoke of going home and crying after convincing the wife of a soldier deployed in Iraq to accept a five figure cash advance that the MBNA employee expected would result in financial ruin for the family once the fees and interest rates began their cycle of escalation ... as they were designed to do. She spoke of wanting to tell the woman not to take the offer, but knowing that if she did she would be, at the least, reprimanded, if not fired, immediately after hanging up. In short, the company was requiring its employees to offer credit to those who could not afford it because it was in the company's short-term interest (over 20% interest, in fact) to do so. In short, the folks who should have been charged with determining whether applicants was credit worthy or not were being told to pretend those who weren't were and to overload them with credit, regardless.

The rules of the game have been written by lobbyists representing the very industries being (supposedly) monitored and regulated. The above anecdote may be only an anecdote, but it is absolutely revealing about the underlying cause of this crisis. Overgrown, bloated, financial entities chasing next quarter profits with no regard for the long term fiscal health of their clients, the economy as a whole or, for that matter, their own company have been given a couple of decades to run amok. And the architects of this have been richly, lavishly, rewarded. They were rewarded with exorbitant pay, bonuses and insulation from the negative effects their actions caused. Then the Bush administration further rewarded them by lowering their taxes and making it even easier to engage in the very practices that now are revealed as having led us to the brink of disaster.

If you want to try to blame lying peasants and evil Marxists, feel free. Me, I'll stick to blaming those masters of the universe who have made "Wall Street" short hand for greed, corruption, self-absorption and narcissism.

Posted by: Chris White on September 26, 2008 7:26 PM

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