corporate bailout

Professors Gary Becker and Richard Posner (University of Chicago) blog on the $700 billion bailout here.

Posner says a more palatable approach would be for the government to drive a Warren Buffett style hard bargain, in which, rather than buying anything from banks, the government would invest in them in a form, such as purchase of newly issued preferred stock. I said the same here.

Becker says he is not enamored of the government taking an equity stake in banks helped if these banks should prosper. He says it is unwise to allow governments in general to have equity interests in private companies, particularly if this equity gives them voting rights on company policies.

Convertible preferred stock or preferred stock plus warrants would give the government an equity stake of sorts. However, it would be very limited if the legislation required government immediately sell any common stock obtained.

Post 21

Friday, October 3, 2008 - 5:28am

In Yahoo! Financial news this morning is the headline Wells Fargo acquiring Wachovia for $15.1 billion (link). It's an all-stock deal.

Near the end the article says, "No government assistance is part of the deal terms." Uh-huh. My understanding is that Wells Fargo is one of the stronger big banks and Wachovia is weak. (This is not apparent from their latest balance sheets, but have a look at their stock prices over the past 12 months.) Probably Wachovia holds more stressed mortgage-related assets that have been written down and the federal government will buy them in the bailout. Pretty sweet deal for Wells Fargo.

Edit: At 10:00 EST Wachovia stock is up 79%.

(Edited by Merlin Jetton on 10/03, 7:01am)

Post 22

Sunday, October 5, 2008 - 12:02pm

Saturday Night Live on the Bailout
http://www.nbc.com/Saturday_Night_Live/video/clips/c-span-bailout/727521/

Post 23

Sunday, October 5, 2008 - 12:28pm

That Saturday Live clip is AWESOME!!!!

It should be run every few hours on all channels as a paid political announcement supporting every political party except the Democrats. These stand-up comics have a far better grasp of economics and the ways of political power than most of our intellectuals.

Post 24

Sunday, October 5, 2008 - 1:04pm

Is it comedy when it makes you cry?

Bush deserved that representation of him. The message is everyone is corrupt, the dems come off as street wise winners, "The Man" is a dolt. Capitalism and the free market are definitely not winners in this skit. It has broad appeal, everyone will see what they want to see and be entertained. Liberals will laugh the loudest. I think the SNL writers are genius's.

Post 25

Sunday, October 5, 2008 - 1:20pm

Mike, I disagree with you on one point - I think it will make the liberal democrats very nervous and irritated. Bush is just made to look stupid in general. But the democrats are tied to the cause of the crisis. That is much too close to home for them. They don't want people to see that they are the direct link to subprime mortgages which are the cause of the crisis and that the subprime loans were that stupid. They don't want people to see that they are the link between greedy wall-street and the crisis (without them, greed would not have caused this harm). They don't want to be visible in this way at all.

Think back to the speech Pelosi gave just before the house voted down the first bailout bill. She isn't so stupid as to let a bill go up for vote when it has that many people against it - she can count, and she isn't so stupid as to roast the Republicans for 5 straight minutes just before a vote that might be in question. She knew it wasn't going to pass and she blasted the Republicans to attach the blame for the crisis on them, and then, when the vote was 'No' as she knew it would be, it cements the image she wants, that the Republicans are still at fault. She knew that she could get this bill to pass with some sweeteners added and that all this drama was just to continue hiding the democrat's blame for subprime mortgages, and to make the democrats look like the ones who were fixing the bill to get the problem solved.

They achieve a major goal of massive funding, an entire new area of fascist control - the capital markets - and cement in the precedent of bailouts as a way of gaining control over previously free or partially free areas of the market, but it only is a safe win if they can fool everyone into not seeing that it was their fault in the beginning. If people catch on to that, they might take it all away from them in the future. I don't think they are laughing.
(Edited by Steve Wolfer on 10/05, 1:31pm)

Post 26

Sunday, October 5, 2008 - 2:03pm

"I think it will make the liberal democrats very nervous and irritated."

Perhaps I'm wrong, but I imagine talking to one or two of my liberal friends tomorrow, I know they will have seen this and will think it is uproariously funny. ANY attempt I make to connect this comedy to real events will seem even more uproarious to them. Hopeless. All political blame in their eyes is either shared equally, or piled all on conservatives. The blame that liberals take is for "honest mistakes" and that they "meant well". Conservatives, on the other hand, are fascists, power hungry, racist schemers, intent on "profiting" at others expense. Capitalist and free market theory is seen as simply "rhetoric" and a ruse to put them off their guard. It doesn't help that I get a little emotional about these discussions. I'm not a poker player. I guess I've been in the trenches having these arguments for too many years.

Addendum: I thought Pelosi was too much of an idiot to plan that far ahead.
(Edited by Mike Erickson on 10/05, 2:05pm)

Post 27

Sunday, October 5, 2008 - 2:27pm

"Addendum: I thought Pelosi was too much of an idiot to plan that far ahead."

To be successful, a rat requires cunning, not genius. If she were an idiot, she would believe the things she says, and I don't think she's that stupid, just dishonest.

Post 28

Sunday, October 5, 2008 - 4:06pm

Ye need read Liberal Fascism, Mike - plenty intellectual ammo there to flay your liberal friends, to hoist them on their own petards...

Post 29

Thursday, October 9, 2008 - 5:01am

Here is a good op-ed from the WSJ.
There's No Easy Way Out of the Bubble
The author is Vernon L. Smith, a Nobel Prize winner in Economics, who was at George Mason University and is now at Chapman University, where Tibor Machan teaches. Near the bottom of the Wikipedia page is a link to an article he wrote (which I have not read yet) about Ludwig von Mises' Human Action.

(Edited by Merlin Jetton on 10/09, 3:22pm)

Post 30

Thursday, October 9, 2008 - 11:56am

Merlin,

Thanks for link to the article.... that fellow does know how to write. I loved this part of his description of our current crisis:

" ...the Fed was "pushing on a string" that only buyers can pull. Further deterioration set in, and nothing terrorizes a central banker more.

Enter a bipartisan Keynesian-inspired Congress and administration, who authorized Treasury to write large numbers of small checks as part of a "stimulus" package to many people who do not pay taxes. People spent the money at Wal-Mart. Much of it went to China (which recycled it into U.S. bonds). And we saw a blip in retail sales that just delayed the inevitable.

So Mr. Bernanke took the only action left: He got Treasury Secretary Henry Paulson into the action. Better two scared leaders at the top than one. They went to Congress."

Merlin, take a look at the post I made on another thread, I'd like to see your take on what's coming down the road.

Post 31

Thursday, October 9, 2008 - 2:56pm

Steve, I agree with what you said except for the bit I didn't understand. The bit was about OPEC cutting production and the supply of dollars circulating in America declining. I have some more comments as well.

These record deficits require more money be printed or more U.S. Treasury debt. Either way it's more money chasing fewer goods (or at least goods flat or increasing less), at least eventually. There is a good reason why Ludwig von Mises titled one of his books The Theory of Money and Credit.

I said "eventually" because an increase in money and credit may not lead to an immediate increase in prices. The simple quantity theory of money says MV = PT or MV = PQ. I have not seen the velocity of money mentioned in regard to the current credit crisis, but I assume that a "credit crunch" leads to a decrease in the velocity of money. Prima facie, this seems to explain price deflation, despite an increase in the amount of money and credit. Also, it seems to me that prices most easily fall in the stock market. The stock market seems to me to be the place for the most discretionary use of money. This is all very tentative thinking and something I want to spend some more time on.

Lastly, the big problem with Keynesian-style demand management of an economy is that politicians love to stimulate demand, but are very averse to reducing demand by running government surpluses or raising taxes, even in boom times.

(Edited by Merlin Jetton on 10/09, 3:58pm)

Post 32

Thursday, October 9, 2008 - 3:50pm

Banks in Iceland Melt Down

"Giving Icelandic banks a UK licence was like letting the Bank of Zimbabwe set up in Oxford Street." -- Camilla Cavendish. The Times

First of all, like the U.S. mortgage crisis, which was known among bankers in October 2006, this, too was known. From April 1 of this year (note the ironic humor).
USA TODAY
Bank default worries slam Iceland's currency
Updated 4/1/2008 1:27 AM
[...]
Financial experts in Iceland say the market tremors are being fueled by speculators, not reality. On Friday, the head of Iceland's central bank, Dav�� Oddsson, called for "an international investigation on such attempts to bring a healthy economic system to its knees."
Indeed, Iceland's major banks have virtually no exposure to the subprime mortgage crisis in the USA. The government's balance sheet is robust and the country has a track record of weathering such episodes, notably in 2006.
"There is no more danger � probably less danger � than in the American banking system," said Tryggvi Herbertsson, CEO of Askar Capital in Reykjav�k.
http://www.usatoday.com/money/world/2008-04-01-iceland-banks_N.htm

Early last month, tremors were felt, and at least one physically attractive person prided herself on her economic foresight
.
Ice bound: Iceland's banks
Jo Thornhill, Mail on Sunday
3 August 2008
Iceland's major banks are facing growing concerns over the risk that they might run into difficulties.
Manju Dhall, 32, (pictured below) a consultant for a global accounting firm, describes herself as 'ultra-cautious'.
'My father lost quite a bit of money at the end of the Nineties with the stock market crash,' says Manju, who lives with her three-year-old son Rohan in Mill Hill, north London. Manju Dhali

'It instilled in me that you should invest only where you know your cash will be totally safe.'
http://www.thisismoney.co.uk/saving-and-banking/article.html?in_article_id=448883&in_page_id=7

THE TIMES ONLINE
October 10, 2008
The guilty men who sent mum to Iceland
Toothless watchdogs have brought us to the brink. Bring back the stickler, not the nit-picker
Camilla Cavendish
Giving Icelandic banks a UK licence was like letting the Bank of Zimbabwe set up in Oxford Street. This was a country whose bank deposits were twice its entire GDP.
http://www.timesonline.co.uk/tol/comment/columnists/camilla_cavendish/article4916210.ece

and two other accounts
http://www.nationalpost.com/news/story.html?id=870988
http://news.bbc.co.uk/1/hi/uk_politics/7659783.stm

(Edited by Michael E. Marotta on 10/09, 3:52pm)

Post 33

Thursday, October 9, 2008 - 3:53pm

Merlin,

The part about OPEC cutting supply was just pointing out that the resulting increase in gas prices takes more dollars out of circulation in America and only some of them come back in foreign trade or investment. But the higher prices of fuel spread through the economy and depress activity which further reduces velocity. Just an example of higher prices, with decreased money supply (in our economy), and resulting deflationary pressures - part of my "it's complicated" theme.

The Velocity is the factor that I don't understand that well. On one hand I can look at it as demand for money - which must be in the equation. But on the other hand, velocity is a real attribute - not unlike like how many inventory turns an item does in a store over a period of time. I can see a relation between velocity and demand but it doesn't seem that one IS the other.

At all extremes, psychology becomes a driving factor. But without putting demand into the equation in some way, that isn't represented. For example, in some countries that have experienced hyperinflation, they are unwilling to hold currency over night and take their wheel barrow of paper out on the road and buy a chicken or something before going to bed... because in the morning it would take 2 wheel barrows of paper money to buy that same chicken. And in the opposite scenario, no one is willing to part with currency. Prices drop lower and lower and still no takers. Too much fear of being without the pocketful of nickels that stand between being a hobo and someone still able to pay for the next meal. In both cases, because they can be arrived at fairly suddenly, there is little to no change in the goods available. There might be a major collapse of credit leading to the deflation, or, obviously a massive increase in currency could lead to runaway inflation, but both are accelerated by psychology and both are examples of demand for money.

All of this might be interesting as theory, but at this point it seems more important than just an academic pursuit. It seems critical to understand now, because the sheer size of the global credit market and its fragility - all of these countries, all of their governments, all of their deficit spending, all of these markets, all of the credit card debt, mortgages, derivativea, commercial paper, loans, and on and on... if we have a major credit collapse - that is a depression. But on the other hand, if all of these entities are stimulated and used to make a massive increase in credit (it must be credit in action, not just available) and massive increases in circulating currency then we could find ourselves facing runaway inflation (Austrian's after a world war that tore their country apart said they would rather live in a state of war than go through another destruction of their money). And as I understand it, the slopes leading to both depression and hyperinflation grow steeper and more slippery as one gets closer and that it isn't possible to predict much less control which way it goes. After you get to a certain stage, it is demand for money that becomes the deciding variable.

Post 34

Thursday, October 9, 2008 - 4:12pm

I can see a relation between velocity and demand but it doesn't seem that one IS the other.

I wouldn't say IS either, but that they are closely connected.

I'm not familiar with the Austrian inflation you refer to. However, but regarding many places where there has been hyper-inflation, such as Latin and South America, they are places that have not had well-developed credit markets, even for the government. Credit requires trust. Printing money was the only practical alternative.

Post 35

Thursday, October 9, 2008 - 5:55pm

The Austrian hyperinflation was after WW I - in the twenties. This is the Austrian Kronen.

Some of the countries that tripped and fallen down that hyperinflation slope:

Angola, Argentina, Austria, Belarus, Bolivia, Bosnia-Herzegovina, Brazil, Chile, China, Danzig, Georgia, Germany, Greece, Hungary, Israel, Japan, Krajina, Madagascar, Nicaragua, Peru, Poland, Republika Srpska, Romania, Russia, Turkey, Ukraine, United States - During the Revolutionary War, and the Confederacy, Yugoslavia, Zaire (now the Democratic Republic of the Congo), Zimbabwe

And here is a 50 billion bank note from Yugoslavian:

Post 36

Friday, October 10, 2008 - 8:44am

Addenda to post 31.

The Fed has injected a lot of money into the system lately. In other words, M in the equations MV = PT and MV = PQ has increased sharply. If eventually M is not reduced as V returns to a more normal level, then P (prices) will increase. We will have to wait and see what happens. Similar to politicians, the Fed may be averse to reducing or slowing demand by reducing or slowing M for fear of slowing or stalling the economy, even in boom times. Of course, you can bet on banks on wanting the Fed to keep the punch bowl full. The more M they have, the more they can earn by borrowing at one rate and lending at a higher rate. Their gross margin = M * interest rate spread = M * (lend rate - borrow rate).

Post 37

Friday, October 10, 2008 - 9:52am

Merlin, it is true they have massively increased M (the money supply), but I still maintain that demand, with money as much as with any good or service, plays as important a role as supply. If the change in demand is greater than the change in supply, we will have a deflation.

Post 38

Friday, October 10, 2008 - 1:35pm

Austria and Germany were saddled with the sum total of all civilian damages for World War I. To shore up the British Empire, the US lent the UK 24 million ounces of silver. When the war was over, the
British repaid that. The silver surely did not come from silver mines operated by the British government. The UK, France, and the USA (and I assume, their allies) simply looted Germany and Austria of their gold -- and probably silver and whatever else -- and it was only a matter of time before their governments were bankrupt. Hence, we perceived that as "hyperinflation." The money was worthless because the governments had nothing to back the money with. The government just paid for pencils and whatever else with the printing press.

In Austria, they got Austrian economists to bail them out. The government borrowed gold and created a new currency. Germany took a different route.

Gold gold 25 schillings of 1926-1938. Notice the iconography...

Single Headed Eagle on Obverse of 25 Schillings

Single Headed Eagle on Obverse of 25 Schillings

Eugen von Boehm-Bawerk appeared on the 100 schillings note of the 1980s.

(Edited by Michael E. Marotta on 10/10, 1:44pm)

Post 39

Monday, October 13, 2008 - 2:54pm