Finally, a sensible view on the financial crisis. The libertarian view has always enticed me. The government comprises mere mortals and there has been no reason to believe that when the government interferes, they can make things better. The most likely scenario is that the government worsens the situation by meddling and bumbling its way through. Moreover, the outcomes are never fair because of corruption and lobbyists; those closest to the centers of power benefit the most.
September 29, 2008
Politics of the Bailout Bill
After most of the Republicans voted against the bill today – the the Emergency Economic Stabilization Act of 2008 or HR 7175 – the bill did not pass. After the vote, Republicans blamed Nancy Pelosi for pissing Republicans off before the vote by making a partisan speech blaming the Bush administration and the Republican party for the financial crisis. So what they are saying is – we have nothing against the bill itself (or that we do, but we would have voted for it anyway – because something’s got to be done). But you said something and we don’t like it so we won’t vote for the bill.
Emergency Economic Stabilization Act of 2008 – HR 7175
There was an interesting debate in the House today on the Emergency Economic Stabilization Act of 2008 or HR 7175. After the debate, when the bill was called to vote, the House chairperson called it for the “Ayes”. It looks like she wanted it to pass so she called it for the Ayes. Someone from Georgia contested that and asked for a recorded vote. That’s when they found that the Nays had it.
September 28, 2008
It’s a dog’s world
When billionaire Leona Helmsley died, she left $12 million to her dog, Trouble. She left $10 million each to two of her grandchildren and nothing to two other grandchildren. According to this fascinating article in the New Yorker magazine
Helmsley made only a handful of relatively small individual bequests in the will, and left the bulk of her remaining estate to the Leona M. and Harry B. Helmsley Charitable Trust. Based on the figures in court files, that trust may turn out to be worth nearly eight billion dollars, which would make it one of the top ten or so foundations in the United States. (Leona’s estate was so large because Harry left his fortune to her.) According to a “mission statement,” which Helmsley signed on March 1, 2004, the trust was to make expenditures for “purposes related to the provision of care for dogs.”
An $8 billion trust to care for dogs? Are we living in the Bizarro world? That is more than the GDP of Mauritania, Swaziland, Sierra Leone, Burundi, Republic of the Congo, Central African Republic, Somalia, Eritrea, Gambia and Liberia. For dogs???
September 27, 2008
The first debate – Special analysis
What’s up with this video page on John McCain’s website? Several videos of the debate just show Obama talking. It’s like giving Obama air time on McCain’s website. It would be understandable if Obama were making a fool of himself. But that’s not the case with these videos. In case the campaign changes the videos on the site, here is a list of the videos that appear on John McCain’s website:
This is the first video. It was titled “Obama: Healthcare” on John McCain’s website.
Second video: this one is actually about McCain. It’s titled “Spending Freeze”
Third video on McCain’s website. Titled “Pakistan”, it’s a 2-minute air time for Obama to talk about his position.
Titled “Obama”, this is the fourth video. Again, there is no point except where Obama says once that McCain is right about what would happen if Iran would get nuclear weapons. Obama gets 2 more minutes of air time on McCain’s website.
Titled “Six Point Plan” (God knows why), this is the final video on McCain’s site for the first debate. Once again, it is Obama talking for 1 minute. This time about Russia.
This is insane. Only 1 out of 5 videos on McCain’s website actually shows McCain talking. And that is the shortest video – only 15 seconds.
Conspiracy theory: Someone within McCain’s campaign is trying to sabotage his efforts because he/she is actually an Obama supporter.
On a related note, here is another example of a gaffe by the McCain camp. From a New York Times article on the debate:
The war over shaping the post-debate narrative got off to an exceptionally early start, beginning, in fact, even before the event occurred.
Mr. McCain’s campaign had actually declared victory as early as 10 a.m. Friday, hours before the debate here and even before Mr. McCain had committed to attend. In what aides said was a mix-up, The Wall Street Journal posted an Internet advertisement twelve hours early showed Mr. McCain proudly looking into the distance the words “McCain Wins Debate!”
A reader of the Washington Post spotted it and alerted the paper’s blog, The Fix, which promptly posted it before the red-faced McCain campaign removed it.
It was an embarrassing, yet telling, false start to the most important battle to shape perceptions of the election year so far…
Obama, on his part, made some mistakes of his own. Even I felt during the debate that he said “John is right” several times. It didn’t take long for people to compile videos:
Ahh..fun times
September 25, 2008
Jinhe naaz hai
Romy sent me this blog post with lyrics of Rabbi Shergill’s new song Bilqis: Jinhe naaz hai. The post also has background information on the people that the song is about: Bilqis Bano, Satyendra Dubey, Shanmugam Manjunath and Navleen Kumar. Here is the Bilqis: Jinhe naaz hai video.
September 24, 2008
I love McCain
I love McCain for his antics. There’s never a dull moment in the campaign because of McCain (or his campaign strategists – whatever).
McCain has given us wonderful moments to cherish: not remembering how many houses he owns and defining “rich” as someone who earns more than $5 million a year.
The Sarah Palin move was brilliant. Here’s proof: she had 10 times as many searches and news volume as Biden. If this was high school, Biden would be called Boring Biden.
Another politically smart move was to complain about CEO compensation in the context of the Wall St bailout. There is something surreal about a Republican complaining about CEO compensation (and about a Republican administration bailing companies out left, right and center). But it was populist – and good political strategy.
And today McCain said he’d like to suspend campaigning, cancel the first presidential debate and go to Washington to build consensus on the bailout package. This is the second time that McCain has suspended the campaign. It supposedly makes him look like some action-taking, decisive, consensus-building, powerful person.
Update on 9/29: Chadwick Matlin calls McCain a brilliant game theorist for this move.
Financial Weapons of Mass Destruction
Frank Holmes, CEO and chief investment officer at U.S. Global Investors, writes in the Daily Reckoning
The cure [for the financial mess on Wall St] is not more regulation – in fact, the current rules are a big reason why we’re in this dire situation.
Almost a year ago, an accounting rule known as FAS 157 went into effect. This rule has been called the “fair-value rule,” but it’s not working that way. FAS 157 is forcing companies to write off tens of billions of dollars in debt-related investments.
That’s because of FAS 157′s requirement of a “mark-to-market” valuation on these investments each quarter. Mark-to-market essentially means the value of these investments if they had to be sold immediately. Current uncertainties and liquidity issues have chased away just about all of the buyers for many of these investments, so the markets are distorted. When there are no buyers, under FAS 157 the value has to be marked down, sometimes to zero. This is the case even for securities that could be sold in the future at face value once they reach maturity.
This is not a blind defense of the companies that have invested heavily in derivatives that Warren Buffett called “financial weapons of mass destruction” in 2002. In the next six years, these financial WMDs grew by 500 percent to more than $500 trillion. The sheer size of these derivatives has greatly increased the risks of catastrophe, and the danger is further elevated because of FAS 157 and Sarbanes-Oxley.
Because global financial markets are woven in a complex web, turmoil in one sector is felt elsewhere. Some wounded financial companies are desperately selling healthy stocks to raise capital to stay afloat, and this heavy selling pressure is forcing down the price of these stocks. The same is being done by leveraged hedge funds that have been hurt by their investments in financial stocks – they need to raise money for shareholders who want out of their fund, so they are selling good stocks to get cash.
What Frank writes seems to make sense at first glance. But if you stop to think about it – why shouldn’t companies be made to “mark-to-market” any of their investments? Aren’t shareholders supposed to know where they stand every quarter? What is to stop companies from misrepresenting their assets and misleading investors? If there are any “securities that could be sold in the future at face value once they reach maturity”, the market knows that the “losses” and write-offs or mark-downs declared by banks are only notional, and the stock price will not tank. But the reality (in the sense of social construct, in other words, market determination of prices) seems to suggest that a lot of these securities are worthless. There is no market to determine prices.
I see the chart depicting a derivatives market of $516 trillion. What does that even mean? I cannot comprehend numbers like this at all. If these derivatives start to “unwind”, “un-hedge”, what does that mean? That seems to be the scenario that Henry Paulson and Ben Bernanke are afraid of. I guess.
September 22, 2008
Absurdity of Wall Street
Saurabh has this tongue-in-cheek remark about the recent demise of free market capitalism
If you screw up, it is your problem. If you screw up big time, it is your boss’s problem. If you screw up really well, big time, for a long time and make a lot of money in the process, the US Fed will take care of you.
The US government (or, more accurately, taxpayers) will take ownership of all bad investments that no one else is willing to buy. These investments that the US will buy will be financed by more debt ($700 billion worth). So the Fed is going to print even more money. The dollar, therefore, ought to depreciate. Given the perverse state of the world financial system with freely floating currencies, it is not likely that other currencies will appreciate much either. So what else is left? Gold, oil and commodities?
At the end of the day, here is how history will record the events of the last 10 years:
- The Fed printed tons and tons of money and increased the money supply (M3). They even stopped publishing the numbers of how much money supply is increasing.
- A lot of this money found itself going to pump bubbles – first the dot com bubble of the late 1990s and then the real estate bubble
- The banking industry professionals (some of whom may lose their jobs in the 2008 financial crisis) made tons and tons of money in the process. The firms made money by making bad loans, the employees of these firms made money in record bonuses
- Here is how the money making machine worked: financial institutions made loans to borrowers who had a snowball’s chance in hell to repay. They made money in mortgage fees and also when they sold these loans by repackaging them to other investors. Real estate prices were soaring, so no one cared about the ability to repay (they thought prices were always going to go up, so even if the borrower defaults on the loan, the principal can be recovered through foreclosures). The ability to repackage mortgage loans helped “socialize” the risk. Credit rating agencies gave AAA ratings to these repackaged securities and much of the blame falls on them for not identifying the risk inherent in the bubble. Long story short, mortgages turned into securities that were packaged, repackaged and sold God knows how many times to God knows who. The terms credit default swaps and collateralized debt obligations (CDOs) are used in this context.
- The money they made during the boom financed by the loose monetary policy was actually based on poor investments. Starting August 2007, it became clear that the investments were poor. A large percentage of loans were not going to get repaid because borrowers did not have the ability to pay.
- The real estate bubble stopped inflating, started deflating. Since house prices were falling and mortgage defaults were rising, it became clear that the packaged and repackaged securities based on mortgages were not AAA and were of dubious value.
- No one knew what the value of these securities was. Banks are required to mark their investments and assets down to market every time they release results. A huge portion of their investments were in these securities. The market for these securities tanked and no one was able to trade these securities. There was no way of knowing what these investments were worth. Banks guessed every quarter what these might be worth and every quarter their notional “value” kept going down. So every quarter, banks and other financial institutions holding these securities announced losses.
- The credit market tightened as banks were reluctant to lend to each other – they didn’t even trust other banks because no one was sure how deep the others are in this mess.
- To avoid the freezing of credit market, the Fed reduced interest rates. This was a bit bizarre because the problem was caused by loose monetary policy in the first place. In any case, the loose monetary policy created a new bubble – this time in the commodities market. There was a brief food crisis where prices of key food items like rice went through the roof. The price of oil and gold skyrocketed.
- In 2008, things finally came to a head and several banks failed – Bear Stearns, Indymac, Lehman Brothers. The insurance company AIG also had to be rescued via a US government bailout of $85 million.
The government is now proposing to create a $700 million fund to buy these securities that no one in the private sector is willing to buy because no one knows what they are worth. Some politicians are also proposing that the government use this new power that they will get through their bailout to help “struggling homeowners”. It is strange that renters are not up in arms about using taxpayer money (theirs and homeowners’) to
- Bail out financial institutions – their shareholders and, more importantly, executives who get severance packages in the millions of dollars
- Buy securities at a price presumably higher than what the market price (there is no market price because no one is willing to buy them)
- “modify existing mortgages to make them more affordable” – essentially rewarding people for buying more house than they can afford.
September 17, 2008
Banned from linking
Found this bizarre story on Slashdot today. A woman was sent a “cease and desist” letter and asked to remove links to a city’s website from her blog. This was apparently political retaliation. The woman is now suing the city.