Hooray for the Tea party organizers. I'm going to my local Tea party today to see what happens.
The stimulus bills and associated pork may have been the catalysts for the Tea party movement. However the larger and longer term issue is the growth of government spending as a percentage of GDP. That is bad, on top of all the other reasons, because a dollar cycled through the government has a lower multiplier than a dollar kept circulating in the private sector. That subject is explored in detail in any good first- or second-year economics course.
For those that don't care about wealth, or want to lower it, the lower multiplier is not a problem. For the rest of us it's a key issue, even if it's not usually argued in those terms.
So I'm off to my local Tea party. Here's an article that surveys the Tea party phenomenon.
http://online.wsj.com/article/SB123975867505519363.html
Wednesday, April 15, 2009
Thursday, April 2, 2009
What To Do About the Cap and Trade Idea?
What really should be done from a normal free-markets and American perspective? Forget it; it’s nothing but a big market distortion. People willingly buy goods and services that return utility to them – not the right to cause dis-utility to another unidentified and nebulous group. Only a small part of the population would pay into such a fund voluntarily. If they feel better contributing, great. If a Cap and Trade tax program is implemented as the Obama administration has proposed, the only logical place for the revenue is to fund forests and other plants that efficiently convert carbon dioxide back into oxygen. Imagine paying Brazilian rain-forest owners and farmers a fee to recycle carbon dioxide! But that’s not what our environmentalists or the Executive Branch are thinking. They want to use the funds to create further market distortions subsidizing their chosen energy technologies and groups.
Monday, March 23, 2009
What Should be Done About AIG Bonuses?
Absolutely nothing should be done about the bonuses paid to AIG employees, at least not legislatively. To understand why, please take out a calculator now and do this simple division. Enter 165, to represent the $165 million in bonus compensation. Divide that by 170,000 to represent the $170 billion in bailout money that AIG has received. Look at the result. Adjust your calculator's display to show 5 digits to the right of the decimal point if your calculator doesn't already show them. The number you'll see is 0.00097. What does this mean? It means that the bonus money is less than one one-thousandth of the bailout money going to AIG.
This money, on a percentage basis, is less then the rounding error in many calculations. While $165 million is a huge amount of money to most of us, it's just not meaningful in the scope of AIG's problems or it's bailout, or the problems in the banking system, the government or the economy.
So I watch with sadness and amuzement while the House rants and then passes a bill that is reckless on several levels. It's reckless on constitutional grounds. If the Senate and President pass and sign anything like it, it may get struck down on those grounds in the courts. It's reckless on business grounds because of the perceptions of recklessness, fickleness and inconsistancy it will create for businesspeople. Who'd want Congress as a business partner? And it's reckless on political grounds, if there is a backlash against things going further wrong due to this bill.
This week we seem to be moving past the AIG furor, and focusing on the Geithner plan. That's great. We should forget about the AIG bonus issue and hope the legislation lapses into irrelevancy.
This money, on a percentage basis, is less then the rounding error in many calculations. While $165 million is a huge amount of money to most of us, it's just not meaningful in the scope of AIG's problems or it's bailout, or the problems in the banking system, the government or the economy.
So I watch with sadness and amuzement while the House rants and then passes a bill that is reckless on several levels. It's reckless on constitutional grounds. If the Senate and President pass and sign anything like it, it may get struck down on those grounds in the courts. It's reckless on business grounds because of the perceptions of recklessness, fickleness and inconsistancy it will create for businesspeople. Who'd want Congress as a business partner? And it's reckless on political grounds, if there is a backlash against things going further wrong due to this bill.
This week we seem to be moving past the AIG furor, and focusing on the Geithner plan. That's great. We should forget about the AIG bonus issue and hope the legislation lapses into irrelevancy.
Monday, March 2, 2009
Is getting the bad assets out of the banks the way to go?
Today Federal Reserve Bank of Boston President Eric Rosengren said about getting the bad assets off the banks' books that it is "desirable to move quickly". I believe even more strongly than that, that it is essential. And that the people and institutions responsible for helping the economy recover are making a strategic mistake if they don't move quickly on it. They may be working on this in the background, and may even be finding problems and making progress. If so, the mistake is then one of communication.
Rosengren's study of the Japanese banks experience points to getting the bad assets out as cucial.
Rosengren points out from almost an organizational studies point of view that while the bad assets are on a bank's books, management stays fixated on the losses and mistakes at the cost of not moving forward into new, good loans. And as a trader, I know that sitting around looking at losses is not helpful in finding and making the next profitable trade. Instead, one should analyze the bad trade, learn what can be learned, and forget about the pain of the loss and move forward.
Getting the bad assets out of the institutions is of course easier said than done. That doesn't affect at all whether doing so is crucial to recovery. As we see with the Citibank bailout effors to date, the sick assets essentially sicken the whole institution. I've listened to many commentators about this, especially over the last three months. And it seems to me that the smart ones are essentially in agreement that paths always lead back to the bad assets in the institutions and their value. Washington and others may want that fact to go away, but it won't.
Neither is the fact that the root cause of the creation of those bad assets was the government's driving the banks to make lousy loans they would not otherwise have made. But I've covered that particular point already in this blog.
Here's a list of issues I've seen regarding the bad assets. Specifically these assets are the CDO's containing subprime loans, and derivatives based on these and other troubled assets, including CDS's.
1) There are losses on derivatives created out of thin air. That is, not just derivatives based on CDO's that actually exist. For the best explanation I've seen of this, see the article "The End" in Portfolio magazine, Dec08/Jan09.
2) The question is how to value assets, and after determining what are they worth. Of course the simple answer is that they *should* be valued by price discovery in an open, regulated, undistorted market. Since that option is not available, some form of modeling must be used.
3) The "taxpayer" has an interest in this. Politicians of any skill at all learned quickly months ago to recite phrases like "protect the taxpayer", "make the investment back" for them, "protect their interest" and the like. Nice to consider, but our situation is so bad that there will just be costs. This situation seems to be worse than the savings and loan debacle, and its relatively successful bailouts. The models for valuing the assets become mechanisms for allocating the losses. Not pretty.
4) The FASB changed an accounting rule earlier in the crisis, known as "mark-to-market" and also "Fair Value Accounting". I feel I understand FASB's basic motivation to make the rule change. A huge theme in accounting is knowing the present value of everything, even things that won't be realized as a financial entry until the distant future. However, this rule change, accompanied by a lack of guidance at the time, did serious but quiet harm to banks and other institutions. This harm is not yet fully discovered. Over-the-counter, unregulated markets and the end of markets and price discovery at all combined with the rule to force banks losses. The get close to declaring the losses; they need the bailouts.
5) The "bad-bank" discussions are about creating containers for the toxic assets outside the instituions. If we had liquid markets for the assets, we wouldn't need the containers. Every few days there's a story about a firm that wants to buy some toxic assets, but learn that they can't. In a sense it's too dangerous to establish a price by selling assets to them. Go figure.
6) In the end, leaving the toxic assets in a fully public "bad bank" wouldn't be as bad as the government nationalizing banks, or almost so. Why? The government can boss the assets around all it wants to, and then sell them later. This will cause less long-term damage to markets and American free enterprise then the government bossing around banks, and creating long-term, heinous market distortions.
Rosengren's study of the Japanese banks experience points to getting the bad assets out as cucial.
Rosengren points out from almost an organizational studies point of view that while the bad assets are on a bank's books, management stays fixated on the losses and mistakes at the cost of not moving forward into new, good loans. And as a trader, I know that sitting around looking at losses is not helpful in finding and making the next profitable trade. Instead, one should analyze the bad trade, learn what can be learned, and forget about the pain of the loss and move forward.
Getting the bad assets out of the institutions is of course easier said than done. That doesn't affect at all whether doing so is crucial to recovery. As we see with the Citibank bailout effors to date, the sick assets essentially sicken the whole institution. I've listened to many commentators about this, especially over the last three months. And it seems to me that the smart ones are essentially in agreement that paths always lead back to the bad assets in the institutions and their value. Washington and others may want that fact to go away, but it won't.
Neither is the fact that the root cause of the creation of those bad assets was the government's driving the banks to make lousy loans they would not otherwise have made. But I've covered that particular point already in this blog.
Here's a list of issues I've seen regarding the bad assets. Specifically these assets are the CDO's containing subprime loans, and derivatives based on these and other troubled assets, including CDS's.
1) There are losses on derivatives created out of thin air. That is, not just derivatives based on CDO's that actually exist. For the best explanation I've seen of this, see the article "The End" in Portfolio magazine, Dec08/Jan09.
2) The question is how to value assets, and after determining what are they worth. Of course the simple answer is that they *should* be valued by price discovery in an open, regulated, undistorted market. Since that option is not available, some form of modeling must be used.
3) The "taxpayer" has an interest in this. Politicians of any skill at all learned quickly months ago to recite phrases like "protect the taxpayer", "make the investment back" for them, "protect their interest" and the like. Nice to consider, but our situation is so bad that there will just be costs. This situation seems to be worse than the savings and loan debacle, and its relatively successful bailouts. The models for valuing the assets become mechanisms for allocating the losses. Not pretty.
4) The FASB changed an accounting rule earlier in the crisis, known as "mark-to-market" and also "Fair Value Accounting". I feel I understand FASB's basic motivation to make the rule change. A huge theme in accounting is knowing the present value of everything, even things that won't be realized as a financial entry until the distant future. However, this rule change, accompanied by a lack of guidance at the time, did serious but quiet harm to banks and other institutions. This harm is not yet fully discovered. Over-the-counter, unregulated markets and the end of markets and price discovery at all combined with the rule to force banks losses. The get close to declaring the losses; they need the bailouts.
5) The "bad-bank" discussions are about creating containers for the toxic assets outside the instituions. If we had liquid markets for the assets, we wouldn't need the containers. Every few days there's a story about a firm that wants to buy some toxic assets, but learn that they can't. In a sense it's too dangerous to establish a price by selling assets to them. Go figure.
6) In the end, leaving the toxic assets in a fully public "bad bank" wouldn't be as bad as the government nationalizing banks, or almost so. Why? The government can boss the assets around all it wants to, and then sell them later. This will cause less long-term damage to markets and American free enterprise then the government bossing around banks, and creating long-term, heinous market distortions.
Thursday, February 5, 2009
President Clinton and Banks' Market Cap
I'm still amazed that President Clinton has taken not a single shot (that I'm aware of) for his part in the sub-prime mortgage debacle and subsequent credit meltdown. Wasn't Reagan the Teflon president, or was it Clinton? I think they both have that property. I tag Clinton with a lot of the blame for the sub-prime situation. He pushed aggressively for the Carter-era CRA to be strengthened and extended. This is noted elsewhere, including my first entry on this blog.
Also, the cosy, corrupt (IMO), and ultimately very damaging relationship between congressional democrats and Fannie Mae and Freddie Mac was extended and deepened through the Clinton years. And this component of the debacle ultimately makes sense. If a lot lousy mortgages are being created, then some party needs to buy 'em so still more can be created. Only after all this was in motion, did Wall Street firms create the derivatives, swaps, and other instruments that spread the bad-mortgage disease around the world. If President Clinton didn't want the relationship and doings at the GSEs to continue, they wouldn't have.
President Bush knew about it and tried to stop it on a few occasions in his first term. But instead he's tagged with blame in the mortgage problem, to my complete bewilderment. Republicans can be blamed for feeble and ineffective communication - of that I'm sure.
A net result of all this was discussed today on CNBC. What's really the market cap of the big banks affected by this? Some say it's essentially zero. It's certainly only a fraction of what it was. Where did it go and who owns the spoils? To the degree that the bad loans created a non-wealth bubble, this "bad air" was sucked into the banks and canceled out value. Thanks for the market distortion, President Clinton. Now we public (taxpayers) own a sizable chunk of the banks' remaining market cap.
The entire issue is a cause of serious concern for anyone who cares about undistorted, free markets. I'm angry. Remember Earl Pitts? "Why I'm so angry, I could......"
Also, the cosy, corrupt (IMO), and ultimately very damaging relationship between congressional democrats and Fannie Mae and Freddie Mac was extended and deepened through the Clinton years. And this component of the debacle ultimately makes sense. If a lot lousy mortgages are being created, then some party needs to buy 'em so still more can be created. Only after all this was in motion, did Wall Street firms create the derivatives, swaps, and other instruments that spread the bad-mortgage disease around the world. If President Clinton didn't want the relationship and doings at the GSEs to continue, they wouldn't have.
President Bush knew about it and tried to stop it on a few occasions in his first term. But instead he's tagged with blame in the mortgage problem, to my complete bewilderment. Republicans can be blamed for feeble and ineffective communication - of that I'm sure.
A net result of all this was discussed today on CNBC. What's really the market cap of the big banks affected by this? Some say it's essentially zero. It's certainly only a fraction of what it was. Where did it go and who owns the spoils? To the degree that the bad loans created a non-wealth bubble, this "bad air" was sucked into the banks and canceled out value. Thanks for the market distortion, President Clinton. Now we public (taxpayers) own a sizable chunk of the banks' remaining market cap.
The entire issue is a cause of serious concern for anyone who cares about undistorted, free markets. I'm angry. Remember Earl Pitts? "Why I'm so angry, I could......"
Friday, January 30, 2009
Obama Starts Down the Dreaded Path
Here a some beefs I have with President Obama's and the Democratic majority's recent actions and positions.
1) The so-called stimulus bill is full of pork. I'm hearing about more items all the time that sound more like ornaments on a Christmas tree of pork than elements of a well-thought-out and effective stimulus bill.
2) The stimulus bill is too light on tax cuts and too heavy on spending. I'll detail why tax cuts are more effective in a later post.
3) The Columbian Free Trade Agreement isn't passed yet. Remember this? It still matters. The U.S. so far has failed to lock in free trade and economic recovery advantages and the drug war advantages of passing the FTA. Stratfor and other sources have warned about Mexico's dire straits. We need to watch our southern border closely.
4) There's a "buy American" clause in the stimulus bill. It's nonsense to codify that in a bill. If a private party wants to pursue a buy America ad campaign that's fine. But massive sellers of treasury notes and the beacon of democracy and free markets, not to mention chief advocate of free trade, can ill afford to do this. It's stupid and economically wrong.
5) The Obama administration naively stated the obvious about China's handling of its currency relative to the dollar. Of course they manipulate it. It's officially pegged, after all. It doesn't even pretend to float in a free market relative to the dollar. But it was a stupid thing to say so. To do so within a week of the passage of a giant spending bill to be financed by government borrowing was a whopper. The Chinese have good reason to fear sanctions and legal consequences if what they are doing is called what it is. And of course a backlash to those actions would hit us. Hard. Please guys, try to act sophisticated even if you aren't. The U.S. and China are in a dance together and it will take at least another generation to unwind things enough to be free-market rational.
6) The "Card Check" pro-union bill lurks in the halls of congress. The election mechanism is un-American and I would think it would be unconstitutional. I'd have to look. The bill will also advance the government's role from referree to dictator of terms after a set time period of negotiations between a company and a union. That's bad on several levels. More on this later. For some detail see today's editorial page in Investor's Business Daily.
7) Obama signed the "Lilly Ledbetter" bill. That's a bill that sounds appealing to people who think with their hearts instead of their brains. But it sets up some incentives and legal mechanisms which will be abused, to the short-term detriment of businesses and the long term detriment of employees.
8) Closing Gitmo? Dumb. Castro's already making hay, and that's before we've let anybody out! We close Gitmo and celebrate only after we're out of Iraq and Afghanistan, UBL is proven dead, al Queada is discredited and dismantled, Iran has been shorn of nukes, the Isreal-Palestinian question has been resolved to the degree that Palestinians move forward economically instead of work to dismantle the present situation, and Hamas and Hesbollah in their present forms are nothing but bitter memories.
My relief at the perceived quality of Obama's cabinet picks is giving way to the forlorn environment I feared before Obama was elected.
1) The so-called stimulus bill is full of pork. I'm hearing about more items all the time that sound more like ornaments on a Christmas tree of pork than elements of a well-thought-out and effective stimulus bill.
2) The stimulus bill is too light on tax cuts and too heavy on spending. I'll detail why tax cuts are more effective in a later post.
3) The Columbian Free Trade Agreement isn't passed yet. Remember this? It still matters. The U.S. so far has failed to lock in free trade and economic recovery advantages and the drug war advantages of passing the FTA. Stratfor and other sources have warned about Mexico's dire straits. We need to watch our southern border closely.
4) There's a "buy American" clause in the stimulus bill. It's nonsense to codify that in a bill. If a private party wants to pursue a buy America ad campaign that's fine. But massive sellers of treasury notes and the beacon of democracy and free markets, not to mention chief advocate of free trade, can ill afford to do this. It's stupid and economically wrong.
5) The Obama administration naively stated the obvious about China's handling of its currency relative to the dollar. Of course they manipulate it. It's officially pegged, after all. It doesn't even pretend to float in a free market relative to the dollar. But it was a stupid thing to say so. To do so within a week of the passage of a giant spending bill to be financed by government borrowing was a whopper. The Chinese have good reason to fear sanctions and legal consequences if what they are doing is called what it is. And of course a backlash to those actions would hit us. Hard. Please guys, try to act sophisticated even if you aren't. The U.S. and China are in a dance together and it will take at least another generation to unwind things enough to be free-market rational.
6) The "Card Check" pro-union bill lurks in the halls of congress. The election mechanism is un-American and I would think it would be unconstitutional. I'd have to look. The bill will also advance the government's role from referree to dictator of terms after a set time period of negotiations between a company and a union. That's bad on several levels. More on this later. For some detail see today's editorial page in Investor's Business Daily.
7) Obama signed the "Lilly Ledbetter" bill. That's a bill that sounds appealing to people who think with their hearts instead of their brains. But it sets up some incentives and legal mechanisms which will be abused, to the short-term detriment of businesses and the long term detriment of employees.
8) Closing Gitmo? Dumb. Castro's already making hay, and that's before we've let anybody out! We close Gitmo and celebrate only after we're out of Iraq and Afghanistan, UBL is proven dead, al Queada is discredited and dismantled, Iran has been shorn of nukes, the Isreal-Palestinian question has been resolved to the degree that Palestinians move forward economically instead of work to dismantle the present situation, and Hamas and Hesbollah in their present forms are nothing but bitter memories.
My relief at the perceived quality of Obama's cabinet picks is giving way to the forlorn environment I feared before Obama was elected.
Wednesday, January 28, 2009
A Skating Rink Guides Regulatory Reform
The issue of market regulation reform lurks behind the automaker bailouts and the stimulus packages. Social engineering is to regulation reform as pork spending is to stimulus packages. Both social engineering and pork should be avoided.
Contemplating an ice skating rink may help guide the philosophy shaping regulatory reform, especially of financial markets. An ice rink is flat, as a level regulatory playing field or market should be. The rink has walls, which define the limits of the playing surface. The rink doesn't limit how fast skaters can skate. Instead they must suffer any negative consequences of their own risk-taking. No one is preselecting winners or losers in the competition.
To stretch the analogy a large step further, unless someone provides the skating rink, the skaters would be skating out on a parking lot. The irregular surface with no boundaries is not conducive to efficient skating. The lack of boundaries and level playing surface enables skaters to pull dirty tricks on each other with impunity.
This philosophy applied to financial markets regulation suggests tranparency, good reporting, open price discovery, and regulated exchanges for all large markets. Credit Default Swaps and Collateralized Debt Obligations should be regulated this way. That's especially true if the Financial Accounting Standards Board holds to its mark-to-market accounting rule. The mark-to-market accounting rule applied to private, over-the-counter CDS market proved to be a dangerous combination when the markets began to seize up. In fact, some who know more about this than I do posit this as a key cause of the seize-up.
Contemplating an ice skating rink may help guide the philosophy shaping regulatory reform, especially of financial markets. An ice rink is flat, as a level regulatory playing field or market should be. The rink has walls, which define the limits of the playing surface. The rink doesn't limit how fast skaters can skate. Instead they must suffer any negative consequences of their own risk-taking. No one is preselecting winners or losers in the competition.
To stretch the analogy a large step further, unless someone provides the skating rink, the skaters would be skating out on a parking lot. The irregular surface with no boundaries is not conducive to efficient skating. The lack of boundaries and level playing surface enables skaters to pull dirty tricks on each other with impunity.
This philosophy applied to financial markets regulation suggests tranparency, good reporting, open price discovery, and regulated exchanges for all large markets. Credit Default Swaps and Collateralized Debt Obligations should be regulated this way. That's especially true if the Financial Accounting Standards Board holds to its mark-to-market accounting rule. The mark-to-market accounting rule applied to private, over-the-counter CDS market proved to be a dangerous combination when the markets began to seize up. In fact, some who know more about this than I do posit this as a key cause of the seize-up.
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