Saturday, March 28, 2009

Thank God for Government, Greenspan Said

Or should have said, though the most powerful prosletyzer for free markets has backtracked more than most.

I don't say it happily, but as I watch equity indexes fall by 3.5% - 5.0% all around the world because the White House refused a no-conditions bailout for GM and Chrysler, I note that the investor need for government bailout money has reached the state of undiluted panic when for a few hours they are forced to go without.

The banker calls for subsidy are an amazing thing.

Here is Roger Altman. Altman is now the CEO of Evercore Partners, a private equity firm, but is a veteran of 2 stints at Lehman Bros, including a 1980s term in which trading starting to take over Wall Street banking, a period at Blackstone, and time in the Carter and Clinton administrations. Call him a Rubin Democrat. Last week, he gave a 3-part interview at the Financial Times in which among other things he waved the flag for the PPIP, saying it will work (while making the reasonable point that it will take time to bring in a lot of bidders).

He also is pretty honest about the positions of the private parties. The sellers with problem loans or toxic assets might not want to sell at far below face value -- where the bids of the professional asset scavengers are likely to be -- because that locks their losses it, forces reporting as such, and can hurt confidence in them, making the hole even deeper from which they have to repay everybody including the government.

As for investors, Altman said,
I think there will be plenty of investor interest. Let's be honest. It's a heads you win, tails you don't lose proposition. And that's the way it needs to be, given the magnitude of this problem. I support that. . . We should all be up front about that. As Larry Summers often says, when markets overshoot, policy also has to overshoot. . . . It's a very strong offensive policy, . . . in terms of the size of the subsidies to the investors, but it has to be.
Adding these points together, we get the gov acting as patient subsidizer and patient free insurer for the private sector, with little hope for Mark Thoma's call to try it then end it quickly.

Anger and worry part 17:

Dean Baker is pissed and not bothering to hide it.

Or Krugman on Friday:
  • finance and insurance doubled their share of GDP from 4% to 8% since the late 1960s.
  • "financial wizards were lavishly rewarded for overseeing the process. But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption."
  • "I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try."
Moderate MacKenzie (FT) on the Public Private Investment Partnership (PPIP)
  • "the irony that the Treasury is relying on securitisation and leverage to resolve a banking crisis that is based on excessive borrowing and owning securitised assets"
  • plus it is not working: "The substantial rally in banking stocks has been accompanied by a far more tentative rebound in the various derivative indices for leveraged loans and subprime mortgages, which the PPIP is expected to grease."
  • "the peak in corporate and consumer bankruptcies for this current recession and ensuing torching of bank loans, is likely still to be a long way in the future."
  • enter nationalization: "For all its shortcomings, the PPIP may be an act of Kabuki theatre that moves us one step closer to knowing the full cost of Wall Street’s collective failure. That might then open the door to what has been an unpalatable prospect for regulators: the outright nationalisation of banks. In these circumstances, maybe everyone might at least agree with such an extreme outcome."
Finally a decent dish of economics and economists as having helped cause this crisis and now having nothing to say. Among other comments:
The scandal of modern economics is that these two false theories—rational expectations and the efficient market hypothesis—which are not only misleading but highly ideological, have become so dominant in academia (especially business schools), government and markets themselves. . . .
Why did such discredited theories flourish? Largely because they justified whatever outcomes the markets happened to decree—laissez-faire ideology, big salaries for top executives and billions in bonuses for traders. And, conveniently, these theories were regarded as the gold-standard by academic economists who won Nobel prizes.
Yes, on some level it's not that complicated.

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