Posts Tagged ‘bank bailout’

Weirdness Happens

March 26, 2009

—  When was the last time you heard Dems angry that a company is paying its workers too much, and the GOP defending the workers?  What happened to the halcyon days of yore, when the auto makers were the ones under the gun, blue-collar workers were the employees in question, and the 2 political parties stayed on their own sides of the car?  AIG: it’s freaky.

—  Many Dems don’t like the idea that we’re turning to the Wall Streeters who got us into this mess to also get us out of it.  I don’t either.  So why is Larry Summers in the White House again?  He’s the Mark Penn of Democratic economists.

And that’s why the Greeks invented hubris.

March 26, 2009

When VH1 does its nostalgia show for the decade of the Twentysies (which will cover the years 1998-2008, sorta like “the Sixties” actually means roughly 1967-1975), its theme will be hubris.  Lotsa people getting too big for their britches, thinking they know something nobody else knows, and that that knowledge means the normal rules don’t apply to them; in the end, they flame out, sometimes destroying themselves in the process, but always destroying lots of innocent by-standers.

It starts off in the late Clinton years, when Sen. Phil Gramm and a guy in the White House named Lawrence Summers (I wonder what ever happened to that dude . . . hmmmm) decided they and their Wall Street confreres suddenly understood America’s financial system better than anybody else ever had.  This special knowledge informed them that the usual rules didn’t apply anymore; that huge, multifarious financial institutions no longer presented a threat to the American economy, and the 70-year-old rules preventing banks and insurance companies from spreading into each others’ industries were no longer needed.  Pres. Clinton agreed, and bye-bye Glass-Steagall Act.

Next comes Enron.  That was basically a case of some guys who thought they had a deeper understanding of energy markets than anybody else.  Ever.  First they convinced their peers that their nonsense was real, but too complex for anybody but “the smartest guys in the room” to understand.  Next they used that social leverage to build a wall of secrecy around what they were doing.  And last they ran their company straight into the ground, in the process throwing hundreds of people out of work and causing rolling blackouts all up and down the West Coast.

The next example is Dick Cheney.  First he convinced himself that he and his inner circle were the only ones who really knew how the world worked, the only ones who really knew what Saddam Hussein was up to, the only ones who really understood what was necessary to interrogate terrorism suspects, the only ones who really knew how to keep the country safe.  Next he built a wall of secrecy around what he was doing.  And last he ran the country into the ground in Iraq.  He walks away with a limp, but for the rest of us it cost trillions of dollars, thousands of American lives, tens of thousands of Iraqi lives, millions of Iraqi refugees, and lost ground in our other war (the one where the people who attacked us actually are) and in America’s global influence.

Then there’s Karl Rove, another big fan of secrecy who thought he knew more than anybody else, thought he understood America better than anybody else, thought there was such a thing in America as a “permanent majority” and he knew how to build it.  That I-have-special-secret-knowledge attitude is how he drove his party into the ground.  As he famously said the night before the 2006 elections, all those polling companies had “their math,” but he had “THE math.”  Oops.  He walked away relatively unscathed, though with his reputation for brilliance diminished.  The rest of us have to deal with the mess he created — a fouled Justice Department and a two-party political system with only one functioning party.

Now, at the end of the Decade of Hubris (we hope), we have pretty much everybody in the financial industry, who all convinced themselves they alone had special insight into how securities markets worked, insight that seemed to lift the normal rules of supply and demand and no free lunches.  They’ve all made out like bandits, but pretty well sunk the rest of us.

That’s a nice bookend to the beginning of the Decade of Hubris, and . . . hey! there’s that Larry Summers guy in the White House again!  Seems he walked away unscathed.  So did Phil Gramm, who left the senate and became vice chairman of UBS, a huge Swiss bank.  He was in charge of . . . wait for it . . . lobbying the U.S. government on mortgage issues.  And, of course, Bill Clinton walked away from this unharmed, too, and now is worth millions.

So here are a few lessons I’ve learned from America’s last 10 years:

  1. If you find yourself thinking, “Nobody gets this but me,” you’re the one who doesn’t get it.
  2. Secret knowledge is not knowledge.  It’s cultivated ignorance.
  3. If you screw up, make it huge.  That way, everybody has to pay but you.
  4. Taking regulatory advice from Larry Summers or Phil Gramm is right up there with getting involved in a land war in Asia.  (A perfectly symmetrical irony, since a) Summers is Obama’s lead economic adviser and Gramm was John McCain’s; and b) we’re currently involved in 2 land wars in Asia.)

Don’t Go for the Blonde

February 17, 2009

“If we all go for the blonde, we block each other and make the other girls mad at us.”

That’s how John Nash’s great insight into “governing dynamics” came to him, according to the movie A Beautiful Mind.  His insight was that Adam Smith’s fundamental model — the one capitalism is based on — was flawed.  Contra Smith, the best outcome doesn’t come from every individual acting purely on rational self-interest; it comes from every individual acting rationally in the interest of both self and the group.

That’s the lesson our Wall Street bankers need to learn.

As this article details, the banks receiving billions of taxpayer dollars under TARP are not lending that money out, as congress had hoped (maybe even intended); instead, they’re hanging onto it.  Why?  Because that’s what maximizes each bank’s own individual interests: in an unstable, recessionary economy, you hang on to the money you’ve got; you don’t put it at risk.

Looked at strictly on an individual level, that is the rational thing to do.  It’s what best serves your bank’s shareholders.  However, looked at on a collective level, it’s ultimately devastating to all the banks’ shareholders, along with the rest of us.  A continuing credit crunch further weakens demand.  Weakened demand causes a shrinking GDP.  And that, ladies and gents, is a recession.  Which causes banks to be even more tightfisted and risk-averse.  Which makes the recession still worse, and so on.  And that, ladies and gents, is a recession spiraling into a depression.   Everybody loses, including — maybe especially — banks and their shareholders.

It’s a textbook collective action problem.  The thing that’s best for the group as a whole is not the thing that’s best for each player individually.  As long as everybody is acting purely on rational self-interest, the thing that would be best for everybody never happens.  In fact, everybody will end up in the crapper.

So how do we get the banks to do what’s best for everybody, instead of what’s best for each of them individually?

Bank Runs for Thee, but Not for Me

February 11, 2009

Felix Salmon makes a good point about bank nationalization: if we nationalize just some of the banks, it creates uncertainty in the markets about whether we’ll nationalize more, and about which ones; it could actually cause otherwise survivable banks to fail, because investors are afraid to buy (or hold) their stock and lose it in a nationalization.

However — and I know absolutely nothing about these things — a question comes to me in response: what if we froze the stocks of the entire banking industry?  Nobody can buy them, nobody can sell them.  Not until the gov’t has done what it needs to do to re-structure the system.

One of the things FDR did immediately upon taking office in 1933 was declare a bank “holiday.”  That is, he forced all the banks to close and remain closed until further notice.  That stopped the runs on banks, which stopped the cascading bank failures that were making an already terrible situation worse.  He allowed them to re-open after the panic had subsided and the gov’t had re-structured the banks by merging them into stronger institutions.

The two situations seem at least roughly analogous.  Isn’t what Salmon describes essentially a run on the banks?  The only difference I can see is who’s doing the running.  In FDR’s day, it was the depositors, who had just wanted a safe place to hold their savings.  Today, it’s the investors, who intentionally risked their money in exchange for a hoped-for profit.

Now, what’s the difference between a bunch of small depositors, and a bunch of Wall Street financiers?  Why might politicians treat them differently?

Hmmmm.  Let . . . me . . . think.