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Bear Stearns Roundup
A couple of years ago, I had dinner with an investment banker who had gone to Chicago a few years before I did. He spent a great deal of the time extolling the virtues of modern markets, proclaiming that over the last ten years, we'd become massively better at pricing risk.
Being a great fan of John Kenneth Galbraith's work on asset-price bubbles, I felt the hair go up on the back of my neck. "Are we really better at it?" I asked. "Or do we just think we are?"
"No, we're really better," he assured me. Ooops.
The subprime problem has its roots in pro-business government intervention; the policies at fault were designed to help the housing industry and the lenders who write mortgages. Now the other shoe is falling. Big lenders and investors handling securitized mortgages who are in over their heads will get their promised bailout under the "too big to fail" doctrine. And the rescue will set the table for the next round of bad business decisions and the next bailout. It's called moral hazard.
What does this have to do with the free market? As Kevin Carson likes to say, if this is the free market, then I'm against it. Of course, it is not the free market. The free market is a profit and loss system void of privilege. When businesses fail, they are supposed to actually fail, not turn to the taxpayers.
Market purists gasped when the British government nationalized mortgage lender Northern Rock last month. But how would you describe tonight's Bear Stearns bailout? It wears the costume of a market transaction. JP Morgan is "buying" Bear for $2 a share. But the Federal Reserve is taking the unprecedented step of seizing control of Bear's investment portfolio. And it is giving JP Morgan Chase a $30 billion loan to take Bear over. So the Fed is simultaneously financing the deal and managing the workout. Why not end the charade and hand Ben Bernanke the keys?
Federal Reserve officials twisted J P Morgan's arms -- which was why the latter 'agreed' to buy. Officials had to provide Morgan's with a loan & a guarantee against the weakest ‘investments' -- bad mortgages -- in the Bear Stearns portfolio. These dubious liabilities amount to some $US 33,000 million -- or some 138% of its total purchase price. Thus its unsound investments are one reason for the very very low price that Bear Stearns' shareholders received -- even from J P Morgan's & even after a Federal loan + guarantee.
In the absence of Federal Reserve intervention & arm-twisting, Bear Stearns would undoubtedly have had to cease trading. And no doubt it would've been taken over, eventually -- at an even lower price. All that govt officials could do was to shorten this time period, & possibly prevent Bear Stearns' value from falling even further. But even the almighty Federal Reserve -- the world's largest & most powerful central bank -- could not prevent the huge capital losses that Bear Stearns' shareholders suffered. In short, even the Fed could not stop the de facto failure of one of the world's largest investment companies.
Jacob|3.17.08 @ 11:25AM|#
The sad fallout of all this will be stricter regulation, Democrats in control of the government, higher taxes, and activist Federal Reserve policies. Few will draw the right conclusions, that the Fed should refrain from creating asset bubbles in the first place and that recessions should not be avoided at all costs.
Jacob|3.17.08 @ 11:26AM|#
Rumor has it that on Wall St. the hot investments are guns, bullion, fresh water, and whisky.
Dave W.|3.17.08 @ 11:32AM|#
"too big to fail" doctrine
a better way of putting this is that when businesses get too big,
then the amount and quality of competition is degraded. Less/worse
competition really meass less/worse/market. Lobbying the government
for bailout is one symptom. Another is the hubris, and irrational
decisionmaking, of McMegan's investment banker pal and all his
pals.
The real answer is to make sure that firms stay small and don't get
market power so that competition always reigns, and the economy
doesn't get a market shock every time an uncompetitive "free
market" suffers the consequences of its inevitable, irrational
behavior.
In a word: antitrust.
|3.17.08 @ 11:35AM|#
I don't know who that Sheldon Richman person is but the excerpted quote is spot on.
Matt|3.17.08 @ 11:36AM|#
The reality of all this is why, in the absence of a Ron Paul
Presidency, I will end up voting Democrat. The repubs are in the
tank, not for free markets, but for Big bizness. Make fun of the
simpleton caricatures if you like, but how can anybody say
otherwise? When any large business gets the shitty end of the
capitalist stick, you start hearing all kinds of feckless,
anti-market bullshit phrases like 'to big to fail' and out goes the
beggars hand.
Id prefer no intervention but if we're gonna have it, intervene on
the side of the little guy. Eliot Spitzer in 2012!
|3.17.08 @ 11:41AM|#
Dave DubbleYooo,
While I probably shouldn't have to spell this out in black and
white for you, I guess I will. Bear Sterns is one of the largest
financial firms in existence but it is in no way THE largest as
evidenced by JP Morgan's purchase. IOW, there is no "trust" to
break up. There are plenty of smaller financial firms waiting in
the wings for one of the big boys to fail, and this should have
been their moment but thanks to the Govt. they will remain small
fry.
I suggest you go back to slurping your HFCS syrup until a real
"anti-trust" problem arises.
JMR|3.17.08 @ 11:45AM|#
I'm slightly pro-Obama because he'd have different shysters in
charged of the Department of "Justice."
JMR
Russ 2000|3.17.08 @ 11:49AM|#
The sad fallout of all this will be stricter
regulation,
Probably true. And that'll adversely affect the lower-middle class
the most, as they were probably the ones who "benefitted" the most
from the prior boom.
(I used scare quotes because whatever benefit the lower-middle
class got from EZ credit was more than wiped out by higher
prices.)
I predict we'll see tighter loan standards follwed by more use of
40-year mortgages. Of course, I'm of the mind that any mortgage
over 20 years is a general rip-off...
tarran|3.17.08 @ 11:52AM|#
The real answer is to make sure that firms stay small and don't get market power so that competition always reigns, and the economy doesn't get a market shock every time an uncompetitive "free market" suffers the consequences of its inevitable, irrational behavior.
In a word: antitrust.
Dave W.
You do realize that what anti-trust amounts to is a company that is
failing in the market place getting the government to take out a
competitor that is succeeding?
That the sole purpose of anti-trust is to bail out companies that
are having trouble satisfying consumer needs?
God! It's like listening to a witch doctor explain that the cure
for kuru is to
eat the brains of someone who died from it.
|3.17.08 @ 11:53AM|#
What's interesting to me is that a number of people are
suggesting that the subprime disaster is a result of lenders
underpricing subprime loans, failing to properly account for risk.
The motive given for that is greed and the blind desire to ride the
real estate bubble. What isn't said is that the states and the
federal government hounded lenders about keeping rates low for
subprime class borrowers. That's not the only problem, and lenders
(and borrowers) share the blame, but it was a major contributing
factor to this mess getting out of hand. Once the credit crunch
ends, will the same opposition to true risk-based pricing continue?
Probably. If that's combined (again) with pressure on lenders to
make loans to low-income and disadvantaged borrowers, we could see
a similar problem in the future. Of course, whatever rate one puts
on a loan, some people simply are not creditworthy.
The secondary market drinking the Kool-Aid is another issue, and
that's the problem that killed Bear Stearns.
Taktix®|3.17.08 @ 11:57AM|#
The real answer is to make sure that firms stay small and
don't get market power so that competition always reigns, and the
economy doesn't get a market shock every time an uncompetitive
"free market" suffers the consequences of its inevitable,
irrational behavior.
That is probably the dumbest post I've read, where the poster was
actually serious. It was government intervention that got us into
this mess, and government intervention will solve it?
This story should be a fucking great example of how a big
conglomerate can fall and how market share is ripe to be picked by
smaller companies.
Your lack of ability to grasp even to most basic concept of
economics is quite befitting of the economic idiocy that exists in
the U.S. today.
|3.17.08 @ 11:58AM|#
I love all the free-market, invisible hand types who see to
forget what the invisible hand actually does.
These fools forgot that by removing the consequences of dumb
business decisions, they actually promote dumb business
practices.
Then they're surprised when - after giving Jim "Bernanke Has No
Idea!" Kramer and the rest of the carping idiots exactly what they
want - they dump everything and run for the hills.
Mad Money indeed.
|3.17.08 @ 11:59AM|#
BTW, I believe in the free market...my post was an ironic statement aimed at people who claim to be free market and actually aren't.
Episiarch|3.17.08 @ 12:01PM|#
Stop beating up on Dave. He's got his sights set on Archer Daniels Midland and he's not thinking straight.
|3.17.08 @ 12:03PM|#
I usually think I'm too dumb to understand all this mortgage and
Fed and interest rate stuff, but for as little as I probably know
about it, even I can see how screwed up we are. I don't care who
you are or how smart you are, but it cannot be a good thing for the
long term to have the interest rates continually dropping, hundreds
of billions of dollars being printed for the heck of it and the
government all but buying up investment banks.
I don't think you can ever really avoid a recession or depression
when everything is set up for there to be one. We're just delaying
it, and apparently, the more it's delayed the worse it will be. The
next president will probably get the brunt of it and end up getting
blamed.
Dave W.|3.17.08 @ 12:04PM|#
While I probably shouldn't have to spell this out in black
and white for you, I guess I will. Bear Sterns is one of the
largest financial firms in existence but it is in no way THE
largest as evidenced by JP Morgan's purchase. IOW, there is no
"trust" to break up.
I understand the bs ReasonMagazine line that competition
only starts to diminish once there is a monopoly, and that if there
is no monopoly, then competition is healthy and the market is
free.
I disagree. I think that vigorous competition, rather than lack of
gov't regulation, is the true touchstone of what makes a market
essentially free. Gov't regulation is generally anticompetitive,
but not always and not when the regulation is designed to increase
competition. More to the point, competition decreases anytime
markets get consolidated and starts to drastically decrease long
before the number of independent firms dwindles all the way down to
one or two.
In this case, how many independent mortgage holders were there in
the US in 1905? How many 2005? This may not be a "monopoly"
problem, but it sure as heck is an antitrust problem. And it became
a cognizable problem that should have been addressed long before
the current round of bailouts became inevitable.
|3.17.08 @ 12:09PM|#
Anyone have any ideas on how to profit from this calamity? Will apartment houses be a good investment as those who can no longer afford homes bid up the existing units? Is there a REIT that is solid in apts.? Is there a public traded auction house that will see profits soar as it auctions off foreclosed properties? Are there any banks that did not participate in the sub-prime nonsense who have solid balance sheets but whose stock has suffered along with the rest?
|3.17.08 @ 12:16PM|#
"Anyone have any ideas on how to profit from this
calamity?"
Mortuaries ought to do a brisk business cleaning up the mess of
swan-diving daytraders.
Russ 2000|3.17.08 @ 12:16PM|#
That's not the only problem, and lenders (and borrowers)
share the blame, but it was a major contributing factor to this
mess getting out of hand.
Somebody had to be buying the mortgage-backed securities, that's
where the root of the problem lies.
Taktix®|3.17.08 @ 12:19PM|#
Gov't regulation is generally anticompetitive, but not
always and not when the regulation is designed to
increase competition.
(emphasis mine)
Design regulation all you want, but it will do nothing but
artificially skew the market. You can't design competition because
competition by it's very nature is uncontrollable. Looked to failed
socialist state to see hoe designs play out in the real
world.
God, it today "idiot commenter" day?
|3.17.08 @ 12:20PM|#
creech,
seriously, gold and silver are still cheap and have lots of upside
left, in my opinion. Lots of volatility too though.
KipEsquire|3.17.08 @ 12:20PM|#
There is a difference between "bailing out" and "underwriting
the orderly liquidation of." The Fed, via JPM, is doing the latter,
not the former.
A perfectly reasonable libertarian case can be made that neither
undertaking is a legitimate function of government (just as it is
not a legitimate function of government to use the tax code or
monetary tools to foster home ownership). But there is nevertheless
a substantive difference between the two forms of intervention.
|3.17.08 @ 12:21PM|#
What isn't said is that the states and the federal
government hounded lenders about keeping rates low for subprime
class borrowers.
Bill Clinton and Alan Greenspan were in on it too. Why doesn't
anyone talk about that, and would that impact on Hillary's
campaign?
Anyone have any ideas on how to profit from this
calamity?
Yeah. Legally?
...no.
madpad, I believe in the free market too, but this ain't
it.
Just out of curiosity, what would you guys call what we have? Is
there even a name for it? It's not totally socialism, not
completely corpratism, maybe a little mercantilism and some
capitalism. We're just a mess.
Jacob|3.17.08 @ 12:22PM|#
Update: As predicted, popular opinion places the blame for this
fiasco on "unregulated capitalism".
Of course, there is little capitalistic about our money and credit
system. Goldbugs and monetarists don't blow asset bubbles.
|3.17.08 @ 12:22PM|#
creech -
To profit off of this, you need to invest in things that the
government will invest in to try to keep any change from happening
at all.
|3.17.08 @ 12:23PM|#
Russ 2000,
Indeed. And their diligence was not due, nor did the lenders
bundling the loans for the secondary market fully disclose how
shaky some of those loans were.
I still think the "subprime" label to this crisis isn't entirely
apt. There's a lot more to this than some poor credit risks getting
secured loans. The pricing boom/bust and the making of ARM loans to
people who couldn't afford them are both probably larger factors in
this mess.
|3.17.08 @ 12:25PM|#
Looked to failed socialist state to see hoe designs play out in the real world.
God, it today "idiot commenter" day?
Looks like.
|3.17.08 @ 12:29PM|#
"Just out of curiosity, what would you guys call what we have?
"
Jim Sinclair calls it a "command economy", with the powers that be
pulling the strings mostly via the Fed.
Russ 2000|3.17.08 @ 12:34PM|#
Will apartment houses be a good investment as those who can
no longer afford homes bid up the existing units?
I'm not the guy to answer this, but I sure am glad I don't live in
a condo right about now. If a 12-unit building had 4 or 5 units
severely underwater or close to foreclosure, the other 7 or 8
owners are going to have a hard time. It's one thing if the house
next door is falling into disrepair, you can at least cut the grass
yourself once or twice a month and trim the hedges; it's another if
you have all the condo board hassles of deadbeats.
But I'd imagine there are a few condo buildings in that kind of
sutuation and maybe someone with piles of cash could buy out
smaller condo buildings and turn them into apartments.
fyodor|3.17.08 @ 12:38PM|#
I understand the moral hazard argument and its consequences. But does the prospect of bailout really enter into the decision making of big businesses? That seems like quite a gamble to take.
|3.17.08 @ 12:40PM|#
Jim Sinclair calls it a "command economy", with the powers
that be pulling the strings mostly via the Fed.
But that's not really true either. China might be a command
economy. The government has control over nearly every aspect, from
workers to production to currency. We still have some freedoms, and
despite all the alarmism, we're still generally free. Our monetary
system is certainly controlled, but that's only one aspect of the
economy, and that's why it's so hard to pin down what we are.
|3.17.08 @ 12:45PM|#
Pro Lib wrote:
...some people simply are not creditworthy.
Inevitably it seems that these are the people for whom the
government seeks to intervene as the insurer of last resort in
recent times. Is the 'too big to fail' philosophy a result of the
'Chrysler experience'? Or are there good examples of such
interventions prior to that?
BakedPenguin|3.17.08 @ 12:47PM|#
The pricing boom/bust and the making of ARM loans to people who couldn't afford them are both probably larger factors in this mess [than subprime loans].
Even the ARM loans shouldn't be a problem now that the Fed has
pushed rates down again, since the rates should adjust down. Yet
more and more people are walking away from their mortgages.
I'd say nearly the entire portion of housing defaults over and
above what would normally occur is the result of people buying
overpriced houses. Which is a result of the Fed keeping rates
artificially low to begin with. A $500,000 mortgage on a $250,000
house is not an attractive proposition.
Fyodor - moral hazard usually enters in somewhere. Think of the
S&L depositors back in the 1980's who saw the massive interest
rates they could get - and the deposits were federally
insured!
PS - those of you looking for a good investment related to this
mess? Think mini-storage
|3.17.08 @ 12:50PM|#
competition decreases anytime markets get consolidated and
starts to drastically decrease long before the number of
independent firms dwindles all the way down to one or
two.
And the government very graciously agrees, at the behest of the
existing market participants, to erect and maintain barriers to
entry, in order to preserve the "monopoly" profits of the
entrenched businesses.
Geotpf|3.17.08 @ 12:52PM|#
Anti-trust regulation does, in fact, increase competition. There
are many cases where a monopoly (or duopoly or the like) will occur
without government regulation. If the government then breaks up the
monopolistic company, competition has increased due to regulation.
This is also probably a good thing.
That is, would America be a better place if Standard Oil wasn't
broken up by the government? Would America be a better place if
AT&T wasn't broken up by the government? Both breakups
certainly increased competition, lowered prices for the consumer,
increased innovation, etc.
|3.17.08 @ 12:55PM|#
Why is it every time a Bush is in office we have to bail out
some financial institutions.
Remember the savings and loan bailout during Bush Sr's
presidency?
|3.17.08 @ 12:57PM|#
BP,
I'd say the overpricing of homes is problem numero uno, but the
ARMs do make their own contribution. Making loans to people who
can't afford them is a major problem, even when those people could
briefly "afford" those loans when they were paying on a 1%
rate.
fyodor|3.17.08 @ 12:58PM|#
Think of the S&L depositors back in the 1980's who saw
the massive interest rates they could get - and the deposits were
federally insured!
Well that was, as they say, different. Insured deposits were an
overt government policy, written into the law. Of course moral
hazard would come into play there. My question is whether
businessfolk can really feel confident enough of a government
bailout in lieu of legal assurances of such to take risks they
otherwise wouldn't. Because that's Sheldon Richman's implication
regarding why the subprime crisis happened. And I'm not saying it's
impossible, only that it's a little hard to imagine that confidence
of a bailout is really a significant decision making factor. For
one thing, what if you don't fail completely but just make a lot
less money than you would have otherwise? I actually want to
believe the moral hazard explanation of the subprime crisis, but I
need more convincing. And you'll likely have to be able to convince
the likes of me before you could hope convince a majority.
|3.17.08 @ 12:59PM|#
The real answer is to make sure that firms stay small and
don't get market power so that competition always reigns, and the
economy doesn't get a market shock every time an uncompetitive
"free market" suffers the consequences of its inevitable,
irrational behavior.
In a word: antitrust.
Bear Stearns is the third largest prime broker in the U.S. Here is
a
list of prime brokers. Do you have any evidence that this
multitude of firms has colluded to deter competition?
Or or you just speaking from your nether regions?
|3.17.08 @ 1:02PM|#
I agree Pro. Which way did the people with an ARM think the interest rate would move when the feds were at 1%. Down? It really makes one wonder if they really understood what they were getting into.
Jennifer|3.17.08 @ 1:03PM|#
Just out of curiosity, what would you guys call what we
have? Is there even a name for it? It's not totally socialism, not
completely corpratism, maybe a little mercantilism and some
capitalism. We're just a mess.
Is there a single term to describe a system where profits are
privatized and losses are socialized? That's us.
|3.17.08 @ 1:03PM|#
Home prices are too high.
Use California as an example. In the San Francisco area the median
home price is about $550,000. The median income is about $60,000.
Median income has to increase to about $190,000, or home prices
must fall to about $190,000.
Dave W.|3.17.08 @ 1:05PM|#
I understand the moral hazard argument and its consequences.
But does the prospect of bailout really enter into the decision
making of big businesses? That seems like quite a gamble to
take.
The moral hazard argument seems to inhere in the idea of the
limited liability corporate form itself. Shareholders can risk a
limited amount of money for an unlimited return. Not an incentive
to gamble responsibly. The idea of the bailout is that even the
limited amount of money at risk is not at risk -- which is just
rotten icing on a rotten cake.
If they started taking the houses of Bear Stearns shareholders,
officers and limited liability partners, then Bear Stearns wouldn't
have to go bankrupt, but rather rich individuals would instead.
Then there would be no "cascade."
You are correct that moral hazard doesn't enter into the thinking
of these people about bailouts. Rather, it enters the thinking of
these people when they write the business law (corporation law,
securities law, bankruptcy law) in general. Really, the argument
proves so much it is scary to contemplate -- so we use bailouts as
a limited hangout for thinking about the problem and that sets our
minds at relative peace.
|3.17.08 @ 1:08PM|#
would America be a better place if Standard Oil wasn't broken up by the government?
Since the Standard Oil "monopoly" was well on its way to being
broken due to discoveries ni Texas and California (which Standard's
management failed to exploit) It's questionable if the breakup had
any affect either way.
Would America be a better place if AT&T wasn't broken up by the government?
Since AT&T was a government created monoply in the first place
it is sensible to ask if the government didn't have a right to
break it up. A better question is, how much harm did the creation
of the AT&T monopoly do in the first place?
|3.17.08 @ 1:10PM|#
Is there a single term to describe a system where profits
are privatized and losses are socialized? That's us.
Keynesian economics?
|3.17.08 @ 1:10PM|#
If only Reason hadn't smeared Ron Paul about those tepid newsletters, the entire nation would have rallied around his monetary policy now. Way to go, Welch, you've destroyed America!
Dave W.|3.17.08 @ 1:12PM|#
Bear Stearns is the third largest prime broker in the U.S.
Here is a list of prime brokers. Do you have any evidence that this
multitude of firms has colluded to deter competition?
I think there is an antitrust problem because far too few firms
control far too many mortgages. This leads to an imbalance of
negotiating power which degrades competition.
Is this against the current law of antitrust? I don't know. Is this
against antitrust law as it should be written? Eight ball says
Y-E-S.
|3.17.08 @ 1:12PM|#
Since AT&T was a government created monoply in the first
place it is sensible to ask if the government didn't have a right
to break it up. A better question is, how much harm did the
creation of the AT&T monopoly do in the first place?
qft.
This reminds me of the war apologists lauding the repeal of
Bremer's de-Baathification law as a major political victory of ours
in Iraq.
|3.17.08 @ 1:14PM|#
Now that the world has been made safe from Eliot Spitzer, perhaps the feds will turn their attention to the rapacious lenders who snatched innocent, hard-working, god-fearing Americans off the sidewalks and forced them, at gunpoint, to borrow more money than they could possibly repay.
|3.17.08 @ 1:14PM|#
I'm shocked, shocked to find that gambling is going on in
here!
Our system is getting weird. I sometimes think of it as "regulatory
socialism", where private ownership still reigns supreme, but the
government defines the limits of that ownership so much that who
really owns what becomes an issue. Unfunded mandates are part of
that fun. The flip side is having to subsidize large voting blocks
when they've done something particularly stupid. Of course, some
industries are more regulated than others, and "regulation" is
sometimes more theoretical than actual (e.g., the FTC's "oversight"
is often exercised more on paper and in arbitrary enforcement than
in anything else).
NoStar|3.17.08 @ 1:21PM|#
In 1988 or 89, I took a course at the University of Washington
School of Business that included pricing risk.
I learned the equations and then quickly forgot them after the
tests. What a load of crap, but the instructor seemed to believe
that risks could be managed, but I couldn't get over my knowledge
that past performance is no guarantee of future results.
|3.17.08 @ 1:23PM|#
Dave W, are you saying that the world would be a better place if
every limited liability shareholder had their skin in the game like
the old Lloyd's of London "names"?
There'd be a lot less risk-taking, true, but there'd be a lot less
competition and innovation.
Jennifer|3.17.08 @ 1:25PM|#
Our system is getting weird. I sometimes think of it as
"regulatory socialism", where private ownership still reigns
supreme, but the government defines the limits of that ownership so
much that who really owns what becomes an issue.
I dunno--after spending a couple of years attending otherwise-dull
zoning board meetins and the like, it seems to me that "ownership"
only applies to minor things like your toothbrush; for big things
like houses or businesses what you're left with is merely
"responsibility for things that go wrong." In theory, for example,
you own your house, but you have to pay rent to the government each
year or they'll confiscate it, plus you have to make sure it's
painted a color on the government's approved paint list, and you
can't add to or tear down any part of it without written government
permission (which you must pay money to get), and the sidewalks are
your responsibility to keep clean for any passing stranger who
wishes to walk on them, and you have to obey the sumptuary laws
regarding what lawn and house decorations are either required or
forbidden ... the only time you clearly "own" your house is when
the roof gets a hole in it and you're wondering who's responsible
for the bill.
|3.17.08 @ 1:31PM|#
I agree Pro. Which way did the people with an ARM think the
interest rate would move when the feds were at 1%. Down? It really
makes one wonder if they really understood what they were getting
into.
Blame it on Greenspan. He was the one pimping them when he had one
foot out the door. The people who were getting them may not have
known better, but if the Fed Chief says they're a good idea, who
are they to argue.
highnumber|3.17.08 @ 1:32PM|#
Lots of great investment advice in the comments. Thanks,
guys!
To those too lazy to read through everything:
- Self-storage
- Mortuaries
- Guns
- Bullion
- Fresh water
- Whisky
- Corn
Honestly, that may not be a bad list at all. We should start a "All
Hell is About to Break Loose" mutual fund.
Dave W.|3.17.08 @ 1:33PM|#
Dave W, are you saying that the world would be a better
place if every limited liability shareholder had their skin in the
game like the old Lloyd's of London "names"?
If I were king? Oh, I like that idea. I like it a lot. If I were
king, then shareholders (and others) would have limited liability
so long as their market share of their firm of any national US
market was less than 2%. Once the firm got more than a 2%
marketshare, liability would increase to double their investment.
At 4% marketshare, potential liability would be four times the
investment. At 6%, 8X. At 8%, 16X. At 10%, 32X. At 12%, 64X. At
14%, 128X. At 16%, 256X. And so on. they really should start
putting smart ppl, instead of rich ppl, in charge, I think.
To put it a different way, there are other options besides the
ancient way and the way of those who subsidize Reason.
|3.17.08 @ 1:35PM|#
highnumber -
we can start it with the "rebates" that we get as part of the
"stimulus package."
|3.17.08 @ 1:39PM|#
You might want to look at affordable housing districts (trailer parks) for the fund, highnumber.
Jennifer|3.17.08 @ 1:42PM|#
Permission-based ownership?
Not even that. It's like these days they're not even
pretending to abide by the old "gov't of, by and for the
people" canard; as a citizen your primary function in life is to
produce money for the government, and if you can't do so to the
extent we see fit then fuck off. Especially in Connecticut, which
foisted the Kelo v. New London travesty on America: We'll take the
house you bought and paid for if we think some rich corporation can
pay more taxes on it than you do.
In the town I cover, there's an old guy who's lived in his
(non-spectacular) house for over 30 years, but he has to sell and
move out because property tax rates, which have risen higher than
inflation for years and years, are so much more than he can afford.
If he offered me his house for free I'd have to say no, because the
tax alone is more than I pay in rent for my spacious
three-bedroom apartment. And yet the folks in town who fight for
lower taxes are called selfish. I'm calling 50/50 odds that when
the article comes out, I get a letter from someone insisting that
the old man is selfish for wanting to see budget cuts, too.
|3.17.08 @ 1:42PM|#
If you don't think the world as we know it is coming to an end,
and you've got at least 10 years or so to stay invested, put your
bucks in a total-market index fund.
If you think the world as we know it IS coming to an end, I'd go
with the whisky.
|3.17.08 @ 1:44PM|#
Jennifer,
Whimism? As in live at the whim of the government?
highnumber,
Going by the movies, don't forget to invest in leather.
thoreau|3.17.08 @ 1:44PM|#
Obviously the most efficient way to ensure competition is for the state to manage the size of firms. But, until that utopia becomes possible, maybe a good step would be just letting a big firm fall so that small firms can scoop up customers.
|3.17.08 @ 1:45PM|#
I just gave myself a great idea. An ETF that's 50 percent
S&P 500 index, 50 percent Jim Beam.
Who wants to buy?
|3.17.08 @ 1:47PM|#
CN,
Maybe we could go over to his house and remove everything in it
made by a LLC, especially the DVD copy of The Corporation he
beats off to.
And the computer he's typing on.
Corporations are the new Freemasons. When people start ranting
about them, I know they can be safely ignored.
|3.17.08 @ 1:48PM|#
Jennifer,
While I agree with you, didn't you once post something about how
the typical libertarian's main gripe is about taxes -- and how they
should be lowered -- while there are much more important
considerations?
|3.17.08 @ 1:48PM|#
thoreau! Nein! The barriers to entry must be made higher! Established companies should not be forced to engage in inefficient competition!
|3.17.08 @ 1:50PM|#
Is there a single term to describe a system where profits
are privatized and losses are socialized? That's us.
I believe the word that you are looking for is "fucked".
Jennifer|3.17.08 @ 1:51PM|#
While I agree with you, didn't you once post something about
how the typical libertarian's main gripe is about taxes -- and how
they should be lowered -- while there are much more important
considerations?
Yes, I did. And I wouldn't write as much about tax issues if the
town government were waterboarding people or shooting them dead in
the streets for brandishing a wallet.
|3.17.08 @ 1:53PM|#
SF,
You've seen that weird logo at Starbucks, right? You know what it
MEANS, right?
|3.17.08 @ 1:53PM|#
You guys are bringing me down. I don't know why I came here
looking to be reassured.
I think we should all invest in some island not currently owned by
anyone and make our own 'Galt's Gulch.'
King Dave the W.|3.17.08 @ 1:54PM|#
Obviously the most efficient way to ensure competition is
for the state to manage the size of firms.
There are other ways to disincentize consolidation without the
state actually deciding or managing the size of the firms. As I
suggested above, one way is to gradually withdraw the (state
bestowed benefit of) limited liability corporations as firms become
larger. Then investors can manage their own optimal size,
understanding that they lose government benefits as they come into
market power, and by degrees begin destroying the societywide
benificence of truly free markets.
Another way would be to key the tax rates to firm size -- that is,
the more market power you weild, the greater your tax rate will be.
Especially when collecting monies to be used to pay for wars and
social benefits for brave soldiers. Once again, this allows firms
to ultimately decide for themselves how big they be, understanding
that the externalized costs by their subversion of Adam-Smithean
capitalism will be recouped every tax day. This plan also has the
benefit that the oil companies and WAL*MART would lobby less for
stoopid wars.
There are more options than you seem to realize, T.
|3.17.08 @ 1:56PM|#
I think we should all invest in some island not currently
owned by anyone and make our own 'Galt's Gulch.'
Done and done, Adamness. I believe you're referring to Rainbow
Puppy Island...
Btw... what happened to Nick? *scratches head*
thoreau|3.17.08 @ 1:56PM|#
Is there a single term to describe a system where profits
are privatized and losses are socialized?
Plutocracy, maybe? I know that's not the precise definition, but it
would seem to be an inevitable consequence of rule by the
wealthy.
|3.17.08 @ 1:56PM|#
TAXATION UNDER BUSHCO
"Bow down to the one you serve; you're going to get what you
deserve"
|3.17.08 @ 1:57PM|#
I think we should all invest in some island not currently
owned by anyone and make our own 'Galt's Gulch.'
Living on an island with all of you is actually the 7th ring of
Hell.
I kid, I kid!
thoreau|3.17.08 @ 2:00PM|#
For those interested in moving to the Island of Doctor Thoreau, I can arrange that. Just contact Oceanic Airlines, and give them access code 4-8-15-16-23-42. They'll book you a direct flight, but I don't recommend packing any valuables.
|3.17.08 @ 2:00PM|#
I think we should all invest in some island not currently
owned by anyone and make our own 'Galt's Gulch.'
And I think we should blow up buildings that don't meet my esthetic
standards.
Oops, just kidding, Homeland Security!
|3.17.08 @ 2:01PM|#
Done and done, Adamness. I believe you're referring to
Rainbow Puppy Island...
If it's not on Google Maps, it doesn't exist.
|3.17.08 @ 2:01PM|#
CN,
There's NO independent coffeehouses left! Except for the three
within walking distance of my office!
|3.17.08 @ 2:03PM|#
Mo,
When two entities enter into a contract, and entity #1 does not
fully explain the contract to #2 and/or #2 does not understand the
contract, why would I blame Greenspan?
|3.17.08 @ 2:04PM|#
But be sure to bring plenty of guns and knives, thoreau - plenty
of guns and knives.
(Will Elizabeth Mitchell and Evangeline Lilly be there?)
|3.17.08 @ 2:04PM|#
For those interested in moving to the Island of Doctor
Thoreau
Old Doc Thoreau, making furries' dreams come true for nearly 20
years now...
"I am so sick of making sexy cat ladies! Doesn't at least one of
you freaks want to assfuck my Hippopotamus man?"
|3.17.08 @ 2:05PM|#
they really should start putting smart ppl, instead of rich
ppl, in charge, I think.
Then you would never get your chance, Dave.
Episiarch|3.17.08 @ 2:09PM|#
Speaking of Dr. Moreau, whatever happened to Brando's private island after he died? Maybe that's up for sale.
|3.17.08 @ 2:22PM|#
You guys are bringing me down. I don't know why I came here
looking to be reassured.
Because you're an idiot?
;-) ;-) ;-)
Of course you aren't. But you need to go here for
reassurance.
Kolohe|3.17.08 @ 2:24PM|#
This is another thread where reading from the bottom up is a totally surreal experience
Geotpf|3.17.08 @ 2:26PM|#
Isaac Bartram-
AT&T was a government-created monopoly? Really? There was a
deal between AT&T and the government, called the Kingsbury
Commitment, but that didn't "create" the monopoly, it merely
prevented anti-trust regulators from stopping it, provided AT&T
followed some (mostly meaningless) rules.
Now, I'm sure phone service is a natural monopoly,
which is different. In any case, that's sort of my point. IMHO,
natural monopolies either need to be regulated fairly heavily or
broken up by the government.
Fluffy|3.17.08 @ 2:31PM|#
Dave,
The only way I'll even consider your "market power" plan is if in
every circumstance where this leads to a shortage of a particular
good, you agree to either not buy the good at all, or agree to go
last while waiting to buy the good.
That means that if there's a book you want to buy, you are
forbidden to buy it until we see if all other consumers get their
copy before the publisher hits its market power ceiling.
You see all movies last, you buy all medicines last, you are the
last in line to get any particular food product, you are the last
in line for cars, you are the last in line for everything. You only
get to buy items where the firm in question stops well short of its
market power ceiling as a result of natural abatement of
demand.
Deal?
Paul|3.17.08 @ 2:36PM|#
What does this have to do with the free market? As Kevin Carson likes to say, if this is the free market, then I'm against it.
Reminds me a bit of the California power deregulation scheme. Hmph,
similar results, too. Welcome to your new Public/Private
partnership: The mortgage industry.
King Dave the W.|3.17.08 @ 2:51PM|#
The only way I'll even consider your "market power" plan is
if in every circumstance where this leads to a shortage of a
particular good, you agree to either not buy the good at all, or
agree to go last while waiting to buy the good.
I don't understand your objection, Fluffy. From what I understand,
you are arguing is that having numerous producers, relative to
numbers of consumers, would lead to shortages that would not
otherwise exist. I don't get it. I just don't see the connection
between these two things.
Maybe you are trying to say that economies of scale are the only
reason that consumer goods are plentiful. In my day, I have seen a
few ernstwhile HitnRunners bow down before the Great God
EconoScale and worship him with the whole of their libertarian
hearts. If that is what you are doing here, then you are being a
bit too coy about it. If you are doing something else then you
have, as the Rave Ups might say, positively lost me.
To answer your objection in a different and affirmative way: if
there was a shortage in my kingdom, then prices for the shortaged
good would go way up. That means that investors would be willing to
lose unlimited liability to produce the shortaged good because
profits would be relatively certain and the risk of loss would
become negligible. Shareholders do not care about or need limited
liability in a sitaution where profit is certain and insolvency
virtually impossible. Same dealee with my anti-consolidiatory tax
plan. If you have big market share in a good in short supply, then
you can afford to pay lots of tax and will gladly do so to remain a
major supplier of a good that is subject to shortage. I mean, even
with taxes, that is the freekin' "catbird seat."
|3.17.08 @ 2:57PM|#
My favorite quote of the day:
The Fed has pulled out all the stops, and eventually it will
work because it always does.
-Cheryl Duke, chief investment officer at Eastover Capital
Management in Charlotte, N.C.
|3.17.08 @ 2:57PM|#
Citizen Nothing | March 17, 2008, 2:05pm | #
Do you have a Hippo man with four asses?"
You'll have to settle for talk radio.
Rush, Hannity, Savage, and Boortz
|3.17.08 @ 3:04PM|#
Hey, how come a crazy, homicidal religious cult leader can get
his own colony in South America, but there's no mini-Libertopia out
there? Huh?
Speaking of that, maybe the U.S. needs its own version of Hong
Kong, a free state within our less free nation.
highnumber|3.17.08 @ 3:09PM|#
ProGLib,
Re homicidal religious cults getting their own colornies vs
libertarians:
It has to do with whose philosophies are more popular.
|3.17.08 @ 3:10PM|#
Speaking of that, maybe the U.S. needs its own version of
Hong Kong, a free state within our less free nation.
I thought San Francisco had that covered.
Oops. You said "free." Never mind.
DannyK|3.17.08 @ 3:11PM|#
I wonder how all this looks to other countries who own
vault-loads of dollars? The Fed has just promised unlimited
borrowing rights to investment banks in exchange for possibly
worthless paper.
I'm having trouble seeing how this doesn't result in inflation, a
collapse of the dollar, and general ugliness.
|3.17.08 @ 3:11PM|#
highnumber,
True. I daresay that there are more homicidal religious cult
leaders in the U.S. than there are true blue libertarians.
|3.17.08 @ 3:13PM|#
Hey, how come a crazy, homicidal religious cult leader can
get his own colony in South America, but there's no mini-Libertopia
out there? Huh?
I think the nature of libertarianism prevents a Libertopia from
happening. A libertarian cult or collective is kind of a
contradiction. I guess the Free State Project is working to it.
Let's see how that goes...
Speaking of that, maybe the U.S. needs its own version of Hong
Kong, a free state within our less free nation.
That Rainbow Monkey Island someone mentioned above might be
easier.
some guy|3.17.08 @ 3:18PM|#
put your bucks in a total-market index fund [or] go with the
whisky
Why not both?
|3.17.08 @ 3:19PM|#
Guantanmo, the American Hong Kong?
http://www.independent.org/newsroom/article.asp?id=1786
|3.17.08 @ 3:22PM|#
I wonder how all this looks to other countries who own vault-loads of dollars? The Fed has just promised unlimited borrowing rights to investment banks in exchange for possibly worthless paper.
It probably looks to them like our hot checks, IOUs, markers,
Federal Reserve Notes, etc. (pick one) are issued by people no more
honest than the issuers of their own hot checks, IOUs, markers,
fiat currency, etc.(pick one.)
:-)
I guess the answer is no.|3.17.08 @ 3:28PM|#
i can haz boylans?
The Web site you are trying to reach has been blocked.
Please send e-mail to the IT department to request access.
URL: http://www.boylanbottling.com/
Reason for restriction: Forbidden Category "Games"
|3.17.08 @ 3:32PM|#
JOIN THE BANKING INDUSTRY WHERE YOU WILL NEVER BE ALLOWED TO FAIL...or really just join any major corporation in this Business-rules-all country and you can expect a healthy stipend or bailout from Uncle Sam!
|3.17.08 @ 3:34PM|#
The best part is how Larry "Free Market" Kudlow is trying to
locate his ass during these rate cuts.
"[McCain]should insist that a President McCain will order the
Treasury Department to initiate open-market actions to boost the
greenback.....[McCain] should state that a President McCain will
appoint a Federal Reserve chief who will stop ignoring the dollar
and inflation....."
This from the man who called for "shock and awe interest rate cuts"
not too long ago.
|3.17.08 @ 3:38PM|#
Um, businesses fail and aren't bailed out by taxpayers all the time. Where do these ideas come from?
Episiarch|3.17.08 @ 3:44PM|#
URL: http://www.boylanbottling.com/
Reason for restriction: Forbidden Category "Games"
Pepsi strikes again!
|3.17.08 @ 3:46PM|#
"""I wonder how all this looks to other countries who own
vault-loads of dollars? The Fed has just promised unlimited
borrowing rights to investment banks in exchange for possibly
worthless paper."""
It's not going unnoticed.
Check this out.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/17/ccview117.xml
BakedPenguin|3.17.08 @ 3:52PM|#
Speaking of monopolies, have you noticed that it's hard to find other brands besides this one?
fyodor|3.17.08 @ 3:54PM|#
Um, businesses fail and aren't bailed out by taxpayers all
the time. Where do these ideas come from?
Thus my own question above. I think those supporting a moral hazard
explanation for the subprime failure phenomenon would have to show
that bailouts are so much the norm that they can be anticipated for
some particular class of business that the mortgage companies that
made the bad loans fall into. In lieu of that, I don't see how
occasional and random bailouts, however bad an idea they may be for
other reasons, can be used to explain the bad risk assessments that
were made. As much as I would love to blame the situation on the
government!
I guess the answer is no.|3.17.08 @ 3:54PM|#
Pepsi strikes again!
Well, it does let me go to the Pepsi site, no prob. The home screen
has a matrix of 9 choices of where to go. The sixth of the 9
choices is "Pepsi Games." So I decided to click on it expecting to
be blocked, of course.
Long story short, I am off to play "Chasm Chaos."
|3.17.08 @ 4:08PM|#
Long story short, I am off to play "Chasm Chaos."
Isn't that what got E. Spitzer into trouble?
adrian|3.17.08 @ 4:49PM|#
All of you anti-trust proponents need to review your history. In
a pure capitalist society an inefficient monopoly cannot exist as
capital will flow to competitors able to make better returns. A
mixed economy is what creates the monopolies and in turn creates
the regulation.
Please don't make me go over the history of the railroads
again.
adrian|3.17.08 @ 4:49PM|#
And,
While we are talking about who's to blame, I want to know how
S&P, Moody's etc. ratings are still respected after this whole
mess.
AAA my ASS
|3.17.08 @ 4:53PM|#
"...inefficient monopoly cannot exist as capital will flow to
competitors..."
What competitors?
|3.17.08 @ 5:00PM|#
And yet the Dow ended up 21 points today. Up!?
Just when it's been revealed that the fifth biggest investment bank
was worth only $2 a share.
Plunge protection team must have been real busy today.
|3.17.08 @ 5:07PM|#
Stupendous,
I think he means that once the monopoly starts screwing its
customers with high prices, this will create an opening for new
competitors to arise and make easy profits. That is, if there's no
govt protection for the monopoly...
|3.17.08 @ 5:16PM|#
Must be all those leprechauns getting too drunk today to guard the end o' the rainbow.
John McCain|3.17.08 @ 5:17PM|#
Plunge protection team must have been real busy today.
What? What the hell are you talking about, sonny?
|3.17.08 @ 5:27PM|#
Or as Jonah Goldberg called it, "The Department of Whatever Ron Paul Was Talking About", without bothering to google the real name.
|3.17.08 @ 7:10PM|#
I think it is somewhat inappropriate to discuss what occured as
a bailout. After all investors, owners, managers in the firm all
have lost over 98% of their capital.
The people in charge have all basically lost everything.
The people who have been bailed out are debt-holders and
counterparties. There is no moral hazard problem for investors in
companies. After all, the lesson is that if you invest in an overly
aggressive company you will lose 98% of your capital rather than
100%. Not a particularly comforting idea.
What the FED was trying to do was insure an orderly market for the
dissolution of the existing liabilities and trades. I.E. to stop a
run on the bank.
This does create some moral hazard issues in that solvent banks and
funds could potentially be to generous in extending credit to
overly aggressive counterparties.
But I think it inaccurate to assume that in the future bankers can
think they can make risky trades and be made whole. After all they
lost 98-99% of their net worth.
|3.17.08 @ 7:25PM|#
Watching the NewsHour, the moderator just asked a panel of
economists where the Fed gets the money to guarantee the
questionable BSC assets, and they each said, without a hint of
concern about this, that they can always just print whatever money
they need. One even said that the Fed's message was "spend the
money you need to, we'll print more."
Yeah. Experts.
|3.17.08 @ 7:27PM|#
Oh, these weren't just random economists either. One was a business writer for the New York Times, one a professor at Princeton, and the "we'll print more" guy was from Harvard Business School.
|3.17.08 @ 7:46PM|#
The Fed/Government derives money from 3 sources;
- Taxes/Tariffs/Fees
- Borrowing (i.e. printing money)
- Assets it owns
Since we have moved away from a feudal system, the government owns
less assets and uses Taxes/Tariffs/Fees to cover pretty much
everything. Even printing money, which is typically done by issuing
debt, is eventually paid for by Taxes/Tariffs or fees.
So that is how it pays for everything, education, healthcare,
social security, etc...
But as long as the BSC assets perform, as most of them are doing
now, the government will not suffer a permanent loss of capital.
Depending on the terms it could theoretically earn money.
economist|3.17.08 @ 8:22PM|#
James,
If you would like to make an intelligent post on how some
businesses screw taxpayers by getting federal bailouts, that's
fine. If you're just going to make an anti-business rant, go fuck
yourself you obnoxious little bitch.
|3.18.08 @ 11:25AM|#
Fred... a couple of points for clarification:
"And yet the Dow ended up 21 points today. Up!?"
The Dow Jones Industrial Average is very narrow market index. The
Dow was up yesterday because one of the 30 stocks in the index, JP
Morgan Chase, managed to buy Bear Stearns, a company worth about
$11 billion dollars in book value for only $237 million, or about 2
cents on the dollar.
Write down as much mortgage debt as you like, but any way you slice
it, that's still one outstanding deal for JPM. The market
recognized this, and bid its stock up 12% on the day, when almost
every other bank, brokerage and financial institution was down
hard.
That's why the Dow was up. Look at a broader market index, like the
Standard & Poors 500, and it will better reflect the negative
sentiment.
"Just when it's been revealed that the fifth biggest investment
bank was worth only $2 a share."
Not quite. Bear Stearns was not worth $2 a share... they found
themselves in a situation where they had to make a deal with anyone
who could provide them the capital they needed to stay alive, and
they had to take the only offer they had. Basically, the reason
they sold for only $2 is because Jamie Dimon could name any price
he was willing to pay, and nobody was in any position to
argue.
The market is already trading BSC shares between $4 and $5. A long
way down from the $57 it closed at on Thursday, but more than
double what JPM has offered. This implies that there is a good
chance that shareholders will vote against the deal, and management
will either find another bidder, or conduct a more orderly
liquidation / restructuring that will realize more value than they
could negotiate amid a liquidity crisis.
"What's a liquidity crisis?"
Here's an analogy:
Imagine you and your wife have a very nice home that you've nearly
paid off, and $10,000 of investments in your brokerage account.
You're about to sell off the investments, and use the cash to
finally pay off the last $10,000 of your mortgage loan, which is
due at the end of the day.
You and your wife drive to your broker's office mid-afternoon, only
to find that your investments have declined in value, and are only
worth $5,000. If you don't pay the mortgage lender in 2 hours, they
foreclose your half-million dollar home, and your wife is going to
kill you.
Where on earth are you going to get $5000 in the next 2 hours? You
don't have any more cash available, nobody will lend you the money,
and the value of your investments isn't miraculously going to
double. Only one choice remains, sell the car.
Now, your vintage roadster is worth at least $25,000 but to get
someone to buy it on the spot, without a chance to test-drive it,
check the records, all of that, you're going to have to offer them
a serious bargain. The used car dealership next door to the broker
offers you $6000, cash. You don't have time to seek out other
buyers. So you grit your teeth and hand over the keys, under the
stern gaze of your extremely annoyed wife.
That's a liquidity crisis, and it's pretty much what Bear Stearns
faced over the weekend, except, the investment account was a
portfolio of sub-prime mortgage securities, the vintage roadster
was the equity in their company, the home they nearly lost was the
the integrity of the global banking system, and the wife was the
Federal Reserve.
Hope that helps.
|3.18.08 @ 11:45AM|#
Chris P.
I hear you. My thought is that a truly powerful monopoly has all
the infrastructure- people, contacts, name recognition, etc. Unless
the competitor is close in size and ability I don't see how anyone
could ever catch up.
|3.20.08 @ 7:33PM|#
Hi All -
I work with a law firm that is investigating Bear Stearns, and
whether the company protected employees' interests during the
recent stock collapse. Many Bear Stearns employees saw their
retirement accounts decimated by recent events, and some are
questioning whether Bear Stearns acted appropriately.
Specifically the firm is looking into whether Bear Stearns lived up
to its fiduciary duty to employees who held Bear Stearns stock as
part of the company's pension plan.
If you are a Bear Stearns employee and are concerned that the
company's actions hurt you or your pension plan, you may want to
contact Hagens Berman Sobol Shapiro (www.hbsslaw.com/bsc or
info@hbsslaw.com) to learn more about the investigation or call the
firm at 206-623-7292.
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