Economics

Bear Stearns Roundup

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Megan McArdle:

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.

Sheldon Richman:

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.

Jay Hancock:

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?

Sudha Shenoy:

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.

NEXT: To the Max!

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  1. 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.

  2. Rumor has it that on Wall St. the hot investments are guns, bullion, fresh water, and whisky.

  3. “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.

  4. I don’t know who that Sheldon Richman person is but the excerpted quote is spot on.

  5. It’s getting to be the only safe place to put your money is in corn.

  6. 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!

  7. 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.

  8. I’m slightly pro-Obama because he’d have different shysters in charged of the Department of “Justice.”
    JMR

  9. Matt,

    Democrats + recession = New Deal

  10. 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…

  11. 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.

  12. 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.

  13. 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.

  14. 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.

  15. 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.

  16. Stop beating up on Dave. He’s got his sights set on Archer Daniels Midland and he’s not thinking straight.

  17. Please be careful reading my last post, as it may contain HFCS…

  18. 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.

  19. 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.

  20. 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?

  21. madpad, I believe in the free market too, but this ain’t it.

  22. “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.

  23. 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.

  24. 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?

  25. creech,

    seriously, gold and silver are still cheap and have lots of upside left, in my opinion. Lots of volatility too though.

  26. 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.

  27. Wow, I need to preview on occasion…

  28. 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.

  29. 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.

  30. 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.

  31. 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.

  32. Looked to failed socialist state to see hoe designs play out in the real world.

    God, it today “idiot commenter” day?

    Looks like.

  33. “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.

  34. 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.

  35. Wayne….that’s pretty much what I was getting at.

  36. 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.

  37. 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.

  38. 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?

  39. 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

  40. 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.

  41. 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.

  42. 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?

  43. 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.

  44. 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.

  45. 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?

  46. 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.

  47. 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.

  48. 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.

  49. 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.

  50. Wow, I need to preview on occasion…

    Nah. Preview is for wimps, I always say.

  51. Nobody could have seen this coming…

  52. 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?

  53. Is there a single term to describe a system where profits are privatized and losses are socialized? That’s us.

    Keynesian economics?

  54. 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!

  55. 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.

  56. 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.

  57. 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.

  58. 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).

  59. 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.

  60. 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.

  61. 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.

  62. Jennifer,

    Permission-based ownership?

  63. 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.

  64. God, it today “idiot commenter” day?

    I guess I’m late to the party, then.

  65. 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.

  66. 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.

  67. highnumber –
    we can start it with the “rebates” that we get as part of the “stimulus package.”

  68. So whatever else you do, don’t, for the love of God, make Dave W. king.

  69. You might want to look at affordable housing districts (trailer parks) for the fund, highnumber.

  70. 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.

  71. 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.

  72. Jennifer,

    Whimism? As in live at the whim of the government?

    highnumber,

    Going by the movies, don’t forget to invest in leather.

  73. 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.

  74. 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?

  75. 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.

  76. 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?

  77. thoreau! Nein! The barriers to entry must be made higher! Established companies should not be forced to engage in inefficient competition!

  78. 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”.

  79. 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.

  80. SF,
    You’ve seen that weird logo at Starbucks, right? You know what it MEANS, right?

  81. 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.’

  82. 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.

  83. 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*

  84. 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.

  85. TAXATION UNDER BUSHCO

    “Bow down to the one you serve; you’re going to get what you deserve”

  86. 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!

  87. 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.

  88. 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!

  89. Done and done, Adamness. I believe you’re referring to Rainbow Puppy Island…

    If it’s not on Google Maps, it doesn’t exist.

  90. CN,

    There’s NO independent coffeehouses left! Except for the three within walking distance of my office!

  91. 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?

  92. But be sure to bring plenty of guns and knives, thoreau – plenty of guns and knives.
    (Will Elizabeth Mitchell and Evangeline Lilly be there?)

  93. 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?”

  94. Do you have a Hippo man with four asses?

  95. they really should start putting smart ppl, instead of rich ppl, in charge, I think.

    Then you would never get your chance, Dave.

  96. CN,

    Why bother when no one’s using the one he already has? Jeesh!

  97. Speaking of Dr. Moreau, whatever happened to Brando’s private island after he died? Maybe that’s up for sale.

  98. Epi,

    It’s still owned by his son. He lives there alone, apparently.

  99. 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.

  100. This is another thread where reading from the bottom up is a totally surreal experience

  101. 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.

  102. 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?

  103. 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.

  104. And Dave is last in line for the cane sugar as well.

  105. 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.”

  106. –be willing to lose limited liability–

  107. 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.

  108. 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

  109. 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.

  110. ProGLib,

    Re homicidal religious cults getting their own colornies vs libertarians:

    It has to do with whose philosophies are more popular.

  111. 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.

  112. colornies

    WTF are colornies?

  113. 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.

  114. highnumber,

    True. I daresay that there are more homicidal religious cult leaders in the U.S. than there are true blue libertarians.

  115. 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.

  116. put your bucks in a total-market index fund [or] go with the whisky

    Why not both?

  117. 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.)
    🙂

  118. 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”

  119. 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!

  120. 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.

  121. Um, businesses fail and aren’t bailed out by taxpayers all the time. Where do these ideas come from?

  122. URL: http://www.boylanbottling.com/

    Reason for restriction: Forbidden Category “Games”

    Pepsi strikes again!

  123. “””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

  124. Speaking of monopolies, have you noticed that it’s hard to find other brands besides this one?

  125. 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!

  126. 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.”

  127. Long story short, I am off to play “Chasm Chaos.”

    Isn’t that what got E. Spitzer into trouble?

  128. 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.

  129. 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

  130. “…inefficient monopoly cannot exist as capital will flow to competitors…”

    What competitors?

  131. any other business man looking to make a profit?

  132. 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.

  133. 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…

  134. Gold was down too. Hmmm…..

  135. Must be all those leprechauns getting too drunk today to guard the end o’ the rainbow.

  136. Plunge protection team must have been real busy today.

    What? What the hell are you talking about, sonny?

  137. Or as Jonah Goldberg called it, “The Department of Whatever Ron Paul Was Talking About”, without bothering to google the real name.

  138. 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.

  139. 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.

  140. 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.

  141. 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.

  142. 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.

  143. 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.

  144. 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.

  145. 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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