Monetary Policy

Let the Guilty Be Rewarded, So Long As the Innocent Don't Go Unpunished


Let the mighty eagle soar!

If the bailout, the stimulus, and the brand-new infinite lifeline for the failed GSEs Fannie Mae and Freddie Mac strikes you as a variation on the old Dave Allen joke about the Viking who wants to rape all the men and kill all the women, you are not alone. This interview with Kevin Duffy and Bill Laggner makes clear that the market interventions (now entering their third year) are not just bad for the economy but remarkably unjust. Duffy and Laggner run the Bearing Asset Management hedge fund, so of course they feed on the blood of Christian children while creating global misery on several planets. Yet somehow they're more attuned to the actual victims of risk-socialization than anybody in the Obama Administration:

What would you have done differently as the credit bubble was bursting and the Fed and the Treasury were declaring that the world would come to an end without an $800 billion bailout package?

Duffy: Allow those who essentially bet wrongly to fail, instead of bailing out people with friends in high places.

What about the argument that a financial panic would have ensued and crushed the little guy?

Duffy: The little guy actually has been crushed. Nobody is asking where this money is coming from. And the money has to essentially flow into the political economy at the expense of the real economy. The little guy is always going to be the last one in the soup line. So he will get a bone tossed to him, like cash for clunkers. But if you are Goldman Sachs or if you have got essentially the red bat-phone to Washington, D.C., you are first in line.

Laggner: AIG made sure its creditors received 100 cents on the dollar. Essentially you have the socialization of risk, but the survivors are still highly leveraged. There is still a multi-trillion dollar shadow banking system that FASB [the Financial Accounting Standards Board] wants to address next year. The central planners have already spent $3.15 trillion on various bailouts, credit backstops, guarantees, etc., and given approximately $17.5 trillion of government commitments, etc., while allowing many of these institutions to remain in place, with the same people running them.

Another suggestion from Duffy and Laggner sounds, well, downright populist, and suggests how we could in fact have let big banks fail without opening up a series of planet-destroying anti-gravity anomalies:

What else could have been done?

Laggner: We could have isolated the money centers and put them in temporary receivership. Then, we could have created — with a mere $100 billion — a thousand community banks. If you believe in fractional reserve lending [in which banks lend multiples of their deposits], something we don't support, they could have created a trillion dollars in new credit that would have flowed to small and medium-sized businesses. Those are the parts of the economy that are choking. Because there has been no reform, it looks like we are going to be spending more money. We are going down this very treacherous path, where debt continues to skyrocket. Private-sector debt is being offset by the public sector. Meanwhile, the cost of funds for small and medium-sized businesses has gone up, while the cost of borrowing for the survivors is little to nothing, and they are speculating with that money, as opposed to letting it flow through into the real economy.

Complete interview.

Vaguely related: Rasmussen says a plurality of Americans now realize the stimulus is hurting the economy.