Hmmm.. that all sounds like a rather pragmatic observation from Zippy there. Isn't giving more money to these crooks kind of like (to paraphrase P.J. O'Rourke) giving alcohol and car keys to teenaged boys? Is it really morally acceptable to enable an addict in their addiction?
D-Ts are always painful. But we accept that it's in the best interest of the addict and everyone around them to go through them in order to break free of the addiction.
What are Zippy's credentials? I am asking this honestly. Not trying to make a point or anything.
I don't know much about economics and I'd just like to know why/if his opinion on the matter are based on something else than just being his opinion.
I figure somebody who made enough to retire at, IIRC, 35 probably understands finance.
Or he's a professional ball player 
There is no doubt Zippy is highly intelligent just as there is no doubt some of his claims - such as the tax payers will profit - are wrong.
http://newsbusters.org/blogs/jef...ill-make-
profit
I mean, everyone is wrong, at some time, when it comes to the economy but the idea the very same folks who caused the crisis are to be trusted to fix it makes no sense to me.
If what we face right now is a crisis threatening to virtually decimate us, then why didn't they prevent it?
As I understand it, today, right now, Fannie and Freddie are engaged in making the same stupid loans that helped to create the mess in the first place.
We were told "tax payers will profit" and that was wrong. We were told major corps could not meet payroll, and that was wrong.
I do not see that much, if anything, has changed in The Establishment. I see the B.O. as a real shot in the arm, as in a fix to keep the doper mellowed-out for a few more weeks.
I have read that next year Bank Debts will result in an appeal to the treasury for 900 Billion dollars.
And on the heels of this crisis comes the sound of American boots on American soil and a rough Dictator slouches towards Washington waiting to be born.
Regarding the latter, an ominous portent presents itself: On October 1, for the first time in our history, the military will assign an active-duty unit – the 3rd Infantry Division's 1st Brigade Combat Team – as a an "on-call federal response force" for homeland security.
http://www.lewrockwell.com/grigg.../grigg-
w48.html
"Zippy's an idiot."
"Zippy's a genius."
There. That about sums it up. We're done and we just saved 180+ comments.
"I figure somebody who made enough to retire at, IIRC, 35 probably understands finance."
Mark,
I wasn't questioning Zippy's intelligence and credentials. I was asking what they were.
I don't know anything about all this so I don't have any way of knowing how valid his explanations are.
Plenty of people are telling us what we should do and why we don't understand, I'd like to know why I should trust them that's all.
The point is that I didn't find his explanation convincing and since I don't know anything about all this I am pretty sure that I am the one that is misunderstanding the whole situation. I just figured it would make me feel better about it if I knew why I should trust somebody, that's all.
If I offended anybody I apologize.
Well, there is this man, who has been around a while and knows a bit about money and the the market
http://www.dailyreckoning.com/
Wr...BillBonner.html
and who has been warning about this approaching crisis and describes as "chumps" the tax payers expected to support this B.O.
And now, echoing me, he has called for these clowns to put their OWN money on the line.
http://www.dailyreckoning.com/index.html
I do not know much but I do know enough to know I don't trust that financial salvation will be delivered by the Establishment devils who drove us into lake of illiquid fire.
Let the market work. Let these companies fall into bankruptcy as a Harvard Economic Professor, Jeffrey Miron, advocates.
http://edition.cnn.com/2008/POLI...lout/
index.html
Or try this guy on for size Mark:
http://www.youtube.com/watch?v=6...h?
v=6G3Qefbt0n4
Its a good question. I knew lots of Microsoft people who retired in their 30's. They didn't a lick about finance though.
Not to say he doesn't. Just a good question.
That should read "...know a lick..."
I think what most people find off-putting is this statement by Zippy: "Finally, the longer it takes to get to intervention the more expensive and socialistic it will be."
That seems to be the very sort of consequentialism he found so offensive in the McCainiacs on this 'blog, who are voting for McCain to keep Obama out of office.
I don't think voting for McCain is proportionalism. I think it is remote material cooperation with evil without a proportionate reason. And I really can't see the connection to the current discussion.
FYI, a little slightly out of date blurb on my background is here.
Zippy's real name is Steve Wozniak.
Well, if those links are correct, it all makes sense now.
It is a virtual certainty that nobody here would recognize my real name :~)
Zippy's real name is Morton Heilig.
Zippy has 6 fingers on his right hand.
"Averting a credit lockup by buying up valuable but illiquid securities is among the best reasons ever proposed for issuing government debt, comparable perhaps to issuing government bonds to finance a necessary defensive war."
If they're valuable why don't they have buyers?
If they're valuable why don't they have buyers?
That's what "illiquid" means in this case.
Zippy's real name is Inigo Montoya?
Ah, no. I get it. Inigo Montoya is Zippy's nemesis.
Wait a minute. Doesn't that mean that Morning's Minion is really Inigo Montoya?
No. That can't be right. MM's real name is Eugene V. Dibbs.
"That's what "illiquid" means in this case."
It was a rhetorical question with a slight hope for an answer that made some sense.
If the Emperor of China said you could go ahead and buy these securities, but that if they didn't pay off within a given term your head would be cut off, would you buy them?
I doubt I'd buy anything on those terms, Pavel. I've characterized the investment here as having risk approximately like a hedge fund.
A neighbor of my parents sold a barn for a good price. It took him two or three years to get the price he wanted. That is "illiquid". It does not mean his property was not worth what he said it was -- obviously, because he actually got that price.
A barn is a discrete solid object with well-known utility, unlike a complex derivative of multiple mortgage backed securities. No?
The point being?
I told the story of the barn to illustrate the difference between value and liquidity. The barn was valuable, but not liquid: it was worth something, but it took the owner a couple of years to get that value out of the asset.
In point of fact, these securities have a well-known utility: they pay out cash to the holder when the homeowners of the underlying houses make payments on their mortgages, or when foreclosure and sale results in proceeds, or when the insurance used to prop them up to get those chimerical AAA ratings has to pay out, etc. This happens over time, and uncertainties about the housing market along with characteristics of the contracts make the payouts - on an individual basis - quite uncertain. They are also rather opaque, that is, determining an expected payout on a per each basis is complicated and difficult. So they are illiquid. But like the barn, they are not without value, to an investor who can simply sit on them, just because they are illiquid.
My sentiments exactly Zippy!
Anybody else?
Well, the Senate passed their version of the Socialization of Amerika Act of 2008 last night.
"This is how freedom dies...with thunderous applause" - Padme Amidala
The govt + liquidity
http://www.lewrockwell.com/blog/...ves/
023260.html
"The point being?"
What I wrote has no point and is completely senseless. Mere noise? Either I don't understand what you're trying to say, or you're being deliberately obtuse.
"In point of fact, these securities have a well-known utility: they pay out cash to the holder when the homeowners of the underlying houses make payments on their mortgages, or when foreclosure and sale results in proceeds, or when the insurance used to prop them up to get those chimerical AAA ratings has to pay out, etc."
So there's no chance at all that these securities are worth, effectively, zero? And there's no chance that if there is a pay-off it won't be in highly inflated currency? Are we going to inflate our way out of this corner?
I understand the urgent nature or the bail-out bill - if businesses are unable to meet their payrolls because short-term borrowing is frozen, there will be chaos. But it strikes people a lot more knowing than I am that this is a desperate expedient which solves nothing and piles debt and inflation onto the country. Or do you think that everyone who opposes it, including highly reputed economists and elected legislators, is a fool?
Are they fools?
List of Senators who voted nay included:
Brownback (R-KS)
Either I don't understand what you're trying to say, or you're being deliberately obtuse.
It certainly isn't the latter. Did you understand how it was true that the barn was both valuable and illiquid?
So there's no chance at all that these securities are worth, effectively, zero?
The question is equivalent to asking if there is no chance at all that all mortgaged US real estate is effectively worthless. I'm not big on saying never, but as a practical matter, yes, there is effectively no chance of that being the case.
Are they fools?
Not at all. They are just wrong.
"The question is equivalent to asking if there is no chance at all that all mortgaged US real estate is effectively worthless. I'm not big on saying never, but as a practical matter, yes, there is effectively no chance of that being the case."
If I buy your car for a thousand bucks although its re-sale value is one hundred, what have I just done?
Pavel:
I get it that you are skeptical that these derivatives have value, even though they are illiquid. But they do, in fact, have value -- especially if the credit freeze is ameliorated.
A car is a terrible analogy, because there is a reasonably liquid market for cars. That's why I picked the barn - a real world example of something which actually happened - as an illustration of an asset which had value, but poor liquidity.
I'm skeptical that the Treasury will break even, much less make a profit. My wife is more optimistic. In any case, as of 1.28 pm EST time the bill has passed the House. The balance sheet will tell, as will the rate of inflation and the deficit in the year and years to come.
A comment on another blog I noted:
"It's amazing how fast this thing is unraveling. In the last 24 hours the Fed has blown through the entire annual defense budget. Between now and tomorrow afternoon, they will spend the entire cost of World War II (adjusted for inflation). In one week, the total national debt will be doubled. They're going Weimar Republic and no one is noticing."
The balance sheet will tell, ...
Well, it would if the Federal government actually kept one, but it doesn't, unfortunately.
It is deceptive to call all this activity "spending", btw.
Market Watch:
"... Desmond Lachman, analyst at the conservative American Enterprise Institute, called it a "stupid plan" and said Paulson should have directly injected capital into banks instead. At a minimum, he said, the plan should have been targeted to banks in dire need of capital.
Others won't go as far as Lachman in their criticism.
For them, a strong point of the program is that Paulson has sweeping power and tools at his disposal to craft the plan. Accordingly, Paulson will be able to adapt it based on experience.
The bill now headed to the White House for President Bush's signature includes language that will allow Paulson to inject capital into distressed banks, Calomiris noted.
Murky macro-level picture
Experts are uneasy that the plan already has the makings of a public-relations disaster, arguing it isn't the panacea for U.S. economic woes that some members of Congress and the media have suggested.
Simply put, it won't keep the nation's economy from slipping into a recession.
Indeed, Many economists say a severe downturn has already begun -- and some say it could last for more than a year.
All this is clearly isn't going to go down well, either on Capitol Hill or on Main Street.
In order to get the measure passed, supporters had to pull out all the stops and give the program super-human strength. This $700 billion program, experts say, should be regarded as a "first step" down a long road to address the root causes of the recent financial turmoil.
It's clearly a frightening day when a $700 billion package can be regarded as merely the first step.
More steps will come as soon as the next president is elected, with Election Day just a month away, analysts predict. More money will have to be spent to put a floor under the housing market.
A second economic-stimulus package is also likely, and aggressive moves by the Federal Reserve regarding monetary policy is in the mix as well.
Traders are already speculating about the possibility of a coordinated interest-rate cut by the European Central Bank and the Fed early next week.
Must left to unfold
Overall, many experts say, Paulson's program opens the door to facilitating industry consolidation.
Strong banks will sell their assets to the government, this line of reasoning goes, and weak smaller banks will not be able to hide their losses. As a result, weaker firms will be acquired by stronger firms.
And even as many more financial firms are bound to fail, state and local governments find themselves in perilous financial shape, said Roger Kubarych, economist at Unicredit Global Research.
"We're going to have further failures -- not just in the banking area but in other types of financial institutions, finance companies and insurance companies can't all make it," said Kubarych in a television interview.
And on the municipal side of things, the prospect that Jefferson County, Ala., may go into default could be just the tip of the iceberg, Kubarych said.
Jefferson County, which includes Birmingham, would be the biggest municipality to go bankrupt since Orange County, Calif., in 1994. "They are not they only state and local authority having problem paying their debt, " Kubarych said, adding: "You can't get foreign money into municipal bonds."
Zippy, you're arguing from paradigms. Can you look for a moment at the empirical situation?
For example, will foreign investors unloading toxic debt on the US through US subsidiaries be able to repatriate dollars? If so, what effect will that have ultimately on US interest rates and the rate of inflation? What effect will there be in turn on the budgets of state and local governments? I don't have any answers, but I think the questions recede into an almost infinite regress. What paradigm is there for an infinite regress?
Pavel:
There are a number of comments I could make on what you just posted; but I'll note in passing that you are changing the subject.
1) I agree that banks have a capitalization problem. This is separate from the liquidity crisis, at the root of which are these illiquid securities. Many, many people, including many "experts", have conflated the two.
2) I agree that buying up these assets will not stop a recession from happening. That was never the purpose of doing so. What buying them up will (hopefully -- and if doesn't, we are in such deep kaka that it doesn't really matter) stop is a complete lockup of the credit system.
3) I think the prediction that strong banks will buy up weak ones is true, and a good thing, since it goes a long way toward resolving the capitalization problem.
4) Your reference to the Weimar Republic is perfectly apt. I've suggested elsewhere that while a recession - even a nasty one - is probably a healthy correction, the kind of situation we would and perhaps still will be in with frozen liquidity is the stuff of which world wars are made.
5) I have looked at the empirical situation, and discussed it endlessly. (The latter not without irony, since I really had no intention to do so and was sucked into it by the prompting of others precisely because of my background).
I could go on. The subject of the economy in general and finance in particular (and the two should not be conflated) is - as you suggest - ripe for endless discussion. But again, you are changing the subject from the particular point that these mortgage-backed securities have value, yet are illiquid for a variety of reasons, which is precisely what the Paulson plan addresses.
Zippy,
I sometimes reproach my wife for changing the subject, and she tells me that she's perfectly capable of discussing her own subject.
Economics is not my field. I agree that the credit freeze is potentially, in a social sense, lethal. (BTW, the passage that mentioned Weimar was not written by me. It's in quotation marks).
I and many others are horrified by these gigantic increments to the national debt, which seem to be arriving almost daily. These too can easily result in dreadful social consequences, though perhaps it may take years for the disease to fully present. Or perhaps it won't take that long.
Demands on the treasury are not likely to remain at the present level. Already, California is clamoring for its own bailout, and threatening not only to cut vital budgets but to delay payment of state salaries.
I sense from what I've been reading that unless realistic valuations of properties are arrived at - conceded - real world prices established - we will be running on a continually accelerating treadmill.
A Gordian knot?
I sense from what I've been reading that unless realistic valuations of properties are arrived at - conceded - real world prices established - we will be running on a continually accelerating treadmill.
I absolutely agree, and I agree with the concerns about debt. Although I do not take the approach that all debt is harmful, I think most of what the government goes into debt for is probably harmful -- though I acknowledge that this is just a gut feeling, since the government does not do the kind of accounting that would be necessary in order for any one to actually know for sure.
On the other hand, I'm quite sure that all scenarios with a credit lockup are worse than virtually all scenarios without.
And part of the whole point to this approach is to do price discovery. Right now we have a situation where everyone knows they are worth something, but nobody knows which specific ones are worth what, and so there is no market for them. Heck, there is hardly a market for commercial paper right now -- that is why GE had to issue $15 billion in stock and the State of California is in trouble. And nobody would suggest that commercial paper - companies borrowing money and paying it back straightforwardly through ordinary bonds - is worthless. It came to that in part because reckless despicably irresponsible congresscritters blocked this a week ago, and irreparable damage is now working its way through the system.
How can anyone discover real prices unless they are marked to market. And how can the evaluators even find the assets so as to price them in this blizzard of derivatives?
The pork chops may be in Hong Kong, and the ribs in Brazil.
However, once again, I agree that this bail-out was politically and socially unavoidable. But what happens next?
"It came to that in part because reckless despicably irresponsible congresscritters blocked this a week ago, and irreparable damage is now working its way through the system."
I think it can be argued that the main damage well proceeded Monday's events.
How can anyone discover real prices unless they are marked to market.
Part of the problem - again - is that you are assuming that an instantaneous price represents the true returns that a thing will actually provide over the course of its existence. That just isn't true. The market is not the infallible price-fixer that many people treat it as. Furthermore, it isn't even the case that a single rational price always exists, because rational prices depend on future states which themselves depend on transaction choices right now.
People know this at a day to day level, but refuse to carry their common sense knowledge into understanding finance. Everyone understands that if there is a Depression, his house will be worth less on March next year than if there isn't. There is no "real price" for your house today which is independent of you and many others making choices to sell or not sell, etc.
It is impossible to get into the fallacy in any depth in a combox; but I touched on it in a blog post.
The bottom line here is that these derivatives will in fact produce a stream of cash over time, and the fact that there is no market for them at the present time does not change that fact. There is uncertainty in what that stream of cash will be -- as there is uncertainty in what will happen from one moment to the next in everything. The market is not an infallible determinant of the future.
People who insist that the value of a thing is always and only whatever the instantaneous market price of the thing happens to be, believe that the market is an omniscient God.
It is not.
I think it can be argued that the main damage well proceeded Monday's events.
Of course that can be argued, and with some plausibility, just as one could plausibly say that the main damage from a heart attack happened before the physician saw the blockage and refused to insert a stent. That doesn't change the fact that the physician could have, and had a grave obligation to, prevent the heart attack. It doesn't change the fact that the patient now has a damaged heart (credit system) which likely would not have sustained that same level of damage had the right intervention been carried out in a timely manner. That the patient is responsible for the lifestyle choices which got him to this point does not exonerate the physician of gross negligence.
"The bottom line here is that these derivatives will in fact produce a stream of cash over time..."
And:
"The market is not an infallible determinant of the future. "
So what what infallible market principle convinces you that a stream of fungible cash - not Zimbabwe billions - will be produced, and in good time?
I've seen it suggested that the correct approach is to inject funds directly and without delay into the banking system.
I've also seen the opinion that the Bill simply does not provide anywhere near the amount of money necessary to unfreeze credit.
What will we see happening next week, or next month?
What does your crystal ball show you about next week?
So what what infallible market principle convinces you that a stream of fungible cash - not Zimbabwe billions - will be produced, and in good time?
The fact that it is built into the contracts that when people pay their mortgages, or when proceeds are produced from a foreclosure, or when the institution backing the insurance policy wrapper (which is the reason why these low-grade securities were, in rather circular fashion, rated AAA to begin with) has to pay on the policy, the holders of the securities get paid cash. In order to believe that these will not produce cash I would have to believe that none of those things would ever happen.
I've seen it suggested that the correct approach is to inject funds directly and without delay into the banking system.
The credit freeze and the capitalization problem are separate problems, though many people treat them as one problem.
I've also seen the opinion that the Bill simply does not provide anywhere near the amount of money necessary to unfreeze credit.
That could be. The delay without question increased the amount required, probably rather dramatically. I wouldn't be surprised if a week's delay and all the concomitant nonsense ends up tripling the cost to control the damage. When the patient is in the middle of a heart attack there are consequences for not acting NOW.
What does your crystal ball show you about next week?
I don't have a crystal ball. I can't tell you whether or not I will be alive next week, let alone whether the patient just saved by a heart stent will be.
"I wouldn't be surprised if a week's delay and all the concomitant nonsense ends up tripling the cost to control the damage. When the patient is in the middle of a heart attack there are consequences for not acting NOW."
Any empirical data for 'tripling the cost'?
Why was Congress sent a politically impossible bill? Do you think its rejection of the bill was merely whimsical?
What is the connection between the 700 B and causing the banks to lend?
Any empirical data for 'tripling the cost'?
Nope. Just my own gut feeling.
Do you think its rejection of the bill was merely whimsical?
No. I think it was criminally, negligently stupid. That is why substantially the same bill - plus pork - was passed a week later: because the further into the heart attack you get, the harder it is to deny that something bad is happening.
What is the connection between the 700 B and causing the banks to lend?
The fact that these instruments on their books is the root cause of the breakdown of both liquidity and trust which made them stop lending.
"...I think it was criminally, negligently stupid. That is why substantially the same bill - plus pork - was passed a week later: because the further into the heart attack you get, the harder it is to deny that something bad is happening."
What was your reaction to section 8 of the original bill?
What was your reaction to section 8 of the original bill?
It isn't that section in itself as much as other things which were lacking that were a problem. On the one hand, the original Paulson proposal was eggregiously lacking in before-purchase oversight, ability to fire the fund manager and appoint a new one, etc.
On the other hand, in order to have the desired effect there can't be any inkling of "rolling back" or post-facto alteration of terms on any of the purchases by political hacks, once they've been done. A done deal has to be a done deal, or you might as well forget the whole thing. So I see the need for it, unlike all the people who freaked out about it. It is an assurance to sellers of these securities that the deal they get is the deal they get, once they decide to do it. That assurance is certainly necessary in this kind of political climate.
Would I trade oversight for the complications, delays, and pork that the politicians have added? No, I wouldn't.
I think it's safe to say by hindsight that the bill was not passable as presented.
I don't know why you would not object to section 8.
Former Speaker Gringrich (referring to section 8 on the radio): "This is not a dictatorship."
That's a direct quote.
Zippy,
I think there's nobody here but you and me.
Pavel:
Yeah, I think this is just a personal conversation between us at this point.
The original Paulson proposal wasn't a bill at all, it was effectively what I would call a term sheet. And I couldn't care less what other people, least of all Newt Gingrich, had to say about Section 8. I see a need for assurances that political hacks will not be able to reverse transactions under the plan. With that assurance every dollar we spend is worth far more than without. Screw Newt Gingrich's and everyone else's incomprehension of the need for that kind of assurance.
"I see a need for assurances that political hacks will not be able to reverse transactions under the plan."
If the courts and administrative review bodies are all hacks, where does that leave us?
Reality, that's where we are.
You just aren't getting it. An assurance in the legislation that the transactions - once agreed to by all parties, completed, and closed - cannot be reversed at the arbitrary whim of courts and politicians is an arguably reasonable element to have in place: a needed assurance in a very uncertain time. Even if you disagree with it, it doesn't justify irrational freakout or tantrums. "We'll take this off bank balance sheets, but we reserve the right to put it back on at any time based on arbitrary political whims" is not as reassuring as "We'll take this off bank balance sheets and keep it off". Any banker who saw the two as equivalently reassuring is a fool.
"You just aren't getting it."
Millions of us. We're all fools, except you.
"...the arbitrary whim of courts..."
You're speaking of the law, right, as interpreted by the legal system?
I believe that this discussion is being rapidly overtaken by events.
Every time I say wrong you hear stupid. I've tried to answer all of your questions patiently, but there is little sense continuing to do so on those terms.
This a huge power grab by the government which could lead to the destruction of the USA as we knew it.
There is no real problem, there was no corporate bank panic, and they are tunneling under your house.
Things are not looking good this morning. I really don't believe that four days' delay in passing a bill is a major contributor to this situation, but if you want to think so, so be it.
I don't understand much of what's happening, but perhaps even with a doctorate in economics I wouldn't understand enough, and if I understood sufficiently I wouldn't be able to do anything about it anyway.
God be with us.
Pavel
Things are not looking good this morning.
They aren't going to look good for a while.
Ok. Go to Yahoo.
Click Finance.
Click the little graph for the Dow Jones Industrial Average.
Click the little "Max" under the graph.
Look for historical context.
Note the 33% drop when the tech bubble burst. Or the 40% drop in the early '70s. We've weathered lots of these things, and we'll weather this too. Note the 80% drop in 1929. It ain't that bad. The sky is not falling.
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