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The hockey sounds fun. About the bailouts and so on, it's just very frustrating when those big companies, who really don't have much to do with my own life other than their ripple-effects, get saved despite their terrible management. It would really be much more fair to seize the millions of dollars of assets of their crooked bosses (and we can be sure that all their assets were not only in the 'value of stocks') than to use taxpayer money. We've been forced into investing in something that we don't want, but you can be sure that we'll never ever see any dividend checks for our trouble. Yes, I understand that such a thing as AIG would cause market collapse if it didn't get saved, but I still don't like having to pay for it. 
Dear Rae, I understand what you say but I am just not sure that these companies have nothing to do with your life. With AIG dead, smaller insurance companies would become uninsured and they could also die, preventing you from being insured either.
When there are particular faces helped by a government's package, it's bad that an individual is helped to thrive - using your money - without good reasons. But this is not really the case here. These are anonymous big structures underlying a large part of the economy. And the money paid to them are just pieces of paper - and sometimes they're not even printed.
I would say that it's not "physically measurable", real wealth that is being paid or transferred. These transactions are so large and "non-local" that the individuals' intuition about wealth doesn't really apply here. These operations just redefine what the word "money" and "confidence" means. They're not going to take a car from you and give it to a manager of a large company.
It's like if you have fish and you want to train them to live with a small number of bubbles or small amount of food in your aquarium. So the fish compete, evolve, eat each other, or whatever is the optimum strategy to deal with their environment. But at some moment, you may decide that what they're doing doesn't look promising and you just add 10% of the bubbles or food to the aquarium. It's not a real violation of market rules at the local level. It's just an overall global change of the environment.
"They're not going to take a car from you and give it to a manager of a large company."
Of course I know that. I'm just speaking about my own frustration with the whole mess. And in some respects I do think that the grandeur of these big companies is a bit exaggerated, and of course, that is always to their benefit.
But of course you're right about the non-physical nature of all these things and all of that. But I can tell you that when we are having to write even bigger checks to the US Treasury in the near future, that will be all too real.
LM: I've written them something rather close to USD 100,000 in my short life whose minority was in the US. With IRS, enough was enough!
Rae Ann,
I feel the same way. Something is wrong when the profits of risky investments are private and the resulting losses are public. Obviously, companies that buy bundles of "securitized" investment vehicles must be required to maintain a reasonable level of liquidity and, more importantly, organizations such as AIG, who issue credit default swaps (CDSs), must carry the same amount of reserve capital as is required of regular insurance companies. Credit default swaps are nothing but investment insurance by another name and the lack of liquidity behind them is the biggest problem of all. The total face value of these CDSs in the US exceeds 40 trillion dollars and there really is no existing source of capital to cover this "insurance". Adding a significant amount of this to the federal debt would seriously weaken this country and there is a real possibility of this happening. This is why the government is taking emergency action; it is essential in order to maintain the security of the United States of America.
I also feel the ratings agencies need some kind of governmental oversight. When packages of subprime loans can be rated as AAA investments something is seriously amiss. It is all too easy to invest in AAA-rated securities, especially when you carry insurance against defaults on those vehicles. We must eliminate the smoke and mirrors; our future as people may depend on it.
While it is true that failings in a free economy, such as depressions, do correct themselves eventually, the human cost is often horrendous and the swing toward socialism, and, often, war, is inevitable. The only answer is a carefully balanced degree of regulation. The alternative is to court catastrophe.
Something is wrong when the profits of risky investments are private and the resulting losses are public.Exactly. And worse than that, the profiteers knew that, and operated accordingly. What's most outrageous about F&F is that the people who made their millions are able to retire comfortably, in large part because they, as "private" companies cultivated a lot of political connections that kept the regulators off their backs.
Some people need to go to prison over this, but they won't. And some of the people who need to go to prison are serving in the senate.
Okay, most of our insurance is with State Farm so I looked up if the AIG problem will affect them at all. Apparently not.
http://www.tradingmarkets.com/.s...20News/1891637/
Dear everyone, I agree with you that it's wrong that profits are private and losses are public.
And it might even be a good idea to try to retroactively nationalize the accessible profits of the people who made them if the company that went bankrupt is paid from public funds.
There are way too many people who seem to know that they will be saved and who afford higher risk than they could afford if they didn't know that they will be saved from public funds.
On the other hand, it can still be cheaper for the whole national and global economy to save these companies than to initiate a domino effect. So this saving procedure, if someone decides that it protects the economy against a uncontrollable downward spiral, is more urgent than some discussions about the justice.
But I tend to agree that the question of justice should be addressed, too.
I Agree with Rea Ann. I had never heard of AIG until I moved to Stowe, they own the ski resort. They know nothing about running a resort Stowe is a mess. I never had a desire to own stock in AIG. But now I own it like it or not.
AIG is big but they are nothing compared to the US economy. I think it is way overblown to suggest economy wide effects.
If there is a rule for government it is in paying the claims of people insured with AIG. Beyond that they should leave it alone.
LM: Well, the 2007 revenue of AIG was $110 billion, see http://en.wikipedia.org/wiki/AIG . That's something like a percent of the economy which could be enough for a critical mass, using the nuclear jargon. You know, 1% is like half of a state. Imagine that 1/2 of Texas is gone. That won't just remove 1% of the US economy: it will influence others because certain things were done almost exclusively there (different types of services are not uniform and there exists a hierarchical structure of proximity of different companies to 1/2 of Texas or to AIG) and others rely on this 1/2 of Texas. They may also go bust and it may spread.
Isn't Marty Straka on the Pilsen team?
He was a member of the 1998 Olympic Gold Medal Czech team. I hope the Czech fans appreciate Marty as much as many NHL fans did.
LM: Martin Straka is our captain. He's playing wonderfully this year even though today, he was not quite among the most successful players. But he was the star in several previous matches. He's loved here dearly. Probably more than in Rangers.
Lubos I largely agree with you. Of course one wants free markets and for most of the time, the speculators are providing the liquidity that we all rely on for depth in the market and low transaction costs. They are not evil people but carrying on an honest and legal business. Actually it's quite a hard way to make a living.
However, speculators would do well to remember that the government runs the game. If the government thinks things have gone far enough they can change the rules unfairly at any time. That is also one of the game's rules.
There is nothing new about this. The legendary Jesse Livermore almost cornered the coffee market during the First World War. Although there was an abundant coffee crop, Livermore correctly reasoned that the war had depleted shipping capacity to the point where producers could not deliver into their futures commitments. Although his profits were massive on paper, the government stepped in and welched on Livermore's contracts bankrupting him (for the third time).
Well, the one thing everyone needs to realize is that all of these big financial companies, whether they are ethical, legal or whatever, are only playing with and addicted to OPM (other people's money, Sarah Palin talked about this in her Hannity interview).
It always sounds so much better and easier and more beneficial to the "greater good" to do this or that when it is OPM instead of MOM (my own money, I made that one up just now) .
As for the 1% of the economy we have to also recall that there are many, many other smaller companies that could buy/acquire/absorb the failing businesses or parts of them, etc. It's not really like the whole 1% of the economy would just vanish. But by that argument you could also say that the 85 billion dollar bailout is taking half a state's economy tool.
Going back to the evolutionary/biological kind of analogy, you might could say that the smaller, healthier, and better managed companies could "feed" on the fallen giants instead of just dropping dead because the big guys fell. (as this has been happening anyway like with Lehman)
I guess I have too much confidence in the "fundamentals" of our economy, just like McCain, because I basically live those by those fundamentals and so my "reference frame" is much different from those who only are involved in complicated and somewhat imaginary shuffling around OPM instead of real goods and services.
These financial giants have counted on the idea that people will panic and think that they are "too big to fail". Yeah, maybe that's what the big dinosaurs thought too?
No, I'm not some academic expert who understands all the theories of investing and speculating and all that garbage that got us into this mess in the first place. But I have been intimately involved in running a successful business for over a decade. And I don't think that experience and the wisdom that comes with it should be too much dismissed just because I'm not so sophisticated or whatever in my thinking.
I don't know how many TRF readers/commenters are actual real-life capitalists who realize just how difficult it is to keep a business afloat (or who have even tried) especially when we cannot expect for the taxpayers to bail us out if we fail. Private profit, private loss. But also if we ever did fail, we would not cause any kind of real domino effect because then our business would just become food for some other businesses.
Okay, sorry for going on about it.
Lubos,
The revenues and profits of AIG are not the issue. They currently insure about $440 billion of indebtedness, most or all of which could default and this represents a much larger percentage of the economy. The loss of confidence resulting from that could lead to a general panic. That is the problem.
The issue at hand is: Just how big does a company have to be in order to be too big too fail? Of course no one knows the answer to this because it depends on emotional factors; what is required to initiate a general panic? The authorities are erring on the side of caution. That seems appropriate.
Rae Ann,
State Farm is safe. Regular insurance companies are required to maintain sufficient capital to cover worst-case losses.
The problem with AIG was twofold. There was essentially no liquidity requirement and their losses were much less predictable than for most ordinary insurance. They had no real motivation to avoid high-risk policies.
The reason that regular insurance companies avoid high-risk clients is that these clients would increase their liquidity requirements. The good news here is that government regulation has not stifled competition; market forces still rule, just as they should. Capitalism does not imply total free-enterprise.
Rae Ann,
You have been running a business that actually creates value, HVAC systems that work and thereby improve peoples lives. My hat is off to you for that and I would never belittle the wisdom that you have gained from that experience. Small businesses are the lifeblood of the American economy and I salute them all.
It's not only that taxpayers are paying, but also the sheer magnitude of it. Up to 1 trillion USD according to some estimates. Probably more. On top of a war that will be several trillion over the long run. This will be very painful over the long run and could bring down the American empire. Empires often die slowly through over-extension. Many conservatives are saying this. It is a conservative thing to say.
It seems you have a 'Budweis' beer. Is that anything like our insipid Budweiser? I thought you were supposed to have good beers in Europe. Brewed by monks and all that.
Rae Ann, your ideas about Other People's Money are nonsensical - especially from one who claims to be a true capitalist.
Of course the investment banks are risking the money invested in them by shareholders in financial markets - that's what investment banks do. Nobody ever accuses Ford of building cars with other peoples money, do they?
Furthermore, the personal fortunes of the top management of these banks are heavily tied to the fortunes of the bank itself either with equity or options. Most of these guys have seen most of their wealth evaporate in the last few months and, as you yourself pointed out, they deserved it by making bad business decisions.
Charles, I'm sorry that you don't seem to understand that all those bad mortgages were, at the most basic level, the financial institutions playing with (and losing) other people's money/resources. And the end result is that other people's money is going to bail them out too. It's pretty simple, maybe too simple for someone who seems to think that "invested money" is equivalent to a real product like a car. You buy a car, and you have that car. It doesn't get smaller or bigger or better or worse or completely disappear depending on the things that apparently determine values in the financial markets. Okay, if that's nonsensical, then so be it. But what I'm trying to say is that what the financial markets are doing doesn't seem to be working out so well for them. And actually, we've recently gotten a much better "return" on selling some vehicles than we have been getting on any of our "invested money."
Advocating totally free markets is like advocating a return to the wild west. Sure, the bank-robber will eventually be shot by a the self-appointed sheriff, but how much damage will he do in the mean time? The repackaging and selling of these bad mortgage loans doesn't seem complicated in the slightest to me (as the media would suggest is the reason no-one--they--foresaw this) so one is forced to conclude that many people were aware of the goings-on and simply chose to profit from it instead of intervene. And that is exactly what a free market should do--profit now and saddle future generations with the externalities.
Dear Luboš, as you know ice hockey does not exist in Spain. I use to play european rugby and I do not feel the need to become a buddhist. Could you check if this (see the link, ps.) happens to ice hockey players too?, just considering to start practicing a different sport while continue reading quantum physics 
thanks!
http://www.dailymail.co.uk/news/...sics-
books.html
best
fonzo, your idea of a free market is pretty much inaccurate because most *successful* long-term free market capitalists *don't* adhere to that philosophy of "profit now and saddle future generations with the externalities."
It's actually quite the opposite. The long-term successful free market capitalists are generally very careful and concerned about protecting and growing assets for future generations. It's only the *crooks* who are concerned only about their profit *today* and not in the future. This is how it has always been in a free market, and unfortunately there will always be some presence of crooks in the system. But you shouldn't throw the free market baby out with the crook-filled bathwater, so to speak.
As we should be learning from the fall of the old company, Lehman Bros., they only fell after they adopted practices that sacrificed future security for short-term gains. Well, that's just not a wise or effective way of staying in business.
And actually, there were people who foresaw this "collapse" and some who even warned against it but were ignored. John McCain warned of it in 2005:
http://
www.theminorityreportblog...ollapse_in_2005
And just to throw in a little politics, I don't know how Nancy Pelosi, or Obama for that matter, can sleep at night when they blame the Republicans for not regulating things better. Nancy can't even regulate the corruption right under her nose (Rangel, for example, as well as others of both parties). What good is she as the Speaker of the House? Doesn't look like she's accomplishing much of anything, especially not "cleaning" House.
And actually, I would imagine the socialists are probably thrilled with the current financial bailouts because they essentially make the government the owners of a whole lot of houses, etc., that will ultimately be "given" to a bunch of people at the taxpayers' expense. And isn't that what they really want, for the government to control and distribute assets?
Anyway, Lubos, I would really like to hear about your "half-baked" ideas. I hope that you will share them soon, fully baked or half baked either way.
Rae Ann,
We seem to have been talking at cross-purposes. If you were talking about bad mortgages, then sure, I agree, it was all done with other peoples money. I think you have it the wrong way round, though. Surely it's the mortgage owners themselves who were playing with other peoples money in order to make unwise investments in properties they couldn't afford? Shouldn't they be held a tiny bit accountable for their own financial transactions?
But surely it is a regulatory problem. Government must ulimately carry the can for failing to monitor and regulate the availability of credit and the conditions under which it was quite legally sold. You are wrong to call Lehman's crooks as they haven't broken the law. Government alone has the responsibility to ensure that the economy is structurally sound and the financial markets are orderly. Now those who elected them will have to foot the bill.
Charles,
Actually, no, I think it's clearly the fault of the lenders moreso than the borrowers because it's ultimately the lenders' responsibility to accept or decline bad credit risks and to pay for taking those risks. They clearly took advantage of the people who wanted to buy houses but didn't really have the personal finances to afford them. The lenders figured that when those people could no longer afford to make the mortgage payments, they could just foreclose and resell the house at a higher price than the loan because they wrongfully assumed that the housing values would continue to grow at an unnatural rate. That, or they knewn but didn't care because they wanted that 'profit' *now* (by selling the bad mortgages to other financial institutions, etc. and therefore selling their bad risk and spreading the "virus") instead of being a responsible lender and only lending to people who could actually afford the loans. The borrowers in most of these cases were victims of fraudulent credit practices. I don't think it's really fair to put too much blame on them for being vulnerable under the circumstances.
I think that the government's role should be fairly limited in regulating business, but of course it's just not that simple in this situation because you had all these Washington lobbyists and Congressmen involved in pushing these practices for their own benefit. It was not going to happen that the corrupt people "in charge" would ever regulate. Look at the ones who are on the big congressional banking and financial committees and what side they were on during all of the build-up to the "crisis." Some in Washington did warn of the eventual problems but they were mostly ignored. The people who were supposed to regulate actually were in on the whole scheme.
I didn't say that Lehman's were crooks. Just that they engaged in bad business practices that resulted in their failure. Okay, maybe they were also just victims of other banks' corruption and bad practices, but where was their internal regulation and oversight? The crooks I was referring to are the guys who pursued unethical and unwise business behavior. In a free system there must be an expectation of responsible practices of the people who have been trusted with our money to do what is good for us and not only for them. They clearly broke that trust.
As for the people having to pay for their elected officials' corruption, I think you are again wanting to blame the victims for the actions of the bad guys. We didn't know they were crooks when we elected them because there again is an expectation of trust in those who are supposed to work for our behalf. It would be real easy to avoid electing crooks if they actually advertised themselves honestly. But they are crooks and so they aren't going to be honest about anything.
Another point about the borrowers vs. the lenders getting the blame. I'm not sure you are aware of the vast amount of advertising and other promotions for people with even "bad credit" to borrow money for mortgages. They advertised constantly on TV for "everyone approved" to get these loans for well over 100% of the value of the houses with no down payments and very low monthly payments, like $900 for a $200,000 loan. Is it really their fault to accept these offers by companies that should know better than to take on these bad credit risks?
As I explained above, the crooked lenders did it because they knew they could sell the bad mortgages to other banks. The original lenders either falsely rated the mortgages as safe and deceived the new buyers, or they knew that the banks buying the mortgages didn't really care because they would pass the bad mortgages along themselves and not really have to face any consequences. Basically they kept 'passing the buck' until now those of us who have been responsible are having to pay for it all.
But yes, I think those borrowers are already paying the price for buying properties that they couldn't afford. They've in many cases lost everything because of it. I have enough empathy to think that is a too-heavy punishment for taking an offer that was 'too good to be true.'
Sorry, one more thing. The current banking gimmick that is going to end up causing bad problems in the future for a lot of people is their big push for "reverse mortgages" for senior citizens. If you have a parent or grandparent who is thinking about doing that, please, urge them not to. One little thing I've learned in my life is that if something like loans and other financial services have to advertise so much, they aren't really going to be a good deal. Just some motherly advice.
Rae Ann,
I don't live in the US so I don't get to see all the adverts you mentioned, but a loan available to everyone, including those with bad credit histories, on greater than 100% of a house's value with an artificially reduced interest rate (i.e. delayed or no repayments) is obviously a recipe for disaster.
I actually agree with you that it should not be allowed to sell such a financial instrument to those who are never likely to be able to pay it back, but protecting vulnerable people from their own stupidity is definitely more of a socialist than captialist concept! I can't think of any other agency than Government who should carry the responsibility of regulating this.
On the other hand, I have no sympathy at all for companies who bought risky financial instruments that subsequently turned out to be a bad investment. They deserve to become "food for other busineses" as you nicely put it.
Charles, thanks, I do think that we had been talking across each other as you put it and that we were basically on the same page otherwise. I guess I grudgingly accept that the government must regulate some things since the people who should be regulating themselves often don't do it without some force. In my perfect, idealistic utopia, all business people would be responsible and trustworthy so that they wouldn't ever try to take advantage of those who aren't so smart or careful. But that is definitely expecting too much in our real world.
Good on you Luboš!
I really liked to read these reflections (quoted below) of yours.
The only thing that I feel a slight urge to comment (not very critically) about is what I have highlighted:
"Dear everyone, I agree with you that it's wrong that profits are private and losses are public.
And it might even be a good idea to try to retroactively nationalize the accessible profits of the people who made them if the company that went bankrupt is paid from public funds.
There are way too many people who seem to know that they will be saved and who afford higher risk than they could afford if they didn't know that they will be saved from public funds.
On the other hand, it can still be cheaper for the whole national and global economy to save these companies than to initiate a domino effect. So this saving procedure, if someone decides that it protects the economy against a uncontrollable downward spiral, is more urgent than some discussions about the justice.
But I tend to agree that the question of justice should be addressed, too."
[End of quote]
I think that an uncontrollably destructive downward spiral is far from inevitable.
Rather than rescuing (reimbursing) relatively fixed-asset-rich speculators and shareholders in essentially unproductive banking ventures (who are relatively immune to the inevitably impending inflation of the US dollar) with freshly printed letters of credit (cash currency), I would (like you would) rather see that the wheels of more productive and creative (other than creative accountancy) ventures would be kept sufficiently oiled 'artificially' for as long as the American society (with its industrial and 'psychophysiological' underpinnings) needs it to be.
This kind of melt-down is an excellent opportunity for honest politicians/lawmakers (could be an entirely unrealistic contradiction in terms!) to put in place some already proposed and possibly healthy - or, rather, "sickness-stalling" - revolutionary restraints onto the money/share market.
If you care to call me a crazy closet communist, you can.
I read a piece somewhere that dissected what happened mid-week, and the problem, which has never happened before, not even leading up to the Great Depression is that in the inter-bank dealings, risk became impossible to estimate, so it became impossible to price. The holders of liquidity made a b-line for the treasuries, even forgoing interest, because they had no way of knowing if bank X, which they'd been doing business with for years, was going to fold. It was kind of like a run on banks in reverse; it was a run on lending to borrowing banks, because the lending banks weren't sure if they'd get their money back.
So it's all well and good to talk about letting the responsible parties lose, but that wasn't the issue here. The issue was that they'd arrived at a moment where no bank trusted any other bank, and the commercial paper market was about to seize, and the entire world economy would come down with it. And that's not hyperbole; if they hadn't intervened, a depression would be inevitable by now.
They had to inject enough liquidity to prevent that; that was a doomsday scenario that had to be avoided at all costs. But when this is all over and behind us, heads need to end up on pikes. In the long run, we can't afford the moral hazard, either.
This has to be the funniest economics lesson you'll ever need!!!!!
http://www.youtube.com/watch?v=V...h?
v=VVp8UGjECt4
