More Auto Talk

Looks like Hank Paulson is back in the news.

"WASHINGTON — The White House and the Treasury are deep into negotiations with General Motors andChrysler over reorganization plans that could result in freeing up more than$14 billion in emergency loans to keep the companies afloat through the first quarter of 2009, according to industry executives and a senior administration official...

...In the negotiations, the Treasury secretary, Henry M. Paulson Jr., is effectively taking on the role of “auto czar,” which was envisioned in the carmakers rescue bill written by the White House and Congressional Democrats and approved by the House but blocked by Senate Republicans."

I've made a number of posts about Paulson recently, and I thought it was time to check out his resume. So I went to that most trustworthy of all sites, Wikipedia, and took a gander at his page.

I'm glad I did! His career is quite impressive: football player at Dartmouth, as well as Phi Beta Kappa and an English degree (apparently, you CAN make money with an English degree), MBA at Harvard, assistant to John Ehrlichman during the Watergate scandal (which got Ehrlichman convicted and sent to prison), and then of course the career at Goldman Sachs.

But I didn't find the one thing that I was looking for. Maybe Wikipedia dropped the ball on this one, but I was sure I'd see a reference to his years as an analyst in the auto industry. Or maybe even a line or two about his days as a successful CEO of Ford, or some small reference to when he worked as a designer during the golden days of Detroit. 

I was doubly surprised because with all the talk out there of how ole Hank is "taking on the role of 'auto czar'", you'd think they'd update his page to reflect his deep reserves of knowledge and expertise in these areas. The White House is going to let him decide what to do with $14 billion, and if I know one thing about the current president, it's that he would never entrust large sums of money like that to someone who wasn't over-qualified to handle it. 

Of course, Hank has other qualifications for this kind of work. He's given away nearly $350 billion with a series of confidence-crushing, flip-flopping decisions in which he injected huge amounts of pessimism in to the financial markets. Smaller men would have tried to hide their incompetence, but Hank found a way to rise above the petty crimes and find a way to screw things up in such a massive and blatantly unapologetic way that he was instantly inducted into the Bush Administration Hall of Fame. 

Still, wasting taxpayers money on cars is a different animal altogether. I hope that he's up for the challenge.

The was another quote in this story that caught my eye:

“Because of the failure by Congress, we’re left with suboptimal options,” said Tony Fratto, the deputy White House press secretary. Cautioning that no decisions had been completed, Mr. Fratto added, “We’ll do what is in the best interests of taxpayers and the national economy.”

I am so happy that someone is going to step up and do Congress' job. When Congress does not pass a bill, it's a prima facie failure. You would think that after 232 years or so, we'd be able to figure out a way to make Congress pass bills every time something happens, but until we do, it's a good thing that the Bush White House is there to do what Congress can't.

Now, some people might say that Congress was performing it's Constitutional function, but I say that something needed to get done, and the fact that there weren't enough votes to pass a bailout for auto-makers is not enough to keep this president from doing what he knows is best. After all, this is a man who has consistently been on the right side of almost every major issue, and has been convincingly elected in a way that Congress never has, and, most importantly, he'll be in office for years to come and will be able, in his usual inimitable fashion, to take responsibility for how this all turns out.

I can't wait!

Bush - Projecting American Power In the Mideast Since 2000!

No one even seems surprised...

Don't Miss This Link

This is maybe the best thing I've read yet on the financial system meltdown. Michael Lewis is perhaps better known as the author of Moneyball, a fascinating look at economics of building a winning baseball team. 

Moneyball chronicles the revolution in empirical analysis of the actual worth of baseball players in what has grown to be a multi-billion industry. It is a celebration, of sorts, of what can be done with an open mind and the realization that much of what we think we know, we don't. 

I actually rekindled my interest in economics because of this transformation in baseball thinking. Baseball had always been a passion of mine- as a kid I religiously read the baseball section of the newspapers every morning before I set out to deliver them. But as I got older, I got tired of the same "analysis". The writers weren't telling me anything new, and they wrote as though there was nothing else to know about the game. By my high school years, I was no longer interested.

With the advent of the internet, however, I found writers and analysts who were not part of the traditionalist network, who questioned everything, and who applied empirical standards to their analysis. Baseball is a sport which prides itself, above all, on tradition. And analysts like Bill James and Billy Beane would have no part of it. 

It's unfortunate that there was no analogue to this on Wall Street. But often, this kind of shift in the way we think can only be effected by a cataclysmic shift in what we experience. If the last few months haven't provided this, I don't know what will.

It's Not Like He Didn't Warn You

If you enjoy watching someone get mocked for what they believe, and then get completely vindicated when it turns out they're right, you'll want to see this.

Reason For The Bailout

I'd like to look at the reasons being offered for bailing out Detroit and comment on them.

1. We will lose 1 million jobs. 

First off, if there are a million jobs associated with the auto industry, they will not go away overnight. Detroit still makes almost half of the cars and trucks sold in the US. One of these companies will find a way to survive. Which brings us to...

2. If one auto-maker goes down, they will all go down.

I have heard Ford's CEO say this, yet he has never offered any convincing evidence, nor have I seen the claim questioned in the media. The supposed reason is that a collapse of GM and Chrysler will result in the collapse of suppliers that service Ford. I find it hard to believe that this would be the case. There is still great demand for vehicles, even if it is down. As vehicle prices rise temporarily as a result of lower supplies, Ford will find a way to keep the suppliers in business. And the suppliers may have to consolidate or change as well. This will not be easy, and will result in job loss, but the job loss is coming one way or the other.

3. This will add an intolerable shock to the economy.

The economy is not going to collapse. Despite the confidence-destroying comments of Hank Paulson, the credit markets have not collapsed. Things will be not be as easy they were a year ago, but we are not going to witness the end of civilization. The economy will probably always go through booms and busts; it always has and it always will until we find a way to allow every player to have perfect  information. The economy right now is telling us that our information, which we use to determine the best place to invest money, was wrong. It is telling us to find a better place to put that money. 

4. We cannot lose such a big part of our manufacturing base.

Building on the last point, a manufacturing base that is losing money is not worth having. But there are, undoubtedly, manufacturing sectors that need capital and will use it correctly. They will create jobs that will last longer than Mar. 31, when we realize we've wasted $15 billion. But they won't get this capital if we insist on propping up broken companies.

I realize that real people occupy those jobs at GM and Chrysler. I know they will be hurt. I do not think it enough to say the hell with them. I think the government should find a way to help them- retrain them, make sure they have sufficient unemployment benefits, etc. We live in a society that can do that, and it is the right thing to do. 

But if GM was in the business of selling steam powered buggies, we would not be trying to save them in order to save the jobs. We would find different jobs for there employees. We should be working on this. It's time to move on.

De Facto Bankruptcy?

With the current auto-bailout bill dead in the water, Republicans are offering an alternative. At first glance it seems that the main differences between it and the previous bill are that the Car Czar would be required (as opposed to being authorized) to call in the loans if requirements are not met. Calling in the loans would, presumably, result in bankruptcy. 

The requirements are also changed. The bill would require the automakers to cut their debt by two-thirds, which is a huge amount. GM and Chrysler alone may have nearly $100 billion in debt. 

This seems to be a pseudo-bankruptcy. In a bankruptcy proceeding, debt can be modified by a judge. There will be enormous pressure on creditors to renegotiate their debt in order to avoid that situation. In this sense, the bill does more to force change. 

However, I don't believe this will have the intended result, if that is what it is. GM and Chrysler are facing imminent bankruptcy as we speak, and nothing is happening. No one will want to make the first move, although, in fairness, some creditors may be waiting to see if the government will write Detroit a blank check.

I hope it will not. Detroit cannot continue on the path it is taking. Chrysler is finished. GM can only hope to survive by downsizing enormously. Ford must do the same. We cannot let our sentimentality for these American icons compromise the future economic well being. Life will go on. 

Knowing The Rules

Here's a link to an interesting article about fund manager Bill Miller. After years of record-breaking returns, he lost everything by betting it all on companies like Bear Stearns, AIG, Freddie Mac, WaMU and other firms who were on the verge of collapse. 

Miller made a career and a fortune out of going against the market, but this time the market was right. There is an interesting quote in the story from Miller where he explains finally selling AIG shares because "we don't know the rules."

In fact, it seems to me that not knowing the rules was a big part of the problem here. Inasmuch as this is a crisis in confidence, the confidence has been lost because the rules of the game have changed. And the biggest culprit here may have the government, which arbitrarily picked winners and losers, nationalized Fannie and Freddie, and promised to buy mortgage-backed securities one day before switching to capital injections the next. Investors and lenders, after all, require predictable rules. When arbitrary decisions are forced on the marketplace from without, as was the case with the Treasury interventions, then predicting the future becomes far more difficult and risky, as does lending or investing. This, of course, leads to frozen credit markets, as lenders find themselves as deer in the swerving headlights of government.

Maybe we should have a plan ready for the next time. You can believe there will be a next time.

This Will Never Happen

More details from the proposed package: the Car Czar (I hate that term already) will have the power to demand immediate repayment of the $15 billion if he or she is not satisfied with the automakers' long term plans, or if they are not submitted by March 31.  This is meant to reassure taxpayers that their money won't be wasted.

In reality, there is almost no conceivable way that the Czar and his ministers, who are a political entity, will be able to demand repayment of the loan. Barring a miracle, calling in this loan would result in the immediate insolvency of both companies. Passively letting one of the Big 3 go bankrupt is politically very difficult; actively moving to cause their collapse will be impossible. 

In fact, denying further requests from Detroit for money will be almost impossible once the government is invested. The political cost of ignoring sunk costs will be far too high to overcome, and we will throw good money after bad.

There are two main components of the current economic crisis. One is a crisis in confidence, and the other is a crisis in misallocation of capital. For the most part, this has been limited to misallocating capital in the housing sector. This bill will exacerbate that by extending it to Detroit.

Car Czar to the Rescue!

The new bailout bill is approaching finalization. Among the highlights are Congress' insistence on the elimination of corporate jets and the creation of a "Car Czar".

Eliminating the jets is the bone to throw the taxpayers for the imminent immolation of $15 Billion or so, which will be only the beginning. I will venture that we will be lending all three automakers another $30 Billion or so by March. To quote the late Sen. Everett Dirksen, "A billion here, a billion there, and pretty soon it starts to add up to real money."

The Car Czar is much scarier. He will basically be running GM and Chrysler, (and soon, in all likelihood, Ford). The good news is that he will have oversight. The bad news, (which is so bad it renders the good news bad), is that the oversight will come from Congress and the White House. There may only be two institutions on the face of the earth that have proven to be more incompetent at management than the Big Three. And that would be Congress and the White House. And the incoming administration's most valuable asset in this regard will likely be their willingness to admit they know next to nothing about making money by selling cars.

There is still a good possibility that the Republicans will block this bill. Whereupon Wall Street will respond with another day of heavy losses and the Republicans will cave and pass a modified version. Because, as we all know, people who bought stock in GM were guaranteed to get their money out. Weren't they? No? It's getting hard to remember, after all.

 

The Real Fear

 

On January 1, 2007 Denver Broncos cornerback Darrent Williams was murdered in his limo during a drive-by shooting.

On November 27, 2007, 24 year-old Washington Redskins free safety Sean Taylor was murdered in his home.

On September 2, 2008, Jacksonville Jaguars offensive tackle Richard Collier was shot 14 times while he sat in his car, and was left paralyzed with an amputated left leg. 

On November 28, 2008, New York Giants wide receiver Plaxico Burress shot himself in the leg at a nightclub, and was subsequently arrested and charged with criminal possession of a handgun. The charges carry a mandatory minimum of 3 1/2 years in prison.

Public opinion was harsh. The media painted Burress as just another angry, young, (black) NFL player who thought himself above the law and was a danger to society. In the wake of the Michael Vick saga, whatever Burress gets he will deserve. But in light of the tragedies mentioned above, we should suspend our hasty judgment. 

We should pause to see this from Burress' point of view. His fear of getting shot or attacked is patently rational. He did not intentionally discharge the weapon. No one has shown or even alleged any malicious intent on his part in any way. He is a black man, with a gun and an attitude, and that's all we need to know.

There may be nothing that can be done for him. The ridiculously unfair mandatory minimum sentencing laws may doom him in the end. But the next time you see someone on TV talking about how we should throw away the key, if you find yourself agreeing then ask yourself this: if it was Tom Brady, how would you feel?

And the answer to that question may be be an indication that our problem with Plaxico isn't that he was carrying a gun, but that he is a young black male with an attitude. 

UAW

The UAW is saying that they are open to making a few concessions if that's what it will take to get a bailout from the government. They will not consider reopening contract negotiations.

I think that UAW management should listen to what GM's management is telling Congress (presumably, under oath.) They are saying that GM will be insolvent by the end of the year without more money. This is in 3 weeks. When they become insolvent, those contracts won't be worth the paper they're printed on. If they want GM to survive, if they want to continue to work in the auto industry, then they had better consider every option, and they had better be prepared to renegotiate everything. Congress is, remarkably, resisting help for a company and a union that will not change it's ways. 

The UAW has a sense of entitlement that is possibly exceeded only by that of GM's management. They continue to make claims of great sacrifice, as though their members are not compensated better than the vast majority of Americans. They call themselves the backbone of the country, but if they refuse to accept the changes that are needed, and cause the bankruptcy of GM, then they may instead become the straw that broke the country's back.

Where The Decider Got His Mojo

It seems as though neither Congress nor the White House are very interested in bailing out the automakers. And if they are, they obviously don't want to take credit for it. Sen. Chris Dodd today suggested that the Bush administration should take executive action, since it seems unlikely that Congress would act in time. 

If you stop and think about it, what Sen Dodd is really saying is that, even though the legislative branch (whose job it is to decide policy) has decided that bailing out Detroit is bad policy, the executive branch (whose job it is to carry out Congress' decisions) should ignore that decision and do whatever it wants.

The next time you hear someone in Congress complain about how the Bush White House has bypassed and marginalized Congress, and how they have used scare tactics to do so, consider how Sen. Dodd has advocated the abrogation of congressional responsibility. Recall how Congress did the same after 9-11. This is how the job of "Decider" was passed off to Bush. But when the president decides, democracy suffers.  

A $25 Billion Bet With your Money

The NYT has an article about the Chevy Volt, which is GM's upcoming hybrid vehicle. It's the vehicle that GM is claiming makes the automaker worth saving. And I think it is a perfect example of what's wrong with this company.

A GM executive says that people are ready for it, saying that people are used to plugging in things like PDA's and cell phones now, and so it shouldn't be a problem getting people to buy it. This is laughable, and a classic straw man argument. The issue with electric cars has not been that people are uncomfortable with the idea of plugging things in. Americans have been plugging in lights and record players and vacuum cleaners and all sorts of things for the last 100 years or so. The issue is that the car costs $40,000. And the average car buyer just can't afford that. If, in times of $2 gasoline, they would even want it is an another question entirely.

I also have serious doubts that GM is going to make any money on these cars, either. They are going to have to sell them at razor thin margins since they are already relatively expensive, and they aren't going to sell many of them. They sure as hell aren't going to sell enough of them to make a dent in their out-of-control cost structure. They are talking about selling 10,000 of them in the first year, which, as the article notes, is the number of Priuses that Toyota sold in October alone. If they made $10,000 on each one (which is a pipe dream, for reasons addressed below) they would net $100 million, or 1/250th of what they are currently asking Congress for. 

Furthermore, they are making a number of claims which, frankly, we should ignore. 

First, they say that the car will be ready in 2010. This means that the technology is not yet complete. If it was, they would be selling it sooner. Because it's not, the car could easily be pushed back, or never actually produced. This happens all the time. It has been delayed already, and GM's track record here is awful.

Second, they claim it will sell for $40,000. This is a guess on their part, since the technology and logistics aren't worked out, and the costs always find a way to change. Predicting the cost of building a car that will come out in 2 years, especially in this economic environment (and more so with a car that hasn't been completely designed yet), is pure folly. And asking for a $25 billion loan from struggling taxpayers on the basis of that guess is insulting. 

It is telling, as the Times states, that GM "has not said if or when it plans to make money off the Volt." And you better believe, when GM is begging Congress for money, that they are painting the rosiest possible picture for potential sales, profit, cost, and technology that can be imagined, if not outright lying about it.

More from the Times piece:

G.M. reportedly spent about $1 billion in the 1990s to develop the EV1, which it dropped after saying it could not make money on the cars. The EV1, which was available only in lease deals, sold for the equivalent of up to $44,000 but cost G.M. about $80,000 apiece to make........

In 2004, G.M. displayed a hydrogen-powered concept vehicle, the Hy-wire, at the Paris Motor Show, making similar promises that it would revolutionize the industry. Thus far, the Hy-Wire has not become reality.

Is there anything about the history of GM which would lead you to believe that they are capable of making money from this car? In a bankruptcy proceeding, the technology will not be lost. The division that is designing the Volt could be spun off as a separate entity, if in fact it were viable. So bailing them out so that the Volt can come and save the American economy and environment is ludicrous. There may be good reasons to bail out Detroit (although I have yet to hear one.) But the Chevy Volt is not one of them.

And Now GM

GM, which is burning through billions of dollars a month, believes that the government should give it another $20 billion or so to throw down the sinkhole with the rest of its shareholder's money. It says, with a straight face, that it just needs some money to get it through this rough patch. This from a company which has been steadily losing market share for years, is saddled with terrible products, redundant models, impossible labor contracts, and most importantly, has a management group that got it into this mess by being good at only one thing: asking the government for help. 

Its CEO is a man who gambled away the future of the company on gas-guzzling trucks, refuses to consider the possibility of resigning (believing that he is the only one who is capable of solving their problems), and likewise refuses to contemplate the possibility of a Chapter 11 bankruptcy filing, which is the only hope the company has without a government bailout (and, in all likelihood, even with one.)

It's management says that bankruptcy will hurt sales even more, as people will be unsure if the warranties on their cars will be honored (as if those warranties can't be insured), and they say this as if the sales numbers that have gone over a cliff don't point to a loss of confidence already. 

Its union, which has secured paychecks for over 8,000 people who don't go to work (!), and whose members make over 50% more than Americans who work at foreign-owned factories in the US and have benefits packages that average Americans can only dream about, complains that the hardship that their employees will suffer is so great that taxpayers making far less should be required to pay billions to support a company that is losing money so that they don't lose the jobs they believe they are entitled to.

GM is no longer a financially viable company. It must go through bankruptcy. Its shareholders must be wiped out. Its management must be replaced. Its debt must be restructured. Its labor contracts, more than anything, must be abandoned. None of this can happen without Chapter 11, and we should not contemplate government help in any form until the company agrees to all of these things. 

Are we getting anywhere with this?

Since my last post was about the enormous debt that we've incurred as a country, here's a quick observation on where some of that money is going. We'll spend around $40 billion (!) this year in the war on drugs, and by the government's own standard, we're accomplishing nothing! We're also around a million and a half people for drug offenses, and yet drugs remain cheap, legal, and popular. Bjorn Lomberg, founder of the Copenhagen Consensus Center, estimates that spending $200 million per year could prevent 300,000 deaths from heart disease in developing countries. Basically by distributing aspirin based medication. He doesn't mention it, but I would think that the people this would help are older and probably wiser, and exactly the kind of people you'd want to help in these regions. The drug war seems to be something that everyone hates, and yet no one will stand up and say something about because they are afraid. Maybe in a time of national crisis like this, we can find the courage to speak out.

Time to Save

I just read an article in the NYT that detailed the fear of the credit crisis affecting Silicon Valley. Apparently Apple has lost around 16% of it's market value, as investors believe that people won't spend as much money on things like Ipods and Iphones over the holiday season. I think that they very likely won't. And shouldn't. But is that the end of the world? With the government nearly $10 trillion in debt, and with all of us about to face an explosion of Social Security, Medicare, and Medicaid expenditures that will make the current crisis seem like the broken light bulb you fix in your house just before the roof falls in, we probably shouldn't be buying that extra Ipod or that new TV. On the other hand, as long as government keeps saying that it has everything under control, why should we worry?

Value II

Speaking of value, Paulson is claiming that the reason these mortgage-backed securities are untradeable is because no one knows what they’re worth, and therefore can’t price them. His original plan claimed to use the the $700 billion as a method of “price discovery”, whereby he would set a market price for these securities. Which is a crock of shit.

Why does he think he knows better than all these firms (who deal with this every day), what the market value of these securities should be?. Paulson is an educated man. He knows better. Therefore, he has to be lying.

But watching CNBC today, with all these people throwing ideas around , and the market reacting every time someone important opened their mouth, it occurred to me that the real reason that the market for these securities is non-existent is not because no one has any idea what they are worth, but because no one has any idea what they’ll be worth tomorrow!

If the government is going to go in and buy $700 billion worth of securities, then that will change what they are worth today. But because we have no idea what the government is going to do, we have no idea what these things are worth.

If Congress and the President would simply say that no bailout is going to happen, then people could move forward with figuring out what things are actually worth. And the corollary, of course, is that if we just bail companies out all the time, arbitrarily, then their value will tend to be arbitrary and capricious.

Value

We’ve been hearing a lot about how these mortgage-backed securities are becoming nearly worthless. You might ask yourself why this could be. If these securities are being sold for 20 cents on the dollar, does that mean that 80% of people are being foreclosed on?

No, it doesn’t. But it brings up an interesting point that I think we should be talking about. And that is the concept of value. Part of the problem is that firms are unable to value these securities properly, which is a problem, because you can’t trade securities if you don’t know what they’re worth.

But whatever they’re worth, we know they are worth a lot less to the mortgage holder than they are to the homeowner.

Why is this? Well, if a bank forecloses on a home, they don’t have any use for it. It doesn’t generate income for them. The are not in the business of renting houses, or investing in real estate, or really even very good at selling them. Other people do these things, but not banks.

As an analogy, pretend your friend, the neuro-surgeon, wanted to buy a set of neuro-surgical scalpels. These scalpels cost $10,000. For some reason he needs to borrow money from you to buy them. You agree to lend it, but require him to sign a document saying that if he doesn’t pay you back on time, you get the scalpels.

Sure enough, he nicks someone’s medulla-oblongata, incurs a lawsuit and a judgement, and has to declare bankruptcy. You get the scalpels. But, like a bank with a house in suburbia, they don’t do you much good. You’re not a surgeon. You could use them for cutting cheese, but that’s a pretty expensive cheese knife. So you decide to sell them.

But when you do, you quickly realize that the potential market for this set of scalpels is pretty small. There just aren’t that many neuro-surgeons out there. And most of them already have knives. Of course, eventually you’ll find someone that will pay close to $10,000, but it could take years. Since you need the cash now, you end up selling them for $3500.

How much were they worth to you? $3500.

But how much were they worth to your friend? $10,000.

And the thing is, this is real value. When you took possession of them, they immediately lost $6500 in real value. Why? Because, as they say, value is in the eye of the beholder.

Why do I think this is important? Because if we could find a way to keep people in these home that are being foreclosed on, we would be maintaining a lot of their actual values, instead of handing them over to banks that have no use for them. This bailout proposal actually takes our tax money, and uses it to buy mortgages from banks who are kicking people out of homes which, in most cases, have far more value to them than to the banks!

If we’re going to bail out anyone, why don’t we bail out the homeowners?

I can hear the objections now:

“It’ll take too long to work out!” How, exactly, is taking the time to do something right worse than do the wrong thing right now?

“It’ll set a terrible precedent!” Of course it will. Do we want people to think that the government will bail them out if they do stupid things? Of course not. But is this a worse moral hazard than allowing multi-billion dollar financial companies think that the government is going to bail them out? I don’t think so.

I don’t know how you would administer something like this. Maybe the government could require people with foreclosures to go through a pseudo bankruptcy proceeding where they would have their debt restructured, but would be allowed to stay in the house if they kept paying the restructured amount. There is a very interesting discussion of this whole issue here.

http://www.voxeu.org/index.php?q=node/1670

The point is that you maximize the value of the underlying asset (the home) when you leave it in the hands of the person who values it most. In almost every case, this is the homeowner.

I’d love Secretary Paulson to explain how buying $700 billion of homes from banks at 60 cents on the dollar from banks that value them at 20 cents at the dollar, and charging it all to taxpayers who are being kicked out of homes they may well value at 80 cents on the dollar makes any sense at all.

The only possible explanation is that the world as we know it will end if we don’t get this done tomorrow. Bush might refer to this as a “Market of Mass Destruction.” I’m going to need some better documentation this time.

This Just In! CNBC May Be Biased!

I was watching CNBC for a minute today, and the cheerleading for some sort of bailout was embarrassing to watch. The Wall Street Journal and The New York Times are not much better, both characterizing the failure of the bailout bill as a failure of Congress. If you didn’t know any better, you’d think that your representative’s only job was to vote yes every time the house leadership and the president told them to. Haven’t we been ripping them for doing just that before we invaded Iraq?

The bill was flawed. Most economists believed it would do little or nothing, and that’s not much for $700 billion. To pretend that this was not debatable is ludicrous. I applaud those members of Congress who had the courage to vote no. I was shocked that enough of them did. I doubt that they will be able to resist again.

Secretary Paulson has been wrong every step of the way so far. He is now asking for at least $700 billion to hand over to Wall Street financial firms, one of whom, until recently, he worked for! He hasn’t explained how this is going to work (at least not in any satisfactory terms) and he refuses to entertain alternative plans. He can not have considered this one for more than a week before proposing it, and yet, in the face of opposition from the public, and widespread skepticism from every expert quarter, he refuses to admit that there might be another way. Or that nothing would be preferable to this.

But he has our president firmly behind him!

This is the very definition of hubris*. If this bill passes, and does nothing but saddle our children with another back-breaking debt, we will look back and ask ourselves, “How could we be so naive? After everything this administration has told us, how could we be so taken in? Will we ever learn?”

Maybe not.

*Edit...You might say that it's hubris for me to claim to have all the answers. You would be right.

Thought on the Crisis

It’s becoming pretty obvious that the people who are going to have to legislate a solution to the current crisis are either very simplistic in their understanding of a complex system, or are pandering to people who are. More likely a combination of both.

There are two opposing and extreme viewpoints that I seem to be hearing a lot of. The first is that government can dictate financial activity effectively, and the second is that the free market must be allowed to work.

In the first instance, we have a complete denial of the unintended consequences that can flow from rash action, examples of which are abundant in recent financial news. The second is based upon the fallacy that a free market currently exists.

Free markets are economic models. They are useful for predicting things in certain situations, but they don’t actually exist in the real world. And even the most hardcore libertarian wouldn’t want them. There are markets which exhibit different degrees of freedom or political control, but there are no truly free markets.

When you introduce rules into a marketplace, they will affect different people or entities differently. It’s at this point that you have to begin to make value judgements on the fairness of these rules. And so I believe that you absolutely do have to balance the interests of those who will be affected by the externalities of this crisis against the impulse to let the institutions that got us here simply fail.

With that said, handing over $700 billion dollars to an official of the same administration that told us to trust it on Iraq because we couldn’t wait for more evidence seems like pure insanity. The moral hazard, precedent, and transformation of the financial system that this “solution” will precede is not something that we should rush. Senator Barney Frank’s pronouncement that we don’t have time to debate whether it’s good or bad is an example of the worst kind of leadership. We do have time, and we must.