Crisis of Faith

It all comes down to what you believe.  If you believe something has value you might decide to exchange something for it.  If you're unsure if something has value, or worse, suspect that something may be garbage, you're not going to be inclined to trade for it.  Often nothing physical has changed in the object of your valuation when you or the market decides to change your valuation.  Only your mental belief as to that objects valuation-utilitarian, fiscal or otherwise- has changed.  Your belief that your bank will be able to pay you your money that you gave it.  The belief that you are sufficiently capitalized because of new and exotic asset backed securities whose value has never been tested before.  The belief that securitization has ameliorated market risk to a negligible level.  (Despite the fact that every previous  iteration of the idea that some financial innovation has effectively extinguished risk has gone down in flames.) The belief that credit ratings are accurate.  

It was defaults on securitized mortgages that heralded the ascent of our current crisis of fiscal faith.  When this happened, no one believed the valuations of the underlying assets anymore.  Arguably this is irrational as a certain amount of default in a mortgage backed security shouldn't impair the value of the security because it is still backed by real estate that can be sold to compensate the security holder.  But when it dawned on the market that securitization provided an incentive to lenders to lend recklessly because they could bundle and sell their risk to third parties, the market realized that securization also provided an incentive for false valuations.  That is because securitization removes risk from the original risk taker thereby encouraging them to play longer odds.  And when faith was lost in the original valuation, the market in securitized mortgages went belly up.  The disbelief then spread to the other derivatives markets. 

Hey Hey Hayek

You have to admit it's funny that only the government can save the free market from itself now. A state in command of the economy--anathema to red blooded free marketers.  Yet I don't  hear any of them arguing against state intervention.  They just want to do it the free market way, as if that's a tenable position after this mess.  Let's solve the problem by doing what caused the problem?  No thanks.  

The only efficient markets are disciplined markets.  A market that collapses because of its activity cannot be said to be efficient.  The derivative markets lacked discipline in the form of proper regulation of valuation and leverage and collapsed as a result.  The collapse resulted in part because of inflated valuations of assets underlying mortgage backed securities used as cash and collateral for lines of credit.  The ready supply of these mortgage based derivatives and the seemingly liquid market for them led to the type of overleveraging that is the hallmark of all credit bubbles. The investment banks and AIG treated their overinflated mortgage based securities as cash, using it for collateral to justify risky behaviour.  The higher the risk, the greater the return.  And when everyone had faith in the value of the assets underlying the securities underlying the leveraging, all was good.  

Then, lo, one day everyone discovered that they couldn't sell their mortgage based securities that they'd treated as cash because no one trusted the valuations of the mortgages underlying securities.  The underlying mortgages had begun to default, and no one knew how many would default.   And one of those entities that had treated its mortgage based securities as cash was AIG, which just so happened to be one of the biggest players in the credit default swap market (a market that sells default insurance).  So when everyone began to default because they were overleveraged, they turned to their default insurer only to find that the insurer was overleveraged too.

Just as the securities laws of the 30's and 40's and the SEC was borne of the carnage of the Depression, a new derivative regulatory framework should rise from these ashes.  To not do so would be to act foolishly in the face of clear empirical evidence that an unregulated derivative  market will eventually seize up.   

Johnny Come Lately

John McCain adds nothing to the bailout negotiations.  The Keating Five affair is reflective of his judgment in financial affairs and crises.   And his alleged campaign pause to return to Washington to save the day is a cynical move that has disrupted the deal at hand.  If the Republicans cut a deal before he shows up, he will look irrelevant.  Thus they're stalling the deal until McCain can play his role.  

Show Me the Money

A $700 billion dollar bailout request from the executive branch sketched out on a couple of pieces of paper?  Carte Blanche to spend as they see fit, with no oversight or judicial review? Ain't gonna happen, not with their fiscal record.  And if we're talking about putting out my tax dollars to pay for some one else's fuck up, then I want an equity stake in whatever toxic sludge laden financial institution my tax money is bailing out.  That way if any of these firms recover from this deregulated disaster we get our money back, maybe even with a return.  It's the capitalist way.  Let's not abandon it now that our system has failed us.  And as for the panic ridden who want to rush a bailout bill through with little consideration, they're just going to have to wait a moment for cooler heads to prevail.  Lack of foresight got us into this mess, and it certainly won't get us out of it.  

The Dukes of Moral Hazard

So the Federal Reserve, whose powers have been traditionally limited to the banking system, has now decided essentially to buy AIG and become the insurer of last resort for the credit default swap market.  This means that you and I, fellow taxpayer, are now on the hook for the irresponsible, irrational, and down right greedy behaviour of huge swaths of the market that wanted nothing to do with government regulation when the getting was good but who now are lined up at the governments door with cup in hand now that the risks have come home to roost.

This is a bad move, and one that it's not clear  the Fed can even afford to do, given the fact that the Treasury is now, wait for it, issuing more debt to insure that the Fed has sufficient liquidity in the days to come.  After re-establishing the moral hazard involved with trading exotic and convoluted credit derivatives by hanging Lehman Brothers out to dry, Paulson and company decide that it shouldn't apply to anyone who bought insurance for their derivative sludge.  But these weren't mom and pop investors who were buying this insurance in the form of credit default swaps, these were sophisticated investors who, if they'd paused for a moment and done their due diligence, should have realized that they were buying insurance from a speculator in the credit default swap market.  And that speculation was centered on the belief that there wouldn't be a systemic collapse in the credit markets.  Well, surprise surprise, yet another credit bubble has burst.  And the taxpayer is now footing the bill again.  

The sophisticated investors should be forced to take their losses.  The only people who should be bailed out are the mom and pop investors who stand to lose their retirement savings because of events they can't understand.  It'd be cheaper that way, and much more morally satisfying.

Dominoes

I wonder if AIG is going to make it.  The house is burning down and now it looks like there ain't gonna be any insurance payment.  What are the virtues of an unregulated credit default swap market again?  Systemic dispersion of the risk? Looks like that's working great right now.  I wonder what kind of financial legislation is going to emerge from this muck. 

Whistling Past the Graveyard

Is this the final financial derivative wave crashing down on Wall Street?  Will all now be washed clean again?  Or are we on the verge of financial catastrophe?  Maybe I'm just scared because I know more about Wall Street now than when I was younger, but banks are going under right and left and major companies are struggling to shore up their capital.  It's going to be an interesting week. Adios Lehman Brothers, Merrill, we hardly knew ye.  AIG, you're not looking too good there, fella. You look like you need some more capital.  Best of luck at the Fed money spigot.  There's no consequences to the Fed extending all this credit, right?

A Melancholy Day

September 11th will always be a melancholy day for New Yorkers at least until the last living memory of the day passes.  A  crystalline fall day savaged by history.  Even those in the heartland who condemn New York for its delightful and diverse iniquity were with us on that day.  Now, however, the boys and girls from the heartland have taken the day from us and used it to spin their incessant fear mongering that cloaks  their will to power.

Any chance that someone could convince me that President Bush deserved his title collapsed like the twin towers that day.  His feeble uncomprehending expression in the school classroom when he was told of the attacks is etched into my mind as indelibly as any horror from that day.  When I wanted John Wayne from Stage Coach I got Elmer Fudd from Bugs Bunny instead.  When thousands of innocent people are slaughtered and the heart of American capitalism is attacked, he decides to keep reading a children's book.  Then he got on a plane to run away and hide like a fucking pussy.  Instead of standing up and taking control of the situation he let the situation control him.  

Let his apologists coo and spew what a virile leader he is, and how he has saved the Republic from the ravages of our enemies.  All I know is that seven years later Osama Bin Laden is still being hosted by the Taliban in Pakistan, whose tribal autonomous zone is the first place this New Yorker would have invaded after locking down Afghanistan.  Iraq has been a waste of time and money.  Explain to me the logic of going after religious extremists by attacking a secular state.  A New Yorker wouldn't have wasted time with Iraq and would have pursued the Taliban and Osama Bin Laden into Pakistan as relentlessly as Patton did the Germans.  But, alas, we were fated to have a half witted faux Texan as our leader, and our enemy is still with us.

Everything You Know is Wrong! The Vice President is Not Part of the Executive!

Vice President Richard ("Dick") Cheney maintains that the Vice President is not part of the executive branch.  This is a bizarre claim never before made in the almost 220 years of our Republic's existence, and one has to wonder how an alleged originalist such as Dick can make it with a straight face.  It certainly doesn't pass the laugh test, but one's laughter fades into melancholy as you realize that this is just another manifestation of the rampant constitutional revisionism that has served this administration's need to coat their often questionable actions in a veneer of legalist rhetoric.

The purpose of the argument is clear.  Dick doesn't want anyone to know dick.  The bad faith argument's purpose is to shield his papers from public scrutiny via the Presidential Records Act, which provides for public access to executive branch records with certain reasonable restrictions for national security and the like.  The basis for his argument, however, is only clear in its asininity.

Dick maintains that because of his constitutional role as President of the Senate, he is actually an appendage of the legislative branch. Granted, he is President of the Senate (a largely ceremonial position) and the Senate does pay his salary and that of most of his staff.  And he does get to vote in the Senate when there's a tie. See U.S. Const. Art. 1, cl. 4 & 5.  But why, if as a matter of originalism the framers thought of the Vice President as a creature of the legislature and not the executive, did they provide for his election alongside the President and not the Senate?  Why, originally, did the winner of the most electoral votes become President and the runner up become Vice President? See U.S. Const. Art. II.  Is Dick maintaining that originally Presidential candidates were running for an executive branch position with a legislative branch position as a consolation prize?  Does Dick seriously think the framers and ratifiers thought of the Vice President as a special legislative officer who just happened to be elected in the same way as the President and serve the same term as the President?  No, he doesn't, he's just doing anything he can to avoid public scrutiny of his public office.  Being President of the Senate no more removes the Vice President from the executive branch than the power of the President to veto legislation makes the President a legislator.

 

The Surge

Isn't saying that the "Surge" is a success a bit like saying you got an A on a test that you were allowed to take over and over again?  Isn't the "Surge" what General Shinseki suggested we do in the first place, a.k.a. send in a large number of troops to pacify a fractious nation whose fissures were going to be ripped asunder by our invasion?  Thousands of U.S. soldiers lives lost, tens of thousands of Iraqi civilians killed, billions of dollars spent, all because of the arrogance of a few with little or no military training who thought they knew better than our military professionals.  The surge isn't a success because it's what should have been done in the first place.  It's nothing more than a do over writ in blood.  I'm glad it's working, but it is fatuous and deceptive to claim success after a carnage that could have been avoided by using the strategy that is the basis of the "success" in the first place. 

What are they afraid of?

If Sarah Palin is a pitbull with lipstick, why is she such a pussy-cat when it comes to the press?