Paulson's failure

What do we really expect? Congress gave Paulson authority the authority to do as he decides is important. Congress has failed us again just like they did during the run up to war. As usual they are PASSING THE BUCK.

http://nomedals.blogspot.com

I don't know if you saw this:

"The government’s mixed signals about rescuing financial institutions may have added to market turmoil in recent months, a Federal Reserve policy maker said Monday.

In remarks to a conference in Israel, Federal Reserve Bank of Richmond President Jeffrey Lacker said the “disparate” government responses to potential failures at major firms created uncertainty and “may have made it difficult for market participants to forecast whether and in what form official support would be forthcoming for a given counterparty.”

“Shifts in expectations regarding official intervention may have added volatility to financial asset markets that were already roiled by an increasingly uncertain growth outlook,” Mr. Lacker said at a conference at Hebrew University of Jerusalem, according to his prepared text released by the Richmond Fed...

indiana jim says “Michael Smith is absolutely right that Obama is the main source of uncertainty.”

Unfortunately, the way our current regulations work, it is the way the credit rating agencies will evaluate the impact of Obama on the markets that is the main source of uncertainty.

Have you not seen? There are now more courses on how to analyze a possible change in the ratings of a company than there are courses on how to analyze the company rated.

Michael Smith is right: Obama's impact on uncertainly grew daily during the election in direct relation to his probability of winning. Furthermore, uncertainty has grown day by day since Obama's election from both Paulson and because of Obama appointments and the provocative comments that have been made by various petty tyrants around the world. Furthermore, Obama bought into giving Paulson the $700 billion, so Obama is also, if one is objective, responsible for his share of the blame regarding whatever uncertainty Paulson introduces into the system.

The best hope it seems is that Obama will screw things up so badly over the next year and a half that come 2010, any in Congress who support BIG GOV will be voted O U T.

Ironically, the long-run will offer greater potential for wealth creation if it becomes clear and certain that Obama is the big government, socialist, radical idealogue that his voting record and choice of people as long-term allies suggests.

Ironically, it is unfortunate that the economic downturn over the past year (for which he is so much responsible via his increased chances of election and election) may work to forstall certainty about what he stands for. For example, if he backs off pushing for nationalized health care, and higher taxes on most successful folks (the engines of growth that disproportionately create jobs for others), then the claims that he is not a radical socialist will gain some force; uncertainty will remain as his apologists continue to spin the tale that he is a "moderate" liberal.

Russ Roberts is absolutely right that "uncertainty" is the main issue not liquidity, and Michael Smith is absolutely right that Obama is the main source of uncertainty.

"Rethuglicans" - how original. You'd think after the election Democrats would not be so bitter.

The problem isn't liquidity. It's uncertainty.

Bravo to Professor Roberts for identifying this fact.

However, in fairness we must say that the uncertainty is not attributable solely to Paulson's erratic, ever-changing and near-hysterical efforts to manipulate the market.

There is also the specter looming of a president-elect who’s talked openly of "spreading the wealth" -- of seizing the profits of entire industries like "big oil" and the pharmaceutical companies -- of introducing cap and trade legislation so draconian that electricity costs will “skyrocket”, to use his term, and any attempt to build a coal-fired power plant is doomed to bankruptcy -- of mandating ever-more employee benefits such as 7 days minimum paid sick leave per year -- of forcing all employers to pay 100% of their employee’s healthcare premiums -- of completing the nationalization of the healthcare industry -- of increasing the capital gains tax and the top tax rate and of imposing some sort of new tax on companies that outsource jobs overseas -- of granting unions the power to intimidate workers into agreeing to a union without that pesky secret ballot -- just to name a few of our president-elect’s proposals.

One wonders who, under these conditions, dares to invest in anything?

"Yes, I remember that the Rethuglicans "overhauled" the bankrupcy laws to make it virtual impossible to ever get a fresh start in life, and get out from under a mountain of debt, until you're good and dead. That was done at the behest of the credit card companies. They wanted their pound of flesh."

Yes, and I remember it was the demosocialist that wrote the bankruptcy laws that the republicans had to overturn.

But, but, but, why did the demosocialist write bankruptcy laws that allowed people to make free and voluntary contracts, run up debt and the just walk away scot free from their obligations? The answer: it was just another form of vote buying welfare to those faithful that were the takers in life.

To the bleeding heart liberals, I say again: A loan never requested is a loan that does not have to be repaid.

If you feel sorrow for the downtrodden sods that make voluntary contracts and then are held to perform to those terms, go to them and get in their face and say, "Hey stupid, don't apply for credit cards in the first place! Don't spend more than you earn.!"

Once again I say, socialist create the ills that they then complain about and blame others for.

Can anyone here imagine ...

I can imagine lots of stuff. I can't tell you why rent seekers won't morph anything I imagine into something more like the "rule of law" we have now.

A central banking system doesn't need any capital requirement at all. It only needs a monetary authority insisting that creditors bleeding too much eventually bleed to death. Obviously, we don't have this system.

In a pure central banking system, banks require no depositors. Rather, bankers borrow from the central bank to extend credit and repay the central bank as borrowers repay. Banks then operate on the difference between interest earned on their loans and interest paid the central bank.

When a member bank's account with the central bank goes too deeply into the red, the central bank ceases lending to it, so it can no longer operate, and a bankruptcy court auctions its performing assets to other banks, including new banks continually joining the fray.

The central bank in this system is not a profitable organization. It's only a policeman requiring member banks to play by the rules. It creates the money it lends from nothing, and it has no authority to spend any money it receives as member banks repay its loans. This money simply leaves circulation.

Since member banks may borrow their start up capital from the central bank, banks don't require shareholders either. In fact, depositors and shareholders are among the rent seeking interests always demanding that statesmen bail out the member banks.

Can anyone here imagine a completely hand-off banking system without formal regulations, consumer protections, and nothing more than a risk borne by the depositors who rely on their own investigation and research?

I cannot. There's not enough people in a society that would allow for that kind of liberty. Nope; there's far too many people in society that want (no, demand) that government offer those assurances that will supposedly take away most risk and nearly all pain associated with risk-taking. These are the same type of people that would come to this blog and begin their screeds with "Dear Tenured Professor". The same types of people who look for government to be involved in everything where two or more parties wish to negotiate the exchange of something material in nature.

Why don't you tell us of your designs of a banking system, Dear Commentator, so that we can see how much (or, how little) you imagine yourself to know!

Professor Russell Roberts reminds us that the great economist F.A. Hayek wrote that "the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

Why did then our Dear Tenured Professor not speak out when a small group of nerds in Basel thought themselves capable of exorcizing risks out of banking, for ever, by cooking up a formula of minimum capital requirements for banks based on some vaguely defined risks of default; and thereafter created a risk information oligopoly by empowering the credit rating agencies, which was all doomed, sooner or later, to guide the world over a precipice of systemic risks; and as happened with the lousily awarded mortgages to the subprime sector.

Was it, is it, because those nerds are not financial operators, but fellow PhDs?

One wonders why the Germans are a century behind the Austrians in Economics....

"Germany to advocate ‘world risk map’


By Chris Bryant in Berlin


Published: November 14 2008 13:39 | Last updated: November 14 2008 13:39


German chancellor Angela Merkel is set to push international leaders to draw up a “world risk map” of global financial institutions to allow financial authorities to quickly identify future trouble spots.

Unveiling the findings of a government-commissioned expert panel on Friday Mrs Merkel also proposed the creation a central body to oversee credit ratings agencies, an international register of major loans and the better alignment of managers’ pay to discourage short-term risk taking.

EDITOR’S CHOICE

Volcker urges overhaul of banking regulation - Oct-07

Sarkozy backs ‘financial Interpol’ plan - Sep-03

Banks told to tackle risk and pay - Jul-17

Bankers signal change of mood over fair value - Jun-29

Banking regulators to tackle liquidity risks - Jun-19

Banks on track to meet reforms deadline - Jun-15

The chancellor and finance minister Peer Steinbrück are expected to lobby at the G20 world financial summit in Washington this weekend for all financial institutions, markets and jurisdictions to be made subject to proportionate regulatory control in order to eliminate “blind spots” in the financial system.

This supervision is intended to shed more light on the opaque workings of hedge funds and insurance companies, which the government believes have contributed to the severity of the current crisis.

The idea has found support in Europe, the US is thought to be hostile to what it views as a heavy-handed approach.

Ms Merkel said on Friday she was "somewhat surprised" about warnings against too much regulation before the crisis had been overcome.

Although Berlin has also sought to play down expectations for detailed solutions to the crisis Ms Merkel said she remained “optimistic” about the chances for progress.

The chancellor will go to Washington armed with a set of policy ideas prepared in the past two weeks by a six-strong panel led by Otmar Issing, a former European Central Bank chief economist.

Prof Issing said the panel had considered ways to reform the world's financial architecture in order to prevent a repeat of the current crisis which had left the financial system "on the edge of ruin".

Among the panel's suggestions isa global risk map which would highlight at a single glance areas where pressure is building up in the financial system.

The map would show all major international institutions and financial products, including credit insurance and asset-backed securities.

Similarly, the group has suggested setting up a cross-border credit register of major loans to provide greater transparency to businesses and governments seeking to evaluate risk.

Credit agencies, which have been criticised for dishing out spurious ratings in the pursuit of profit and failing to spot the build-up of risk, should be subject to a central supervisory body that would report annually on their work the report said.

Furthermore the fee structure of credit agencies must be reformed to incentivise the issue of a correct rating, for example by making agencies buy into the tranches of debt that they rate.

The group also proposed realligning management compensation schemes to motivate long-term performance.

A new compensation model could incorporate both bonus and malus components, similar to the system used in the car insurance industry,an idea favoured by Mr Steinbrück"

Yes, I remember that the Rethuglicans "overhauled" the bankrupcy laws to make it virtual impossible to ever get a fresh start in life, and get out from under a mountain of debt, until you're good and dead. That was done at the behest of the credit card companies. They wanted their pound of flesh. So this is some ironic injustice that the companies that were making the biggest loans now want (and are getting) a bailout to save them from bankruptcy. I say it again: Let them fail. At least by being a corporation, their personal assests aren't at risk, just the shareholders' investment. The poor schmuck with a mountain of credit card debt has no place to go anymore; at least bring back the poor house.

To be fair, there are plenty of people who didn't live totally within their means, racked up some debt, and are probably taking the opportunity now to pay it down. I suspect this is a little closer to the norm of people who don't default than Russ's characterization of those who passed up getting a new car or a bigger house. Isn't average household credit card debt like $10K-ish and average household credit limit above $20K?

Arnold and Russ's comments on the bail out are a bit of a blur to me now, so I don't know which one of them to credit with the observation that the credit lockup might be because there is reduced demand for credit, but that hypothesis would be consistent with people waking up in a world of uncertainty and wanting to get existing debt under control before taking on new obligations. I know that I'm deferring big purchases for a few months while I focus on getting a few debts paid off.

I'm sick of the rich and powerful getting handouts, bailouts, and welfare from Uncle Sam. Any 2nd grader who's learned long division can tell you that 1 trillion dollars divided among 300,000,000 people (the current U.S. census figure) is $3,333.00. Since the top 100,000,000 people don't need the money, my check alone should come to $5,000. My hardworking neighbors who have 3 kids should receive a check for $25,000 forthwith. GM should be liquidated and auctioned off lot, stock, and barrel. I haven't forgotten what GM pulled in Poletown to destroy a working class community. Goodbye, good luck and good riddance. I'll turn off the lights for you, and show you the door. Don't let it hit you in the ass on the way out.

The bailout is about the banker, not my neighbor.

Yes. Foreclosures are one of the few opportunities for real political alchemy though because for whatever reason the populace really seems to have a preference for banker bailouts that "keep people in their homes." I wonder why more people don't share Martin's view that evicted renters can find a place they can afford?

Roberts' comment is brilliant.

I am grappling to state my insights, hoping to get better at it by and by. For the time being, here is what I've tried at Cafe Hayek and in another blog - http://redstateeclectic.typepad.com/redstate_co... :

Further to my below comments, here is a rather clumsy comment that I made regarding a post at Cafe Hayek.

You will see just how hard I find it to get my ideas across intelligibly, but I hope to improve in the course of time and with your help:

The essential point in my below Cafe Hayek-comment: the contempt for the rule of law generally shown nowadays in Western democracies logically leads to a contempt for capitalism (and vice versa; while I suspect in pro-capitalist America, the degeneration of legal thinking provided an inroad for anti-capitalist attitudes, while in Europe anti-capitalism has always been strong and law was eagerly abused to reinforce anti-capitalism); while capitalism is based on principles that protect all form arbitrariness and thereby produce the security of law and the predictability of behaviour in society that is an indispensable precondition for maximum prosperity, the prevalent (anti-capitalist) regime of political expediency that crowds out the rule of law and stifles the beneficent character of true capitalism, is truly unprincipled and "unbridled" and creates distortions in the economy that are falsely ascribed to capitalism. (See the present crisis).

True capitalism (the result of the rule of law) does not produce a paradise (which is the Utopian standard against which its enemies judge it), indeed capitalism depends on the constant frustration of certain expectations and on disadvantages and even hardship, which come with the constant adjustments typical of and needed in a vibrant free economy - but it also provides the best means to cope with these problems in a way that maximises the likelihood that everyone can make its largest contribution to society's wealth, and that, thanks to the rule of law, restrictions on the scope of allowed behavior serve to maximise personal freedom and systematically improve the conditions of voluntary and spontaneous collaboration and cooperation in a society so large and complex that it can be conducively ruled (i.e. impersonally led to form a desirable overall order) only by principles rather than government decrees (= efforts at government planning).

The larger, the more complex a society the less we can afford to leave the shaping of its nature to a few (politically powerful) minds, and the more we need to rely on general rules instead.

Here the comment at:

http://cafehayek.typepad.com/hayek/2008/11/everyday-global.html

The consequence of the rule of law in the economic sphere is capitalism (a free market economy). In that sense, there is nothing "unbridled" about the market. To the contrary, capitalism is the result of a strict regime of law, which encapsulates and enforces a consistent notion of justice, the latter term strictly relating to human behaviour and nothing else - rather than to any possible impersonal state of affairs (that is not the intended result of such human conduct as can meaningfully be judged "just" or "unjust" and) that this person may prefer while another dislikes it. By relying on the criterion of just conduct, the rule of law (and thus capitalism) does indeed allow for (economic and other) outcomes that may very well be considered by this person or that person as unfortunate or entailing hardship. Whatever correction or improvement may be sought, under the rule of law it has to be endeavoured in a way not involving unjust conduct. The rule of law ( = (economically) capitalism) is neither free from disadvantages nor does it rule out efforts to do something about such disadvantages - but it does rule out arbitrary action, contrary to the daily practice in today's society, which has effectively replaced the rule of law by politicized legislation. What we call "capitalism", what we call the defects of "capitalism" today, are the defects of an economic system that is not derived from the rule of law but from politicized "law" - which is indeed awfully "unbridled".

In the name of "fairness", how about writing my mortgage down by 20% even though I didn't pay $100,000 more than my 1000 sq. ft. flat is worth and can easily afford my payments? No, some guy in Vegas with the same income and tax burden, plus a 2500 sq. ft. house with all the finest amenities, is clearly needier.

Happy? No, I'm not. Foreclosure doesn't harm my neighbor, who lived for months or years in a house he couldn't afford before his ARM payment ballooned, nearly as much as it harms his banker. My neighbor can easily find a home he can afford. The bailout is about the banker, not my neighbor. I'm not fooled.

Martin, I heard the FDIC chairman on the radio this morning and she explained how happy I'll be because "my neighbor" won't have his house foreclosed on. Or something like that. I feel SO MUCH better now.

And who's going to pay for all of this? Those who lived within their means, who went with the smaller house, who waited a few more years to get that new car, who took a part-time job rather than borrowing even more money to pay for college. Suckers.

Absofuckinlutely.