Smoking gun: The Affirmative Action Financial Crisis

It’s really sickening how big-government liberals can create a problem, and then demand a big-government solution like the Bush-Pelosi bailout:

Half Sigma: Smoking gun article: liberals, Democrats, poor people and non-Asian minorities caused financial crisis
A conservative warns of the problem, but he is ignored by Democrats because Democrats and liberals know that the conservative is motivated by racism.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

It’s all clear…

Banks should have been smart enough to recognize that pro-”diversity” laws, rules, regulations, Congressional hearings, and the like were going to lead to the liquidity crisis, and tried to lobby against it as hard as they could.

The Bailout: Liquidation and Subsidy

The Bush-Pelosi Bailout has two components: first, a liquidation (Secretary Paulson implied that this is the only purpose of the bailout), and a subsidy (CNBC has been focusing on the need for this portion). The liquidation is an attempt to replace the value of subprimes which cannot be sold at today’s prices with cash nominally worth the same, but much more liquid. The subsidy is an attempt to raise the value of those subprime mortgages, so that banks do not have to pay (“lost wealth because of”) their bad investments.

The politicians have been silent on this distinction, and most of the pro-bailout members of the chattering class have simply ignored it. Some more thoughts on the bailout, focusing especially on the subsidy:

The Corner on National Review Online
2) The Paulson-Democrat Wall Street Bailout will not work

· Banks are highly insolvent and the capital hole to be filled would not be filled by this plan – and any attempts to do so under this plan would drive up the cost of the “toxic asset” purchases (see next point)

· The supposed “profit” or “minimal cost to the taxpayer” is predicated on buying toxic assets low and selling them high – yet that inherently conflicts with the price point necessary to inject sufficient capital

· But even when prices are bid up (because Treasury is incentivized to do so to make it work), there is no guarantee banks will use the money to then lend if they are still insolvent and facing a likely recession

· This bill does nothing to deal with the over $60 trillion in largely unregulated Credit Default Swaps that are wreaking havoc with the financial system

· The plan is operationally questionable – with little clarity about dealing with the pitfalls of price-fixing, how a “reverse auction” won’t be easily manipulated to allow prices to get bid up, and other problems

And:

The plan has no restrictions on buying up assets from foreign banks – banks who aren’t active lenders in U.S. markets directly and whose leverage is far greater (40x) than even American traditional investment banks (25x), whose leverage is greater than American commercial banks (10-15x).

· Moreover, many of these foreign banks are currently being or are soon to be nationalized. Therefore, the US government would be buying toxic assets at above market prices to support foreign governments.

Now, it may be wise to spend 700 billion something to help the economy. Universal health care for ten years, two complete interstate maglev systems, or using some of the money to eminent domain the subprimes at domain prices, while using the rest to pay down the debt (that is, not increase the debt). This is a serious issue, and we need an honest debate on it to come up with ideas.

The National People’s Congress considers the Bush-Pelosi Plan

China’s legislative arm is the “National People’s Congress,” a rubber-stamp boddy where votes are routinely 99.9% for the Communist Party’s proposal, and .1% abstaining.

The debate of the Bush-Pelosi Wall Street Bailout seems to be following this line.

As I am watching now, a Democrat spoke about what a great plan the bail-out was. The Republican response… was how great the bail-out plan is.

At least the USA PATRIOT Act was focused on killing people who did bad, instead of transfering hundreds of billions of dollars to them.

The Financial Crisis, or, The Power of Nightmares

With a word-change here and there, and of course different visuals, BBC’s The Power of Nightmares works remarkably well for the current Financial Crisis.

Of course, a nightmare can manifest itself in reality. It is possible that the cries of Wall Street of Money, the cries of the Administration for Trust, and the cries of Congress for Power are well founded and not just a reflection of their perpetual desire for money, trust, and power.

We’re not given logical arguments for why such a thing might be true, other than vague arm waving, secret documents we can’t access, and the deeply held beliefs of truly incompetent people. Then again, even a stopped clock is right twice a day.

Second Order Effects, or, The need to estimate the Death Toll of the Bush-Pelosi Bailout (EESA-2008)

The Bush-Pelosi Bailout, or the Emergency Economic Stabilization Act of 2008, is as expensive as several major wars. Wars are conventionally measured in relative death toll. It may be wise ot measure the Bush-Pelosi bailout the same way.

CNBC this morning informs us the government “does not want to” pay market prices for the subprime properties, that there is “no way” the government will recoup its losses, and so on. If true, this means that the Bush-Pelosi Bailout will be an ‘investment’ in the way that Head Start, welfare, and other government giveaways are ‘investments’ — the plan is foolish, but at least it’s somewhat better than simply burning piles of cash to heat the Congress.

What are the second order effects of this bailout. If Wall Street crashes, and ambitious young people give up on a career in Wall Street and instead focus on engineering, computer science, nursing, research, lives may be saved. On the other hand, if ambitious young people seek to maximize their profits by working in highly-profitable but risk-protected Wall Street firms, the cleverness will flow away from those fields.

How much money is going to be lost? What else can be bought with that amount of money?

Which alternative keeps more people alive?

The Detroit Bailout

Compared to the Bush-Pelosi Wall Street Bailout, which is twenty-eight times more expensive, the Bush-Pelosi Detroit Bailout is downright fiscally prudent!

US Congress passes 25 bln loan guarantees to automakers
The US Senate Saturday approved 25 billion dollars in loan guarantees for the financially strapped US auto industry, intended to spark a wave of automotive innovation.

The loan guarantees were included in a continuing resolution that included funding for the US government and the wars in Iraq and Afghanistan.

The Detroit Bailout is a companion to McCain’s gas tax holiday, Obama’s energy tax credit, and other such give-aways. Obama is right to say that the price of gas should be high, but it went up too fast. Industries did not have the time to adjust, because we did not implement my plan in time.

The loan guarantees to Detroit will help speed development of high-tech ways to minimize gas consumption. Or at least, they better.

Sould we trust Hank?

Some highlights from the Emergency Economic Stabilization Act of 2008, the current draft of the Bush-Pelosi bailout:

Calculated Risk: Draft: Emergency Economic Stabilization Act of 2008
Here are some parts on pricing mechanism:

(d) PROGRAM GUIDELINES.—Before the earlier of the end of the 2-business-day period beginning on the date of the first purchase of troubled assets pursuant to the authority under this section or the end of the 45-day period beginning on the date of enactment of this Act, the Secretary shall publish program guidelines, including the following:
(1) Mechanisms for purchasing troubled assets.
(2) Methods for pricing and valuing troubled assets.
(3) Procedures for selecting asset managers.
(4) Criteria for identifying troubled assets for purchase.

So it’s all up to the Secretary to establish the rules. Same with Warrants – it’s up to the Secretary to negotiate.

Treasury Secretary Hank Paulson is of course the Ken Lay of Goldman-Sachs — the CEO who bailed out shortly before the whole thing imploded. Hank was closer to our President than Kenny Boy, however, so while Enron went bankrupt, Goldman-Sachs was bailed out in the nick of time and now we’re going to trust one of the men who built this mess to solve it.

What else can you buy with hundreds of billions of dollars?

As George Bush and Nancy Pelosi try to rush through a bail-out of speculators, the cost of their plan is best understood as the cost of what else we could buy with it.

For instance, why not transcontinental maglev networks?

Thomas P.M. Barnett :: Weblog
Cost estimated for mag-lev network in manner of interstate highway system? A mere 350 billion. Pocket change this week!

Or, for that matter, fiscal discipline?

The Bush-Pelosi plan is bad policy and must be defeated.

The Bush-Pelosi Bailout

From an interview with the ex-CFO of Lehman Brothers, a major investment bank that is now out of business:

Erin Callan: Lucky to get out – Sep. 26, 2008
Did Lehman think the Fed would help it?

Yes. No one knew what it looked like for a broker-dealer this big and connected to the world economy to go bankrupt. And no one wanted to know.

Wall Street’s view of big risks has been this: if they win, they should keep the profits; if they lose: the government should pay the losses.

George Bush agrees. Nancy Pelosi agrees. The anchors at CNBC agrees, this morning warning us that buying these subprimes from investors at more than firesell prices would hurt the investment industry.

Well, relatively, yes. Everyone would like a free check for about $200 billion, give or take. Especially if you’ve run your life assuming that the government would save you.

The New York Times has an article on the Swedish bailout, which protected taxpayers and not speculators.

McCain can show his leadership be helping the Congressional Republicans hold out against socialism, and support a bail-out that does not teach bad behaviors. Obama has an opportunity to do the same thing, if he can convince the Congressional Democrats of the same thing.

This redistribution of loss from investors to citizens, if it happens, will be known by the most influential people who made it happen. To now, it has been the Bush-Pelosi plan. If McCain caves, and wins the election, it will become the Bush-McCain bailout. If the Democrats and Bush pass this over Republican objections, it will be the Bush-Obama bailout.

The Bailout

The Bailout, as it is currently being talked about, is bad policy and must be defeated.

Secretary Henry Paulson, Chairman Ben Bernanke, and President George Bush are advocating a bailout that will buy home mortgages from financial institutions in exchange for cash. Because these institutions are free to buy or sell any time — if at prices they find distasteful — the plan advocates paying above-market rates for mortgages, and allowing the financial institutions to keep the profits.

There are two components to this plan. The first is making the investments of financial institutions “more liquid,” or more easily transferable to something else. Cash is very liquid. A mortage which is hard to sell at the price you want is not. Secretary Paulson emphasized the need for liquidity in his original address on the matter last week. Illiquidity is a well known economic problem, and this is one we should take seriously.

The other component of the plan is to transfer wealth from tax payers to these large financial institutions. The wealth transferred is the difference between what we pay for these mortages, and what the institutions could make if they just sold the mortgage. For instance, if the government pays $200,000, but the bank could only sell it for $100,00 (perhaps to the individual who is currently making the mortgage payments, perhaps to a foreign investor, perhaps to a local government, etc), then we would be transferring $100,00 worth of wealth from the taxpayers to the financial institutions. This is horrible. It reinforces bad behavior, it sets an example for others, and it prevents the market from learning the full lessons of this disaster.

On CNBC yesterday, some hosts were saying that this is “everyone’s fault,” that “no one is innocent,” that “we are all to blame.” This is not true. It is not the fault of those who did not take out risky loans, or who paid their mortgages, or the investors who were wise with their money. It was the fault of individuals who were more-than-average stupid and took out loans they could not pay back, and investors who were more-than-average risky and gave loans they could not collect. It is the fault of politicians whose response to the low credit available to blacks and hispanics was “this is racial discrimination,” rather than “this is a reflection on the relative credit worthiness of groups within the American population.” This is the fault of bad officials, bad investors, and bad politicians. It is not everyone’s job.

On NPR this morning, a reporter said that Goldman Sachs estimated that the plan — which will initially cost $700 billion — will recoup $500 billion, leading to a net transference of wealth from taxpayers to investors of only $200 billion. If this is true, two alternatives to the bailout present themselves:

1) Because the government will on average be paying 7/5ths of the actual value of the mortgages to the investors, then the investing institutions should make up the difference in non-voting preferred stock. That way, the institutions still become more liquid, the owners of these risky firms are not unduly rewarded, and the government’s investment is protected both by the value of the mortgages and the value of the preferred shares.

2) Eminent domain the illiquid assets. If your house is in the way of a new highway, or new shopping mall, that your government wants to build, it will use its constitutional power of “just compensation. While we might squabble whether the “just compensation is the current market value or the market value the U.S. government could most probably get for these properties down the road, it would not be as much under the current bailout.

All we now hear — of talk of limiting executive pay packages — is well and good, but does little to protect taxpayers from investors. It is a red herring away from the real problem: a $200 billionish giveway as a reward for incompetence.

As I write this, John McCain has already suspended his campaign and traveled to Washington to join in the negotiations. If the bailout passes in its current form and John McCain supports it, his suspension will have been a gimmick and he will display the same big-government approach to policy that I would expect from Richard Nixon. If a the bailout fails in its current form, and we don’t encourage such bad behavior by transferring hundreds of billions in wealth, then John McCain will be a leader of the same quality on economic policy that has been on the Iraq War.