A Few Thoughts On Financial Armageddon

September 25, 2008 § 18 Comments

I think it is more than a bit silly to call this a “bailout”. In point of fact, taxpayers will probably be buying quite valuable assets at bargain-basement discounts. Rather than costing the taxpayers money, this is very likely to earn the taxpayers quite a lot of money, as long as it is managed with a minimum of competence and oversight. In short, I agree with Bill Gross.

Also, much ado is being made of the ‘carte blanch’ authority being granted to the Treasury Secretary under the proposed emergency plan. This ignores the straightforward fact that what Congress giveth, Congress can taketh away; and that the middle of triage is not the time to start brainstorming about detailed health insurance rules.

I don’t blame Main Street for looking at all the hubbub and instinctively seeing “ripoff”. But in reality, taxpayers are being offered a bunch of free money because the financial institutions which made the mess don’t have the liquidity to get themselves out of the hole. Like all cash-rich value-investing bottom feeders, the Federal government stands to make a killing on their misfortune. Why aren’t private investors doing it? Because they are small fry next to the US Government: they just aren’t big enough to make this scale of deal happen. When push comes to shove, cash is king, and the US Government is the guy who can raise all the cash. But on a smaller scale this kind of deal happens all the time, where smart money which can afford to hang on to some illiquid assets for a relatively long period of time buys them dirt cheap from cash-strapped firms in distress.

Ignorance is almost always expensive, of course. In this case, naive Main Street dudgeon could be very, very expensive indeed. There are probably people involved who are guilty of criminal fraud, and they ought to be investigated and prosecuted. But at the end of the day, this looks more like a taxpayer windfall to me than a bailout.

Heck, with enough deals like this the federal government could ultimately fund itself and would not have to levy taxes anymore. Likely to happen in corrupt and financially idiotic Washington? Nope. But a guy can dream.


§ 18 Responses to A Few Thoughts On Financial Armageddon

  • Aaron says:

    If I understand him correctly, I think EF Schumacher suggests something like this in <>Small Is Beautiful<>. He proposed that, because the government provides the infrastructure that supports industry, the government should own a non-controlling share of every company. The revenues from that ownership would take the place of taxes. That way, companies wouldn’t be motivated to find ways to increase profits by giving the government less (ie, skirting tax laws). Instead, it would be in the interest of the company to increase stock value–which would give the government more funding.

  • William Luse says:

    I was thinking of asking you to post about this. Your take is different than any other I’ve seen, and though I am not qualified to make the distinctions, I’m rooting for yours. And Schumacher’s.

  • love the girls says:

    arron write : “He proposed that, because the government provides the infrastructure that supports industry, the government should own a non-controlling share of every company.”I suspect that a fantastically large government’s ownership of conglomerates was not quite what EF Schumacher had in mind.Nor do I think that EF Schumacher’s concept can be enlarged to encompass the vastness because human scale is violated.We live in a world without limit.The federal government created the problem when it started financing homebuilding, and now it is simply cleaning up the least of the mess it made, but unfortunately the worst of its mess is the destruction of a sense of place and localization which even mentioning Small is Beautiful ironically signifies.

  • Lydia McGrew says:

    I gather, Zippy, that you are not bothered by the deficit increase, printing money, or whatever other inflationary shenanigans the federal govt. is going to be engaging in to make this much “cash” appear ex nihilo? What about the sheer fact of the government’s owning that many of the homes in the country? (That one sure bothers me.) Then there is the constitutional matter. I can’t find anywhere in the constitution where the federal government is authorized to do this kind of thing.I haven’t quite given up on fiscal conservatism, even though it’s one of those things I compromised to vote for Bush and his “compassionate conservatism.” I agree with Michelle Malkin: Fiscal conservatism is dead, at the national level, and in being unhappy about it. And that needn’t prevent me from still having an affection for the time when Davy Crockett voted against federal disaster aid for a fire (I believe it was) on the grounds that Congress had no power to give it.

  • zippy says:

    The deficit increase doesn’t bother me as something set apart from government accounting in general. It might be a problem, it might not be a problem, and there is no way for me (or anyone else) to know.The government does cash accounting not accrual accounting, so we really have no idea (and no way to get an idea unless government accounting rules change, which they won’t, because if they did that would bring government transparency up to the still suboptimal level of corporate transparency, which the pols will never allow) — we have no idea whether the level of national debt or the level of the deficit is good, bad, or indifferent. I can’t look at the government’s balance sheet to try to figure it out, because the government doesn’t have a balance sheet.Let me say it again: we have no idea, and no way of even getting an idea, whether the current levels of government debt are healthy or unhealthy. And it is entirely possible for levels of debt to be <>unwisely low<>, depending on circumstances.I’ve long thought that ideally the federal government ought to operate as an endowment, with no need to (and no authority to) levy taxes at all except in a national emergency. It is a pipe dream in terms of <>political<> reality, but it isn’t a financial impossibility.As for ownership, well, as far as I am concerned the ability to tax as much as the government does <>is<> a form of government ownership of private assets; a particularly (and unnecessarily) adversarial form.

  • Anonymous says:

    Zippy is a “partner in a number of investment partnerships” and Bill Gross runs PIMCO mutual funds. It isn’t all that surprising that they would be in favor of the bailout.Keep in mind also that Zippy “has just the barest clue how venture capital and Wall Street work, and is useless (dangerous even) as a source of advice on personal investment”

  • zippy says:

    Anon:Sure. Always consider the source, and take it for what it is worth. I’m certainly not going to make anything on the ‘bailout’, other than that my relatively modest assets (like everyone else’s) will be less likely to go into meltdown. The institutions who have to sell their securitized mortgage assets to the federales get survival with a good hammering loss out of the deal, not profit. The reality is that I’m a heckuva lot more immune to meltdown than the average main street 401(k) holding homeowner.Also, and FWIW, I had the ‘endowment instead of taxation’ idea when I first got my MBA, long before I stopped living paycheck-to-paycheck.But by all means take into consideration what you may presume to be my biases.

  • Lydia McGrew says:

    Are there not also issues here of perverse incentives? That is, it seems to me a matter of common sense that whatever the banks, etc., have been doing with this sub-prime stuff has been highly unwise. So _any_ sort of government rescue (and why would they be begging the govt. to do something if it weren’t helping them not to crash?) just gives an incentive to do the same thing over again.Then, too, there is the question of whether the govt. and other political groups actually pressured the banks to do all this subprime lending. As you know, Zippy, there has been plentyof talk along that lines regarding all this “equal housing lender” stuff, and Tim heard a positively chilling call-in person on a radio show the other day who said he literally saw it happening in the 90’s: ACORN would come in and literally threaten the banks to accept a higher percentage of mortgages on pain of what amounted to business-stopping sit-ins at the bank sites. Every year, the guy said, the percentage of mortgages they had to accept by demand of ACORN went up by a little bit, and it was in those very politically-forced points of extra mortgages accepted that the foreclosures started coming in at higher rates. Which isn’t surprising, of course. Now it’s all melting down, and they’ll just turn around and keep doing the same thing.

  • zippy says:

    Lydia:Yes, those absolutely are problems, and absolutely need to be addressed, but when a train wreck happens you do the rescuing first and figure out what went wrong and who to blame later. “Main Street” opposition here is like refusing to get paid handsomely to stop a chemical spill from making it into your own neighborhood until blame is assigned to whomever caused the spill. It just doesn’t make any sense.

  • August says:

    Listen to Lydia on this one.Theft is often profitable, but I doubt it ceases to be a sinful thing just because the government passes a law about it.

  • Bob says:

    I’m thinking tar baby here.The government steps in to fix some perceived need.Then the government steps in fix the mess that its previous intervention caused. Then on, and on, and on.

  • love the girls says:

    Bob writes : “I’m thinking tar baby here.”But then question is, who is br’er rabbit? And what is the tar made of?

  • e. says:

    Zippy,“…because the financial institutions which made the mess don’t have the liquidity to get themselves out of the hole.”I think you are neglecting that what we’re getting are distressed assets and that if these firms aren’t going to independently raise capital on their own (like Goldman has done) and are simply going to rely on this bail-out; it would’ve been done in vain.I believe the manner in which the Goldman firm tried to raise capital on its own (in spite of the Buffet $5 billion deal) in order to fix up their balance sheet is a course of action the other firms should be taking <>or else<>.

  • Lydia McGrew says:

    I infer that the Secretary of Treasury and the team of financial advisors for Zippystan are not supplied by the Von Mises Institute. 🙂

  • zippy says:

    Lydia:I think government finance is like global warming. There is definitely activity, and a lot of people pontificate on it (taking various contrary positions) with religious fervor; but in fact it simply isn’t possible to have the kind of confident knowledge expressed by the faithful.

  • e. says:

    Zippy,“There is definitely activity, and a lot of people pontificate on it (taking various contrary positions) with religious fervor; but in fact it simply isn’t possible to have the kind of confident knowledge expressed by the faithful.”I hope at some point, you will come to the same view about Politics as well.

  • William Luse says:

    Lydia, wasn’t Obama associated with Acorn?

  • Lydia McGrew says:

    Yup. The brown-shirts of the community organizers. “Give our people loans or we shut you down.”

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