Defeat of the Bailout Bill

I can't help but wonder if yesterday's defeat of the Bailout Bill isn't the equivolent of the passengers on the Titanic refusing to help an unpopular captain steer the ship and then saying, "Serves him right, now he'll sink," when he hit an iceburg.

You can't lose

NPR ran a story this morning on how much collecting tractors has been gaining a following in both Europe and here. Apparently, tractor prices are jumping at a rate of about 100% a year.

They talked to one gentleman who has been collecting tractors for about 5 years now. According to him, it is his "retirement plan" and "you can't lose."

Anyone remember when the only risk in the stock market was not being in it? Anyone remember when you couldn't lose by investing in real estate? When was the last time you saw something increasing in price by doubling every year and it wasn't a bubble?

Anyone think this guy will need a bailout eventually?

Market Meltdown

All that seemed to be on NPR today was discussion about the status of the markets and as they talked I had a lot of comments. Some of which I remember now, hours later.

Everyone is busy decrying the "greed" of Wall Street by which they mean corporate America. Hypocritical. Now that "we" are in this mess because of "them," we get mad at them, and in the rush of emotion, fear, and panic, you hear all kinds of crazy things. One listener posited that "we" should send them to "jail" for what they have done "to us." Another suggested that the government, giant wet-nurse to the nation, should step in an allow bankruptcy judges to unilaterally change the mortgages and loan notes. But here is the thing, or at least the first thing: The "we" that got us into this mess is the same "we" who wants to blame the faceless "thems" and send them to jail. For the big banks and big insurance companies to have gotten into all this trouble with their mortgages, they had to lend the money to someone. That someone came to them wanting a loan and was delighted to get a loan. That someone wanted the loan, in many cases, to pay for something that has subsequently turned out to have been a poor purchase decision. That someone would have been very angry had they been turned down for a loan because the bank thought the house was worth far less than a "certified" appraiser. "We" wouldn't be in this mess without the "someones" I described who are, wait for it, the same main-street middle Americans who are outraged and calling for the heads of the captains of Wall Street. If "we" want the culprit, "we" need to look in the mirror.

I don't hold Wall Street blameless either, but I certainly understand a captain of business following what works. More accurately perhaps, I'm not going to force him to choose between a decade of what would have been dismal performance for his company by making sound decisions and dismal decisions in order to keep his job. Make no mistake, had any of these "thems" done what we are now telling them they should have done, their stockholders (including the "we") would have forced them to resign because their profits were so low. The short-term now-now-now demands of the American Public set all of this up. The greed and short-sightedness of the public made this disaster a disaster, and our lack of patients and unwillingness to sleep in the bed we made are going to make it worse.

There is a song refrain that says, "I want it all. I want it all. And I want it now" or something like that and that encapsulates the American Public, especially the baby boomers (who might be the most me oriented generation ever). The public wanted their parent's standard of living (attained over their parents' lifetime) immediately. They wanted stock to go up fast and rewarded short term performance. Worse, they punished poor short term performance which, as mentioned causes fund managers to either focus on the short term exclusively or to get a new job. They wanted new TVs, new computers, new cars, new ipods, bigger houses, all right now. Borrow all you need up front and then pay it off over a lifetime instead of save it over a lifetime and only get the STUFF at the end. What did that do? Well, the first thing that happened is huge credit card debt -- buy now, pay later. Better yet buy now, pay a little later so you can buy more then too. Hey, look you can borrow against your house like a giant credit card for those really big purchases (or to pay OFF your credit card giving you more credit there). This rush of buying was akin to a sprint only no one saw it. Of course, if everyone bought everything they'd ever need in the next year, then we'd have a bunch of activity for a year and then a sudden drop off. Worse, that drop off would then cause lay offs at exactly the time when everyone is trying to pay for everything. We created an economy that is driven by these credit transactions and when there was not enough money in the system to keep things going "at pace" the "we" borrowed it just like a sprinter injecting steroids. Like that sprinter, we could not keep up the pace forever and eventually, something broke. That's the problem with momentum economics.

Also when everyone is buying something,it increases demand which, in turn, increases price. Prices go up until suddenly demand drops and then prices fall. The guy who buys an item at the top, now loses all that value and says he loses money. It's more accurate to say he lost illusory value for which he paid "real" money. Of course, if the seller of that item turned around and sunk that money into something that also lost value, then it's almost like losing illusory money as well.

That brings me back to greed. Readers may recall a previous blog entry about people who were just voluntarily walking away from their mortgages because they still owed more than the property was worth. When people do that, it furthers all that bad debt, corporate collapse, and recession we keep hearing about. Additionally, one of those default credit swaps (insurance policies on mortgages) has to then be paid which is yet another blow against AIG and others. The irony is that these same people who are walking away from their signed word (the note and mortgage), are the same ones who are blaming the greed of Wall Street. If what the bankers did is "criminal" "bank fraud" then I think walking away from a mortgage you could pay if you chose is equally bank fraud.

We also have to ask ourselves what sort of society we are creating. More and more I see a no-fault society where we, be it big brother or whoever, moves in to save everyone from their own mistakes. Bad investment? We make it good. Lost your job? We make it good. It's all about shifting responsibility. It's all about not feeling like what just happened to you is not your fault; that someone should have prevented it. That someone is never the victim because, to us, the word victim implies guiltlessness. It's all the bank's fault because they should have known not to lend money to me when I asked for it by filling in fraudulent information on my loan application. Shame on them.

I note that I've heard a lot of criticism of the "free marketers." They are getting blamed for this mess but they caused "deregulation" which everyone now knows is synonymous with "greed" and "irresponsibility." The thing I'm noting thought is that this is not a test of deregulation and free market economics because you aren't allowing half of that approach to operate. In a free market, you pays your money and you takes you chances. If you do well, you do really well and reap a windfall. If you screw up, you reap the whirlwind and get hammered by the free market. It is the latter part our society is now predisposed to prevent and THAT throws the whole thing off balance. The good must balance the bad and the goods of a free market are all huge, BUT SO ARE THE BADS. The true free marketers are the ones saying that we should not rescue AIG or Fannie and Freddie; that it's now time to take our medicine no matter how bad it tastes. Fair weather free market doesn't work.

Now lest you think I am a total free marketer, I have to say I'm not sure that I am. The free market is essentially a Darwinian system and, in evolution, extinction is the rule. The problem is that when you get something as major as AIG or Fannie and Freddie going extinct, it drags a lot down with it, often through fear and panic. The market is not called the thundering herd for nothing. When a company gets so big and affects things on a national or international scale, when the government "cannot allow it to fail," then it seems to me governance of that company almost becomes a position held in trust. We either have to treat large companies as trusts for the nation or we have to prevent them from becoming so large and influential that they need to be treated as trusts. I don't like those options; the capitalist in me is hiding his head. But the protection of the larger population means we need to make sure that the extinction of any given part cannot threaten the whole.

I heard this morning that the Dems want to do a couple of things: 1) Give bankruptcy judges the power to re-write mortgages and 2) change the executive compensation for companies that are being helped by Federal funds. I'll begin by saying that I agree 100% with the Dems that the government should allow itself to renegotiate its loans with the borrowers who are in default. I could not disagree more about the rest. We have something called freedom to contract which should govern the loans. If the gov wants to buy the loans and then renegotiate, that's fine, but it should HAVE to buy them. Deciding for the lender that it is better for the lender to renegotiate violates the freedom to contract. Worse though is stepping in and telling a company that it's pay structure for its executives is now something other than what it was. Again, this interferes with contract. It also provides a huge incentive for the executives of these companies to turn down aid. At the very least, the executive should have the immediate ability to quit under the terms of their old pay package before a new one is imposed. We also must consider that a lot of the so called golden parachutes are coupled with the exiting employee's obligations to keep information confidential.

International Talk like a Pirate Day

Today is apparently International Talk Like a Pirate Day. Think about pirates. Think about what they really did. Think about them raiding, killing, raping, and so forth. Then ask yourself if this is really something you think we should be honoring by emulating them?

I realize it's fun to talk like a pirate and that pirates have a certain glamor. The make good Halloween costumes and Kiera Knightley looks great as one, but this day makes little sense.