Monday, September 15, 2008

Third Rant of the Day

When it rains, it pours. This one is really sort of a repeat of my first rant, but with more explanation and less sarcasm. Well, more explanation, anyhow.

Here’s Treasury Secretary Paulson at a press briefing this afternoon:
I never once considered that it was appropriate to put taxpayer money on the line in resolving Lehman Brothers.
When I first read this, I interpreted it to mean, “I never once considered the possibility that it was appropriate...,” and I was ready to write a somewhat more obnoxious rant about how Paulson was either a liar or irresponsible, and I hoped he was a liar. But a more careful parsing reveals that he is neither lying nor being irresponsible; he is just engaging in doubletalk. I don’t fault him for that, since it’s pretty much part of the treasury secretary’s job description. He never considered it to be the case that it was appropriate to put taxpayer money on the line.

Secretary Paulson is drawing his macho line in the sand and saying, “See, Mr. and Mrs. Average American, who faithfully pay your taxes, I’m protecting your money from the whining Wall Street plutocrats. So never think that just because I came from Wall Street, I will put Wall Street’s interests above those of Main Street. And never say that Republicans always help the rich.”

Which is fine if you believe that financial events have no impact on the nonfinancial economy. But most economists (and, I would guess, Secretary Paulson himself) don’t believe that. Let me assert – and see whether I get broad disagreement – that the failure of the 4th largest investment bank in the country can be expected to increase significantly the risks faced by participants in the nonfinancial economy. In particular, when the financial system is strained and interest rates on Treasury securities are already quite low, there is an increased risk that a weak economy will turn into a serious recession which the Fed will have little power to combat. If you depend on your job to earn a living, that’s a pretty serious risk.

So instead of putting “taxpayer money” on the line, Secretary Paulson is putting taxpayers on the line.

But then there is also the question of whether even “taxpayer money” is really less on the line than it would be if the Treasury had provided loan guarantees. I’ve addressed this question before in connection with the Fed’s Term Securities Lending Facility. Each individual taxpayer who benefits from public services depends on the taxes collected from all the other taxpayers to help pay for those services. If the other taxpayers start losing their jobs, tax receipts will go down, and this taxpayer will eventually have to pay more taxes, or give up more public services, to make up for that loss. If you risk the potential economic effects of a major investment bank failure, you are risking that taxpayers will have to pay higher taxes. That’s just the same as if you had provided loan guarantees, which risk that the loans will go sour and require an increase in taxes to make up the difference. In which case is the risk bigger? Not obvious to me, but if I had to guess, I would say that the investment bank failure risks taxpayer money more than would the loan guarantees. So I would say that Secretary Paulson’s stance on “taxpayer money” is either politically disingenuous or economically naïve.

Let’s consider the possibility that it is politically disingenuous and that his motivation is actually something different than protecting taxpayer money. I’m not suggesting anything sinister; I’m just suggesting that there is a (slightly) more reasonable, but harder to explain, argument for avoiding a bailout. As Secretary Paulson says elsewhere in the briefing:
Moral hazard is something I don't take lightly.
Rather than trying to define moral hazard, I’ll go with the definition used by the AP in the report about the briefing: “the belief that when the government steps in to rescue a private financial firm it encourages other firms to engage in risky behavior.”

But does it? When the government steps in to rescue a firm by facilitating its sale at a small fraction of the price that it fetched a year or two ago, does that really encourage other firms to engage in risky behavior? It’s kind of like when your health insurer requires only a $950 co-payment for a $1000 procedure. Does that give you an incentive to make excessive use of the health care system? If I were a financial firm contemplating engaging in risky behavior, I wouldn’t find the prospect of a fire-sale rescue to be very encouraging.

It’s really not the firm that would be bailed out, but the firm’s creditors. Were the creditors engaging in risky behavior that needs to be discouraged? There isn’t much I can say about that that I didn’t already say this morning. In general, I think that doing business with major investment banks is something that we should encourage. A financial system doesn’t work very well when everyone is afraid to do business with everyone else. Should counterparties really be expected to do extensive due diligence on the 4th largest investment bank in the country before they engage in credit swaps with it? It seems to me that would not be a very efficient use of resources. And in any case, it’s not clear that even extensive due diligence would have uncovered the depth of Lehman’s problems.

End of rant. Executive summary: They should have bailed out Lehman.

Labels: , ,

10 Comments:

Anonymous Anonymous said...

If LEH had gotten the lifeline, then the MER deal wouldn't have been done, so they would have needed a bailout. Followed in short order by WM, AIG, WB, GM, F.

When does it end, when we have a Soviet-style command and control economy and 5-year plans?

Mon Sep 15, 10:37:00 PM EDT  
Anonymous Anonymous said...

Or Dick Fuld could have dropped his price to KDB?

Or if BSC had been allowed to collapse Lehman might have done something sooner.

Rescuing Bear but not Lehman doesn't make obvious sense but the Fed has already rescued Bear, Fannie Mae and Freddie Mac and extended a lot of help to everyone else. Plus the help would probably have gone to a non US bank which would cause trouble.

You're also rather vague about people being afraid to do business with the fourth largest investment bank. What sort of trust and what sort of business?

Investment banks have never been thought particularly credit worthy and have repeatedly had to be bailed out. Many great names of the past have vanished -- Salamon, Kidder Peabody, First Boston, not to mention Lehman's own merger with Shearson. There have been loads of them but only two survive and even Goldman as the strongest has a less than glorious history including an eponymous Ponzi scheme and had to be bailed out by Sumitomo Bank within working memory. Why do you think they have such shiny offices?

As recently as 10 years ago they were not viable counterparties for major derivative transactions and had much higher funding costs than proper banks.

My point is that the investment banks were essentially intermediaries and never had to rely on being good bets. There is little in Lehman's past to suggest that due diligence should have been unnecessary.

The problem is surely that they have done too much business and that really can't be fixed by one way traffic from the Fed.

Tue Sep 16, 08:30:00 AM EDT  
Blogger knzn said...

Let me point out, though, that in most of your examples of investment bank failures, the creditors came out whole. They weren't so much failures as liquidity problems that had to be solved by selling off the company on the cheap.

Tue Sep 16, 11:05:00 AM EDT  
Anonymous Anonymous said...

polo ralph lauren
lacoste polo shirts
burberry poloscheappolos
polo fashionpolo shirtspuma mens shoes chaussure pumaPuma shoeschaussures pumaugg bootsed hardy clothing ed hardy clothing

Wed May 13, 10:22:00 PM EDT  
Anonymous Anonymous said...

現在來談談
台中搬家公司的未來展望,買新房子想從北屯搬到台中七期,當然要找台中搬家公司來執行台中搬家,明年台中縣市就要合併升格,到時候就無所謂台中縣搬家公司了,就只剩下台中市搬家公司。一搬來說大台中地區包括台中縣市,也包含彰化及南投,所以網路上找中部地區搬家公司,就會用南投搬家公司或者彰化搬家公司


再來談行的問題,景氣不是很好很多人買不起新車只好買中古車囉!中古車買賣是需要技巧的,胡亂買中古車可能會吃大虧的,消費者可要睜大眼睛看清楚,免得買了後悔不已。如果買新車的話,就沒有剛剛的問題,新車業務員在交車時一般都會幫車主貼隔熱紙,就是我們所說的汽車隔熱紙,不過他們貼的隔熱紙品質都不是挺好的,相信很多車主有許多不愉快經驗吧!有了車之後免不了要學開車吧!一般學開車是要到駕訓班,當然也可以叫做汽車駕訓班,聽說學費不便宜喔!還是省一點好,不要亂花錢。

經濟不景氣,討論借錢的話題很多人應開有興趣,在台北想借錢或者汽車借款可以到台北當舖或者是台北市當舖台北縣當舖當然也可以,如果是住在台北火車站到台北市當舖借錢比較方便。那我住在內湖就可以到內湖區當舖借錢融資囉!住在東區就找信義區當舖借錢,以此類推。一般支票貼現也有辦理,銀行有辦理票貼當舖也有阿,而且比銀行更方便,利息雖然高一點不過時效性卻非常好,一般工商人士短期借款就很喜歡到當舖的原因。我家現在住在桃園想融資票貼就得到桃園當舖,住新竹的人往新竹當舖借貸是比較方便。來到台中手頭不方便,想週轉借貸一下台中當舖是有這樣的服務,報紙或者網路上隨時都可以查到台中
縣當舖
的資訊,因為台中當舖是非常有名的,服務也相當好。往台灣南部走先碰到的是嘉義當舖,借錢票貼一樣容易,聽說嘉義還蠻好玩的,火雞肉飯不錯吃喔!再往南走將會遇到高雄當舖,高雄人是很熱情的,借錢當然也不囉唆,依據話就搞定。鳳山再過一點點就到達台灣最南邊的屏東,一樣有屏東當舖可以服務缺錢的人,住在台灣真方便,哪裡都可以週轉融資。

有錢之後男人花樣變多了,想輕鬆一下,台中大大有名的就是台中護膚台中指油壓,不去體驗一下怎麼可以呢!食色性也這是孔老夫子講的,想找一些網路上情色消遣,只要關鍵字打上一夜情,視訊聊天,免費視訊聊天,免費視訊,視訊交友,情色貼圖,讓你看的眼花撩亂,爽快不已,E時代就是這麼方便,彈指可取情色
資訊。找女朋友到motel去休息,要挑好一點有情趣的汽車旅館,這種錢是一定不能省的,燈光美氣氛佳才能辦好事。

身體要強、要勇,買花旗蔘來補身一定有用,不過要用加拿大來的西洋蔘功效比較好,不信可以問一下專家的意見,相信他所給的答案就是粉光蔘。

Thu Jul 30, 11:32:00 PM EDT  
Anonymous Anonymous said...

ghd
cheap ghd
ghd straighteners
Benefit GHD
GHD IV Salon Styler
GHD MINI STYLER
GHD Precious gift
Gold GHD
Kiss GHD
New pink GHD
Pink GHD
Pure Black GHD
Pure White GHD
Purple GHD
Rare GHD
Babyliss
polo boots
polo shoes
cheap straighteners
ghd hair straighteners
hair straighteners
Purple GHD IV Styler
Pure White GHD
Pure Black GHD
Pink GHD IV Styler
Kiss GHD Styler

Wed Mar 10, 03:24:00 AM EST  
Blogger Unknown said...

Armani Sunglasses Burberry Sunglasses Cartier Sunglasses
Chanel Sunglasses
Coach Sunglasses
D&G Sunglasses
Dior Sunglasses
ED Hardy Sunglasses
Fendi Sunglasses
LV Sunglasses
Oakley Sunglasses
Police Sunglasses
Ray Ban Sunglasses
Roberto Cavalli Sunglasses
Versace Sunglasses
cheap gucci sunglasses
cheap prada sunglasses
cheap D&G sunglasses
discount gucci sunglasses
discount prada sunglasses
discotunt D&G sunglasses
cheap oaklay sunglasses
discount oaklay sunglasses
sunglasses outlet
air max,Nike air max
air max 90
nike air max 90
air max 1
air max 95
nike air max 360

Mon Mar 15, 03:43:00 AM EDT  
Blogger janewangleilei said...

jordan 1
jordan 2
jordan 3
jordan 4
jordan 5
jordan 6
jordan 7

Wed Mar 24, 09:44:00 PM EDT  
Anonymous Anonymous said...

宜蘭民宿花蓮民宿宜蘭民宿宜蘭美食房屋網台北房屋

Sat Oct 22, 12:49:00 PM EDT  
Blogger Unknown said...

طرز تهیه ژیگوی بوقلمون بهمراه خواص بوقلمون
طرز تهیه پنیر زیره کرمانی کاملا خانگی
پخت املت مدیترانه ای با فلفل دلمه ای رنگارنگ

Wed Nov 08, 06:37:00 PM EST  

Post a Comment

<< Home