Bank Bailouts Explained

The video above is a humorous explanation of how US banks have been bailed out.

Budget Crisis

The Blue State Budget Crisis: "the blue-state financial misery continues and deepens the ideological crisis of American liberalism." Soon states like California and New York will be asking red-states like Texas and Indiana to bail them out.

It's Official: We'll Lose Money on GM

Megan McArdle of The Atlantic reports The Government Isn't Getting Its Money Back Out of GM:

Well, they've priced the GM IPO, and it looks like they've valued the firm at just about what we lent it: $50 billion. Since the government only took a 60% stake, that's well below what would be needed for the government to recover its investment. Even with the billions they've already 'paid back'--by not using all the money--Uncle Sam needed the company to be worth more like $70 billion to break even on the bailout.

GM is a zombie. It will never be able to sell cars in the quantities that it used to because its brand has been tainted with the stench of the bailout. This is exacerbated by the fact that Ford opted not to take a bailout. In so doing, Ford burnished its brand. GM (and Chrysler) are marking time until they go back into bankruptcy.

It's also ironic that the GM IPO was announced the day before we learned about a massive new round of quantitative easing (what some are calling QE2). The portion of the GM bailout that is repaid will be repaid with devalued dollars. It's a perfect metaphor for the smoke and mirrors of DC.

Russ Carnahan has Three Strikes Against Him

Rasmussen reports that Most Voters Oppose the Reelection of Anyone Who Voted for the Health Care Law, Auto Bailouts, Stimulus Plan:

A new Rasmussen Reports national telephone survey finds that most Likely Voters think their representative in Congress does not deserve reelection if he or she voted for the national health care law, the auto bailouts or the $787-billion economic stimulus plan. (To see survey question wording, click here.)

That's good news for Ed Martin (R) since his Democrat opponent, Russ Carnahan, has voted for all three.

Banks: Too Big to Bail

Dr. Doom, Nouriel Roubini, has coined a new phrase: Too Big to Bail:

'A year ago we had all these policy bullets,' he said. 'We could push down rates to zero, we had (quantitative easing), we could do a budget deficit of 10 percent of GDP (or) backstop the financial system.'

'Banks at this point are too big to fail, but also too big to be bailed, especially in Europe where the sovereigns are in trouble and therefore the ability to backstop the financial system is not there,' he said.

Rome didn't collapse in a day, but Rome didn't have interdependent banks lined up like dominoes. What's the over-under on the European Union unraveling in a day?

What Could Possibly Go Wrong?

Retailers offer loans to consumers: "Wal-Mart's Sam’s Club is introducing a program in which it facilitates loans for shoppers of up to $25,000, backed by the Small Business Administration." At least it's not some fly-by-night mom and pop dime store offering these loans. No sir! Those loans are backed by the full faith and credit of Too Big To Fail!

US Financial Earthquake causes Asian Tsunami

ABC Radio Australia reports Turmoil on Asian markets over Greek debt crisis:

Japan's central bank says it will inject more than $US20 billion in liquidity into financial markets amid market turmoil caused by the Greek debt crisis.

While the Japanese blame the Greek debt crisis, America's ABC News is investigating a Possible Trading Error:

The sources told ABC News that the possible error by Citi involved what was supposed to be a $16 million trade on an S&P 500 futures-linked contract. The trade was entered in billions instead, they said.

Financial Crisis 101

Andrew Klavan of PJTV summarizes the financial crisis.

Bob Corker Sellout

BigGovernment reported The Bob Corker (R-TN) Bailout Sellout [emphasis added]:

Sen. Bob Corker (R-TN) has snatched defeat from the jaws of victory with his complete capitulation and total surrender on the Financial Services bill. The bill, passed by the House with a $4 trillion bailout provision, making bailouts the permanent policy of the United States government, was on it’s last legs until Corker came to the rescue. Now the Washington Post and other are reporting that Corker and ethically-challenged, retiring Sen. Chris Dodd (D-CT) are on the verge of a deal to breathe life back into the regulatory and bailout scheme.

It looks like some Republicans still haven't learned that "too big to fail" is exactly two words too long. We need to build a country where every business is a small business, where the creative destruction of the market place is a tolerable difficulty that spawns new innovation, and where the politically powerful can no longer aggregate the public's money in the coffers of their future campaign contributors.

Update: Now ABC is reporting that George Soros is endorsing a new "consumer" protection agency:

"We need a consumer protection agency, and we need it very urgently because there is political outcry about the injustice of the current situation," [George] Soros said at a Roosevelt Institute conference in New York.

Senate Banking Committee Christopher Dodd has been trying to bridge a gap with Republicans, who oppose an independent consumer protection agency, and discussed with Republican Senator Bob Corker the possibility of making the agency a division of the Federal Reserve.

"The bureaucracy is expanding to support the expanding bureaucracy," as someone once said. Let's review the agencies charged with oversight of our financial institutions:

1. Congress (House and Senate)
2. US Treasury
3. Federal Deposit Insurance Corporation (FDIC)
4. Federal Reserve ("The Fed")
5. Office of the Comptroller of the Currency (OCC)
6. Security and Exchange Commission (SEC)
7. Bureau of the Public Debt (I bet they're busy these days!)
8. Community Development Financial Institution Fund (CDFI)
9. Financial Crimes Enforcement Network (FinCEN)
10. Federal Inspectors General
11. Office of Thrift Supervision (OTS)
12. National Credit Union Administration (NCUA)
13. Housing and Urban Development (HUD)
14. Office of Fair Housing and Equal Opportunity (FHEO)
15. Federal Housing Administration (FHA)
16. Fannie Mae
17. Freddie Mac
18. Ginnie Mae

These bureaucracies exist to absorb blame from the political class—#1 on the list above. A "consumer protection agency" would be no different. To better understand this general problem, read the Practical Rule of Bureaucracies.

"We're Out of Money Now"

So said President Obama. The whole exchange with C-SPAN's Steve Scully is interesting. Here are some highlights with emphasis added:

SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?

OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we've made on health care so far.

There's The Won's obligatory plug for health care reform. Does he realize what a non sequitur that is? Perhaps he actually believes that reforming health care will save the economy.

So we have a short-term problem and we also have a long-term problem. The short-term problem is dwarfed by the long-term problem. And the long-term problem is Medicaid and Medicare. If we don't reduce long-term health care inflation substantially, we can't get control of the deficit.

Actually, Medicare is a medium term problem. It'll become insolvent in 2017, two years earlier thanks to the current administration's bloated spending this year. Presumably, another year of record spending will shave another year or three off Medicare's projected insolvency date.

The long-term problem is the other American Ponzi scheme: Social Security. It will be depleted in 2037, four years sooner thanks again to reckless government spending this year.

SCULLY: When you see GM though as “Government Motors,” you're reaction?

OBAMA: Well, you know – look we are trying to help an auto industry that is going through a combination of bad decision making over many years and an unprecedented crisis or at least a crisis we haven't seen since the 1930's. And you know the economy is going to bounce back and we want to get out of the business of helping auto companies as quickly as we can. I have got more enough to do without that. In the same way that I want to get out of the business of helping banks, but we have to make some strategic decisions about strategic industries...

GM and Chrysler are zombie companies. While the undead may be animated for a time with large infusions of tax payer money, they are still dead. The government can "get out of the business of helping auto companies" anytime by sending GM and Chrysler to a bankruptcy court to have their functioning organs cutout and auctioned off. Since the government avoided that option, Obama is being disingenuous when he suggests that they're moving "quickly".

SCULLY: States like California in desperate financial situation, will you be forced to bail out the states?

OBAMA: No. I think that what you're seeing in states is that anytime you got a severe recession like this, as I said before, their demands on services are higher. So, they are sending more money out. At the same time, they're bringing less tax revenue in. And that's a painful adjustment, what we're going end up seeing is lot of states making very difficult choices there...

We are talking to state treasurers across the country, including California, to figure out are there some creative ways that we can just help them get through some of these difficult times...

I wish reporters would ask questions in a way that prevents wiggle room. The question should have been: "will you bailout the states?" or "will you bailout California?" If you were to ask Obama: "were you forced to bailout the auto industry?" The answer would be "no." If you asked him: "were you forced to support TARP?" Again, the answer would be "no."

Megan McArdle has some interesting posts about Federal bailouts of California and municipalities.

Update: Gateway Pundit has the video.

Update 2: Glenn Reynolds agrees in colorful terms:

So we’re out of money because we don’t have national health care? Bogus. I think, instead, that it has something to do with the fact that Obama has been pouring money down a crony-statist rathole at absolutely astronomical and unprecedented rates.

They're Just "Too Big"

Glenn Reynolds links to a CNBC post about big banks. It reminded me of something Christopher Hitchens said awhile back: "'too big to fail' is two words too long". I'm not sure how we undo decades of consolidation, but, like the banks, I think the auto industry would be better with the small thirty-three than with the big three.

Questions for Economists

I've been thinking about some things that have passed from the spotlight, but may still be relevant to understanding the financial crisis and the current state of the economy. If you're an economist, or play one on the Internet, please share your thoughts either in the comments below or with a link back from your blog.

1) If it had been available, would M3 data have provided an early warning about the financial mess?

In March of 2006 the Fed stopped publishing M3 data because "the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits." I'm all for fiscal responsibility, but, with the benefit of hindsight, would M3 have indicated a looming disaster? I would think that problems in the credit markets would vacuum up assets in the financial markets causing M3 to fall. Perhaps such an effect would not have been large enough to notice until it was too late.

2) How can we best balance unemployment, the minimum wage, deflation, and inflation over the coming year or two? (And, what are your expectations?)

The US Department of Labor lists the minimum wage at $5.85 in 2007 and $6.55 in 2008. It is scheduled to rise to $7.25 in 2009. Did the 2007 and 2008 minimum wage rate hikes contribute to our worsening economy? Won't the 2009 bump drive unemployment way up? Perhaps I should ask: what are your expectations about deflation? How many months of deflation are we likely to have? Would it be wise for the Fed to allow greater inflation, perhaps by not taking the newly minted money out of circulation, once the hemorrhaging has stopped?

3) Was it speculation that drove oil to its peak last summer and is speculation driving it down now?

I'm not even sure that I accept the premise that speculation contributes anything (except liquidity) to the oil market. Last summer I scoffed at the speculation argument. Now, I'd like to know how much travel has fallen off, whether vast new reserves of oil have come online, or whether other market forces are driving the oil price. Looking at oil today and last summer, is it possible to quantify speculation? For instance, can we determine that last summer's oil price was driven higher by, say, 20% because of speculation?

Russ Roberts has a great opinion piece on NPR.org discussing the bailout and the credit markets. Roberts point is that the issues with bank lending, the stock market, and consumer sentiment have little to do with liquidity—the availability of cash and credit—and everything to do with the principled risk avoidance caused by uncertainty about future policy direction. While Roberts doesn't explicitly say it, he hints at a second reason: loss of confidence in both markets and government (eg: Treasury Secretary Paulson, the bailout). Here are some key quotes:

Paulson doesn't realize that his erratic attempts at creating liquidity are creating the uncertainty that makes liquidity meaningless.

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."

With each improvisation, Secretary Paulson is proving how little he knows about what he imagines he can design.

Hayek and Roberts deeply understood the opening lines of William Blake's Auguries of Innocence. Paulson does not. Here they are... probably my favorite four lines of poetry:

To see a world in a grain of sand
And a heaven in a wild flower,
Hold infinity in the palm of your hand
And eternity in an hour.