Posts Tagged ‘Bailouts’

Explaining California “lifers,” or why people stay in a failed state.

November 13, 2012 3 comments

I have been a resident of several states across the United States, but two in particular stand out. One is California, to which I moved when I was ten, left at fifteen, and returned to for college. The other is Minnesota, where I was born, but to which I did not return until after college.

Just recently, my total time spent as a Minnesota resident surpassed my time as a Californian, capturing a plurality of my life’s years. Many have found it remarkable that I left a tropical paradise like California for the frigid tundra of Minnesota, but if you can look past the weather, California simply isn’t a great place to live. As I have been saying for years, “it’s a nice place to visit, but I don’t want to die there.”

Many of my friends disagree with me. One has spent nearly 70 years (aside from higher education back east) in the same beach community. Another calls himself a California “lifer,” which I find eerily similar to how prisoners with life sentences describe themselves.

In any case, while California has many things acting in its favor, it is nevertheless a failed state that I simply cannot find attractive as a home. To be fair, Minnesota is also heading in the wrong direction, but if California is just about to break the tape, Minnesota is still putting its running shoes on.

Victor Davis Hanson at the City Journal recently attempted to explain why he is a California “lifer,” in an article entitled “California, Here We Stay.” Many reasons he cites make perfect sense. Family heritage is one, and it is perfectly understandable. Indeed, it is the best reason I can think of for why I live in Minnesota and not Texas. There is the weather, of course. And there are certain cultural and educational institutions that are very attractive.

On the other hand, hegemony and inertia cannot prevail forever – just ask Britain, Rome, Greece, even Akkad. The general rule is that it is better to be present for the incline phase than the decline phase, and I can’t help but think that even the best of California has hit its peak. If UC Berkeley were a stock, it’d be

Hanson is honest about California’s shortcomings. Finances built on rainbows-and-unicorns accounting methods; poor primary and secondary education; hostile business climate running the productive out of state; environmental extremism – all of these things are conspiring to choke off the best of what the state has to offer the world.

On the other hand, he makes a point that I simply cannot get behind:

Another reason to feel hopeful about California is that it’s reaching the theoretical limits of statism. To pay for current pensioners, the state simply can’t continue to bestow comparable defined-benefit pension packages on new workers, no matter how stridently the public-sector unions claim otherwise. And as public insolvencies mount—with Stockton, Mammoth Lakes, and San Bernardino seeking bankruptcy protection a year after Vallejo emerged from it—public blame is finally shifting from supposedly heartless state taxpayers to the unions. The liberal unionism of an aging generation is proving untenable, as we saw in recent ballot referenda in which voters in San Diego and San Jose demanded that public-worker compensation plans be renegotiated.

California is reaching the theoretical limits of statism? This strikes me as remarkably naive, and it sounds hauntingly similar to things like “it couldn’t happen here,” or “it can’t get any worse.” Or perhaps “there are no black swans.”

I for one prefer not to underestimate the statist impulses of a polity that has consistently pushed the once-bright beacon of hope that was California back into the dark ages of economic and social thought. And they did it in less than a century and a half to boot.

In my personal opinion, the decay in California is not over, and it is not close to being over. I know that making predictions is the easiest way to be proven wrong, but here goes nothing.

I think that California will continue to be held in a chokehold by statists until the situation becomes completely untenable on a state level. At that point, the citizens of California will become enraged – not at their elected Judas goats, but at the federal government for not bailing them out. Seeing the practical importance of California’s electoral votes to their parties, the statist kindred spirits in Washington will forge a bipartisan grand bargain to bail out California, complete with all the crony capitalism and blatant corruption that entails. California will then double down on its failed policies and things will get worse. Another bailout will happen in quick succession, and while token gestures may be made to restore fiscal sanity, the damage will have been done.

California’s future is not bright. Perhaps California “lifers” have a reason to stay if they are already wealthy or comfortable enough to avoid the worst of the coming catastrophe. But if you’re a common person, your odds are poor.  I fully expect to see the middle class, whose livelihoods are far more likely to hinge on the day-to-day health of the economy than the wealthy, to continue to flee.

My only hope is that they don’t bring the politics of old California with them when they go.

The Tacit Admissions of the Political Class, Part 2

June 14, 2011 Leave a comment

Continuing the discussion from the last post about what politicians really mean when they say (and fail to say) things, I have come to the news item that initially sparked my thought process.  It involves an old friend of ours.  Welcome back Timmay!

Financial Regulation

With all the sound and fury lately regarding financial regulation and “systemic risk,” it is interesting to see Tim “Timmmmay!” Geithner urging “global minimum standards” for derivatives regulation.  In the same breath he urges against a “race to the bottom.”  By now, we should all know where I am going with this.

By positing a “race to the bottom,” Geithner implicitly admits that investors, traders, and various other market actors would prefer less regulation.  If the derivatives trading market found the regulations proposed by the SEC useful, they would gladly submit.  Given the choice, they simply would not.

I am sure that I would be accused of unwarranted simplicity here, but I disagree.  I concede that it is entirely true that poor risk management on the part of purely private-sector actors is a recipe for crisis, and I know for a fact that in the absence of regulation, there would be many a company bankrupted in the blink of an eye.  (Note, however, that regulation did not prevent these bankruptcies either; see AIG, Fannie, Freddie, Lehman, Wachovia, Washington Mutual, etc.)

So what’s wrong with Geithner’s proposal?  Let’s read between the lines.

Geithner’s tacit admission that people would prefer less regulation in spite of overwhelming risks indicates that derivatives market actors do not take seriously the idea that companies will be allowed to fail or investors allowed to lose much money. In other words, market actors do not view the dangers of poor risk management – whether in the presence or absence of regulation – as a credible threat.

If they did, massive and blatant risks would have to be accounted for, and quite frankly, that would affect a huge financial company’s bottom line, and not in a good way.  Why would such a company want to give up the ability to take massive risks and possibly reap massive profits if the only downside to massive losses is having the government cut you a check?

Of course the big banks have no desire to regulate themselves, but it is a problem that stems entirely from the “solution” to the last financial crisis, i.e. bailouts, and it is precisely the problem with Geithner’s proposal now.  The only real solution is erasing the errors of the last faux-“solution.”  What is needed is not more regulation, but healthy incentives, beginning with complete, total, and unambiguous disavowal of “Too Big to Fail.”

Remove regulation concurrently with removing the possibility of bailouts, and before the regulators could even catch their breath, financial institutions would be self-regulating their own risks.  They would respond to the disciplined incentives presented them, just as they responded to the perverted incentives presented to them last time.

By claiming that only one option is available – broad-reaching, top-down, command-and-control, global regulation – Geithner tacitly backs up the current assumption that the bailout incentive has not changed.  The way the market sees it, Geither is “threatening” to keep bailing companies out unless he is given godlike powers over the economy.  After all, he has never once seemed to consider that market actors could possibly be responsible for their own profits and losses.   Is it any wonder the big financial companies are so much happier with the status quo?

Heads, Geithner wins.  Tails, you lose.  It looks to me like “Too Big to Fail” is here to stay for a while.

Dear Citibank, it’s not about the money. It never was.

December 8, 2010 Leave a comment

Perhaps you heard earlier this week that the government bank bailouts were a success.  The Los Angeles times certainly implied it, stating, “The U.S. Treasury said late Monday that its $45 billion bailout of banking giant Citigroup Inc. produced a $12 billion profit for the taxpayers.”  CBS News splashed it across their headlines, saying “Government annouces $12 billion profit on Citigroup.”  The Wall Street Journal reports uncritically that “taxpayers will reap a profit of $12 billion on their $45 billion [bailout].”

This has led to much crowing among the allies of the political powers-that-be.  So far, they have thankfully refrained from refrains of “I told ya so,” but there can be no doubt that the paper profits referenced here will be ample ammunition against free-market oriented critics of the bailout nation.

Color me unimpressed. 

Let’s forget for a moment the other ways in which Citibank and its affiliates are still government-backed – for example, its $300 billion plus in federal loan guarantees, its hundreds of billions of federally-insured deposits, its access to cheaper-than-market credit as a result of being government owned, and its artificially inflated credit quality due to the implicit backing of Uncle Sam, which became very much explicit a short time ago.  These hardly matter at present. 

Let’s also set aside the fact that a “$12 billion profit for the taxpayers” will never come close to reaching the taxpayers.  This profit will be sucked up instead by the relentless vacuum of government special interests, to be squandered before its ameliorative effects on the national debt can even be calculated.  And given the massive additions to the national debt lately, I am not holding my breath for a check in the mail with my portion of these “profits.”

This is not mere sour grapes from a professed opponent of the bank bailouts, who believed (and continues to believe) that the bailouts could never work.  In fact, the “profits” realized here barely scratch the surface in the overall story of Citibank and its profligate partners in crime.  Claiming victory on the basis of a $12 billion ledger entry would be the intellectual folly of those with the terminal inability to think one step beyond the here and now.

Indeed, the pertinent issue is absolutely not the immediate aftermath of the bank bailouts; instead, one needs to broaden one’s scope in order to fully understand its implications.  This means examining the circumstances leading up to the bailout and determining whether we have cured the disease or simply been given a temporary reprieve.  Furthermore, an honest assessment of the bailout must include its long-term consequences.  Once that $12 billion is gone down the memory hole of federal spending, will we be left with fond memories or festering problems?

The march to insolvency

The march to insolvency, of course, is not merely a story of reckless lending and disregard for risk.  Those elements existed in spades, but they did not exist in a vacuum.  By way of example, one can point to the death spiral of credit standards in the mortgage underwriting business, brought on without a shadow of a doubt, by federal regulators in conjunction with the federally-backed mortgage giants, Fannie Mae and Freddie Mac.

Where purchase-money loans secured by real estate were once a nearly risk-free operation, federal rulemakers decided to step in and impose risk, in the name of “consumer advocacy.”  The government’s desire to put people into mortgages in the name of an “ownership society” degraded credit standards to the point where mortgages were being offered to those who could clearly not afford them.  Ironically, the push toward an “ownership society” led to a huge jump in defaults.  After all, it should be obvious that when you add debt to poverty, all you get is leveraged poverty.

The bigger story, however, was “prop trading,” or proprietary trading of stocks, bonds, derivatives, mortgage-backed securities etc. for the bank’s own account.  To listen to regulators tell it, the banks were “allowed” to take on huge amounts of risk – as if the government was not complicit, and, given the chance, the regulators would have put a stop to the whole thing.  The real story is a bit more involved.  Take one of the aforementioned mortgage-backed securities for example, and place it on the books of a bank, like Citibank, which has $1 trillion plus on its balance sheet.  The executives in charge of the bank knew that their position was more or less untouchable. 

Were they to honestly believe that the government, which had done so much to push homeownership, would suddenly remove its support for the whole program?  And even if it did, how could the government allow a bank whose assets were equal to some 7% of the entire gross domestic product to fail?  (Of course, assuming that a bank failure causes those assets to simply disappear is facile and silly, but that’s a story for another day.)  What incentive did they have to manage risk?  Why not ride the property boom to multi-million dollar paydays, and claim to be “too big to fail” if worse comes to worst?

Any bank operations employee knows all to well the litany of regulators involved in every facet of their operations.  Among their constant companions are the Office of the Comptroller of the Currency, of the Department of the Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation, the Securities Exchange Commission, the Commodity Futures Trading Commission, bank and insurance regulators in every one of the 50 states, and various and sundry self-regulatory organizations, such as the New York Stock Exchange, and the Financial Industry Regulatory Authority. 

The idea that banks were “allowed” to do whatever they wanted without oversight is patently ridiculous.  The clear reality is that banks were encouraged, or at the very least, not disincentivized, to heap on risk after risk with the rational expectation – later proven – that they would never be held accountable.

The post-crash aftermath and reinflation

So what now?  The banks crashed, Citigroup went down in flames, and the government pledged hundred of billions in aid, even trillions when various “stimulus” packages are accounted for.  We need to determine what, exactly, a recovery program such as the Citibank bailout could accomplish to determine whether that recovery program should have been pursued.  Again, it is necessary to look beyond the here and now to determine the efficacy of any recovery program.

As usual, we need to begin at the beginning.  Ask yourself why the crash happened, and it becomes clear that there was rot in the system.  You may agree or disagree with my description of the source of the rot above, but when the facts came to light in late 2008 and 2009, not a single entity, from the regulators to the bankers to the mortgage brokers to the consumer advocates – even to the consumers themselves – came out untarnished. 

In my personal opinion, poor monetary policy which led to asset inflation, coupled with the moral hazard inherent in constant government intervention, led to the current crisis.  In another’s opinion, perhaps the entire crisis may be laid at the feet of greedy bank executives.  But consider this: by bailing out and propping up the system, neither potential problem gets solved.  Either the Fed lives to inflate another day, or the Citibank executive rides his golden parachute straight to Boca Raton.  Or both.

If we accept that the boom years of roughly 2004 through at least the end of 2007 were nothing more than a castle built on sand, why would we want to rebuild in the same spot? 

And that is exactly where those who are presently touting the $12 billion Citibank “profit” have gone wrong.  The bubble popped, and it caused massive financial losses and individual suffering; we are still not out of the woods, with unemployment hovering near 10% and millions of homeowners still underwater.  The losses from 2007-2008 through today massively outweigh the $12 billion profit announced on Monday.  And yet by bailing out the banks in the first place, we are simply reinflating the same bubble.  And when it pops again, the resultant losses and suffering will again make $12 billion look like chump change.  Perhaps they will be even worse than this time around.

The fact is, whatever paper profit comes from the bailouts will pale in comparison to the losses inflicted by the lack of real correction and real reform in the banking sector.  This $12 billion is not evidence that we have cured the rot.  Instead, it is an inducement to more complacency – to be followed by more collapse.

Tread lightly, Republicans

November 3, 2010 Leave a comment

The news was mostly positive for Republicans this midterm election cycle (aside from the terminally hopeless California Republican party), with the red team retaking the House, recouping several seats in the Senate, and capturing several more governerships.  But, tread lightly, Republicans – yours is not a mandate.

Make no mistake about it: voters did not vote for Republicans because they like them.  Popularity numbers for both parties are abysmal, and interestingly enough, most polls show that Republicans are still more unpopular than their statist allies across the aisle.  Voters hate you, Republicans, and they hate the other guys too.

So what are we to make of the historic rout of Tuesday Nov. 2?  Voters soundly rejected the one-party rule of the past two years that brought us state-controlled health care, massive bailouts, ridiculous money creation, and ever more government interference. 

This has its precedent, of course.  In 2008, voters eager to get rid of the last vestiges of George W. Bush, that prime example of neocon meddling, instead ended up with a more overt, and some would argue more pernicious, form of meddling in the neo-Bismarckian Barack Obama.  The whipsaw from 2008 to 2010 simply means that voters who didn’t want neocon intervention want neo-progressive intervention just as much.  Which is to say, not at all.

So a word to the wise, Republicans.  You may be celebrating now, but you’ll be wandering in the wilderness again before you know it unless you give the voters what they want.  Here’s a hint: it ain’t Mitt Romney.

They want to be left alone.

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