Re: OT: Want to Take My Over/Under Bet?

Wow, there is a lot of hysteria here.

First on non-bank seizures. One of the lessons learned from the Depression to the S&L debacle, to the Swedish Solution, and Japan, Russia, and Thailand.

Is that institutions that threaten the very nature of money cannot be allowed to continue or close down in a natural way. If they do, they cause MUCH more damage than if they are suddenly closed, their books put in order, and resold, or restructured into the private sector.

One of the reasons that banks pay dividends, is that for share holders, there is a constant risk that they could be shafted on a given day. (ASK Wamu share holders). Because of this constant risk there are benefits that are provided the shareholders that are larger than other comparatively sized firms. This also gets reflected in their share prices and market cap.

Another risk about financial firms. Is that they lie in order to maintain trust. They are very Orwellian like that, because imagine what would happen if there were millions of YOU running through the streets like their hair was on fire, cursing the bankers and shaking their fists.

Well, the economies would come to a streaming halt in a massive fit of self-prophesied doom, and the loons would say it was all *their* fault.

Insurance firms, and market firms, have not historically placed the financial system itself at risk. This has changed. These firms are currently directly in the cross hairs of the financial system, and now need to be treatable with the same tools. If not, their failure will cause the same excessive damage.

Bailout money is not bailing out the banks. Or the insurance firms. At the end of the day, the bailout money is restoring the 401ks and money market accounts of the depositors. They don't even know they are being bailed out. But seriously, that is where the money is "going". Most corporations by charter are not allowed to have their money in any place other than money market accounts. They are not insured and dwarf individual depositors. IT IS THIS MONEY that is at risk of disappearing if the books were made "right" and the banks become insolvent. This is the hair on fire calamity that is sitting out there. Not that billionaires may go broke, who cares, it is Subway and Blockbuster, Starbucks and The Olive Garden, Jiffy Lube and the Hairmasters. These are the guys that go broke. Can't pay rent, can make paychecks, and it all happens suddenly. In the event this happens, it is not an inflationary problem, it is a sudden and complete failure, it is riots in the street, it is martial law. Seriously.

Doing nothing is NOT an option.

So, is what we are doing inflationary? In normal times probably, at the bottom of the slippery slope, of course. Now, maybe, but possibly not, and the costs are MUCH less, MUCH less than doing nothing.

Stimulus. Stimulus is a way of preventing some of the resource damage and the death spiral that has been caused by massive layoffs. It is by itself not inflationary because it is causing activity in excess resources, and in and of itself may actually generate long term economic benefits to the future. Wealth engines of sort. Why don't we do this all the time. Well we do, a bit. But if resources are tight, than this activity can cause local or larger inflation, and it is no longer a worthwhile or reasonable activity. But after the initial downtick in a market it is totally reasonable. The key is the speed in and the speed out. This will never be perfect.

Financial System Bailout. Why the markets are acting so good and financial institutions are looking much better, is that this is actually a fairly thoughtful plan both from an effectiveness standpoint, and an inflation standpoint.

It moves trememdous amounts of bad assets off the books of banks (500 Billion bailout). It covers existing failing assets (AIG), and creates a massive anti-inflation mechanism for dollar and wealth destruction (1 trillion dollar mortgage rewrite, and 300 billion dollar debt purchase). In the trillion dollar mortgage case financial institutions will be given 1 trillion dollars in cash in return for their good loans, and the loan holders for their part will have a couple thousand dollars a month for medium term stimulus spending. As those loans are paid off, the dollars are "destroyed" and that destruction is anti-inflationary.

In the case of new loans, most of those loans will go to good sources due to at a minimum a newly chastened industry, and more likely chastened and regulated to prevent really bad loans. This is also anti-inflationary as it will slow down the entrance of this money into the marketplace, and it will tend to be around wealth creation activities.

The final anti-inflationary part of this, is that there will still be some bad loans out there. These will be paid for by the Banks and investors, and this activity will slow down the inflationary activity of the banks if there were no problems.

And I haven't even touched hedge funds, or your bizarre belief that somehow a deposit into a hedge fund should be treated as the same as a deposit into a bank. Oh NO the funds are "GATED".

First, there is a problem with hedge funds, and their size. And they are essentially thieves that provide very little service to the economy (with the exception of benefit of arbitrage being useful in setting correct value in the market place, which is actually fairly small). But, unregulated they generate tremendous market pressure by using money to create stress in the marketplace (stress that causes real people to lose jobs, break industries and ultimately cause societal misery) way beyond what is useful for society, and then profit from this stress. They are too big, run by too many a-social people, and there needs to be some form of regulation that allows them to be useful, without being dangerous.

This is a VERY difficult problem. Very. It has to do with the core beliefs of capitalism. It has to do with belief in markets. It has to do with belief of capital vs the needs of society and their interaction. And it requires a much deeper discussion than the one that you or I or the article provides.

The problems they create are deflationary not inflationary in nature, for the most part.

As I said in another message, I take the under, I take your wager. My arguments are as above.

The overall tone of conclusion that we shouldn't be doing this is wrong. We should. But we don't do what we are doing in healthy markets in full employment. It is a matter of timing, a matter of scale, being restorative, being preventative, and ultimately getting out of the way.

This my friend, are the tools of the Fed. Tools that simply wouldn't work with the speed or efficacy required if there weren't a Fed, for some reason or another. These are the kind of problems that is WHY we have a Fed. And the ultimate lesson they need to learn. Is to stop acting "good" and breaking the markets, and to act in the longterm best interest of bankers. Which has the societal benefit of a stable financial system.






lawhonac@xxxxxxxxxx wrote:
My "bet" offer is in the third paragraph of my reply to my friend
Susan.

Alan C. Lawhon
Huntsville, Alabama

<http://www.washingtonpost.com/wp-dyn/content/article/2009/03/23/
AR2009032302830_pf.html>

U.S. Seeks Expanded Power to Seize Firms

I'll keep an open mind, but it won't surprise me if the article turns
out of
have merit.

Susan H.


Susan:

I read the first two paragraphs and stopped. You're correct to be
wary as the idea of authorizing the Government to "seize" private
companies outright is unnerving - even to me. On the issue of
Government seizure of hedge funds, I have a definite opinion about
that. Hedge funds are about nothing but unfettered greed. Writer
Bethany McLean has an article - "The Hedge Fund Time Bomb" - in the
current issue of Vanity Fair magazine. Ms. McLean's article makes
clear that the people who profited the most from hedge funds, (in some
cases to the tune of BILLIONS of dollars), are the hedge fund
managers. And, in the truest tradition of wretched Wall Street
excess, most of these hedge fund managers engineered their funds to
make sure that if any losses occurred, those losses, (whatever they
were), would be eaten by the funds "investors" - while the fund
managers themselves continued to get paid! (Don't take my word for
it, read the article.) So now you have a lot of hedge fund
participants, (most of them fairly well off on a comparative basis to
the average American), who are mad as hell with these hedge fund
managers. How would you like it if you had money in the bank that you
wanted to get out and the bank manager told you, "Sorry, but you can't
withdraw your money." That's what hedge fund managers are telling
their investors, (i.e. "We've got your money and you can't have it!")
The industry term for this is "gated" - as in our investor's money is
"gated" [in the fund] and they can't withdraw it.

On top of all this, many of these hedge funds invested in the same
toxic assets that drug AIG down, which explains why billions of
taxpayer dollars that went to AIG wound up being funneled directly to
some of the hedge funds with the most serious exposure. So here we
are bailing out billionaire hedge fund managers! Do you folks see why
I'm mad as hell about this? Most of us are struggling just to
survive, yet we're being forced to bail out some of the richest
greediest bastards in the country! Maybe some folks on here think
this is all OK, but we are going to drown under the weight of all the
debt and inflation that will surely destroy the purchasing power of
the dollar. (Why do you suppose the Chinese are calling for a new
"world currency" separate from the dollar? Not exactly a ringing
endorsement of American economic policy from one of our major
creditors.)

Who wants to take an "over/under" bet with me right now? Right now I
will lay a $100 bet [at even money] to any taker that before Barack
Obama finishes his first term, the annualized inflation rate, as
measured by the Consumer Price Index, will be running in excess of 20
percent. The price of an ounce of gold, at a minimum, will be between
$1,500 to $2,000 per troy ounce. That's my prediction of where this
freight train is headed. If you believe that Alan's crystal ball is
clouded with faulty thinking, then you'll want to take the "under"
bet, (i.e. the inflation rate will not top 20 percent), and make an
easy $100.00. So I'm "going on record" and putting my money where my
mouth is. I'm betting that our Government is going to destroy the
value of our money in a desperate effort to avoid a repeat of the
Great Depression.

As for the direct issue addressed in this article, (which I have now
went back and read), I think the problem of out-of-control companies
with systemic risk who manage their affairs irresponsibility should be
dealt with a little differently. For private companies and hedge
funds who are "too big to fail," the best solution to this problem is
a lot more sunshine (in the form of transparency) as to what these
companies are doing, (i.e. how they're making their money), along with
a set of draconian claw back provisions (going forward) that will
impose severe financial penalties - in the form of income taxes - upon
the compensation of all executives (and board members) of companies
who turn to the Government for help. (If a company does the honorable
thing and files for bankruptcy, then claw back provisions would not
apply.) These "claw backs" should apply to all former executives and
board members going back [at least] ten years. This would ensure that
folks like Stan O'Neal, Merrill-Lynch's former CEO, don't run the
company into the ground and then walk away with a $160 MILLION
"severance bonus" while simultaneously dumping the mess on his
successor. If we taxpayers are going to have a gun held to our heads
and told, in effect, "You have to bail us out because if you don't,
then half the people in the country will be out of work," then we
taxpayers should have some recourse to the compensation and bonuses of
the executives who create these financial disasters. (Before anyone
accuses me of gross exaggeration and hyperventilating, Fed Chairman
Ben Bernanke made this very point in Congressional testimony
yesterday. In response to a direct question, Mr. Bernanke stated that
the reason why the Government is bailing these companies out is that
peoples' 401(k)s "... would be down 70 percent rather than 40 percent"
if the Government had not intervened. "That's why we did it," said
Mr. Bernanke.

One other [possible] antidote in the way of transparency and sunshine
would be to allow short sellers greater leeway rather than trying to
hamstring and harass them - as is presently the case. Short sellers
tend to do their homework for the simple reason that if they bet
against a company and turn out to be wrong, then they can literally go
broke - a short seller's losses are theoretically unlimited. For this
reason, when short interest in a company with potential systemic risk
significantly increases, that should be a "warning signal" to
Government regulators that they should be paying greater attention to
that company. (I imagine there are quite a number of victims of
Bernie Madoff who are wishing that short sellers had been on Madoff's
ass like stink on poo. How much faith do you think Bernie Madoff's
victims have in our Government to police irresponsible and/or
fraudulent companies?)

I'm sure there are problems with my proposed "solutions" - which
somebody on here will surely point out - but I would think that these
measures (or something like them) would be preferable to giving the
Government even more power over the private sector. I mean, if the
Government is so damn smart, why didn't the Government prevent all
this in the first place?

Alan C. Lawhon
.

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