Financial and electoral upheavals breed nightmare scenarios,
and I have one – a world in which packs of feral financial regulators roam the
streets, savaging any sign of intelligence or creativity.
In reality, governmental complaints that it needs more
authority are pretty much nonsense. Governments had all the authority they
needed to control Fannie and Freddie, or to make the derivatives system more
transparent, or to address problems of excess leverage. They chose not to do any of these, for reasons of politics, particularly with respect to the GSEs, or because
they simply did not see the risks, or because the regulatory regimes
that were erected invited strategic gaming.
Adding authority willy nilly will not make governments less
political or more intelligent. Quite the reverse; the pay-offs from political
clout and gaming will become even greater.
As a challenge, name a recent government regulatory regime
that is a success. Sarbanes-Oxley? McCain-Feingold? Remember one of the elementary rules of life: Nothing
is ever so bad that panicky regulation cannot make it worse.
In this paper, we argue for a New American Bank Initiative: use the $700 billion in government funds to capitalize new banks and distribute the shares of the new entities to the American People. These new banks would then acquire the operational and human capital assets of failed banks in FDIC receivership.
New structural flaws in the government’s rescue plans are revealed on an almost daily basis. The incentives for these plans to work to the benefit of the country, and not the failed firms are poorly aligned. The NABI would involve no moral hazard, no hoarding banks, no government ownership, and no throwing good money after bad. Most importantly, it will immediately provide $7 trillion or more in unencumbered lending capacity to real projects—green energy, infrastructure, auto and other manufacturing, . It is also the best plan for preserving the operational and human assets of failed banks and saving existing solvent institutions by making everyone confident in the availability of funds again.
Some arresting points:
The bottom line is that it would be irrational and irresponsible (to a bank’s shareholders) for any bank with shrinking assets and uncertain access to credit to take on new risk (i.e., make new loans) no matter how much new capital is given to them. Given this, no plan which involves injecting arbitrary amounts of capital into existing banks has a reasonable chance of undoing this zombie logjam in our financial system. If anything, they are more likely to prolong the problem.
[T]his is the best plan for making sure that existing solvent banks will survive in a non-zombie state since it will make them comfortable with their own access to short term capital. We also need to come to terms with the idea that much of the current banking system is in fact collectively insolvent and the problem is much, much deeper than one of liquidity and confidence. If the current banking system is solvent, this plan will help save it. If it is not solvent, then this plan prevents a financial system collapse from turning into an economic collapse since we will still have new conduit institutions between savers of capital and businesses that need it.
My take on this wild-eyed idea? It is intriguing, and a fresh
perspective on the problem. I suspect the real issues are social,
however, not technical, so the likely problems are likely to be in
recreating functioning organizations in a reasonable amount of time,
etc. Nevertheless, this fever dream is is definitely worth mulling.
It makes sense to me. Clearly, the existing institutions are hunkering down to save themselves and their operators, not the economy. If something along these lines needs to be done, 'twere well it were done quickly.
Buzzword Bingo is no fun any more because there are now only two words in play: "bailout" and "stimulus."
The original idea of the bailout was to save the financial system, not the individual players. In fact, a key part of the original interventions was an insistence that the shareholders be wiped out, a necessary step to minimize moral hazard.
Now, everyone is getting into the act, from auto companies to state governments. For these institutions, the moral hazard factor remains acute; in Detroit, the major stakeholders are the unions and the dealers, both of which have insulated themselves from the collapse of the companies.
Auto companies care not that the shareholders or bondholders are wiped out as long as their gravy train rolls, and for this they need a bailout that avoids bankruptcy. State governments are . . . state governments. Again, institutions that have been taken over by special interests eager to avoid the consequences of past profligacy and to continue business as usual, now claiming that money given to them stimulates the economy.
Steve Malanga comments on this at Real Clear Markets:
Bailout money may not truly stimulate, but it does insulate. If states
can rely on billions from Washington, they won’t reform their budget
processes, refocus their own borrowing, or tap innovative sources of
capital, like private equity pools around the world that are investing
in infrastructure. If struggling private industries can rely on aid
from Washington to prop up assets and failing operations, prices won’t
fall enough to attract new investors and innovative and efficient new
firms. Both scenarios are a prescription for a society of sclerotic
public and private institutions.
My colleague Ray Gifford, known for being unable to write anything without citing Schumpeter, would say that you can't get creation without destruction.
Professor Bainbridge comments on a dimension of the auto industry problem that usually gets overlooked. While people rail about union contracts, bad management, and constricted creativity, another top problem is:
An antiquated distribution system cemented into place by state franchise laws that insulate dealers from any real changes. GM needs a radically new distribution system involving fewer dealers, just in time inventory practices, and considerably greater use of on-line sales. State franchise laws protecting dealers, BTW, are a big part of the reason GM can’t shed brands. Killing a brand simply gets too complicated when you’ve got hundreds of dealers protected by 50 different sets of laws. In a bankruptcy reorganization, it will be much easier to kill a brand despite dealer opposition.
There is a lot of high-falutin’ theory about states as “laboratories of democracy,” but it is also true that states can be captured by special interests more easily than the nation, especially when benefits of the fix can be captured by in-staters and the costs dished off onto others.
The tort system suffers from this, where certain states specialize in granting outrageous awards that must be paid by out-state customers.
In politically correct schools, teachers/coaches hate the idea of people actually losing, so the focus is on rewarding everyone for effort and getting rid of such invidious things as grades or scores.
The US. seems to be adopting a similar approach to the financial bailout -- there can't be any actual losers from this unfortunate orgy of mis-allocated capital. Instead, we will all bail each other out.
The Great Depression ended when the Debt to GDP ratio dropped below
150%. When enough debts were extinguished by payoff or default, the
system could once again be normal. Virtually none of the efforts of
FDR focused on eliminating debts; in my opinion, he lengthened and
intensified the Depression by not encouraging the liquidation of bad
debts. And now we do the same thing. We perpetuate the misallocation
of resources by trying to keep house prices high, by bailing out
institutions that should go through the bankruptcy process. This fails
to convert bad debts into equity in newly solvent businesses.
All the US government is doing is creating a bigger bubble.
What will happen when the Treasury auctions fail, or, stretch the yield
curve so wide that there is panic. We don’t want our financial
institutions to fail, so we are willing to wager the creditworthiness
of the nation in order to save them. I don’t like that bet. Many
empires have died choking on debt. Is the US to be next?
. . . .
But in the present, we contemplate borrowing to bail out all manner
of problems — bail out homeowners, automakers, banks, insurers,
guarantors, etc. The end to this phase will come when the creditors of
the US write off their prior lending, and decide not to throw good
money after bad. I have no idea when that time will come, but the
dreamy schemes of politicians aiming to solve every financial hurt will
help to force such a time to happen.
The struggles over net neutrality, white-space broadband, and telecom
competition all have the same theme. Should the government lean towards
protecting the rights of large, incumbent players in a space, or lean
towards disrupting those marketplaces for new entrants? No matter what,
there's always a lean; in these kinds of battles, no policy is neutral.
Segan may be right, but another way to look at it is, will the administration protect property rights and markets or will it buy off on the communitarian views of Larry Lessig and his crew? Google is a disruptor largely because it has found a way to monetize not only the value of search, but the value of others' contributions. Markets will eventually sort this out, IF property is protected.
Steve Sterling writes alternative history faster than most people can read. At the moment, he has just finished the fifth in a multi-volume series called The Change that is based on a simple premise: One day, electricity suddenly stops working.
Within months, little is left of civilization. Except for a lucky few, humanity rapidly dies of disease and starvation, and that few survive only because they can mine the ruins for raw materials. Life quickly becomes nasty, brutish, and short, and variations on feudalism dominate, as each community must support an upper class of fighters.
The point is that energy is a good thing, not a bad. Energy is the difference between a mighty civilization and semi-savage peasants scratching at the ground with sticks. Furthermore, the cheaper energy is, the better, because the more we can do and the less time we spend scratching at the ground with sticks.
For example, there is now great concern over water. People don't have enough of it, and much of what exists is not potable. But in fact the world has plenty of water -- oceans of it, and it is an infinitely recyclable resource. What is missing is the cheap energy needed to de-salinize it, purify it, and transport it. To raise the price of energy is to condemn billions of people to inadequate supplies of bad water.
Nor can the high tech information economy divorce itself from energy. The whole thing runs on electricity, and it is no accident that high tech firms are busy nailing down server farm sites near sources of cheap energy. But if energy prices go through the roof, do not think that these firms can insulate themselves; they will be forced to share.
If CO2 and climate change are a problem, and at present no one knows, despite the barrage of pseudo information, then we need to address these directly with techniques of sequestration and neutralization, not with a misguided attempt to reduce energy use by raising the price.
The FCC voted to open up the white spaces. All five Commissioners agreed, though Tate would prefer to limit the number of channels covered, and each issued his/her own statement. All emphasized the careful and tentative nature of the action; were they into Deng Xiaopeng quotations, they would have said "Mozhe shitou guo he" ("Crossing the river by feeling
The underlying Second Report and Order (08-260) will be published within a few days.
Chairman Martin commented:
Today’s action was advocated by a diverse coalition of consumer groups, technology leaders and Internet pioneers. Opening the white spaces will allow for the creation of a WiFi on steroids. It has the potential to improve wireless broadband connectivity and inspire an ever-widening array of new Internet based products and services for consumers. Consumers across the country will have access to devices and services that they may have only dreamed about before. I fully expect that everything from enhanced home broadband networks, to intelligent peer-to-peer devices, and even small communications networks will come into being in TV “white spaces.”