Bailout Culture
{Post by See-Dubya}
Good to see someone on Wall Street take on bailouts big and small, both for housing and for big corporate belly-flops like Bear Stearns:
In one of this year’s primary debates, Ron Paul said it is not the president’s job to run the economy. I’d add that it is not the government’s job either. It is each and every citizen’s job to manage our own affairs, make our own decisions, bear the fruits or painful consequences and learn our lessons.
The free market is the essence of our society’s strength and is rooted in the Lincolnian precepts of accountability and responsibility. When decisions are made and actions taken (or not taken), there are consequences. These consequences are models for us to learn from and serve to stimulate social growth and advancement.
Well said. That’s Ethan Penner, former CEO of Nomura Capital, in today’s WSJ. Penner brings up the economic notion of “moral hazard“, which is exactly what these bailouts create (or, rather, perpetuate). The term is getting thrown around a lot, though a quick glance through recent news results suggests it’s applied more to the big unlovely capitalists at Bear than it is to small-scale miscalculations like mortgages. It’s easier to get on your high horse about Wall Street plutocrats, but the problem is exactly the same. And the bailout exacerbates it; there is no reason to expect this won’t happen again in the next economic cycle, because the government bailed everyone out last time. It’s a perverse incentive to repeat the process.
What I thought was interesting was this critique of the Bear buyout in a blog of the left-leaning Guardian:
The result is that as of Sunday night the US central bank, the Federal Reserve, is nationalising the debts of a Wall Street investment bank. (They won’t call it that, being America, but that’s the reality.) I can’t think of a parallel in modern US business history. By taking direct control of the Bear Stearns investment portfolio, the Fed will effectively be running the bank (presumably until shareholders finally agree the JP Morgan takeover) as well as intubating it with cash. The word “unprecedented” springs to mind – “highly unusual,” said the New York Times.
There’s another word for that, of course–when the government nationalizes the means of production, and manages them for the common good. And our government sure doesn’t like it when other countries do that.
You know what? That’s another moral hazard right there. If politicians can get away with advocating socialist solutions to our problems and then suffer no political consequences, why shouldn’t we expect them to do it again, and again, and again?
MORE: Takeaway point from Penner: “Consequences not suffered from bad decisions lead to lessons not learned, which leads to bigger failings down the road.” Not just true of finances, is it?
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yes, yes…but how can people take care of their own affairs when evil corporations drag them – kicking and screaming no doubt – into a culture of conspicuous and unadulterated materialism?
Thanks dubya for posting this. They won’t listen to Penner but he is a breath of fresh air.
Thanks for the information See-Dubya! I do like the word “moral hazard” used to describe the government’s involvement and interference in the economy. The lessons of FDR and his meddling with the recovery during the “Great Depression” only made it last longer.
AWE, But How will the illegals be able to pay back their home loans?
Yes this is why the Republicans will go down in flames this election — they have truly lost their way. And yes, it is Bush’s fault.
How about bailouts for people who bought cars that now are too expensive for them? And how about those with credit card debt? Why the discrimnation?
Probably due to the feeling about “ADDI 2003″ which made home loan denial a form of discrimination. Yes, Bush signed this piece of crap legislation. It is the government equivalent of bubble financing. You could get cash back for buying a house, and walk with the money.
Government creates, government fixes, soon no one will recognize right from wrong, or market economics, the bailout will be just around the corner. The flippers on our block are trying to see how to cash in on the bailout — Even changing their prime residence to get bailouts.
Bit by bit we are losing our once great and proud nation. This nationalization of corporations and separation of “sub”cultures must end now. Perhaps however, it is already too late.
Go ahead, wean them off their government entitlements … It ain’t gonna happen.
For many years, that was good sound advice. Today, it’s considered heresy. Unfortunately, many people today, want government entitlements (socialism) and the politicians gladly oblige them, in order to stay in office. I believe there is a bill in the House now, that will add a box on the tax returns where a taxpayer can voluntarily pay more tax. I forget the sponsor’s name, but it was mentioned that there are people who want higher taxes, so why shouldn’t they voluntarily pay now? I doubt it will pass, being “tongue in cheek”. People falsely assume that their rights will stay, even as the government controls more of their lives. Quite a contradiction. Amazing that people will cheer as the politician announces that they will pay more taxes, have less money in their pockets, and see fewer rights.
I don’t buy this labeling of Bear Stearn’s demise as a ‘rescue’ or a ‘bailout’ or as put here ‘intubating it with cash’. As I see it, the FED’s message was plain: if you (investment banks, hedge funds, or your run of the mill too big to fail banks) screw up and because you’ve leveraged your balance sheet with 30 times your own capital (ie borrowed 30 times more than you’re worth), you do not get turn your back on your debts and screw those 30 lenders (of comparable size; the actual number of lenders is probably many many more than 30). Instead what will happen to you is that when you screw up and threaten to declare bankrupcy, your stock will be sold for $2 a share on Monday, your business will be divided up and given away for a song. And “you bums, you bums, you know,” will be looking for new jobs on Tuesday with a really crappy resume.
To put in another way — say you’ve just been caught in a flash flood. You and your car are floating off to the great beyond and someone offers you a ‘bailout’ or a ‘rescue’. Would you want one like Bear Stearns got?
*ps, the faintly recalled refrain of “you bums, you know, you bums” is probably from some comedy routine from the 70’s. Google, alas, can’t remember either. Anyway, I like it.
I hate to sound contradictory SecondSight, but wasn’t it government programs forcing them to make the adjustable rate mortgages available in the first place, lest they appear racist? Again, the entire problem is any type of government interference with, regulation (To a great extent … but then again, that is what started us down this slippery slope in the first place) and now government control of private industry.
Just my two cents though.
WarTip, I think that’s a separate though related can of worms. If you want to see a Democrat politician bristle, catch them being questioned about Community Reinvestment laws.
What is becoming clear is how dreadful many of those securitized loan packages were and are. BSC wasn’t the only investment bank to get burned [alive] there.
As for regulation, it’s hard to see this mess as over-regulation. It looks more like under-regulation right at the point where the rubber hits the road. NINJA loans, 100% mortgages, ARM’s with staging baloons, flippers up the wazzoo, WaMu’s turn-your-house- into-a-HELOC credit card…
Sorry, I’ve just discovered the HousingBoom blogosphere and shhiiiittt man, these guys have been crazy for a while now.
The only good thing (and that’s relative) is that JP Morgan will be taking over BSC. And although the Fed will backstop their takeover, JPM is expected to spend 1/4 of their 2009 profit doing so.
A question for the candidates: “Senator, now that it has shown to be a bad act, are you planning to rescind the Community Reinvestment Act to help the mortgage slump and the economy?” The answer will be 1 of 2 options…total confused look, or “crickets”.
So we finally have admission that Ron Paul should have been the Republican nominee. I wonder why the Democrats chose John McCain to be the Republican nominee, not Ron Paul…. maybe it’s because the Democrats are afraid to run against a pro-Constitution Conservative.
Here’s a terrific run-down of how Bear Stearns (and everyone else, even you and me) got here. Think of it as CDO’s expressed in Duckies and Bunnies.
What’s really interesting is that it was written June 27, 2007!
What happened with the Community Reinvestment concept was really converted to a race to the bottom where the worst abusers of mortgages (flippers, frauds and near criminal players at all levels and all sides of the transactions) sucked the system dry.
Maybe there’s a reason Countrywide’s CEO looks like a mafia don…
It is a little troubling that MM doesn’t bother to inform herself about what happened at Bear Sterns. It was not a bailout. The principals and stock holders lost almost everything. What did not happen is a bigger meltdown of the finance industry.
I am so sorry to have troubled you, LGM.
Come on, lgm, think! Of course it was a bailout of sorts.
Thanks to the federal government;
1. The bond holders haven’t “lost almost everything.”
2. The debt holders haven’t “lost almost everything.”
3. The account holders (think deposit holders of a Savings and Loan) haven’t “lost almost everything.”
4. The employee severances are carved out so the employees haven’t “lost almost everything.”
There are plenty of interested parties of BSC that were bailed out.
However, that’s not necessarily a bad thing. See my next post.
I’m not sure I agree that all fed intervention is a bad thing.
Do any of you have “risky” money market investments? Well guess what? I can argue that the federal government just bailed you out!
“Bank runs” are a bit more complex since the day Jimmy Stewart saved the Bailey Building & Loan by thwarting the irrational behavior which could have led to an unnecessary liquidity/financial crisis in Bedford Falls.
I think that’s the way the fed saw this. If Bear had defaulted on its bonds, other debt, and account holders, then it’s possible that we would have seen irrational runs at Lehman Brothers, Merrill Lynch, Morgan Stanley, etc as people realized that their money market, 401(k), and brokerage accounts aren’t well protected. It might be a bit of a stretch to assume that all these banks would have frozen retail customer accounts while navigating through bankruptcy – but it’s certainly very possible.
I’m sure many of you don’t grasp the possible precariousness of the current liquidity situation. Many believe that some of the disaster associated with the Great Depression could have been avoided if the federal government had intervened more quickly, and I agree. George Bailey relied on his personality and reputation to save his business and much of the town in the process. Well, lgm is partially right. The George Baileys of Bear Stearns were not bailed out (beyond $10 per share). They’ve lost their business. But at least much of the town has been saved.
Yes, yes, yes I’m a capitalist. But certain regulation and oversight is very necessary. Anyone that doesn’t keep their money in a mattress sees the benefits of FDIC. Yes, the federal government is hastily pushing beyond the role established 75 years ago. Sure, it would be better if it was regulated a bit more methodically, and hopefully it will be soon. (Maybe investment bank liquidity will be regulated in the same manner as insurance companies going forward.)
Overall, I think it’s possible that many of you would be doing the same thing if you were helping to manage the fed right now.
Our founding fathers (who are still smarter than most people of this world) gave us rights. They said we have the right to PURSUE happiness. Perusing happiness does not mean there is a guarantee of it. You have a right to make bad choices and live with your decision. You do not have a right to tell me I have to pay for your house cause you where to stupid to figure out that if you only make $250.00 a week you cannot afford a house payment of $1500.00 a month. That entitlement reasoning is why we have so many entitlement programs now.
GaMidnightRider,
If your bank went under, someone might claim that you were too stupid for entrusting a Savings and Loan with your money. They might say that you are not entitled to receive an FDIC bailout.
I think everyone needs to see a difference between government actions aimed at rewarding bad home buying/lending and government actions aimed at avoiding potential liquidity problems which could be extremely messy and much more expensive for the economy.
I’m strongly opposed to the first type of actions, but I support the second type of actions if they are smart, reasonable, and timely.
Corkie, I agree with you but our govt. makes a mess of everything they touch. I do not see our govt. officals being able to do anything…. smart, reasonable, or timely.
Does this include the military?
Does this include FDIC?
Should both be disbanded?