Sunday, March 22, 2009

Last Call

Obama on 60 minutes was pretty interesting stuff. Most telling quote:
“One of the things that I have to do is to communicate to Wall Street that, given the current crisis that we're in, they can't expect help from taxpayers but they enjoy all the benefits that they enjoyed before the crisis happened,” Obama said. “You get a sense that, in some institutions that has not sunk in. That you can't go back to the old way of doing business, certainly not on the taxpayers' dime.”
And I shake my head because the Geithner Plan seems to me like it's the old way of doing business, only precisely on the taxpayers' dime.

Wanting to limit executive pay across the board is one thing, but that's sturm und drang signifying nothing if the taxpayer is the one stuck with the bag should Timmy's plan come up snake eyes.

And there seem to be an awful lot of ones on the sides of those dice.

The Battle So Far

There's basically two lefty blogosphere camps now on the Geithner Plan.

One is the Brad DeLong/BooMan/Kevin Drum camp, which basically says the problem is that toxic assets are critically undervalued and the solution is the Geithner Plan, it's as good as we can hope for, there's a decent chance that it'll work, but that the real problem is the Left is insane for attacking Geithner now and is making a critical mistake: it will only assure that the plan fails along with the rest of the Obama agenda.

Ergo, the correct plan of action is to stay cool and be practical, let Obama and Geithner get to work, support them on this, and pray it works. We don't have much choice: There's a greater than zero chance the plan will work, and a zero percent chance the plan will work if Geithner resigns and the GOP is able to block a replacement, assuring that zero work gets done to save the economy, leading to economic failure.

The other is the Digby/Kroog/John Cole camp, which basically says the problem is that the assets don't matter, the fact that one financial entity can cause a near collapse of the system is, and that the Geithner Plan is whistling past the graveyard. The real problem is that people refuse to see the system is broken, the banks are insolvent, and that Geithner's plan does nothing to address the issue. At best the same entities survive to cause problems down the road, at the worst we give away trillions into the black hole of moral hazard and the economy follows.

Ergo, the correct plan of action is to dump Geithner (for somebody who does see that the question of undervalued toxic assets is like wondering what temperature the lava is when it's flowing right towards you from the volcano) and then replace him with somebody ready to break up these Too Big To Fail institutions. There's a greater than zero percent chance replacing Geithner and instituting Plan N will save the economy, and a zero percent chance that the Geithner Plan will work, leading to economic failure.

The problem is one of these two groups is right, and making the wrong choice here more or less leads to total financial ruin. I happen to believe the second camp is correct, but I have to respect some of the arguments of the first camp. It boils down to which do you see as the larger risk, keeping Geithner and his plan, or dumping him and trying to make a new one?

Only Obama gets to make that choice.

The Pros And Cons Of Timmy's Plan

Brad DeLong takes up the pro position on it, The Kroog takes up the con with his response to DeLong. Both are very much worth reading. DeLong's basic theory is that, well, the Geithner plan looks really good on paper.
Q: Why is the government making hedge and pension fund managers kick in $30 billion?

A: So that they have skin in the game, and so do not take excessive risks with the taxpayers' money because their own money is on the line as well.

Q: Why then should hedge and pension fund managers agree to run this?

A: Because they stand to make a fortune when markets recover or when the acquired toxic assets are held to maturity: they make the full equity returns on their $30 billion invested--which is leveraged up to $1 trillion with government money.

Q: Why isn't this just a massive giveaway to yet another set of financiers?

A: The private managers put in $30 billion, but the Treasury puts in $150 billion--and so has 5/6 of the equity. When the private managers make $1, the Treasury makes $5. If we were investing in a normal hedge fund, we would have to pay the managers 2% of the capital and 20% of the profits every year; the Treasury is only paying 0% of the capital value and 17% of the profits every year.

And that's a good argument. But it's based on the assumption that the problem is the toxic assets are critically undervalued. If the value of the assets goes up, the government makes money. If it goes down however, the government loses literally a mint.

The bottom line is this: the public-private partnership hedge fund beast by definition has to pay a premium price for these toxic assets and hope that the prices manage to go up above what the bank valued them at in the first place. Geithner has to.

The only way that happens is if the government creates and sustains another mega-housing bubble causing home values to explode across the country again, which will capsize the dollar completely in the process causing hyper-inflation to go with it.

This plan seems to be not only conducive to causing that scenario, but in fact it seems to be absolutely counting on it to happen. If Timmy doesn't pay the banks a massive premium, they won't sell, and they'll go under. This is nothing more than a giant accounting error, in other words...which is such a ludicrous assumption that it makes my chest hurt.

And that, ladies and gentlemen, is why the Gethner plan won't work. If all this was was an accounting error, then why not just absolve the banks of the accounting error and move on? It's because our entire economy is built on the shadows and assumptions that these trillions in toxic debts are real money that somebody owes somebody else. Without all that money actually existing, our economy ceases to exist.

Hell, we can't even figure out who owes whom what and how much!

And we're throwing trillions of real money into to hole to see if enough of it magically makes these assets worth something again.

Obama Goes After Executive Pay

This is going to be a hard measure to put through, and the arguments against the government doing this are pretty simplistic: what CEO would want to take the risk to innovate now when you know being successful means you'll get your pay capped? We'll drive the best and brightest away from the boardroom!
The Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation, government officials said.

The outlines of the plan are expected to be unveiled this week in preparation for President Obama’s first foreign summit meeting in early April.

Increasing oversight of executive pay has been under consideration for some time, but the decision was made in recent days as public fury over bonuses has spilled into the regulatory effort.

The officials said that the administration was still debating the details of its plan, including how broadly it should be applied and how far it could range beyond simple reporting requirements. Depending on the outcome of the discussions, the administration could seek to put the changes into effect through regulations rather than through legislation.

One proposal could impose greater requirements on the boards of companies to tie executive compensation more closely to corporate performance and to take other steps to assure that outsize bonuses are not paid before meeting financial goals.

The new rules will cover all financial institutions, including those not now covered by any pay rules because they are not receiving federal bailout money. Officials say the rules could also be applied more broadly to publicly traded companies, which already report about some executive pay practices to the Securities and Exchange Commission. Last month, as part of the stimulus package, Congress barred top executives at large banks getting rescue money from receiving bonuses exceeding one-third of their annual pay.

It hasn't occured to a lot of folks on the right that sharing that success with the rest of the company might encourage more innovation, productivity, and loyalty, but as conservatives will tell you, the CEO is the only person in a corporation that actually matters, and it's perfectly fine for that CEO to make thousands of times the salary of their entry level workers.

The only thing unrestricted greed has gotten us here in 2009 is an economy on the brink of failure. Guys like Bernie Madoff and Sir Allen Stanford. Guys more interested in playing the system for maximum personal benefeit than the benefit of their own employees. So yes, if this measure drives these "best and the brightest" away from the corporate boardrooms of America, then Obama's doing us a favor.

"Innovations" like collateralized debt obligations and credit default swaps and subprime loans ruined America, and we'll be paying for it for the rest of our lives. The free market Galt kids were running fast enough to get government bailout money, declaring they were too big to fail.

If you're too big to be allowed to fail, you're too big period.

More Governor Goofiness

It's bad enough SC Gov. Mark Sanford is writing nonsense in the Wall Street Journal about why he's rejecting stimulus money for the state with the second worst unemployment rate in the country, displaying a level of economic ignorance that borders on the criminal:
If South Carolina could use stimulus money to pay down debt, in two years we will be able to spend, cut taxes or invest even if the federal government can no longer provide more money -- not a remote possibility. In fact, paying debt related to education would free up over $162 million in debt service in the first two years and save roughly $125 million in interest payments over the next 13 years -- just as paying off a family's mortgage early frees up money for other uses.
Of course, that's if the number of unemployed in SC doesn't change and the state has to spend even more money on unemployment benefits...which it most certainly will now since the $700 million won't be creating a single new job. So, as the Palmetto State's tax revenues continue to plummet due to falling home values and foreclosures, and rising unemployment, the state will have to in fact borrow more money to provide the services it has now, or cut them drastically.

Sanford seems like the kind of guy who will do the second there, slicing public services when more and more South Carolinians will need them the most. And let's not forget the state ended up getting $2.1 billion from the feds ANYWAY, making Sanford's fiscal responsibility argument moot. It's clear the Republican governor with the best shot to win nomination in 2012 is the Governor with the largest complex of tent cities.

But in actuality there's now a worse Republican governor than Mark Sanford, and that's Nevada Gov. Jim Gibbons, a guy cutting off his state's unemployed even though he doesn't have anything close to a shot at getting the 2012 nomination.
Conservative Republican Govs. Sanford, Perry, Jindal, and Palin have already taken steps to reject federal stimulus aid. Apparently, Nevada Gov. Jim Gibbons (R), arguably the nation's least popular and most scandal-plagued governor, wants to join the club.

With Nevada suffering from some of the nation's highest unemployment and foreclosure rates, no one seems to understand what Gibbons is thinking rejecting funds for extended unemployment assistance. If the governor assumed taking an uncompromising conservative stand might rally the Republican base to his defense, he badly miscalculated -- GOP lawmakers and the state's Chamber of Commerce want him to cut the nonsense and accept the money.

While many states would have to change their laws to receive the cash -- the federal government's offer of $7 billion is contingent on states' expanding the eligibility for the benefits -- Nevada already meets the criteria, according to the State Department of Unemployment, Training and Rehabilitation, since it gives benefits to some part-time workers and those who quit their jobs under certain conditions.

Further, some governors have rejected the unemployment piece of the package because their unemployment levels are below the national average. With a 10.1 percent unemployment rate, according to the latest data released Friday, Nevada's rate is above the national average and rising, and the state's fund will be broke by the end of the year. That will trigger federal borrowing to replenish the fund, which Nevada has not had to do since 1974.

A spokesperson for Senate Majority Leader Harry Reid of Nevada told the NYT, "What makes this particular situation most extreme is the terrible situation the state is in. I mean, how do you look at someone in your state that has lost their job and tell them, 'No, we're not taking this money'? "

And so it goes. Nobody seems to understand why Gibbons is actually doing this, other than he thinks it's cool or something. Nevada will just have to borrow the money anyway. Republicans really are that stupid. I may despair about Obama being able to fix the economy, but not as much as I would be if Republicans were in charge.

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