Monday, March 30, 2009

Pragmatism or Populism

I am sick and tired of one or both of the above coming from Conservatives - WHO SHOULD KNOW BETTER.

Let me backtrack and lead you by the chin to the basis of my current disgust....

Last year, the financial markets began to crumble. The process was foreseen by those willing to look and ignore the anti-deniers ("You are just trying to talk down the economy. Look at the numbers, across the board the economy is strong and getting stronger.") No matter how much the voices in the wilderness suggested the foundation was rotten, cracked and sinking, the anti-denier argued the doom and gloom was unwarranted.

"The Washington Post had even run a column the day before Lehman's collapse ridiculing those who were making negative comments about the state of the economy."

Bear Stearns should have been allowed to fail. The die was cast and the 'moral hazard' argument won, too late though for the lesson to be correctly applied. Lehman Brothers was let fail and the repercussions scared the Politicians (probably the Fed too) into worrying that systemic failure would cause financial and structural collapse of the world economies. That belief is short-sighted and naive. Coming from the Fed and the Treasury, it can not be reassuring - and it is not.

With the failure of Lehman, no further failures would be allowed. Moral hazard was something that was 'academic', the Powers were dealing with real financial systems and real economies. Moral hazard lost it's ability to impose a check on improper behavior.

AIG. There are enough lessons for 20 or 30 books but the most important ones - from my perspective - are being ignored by many. I have said that freedom is messy. Bankers don't like messy. Especially when it comes to risk and any 'respectable' entity that tells them they can make risk less messy, more controllable is going to get a long look. AIG was offering financial managers a way to 'diversify and distribute' risk and this was paired with products that gave the illusion of AAA, almost Treasury safe, leveragable returns. How much AIG was involved with we will learn some time into the future, but my guess is somewhere around 45 TRILLION dollars of products/derivatives. With an exposure of .1 to 10% depending on the product, AIG had the potential to lose $450billion to $4.5 TRILLION. Obviously it did not have the ability to cover those losses and so their counter parties and clients would except....except. The Clients were people that were not free participants of capitalism. Most bankers are not and the financial markets have learned that they too dislike capitalism. See, capitalism can have winners AND losers. Win/win is not the normal of capitalist events. Risk means that there is a chance that investments fail. And despite AIG, failure was not only an option, but coming like an avalanche.

Who were the clients? Sovereign funds, hedge funds with 'serious' clients like Princes and National Banks. They couldn't lose...that was unheard of, and I think the Fed and the Treasury got a long lecture after Lehman about the viability of the American way of life if large holders of American Capital products in Europe, the Middle East and Asia were going to take big losses.

So, AIG would be unwound. It had to be done slowly, and the money would have to be given to make sure that AIG counter parties didn't get burned. The problem was, how much money? I am sure that AIG and others said that the markets were just disrupted and pricing products too harshly. If the markets could be calmed, the unwind could be done slowly with minimal losses...maybe less than a $100 billion. And if the economy had held on, that might have happened. But moral hazard has a dark side. It is bad enough to be caught violating it, it is much worse to be caught hiding that you might have violated it (regardless of the truth). The politicians and the Fed and the Treasury oversold the issue: imminent collapse, financial Armageddon. People shut down. The financial markets were houses of cards, one bankruptcy (AIG) away from disaster. People know people one paycheck away from disaster, they don't like to think of their national ECONOMY in the same position.

Like a tornado warning well heeded, people shuttered the windows, bolted the doors and headed for the cellar. Big ticket items died first as small stuff was stocked up on. What the financial markets feared was losses, what they got was rug pulled out of the economy.

How much of AIG is left is irrelevant. The multiple dips into the public trough put lie to all the claims that the situation was contained.

Now this is where I got pissed.

The Fed and the Treasury should never have bailed out AIG. Yes, I DO understand what the potential was, IS. YOU probably DON'T. 600 TRILLION in derivatives. The systemic failure of every major bank, most small COUNTRIES and a financial system a smoking ruin. Instead, we are going to burden the American People with bailing out anti-capitalists that believed they had a right to a free lunch - no risk.

And most conservatives are letting them get away with it.


Should never have been bailed out. But was. And that did NOT give us the right to interfere private enterprise. If I borrow $20 from you, you do not get the right to check my pantry for expensive soup, or publicly call me out for my spending choices. Our agreement for the $20 is the extent of your involvement.

I don't care about AIG bonuses AND NEITHER SHOULD YOU. It is NONE of your business and take that 'but it is our money' crap and stick it. Shareholders do not get a say in the day to day running of a business and the capitalistic system is either an all in, or get out choice. Since the 1930s, we have been trying to have it both ways and the more it is tried, the worse the situation is getting.

Capitalism, like freedom is messy. Too many conservatives have forgotten and have looked at their 401ks and home values and quietly, hopefully, they have encouraged the Obamas and Geitners and Bernakes to succeed so that they will not have to suffer from the risk THEY wanted to benefit from, but also be protected against.

Choice has consequences. Demand to be protected from those consequences and you lose the freedom of choice.

Too many are seeking protection and I am damn tired of it.

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