Wednesday, October 29, 2008

The Bail Out and Rate Cuts

For a bit of a change of pace, but still with a focus on science - the science of economics. OK, that isn't science any more than astrology is, but they do get a semi-Nobel in economic science. A bunch of Swedish bankers would never make a mistake. Here is my reaction to the rate cut.  :-)

The Federal Reserve cuts interest rates by only half a percent to 1.0% - WIMPS!

One of the really cool things about the bail out, is that rate cuts do not have to stop at ZERO. We can use the government to subsidize borrowing. If the interest rate is minus 5 percent, the government will reimburse the bank for the amount of money they are paying you to borrow money. 

If the original bail out plan did not appeal to the Huey Longs of the world, this one will. Of course, they will have to come up with some sort of needs testing so that it does not benefit the really rich, but it can put money in the hands of the poor. 

If you structure the loan just right, the interest rate you receive for borrowing the money could cover your payment on the principal and you would never have to pay anything out of pocket.

Sign me up for a few million in loans. I don't want to overdo it, so I will not ask for more. I will then quit my job, so that the unemployment numbers improve. This is clearly a Win-Win-Win situation. The more money the government gives away, the better for everyone.

Instant Recovery! FDR would be proud.


Wednesday, October 15, 2008

Smaller Banks Resist Federal Cash Infusions

An article in the Washington Post points out some of what is wrong with the Great Bank Bailout of 2008. Smaller Banks Resist Federal Cash Infusions.

A few quotes -

At Evergreen Federal Bank in Grants Pass, Ore., chief executive Brady Adams said he has more than 2,000 loans outstanding and only three borrowers behind on payments. "We don't need a bailout, and if other banks had run their banks like we ran our bank, they wouldn't have needed a bailout, either," Adams said.

The first $125 billion will be divided among nine of the largest U.S. banks, which were forced to accept the investment to help destigmatize the program in the eyes of other institutions.

Officials said they expected thousands of banks to participate.

But both the American Bankers Association and the Independent Community Bankers of America said that they knew of few banks that planned to participate.

Participating banks cannot increase the dividends they pay to shareholders without federal permission, they must accept some limitations on compensation for their executives, and Paulson said the government would press companies to limit mortgage foreclosures.

Not to defend the limitation of the compensation for executives, but that is not the role of government. We should not be paying out trillions of dollars, just so some redistribution of the wealth types can say, "We kept those dirty rich from making too much." They will always be making too much. The government even set up businesses that do this - Fannie Mae and Freddie Mac.

The sensible way to do this is to educate the stock holders, since they are the ones who pay the money to the executives. Let the stock holders take responsibility for their responsibilities. It is not the responsibility of the government.

As far as encouraging risky investments, this is a spectacular incentive to the irresponsible members of the banking community. Go forth and make bad loans, but do not worry. We will be there to bail you out. Then we will use that as an excuse to put more regulations on those, who behave responsibly.

Fannie Mae and Freddie Mac, corporate/government chimeras were part of the problem. Completely private financial institutions were just as bad. The ordinary solution to these excesses would be bankruptcy, firings, lay offs, foreclosures, and other misery. Fortunately, much of this would fall on those responsible. Many executives will have made fortunes out of this. The bailout will not change that. Regulations might have minimized that, or delayed it, but the regulations seem to have been encouraging sub-prime loans.

Free markets are more of a concept than a reality, since there are regulations on almost everything. The value of free markets is that they allow people to take risks. Many of these will fail, but some will prosper. This is what gets economies going. The government incentives and punishments have nothing to do with a free market and only pander to those with power.

The only guidance the government seems to have is the stock market. If the stock market goes up, they must be doing the right thing. If the stock market goes down, they just need to do more.

I was wrong about the market being near the bottom. Maybe it will bottom here (DJIA at 8578). Maybe.

They have already decided it is the right thing. There is no possibility they will consider that they are already doing too much. I was not expecting that I would be missing Mr. Greenspan, ever. He would probably keep everyone too confused to go along with such a plan.

I heard someone (Alex Blumberg) on NPR talking about a paradox of the bond market. With most countries, when there are bad financial times, the interest rate goes up. This is because the currency is considered to be more risky. With the US, as the demand for treasury bonds goes up, the interest rate goes down. The conclusion was that the worse the economy gets, the lower the interest rates. This is true, but only up to a point. There will be a bubble in bonds. At some point the US will owe enough money, that it will be seen as wiser to default on the debt, than to pay it back. This was considered back in the inflationary times of the recent past.

Why is a US bond default unthinkable?

Is the US so responsible with its money, that they have surpluses of cash and bullion to back up the currency?

Will the US be again, faced, with high interest rates to borrow money?

This guy seems to think so.

Picture from NPR (the web site, not the radio) that provides a giggle.


Friday, October 3, 2008

Something that should amuse the short term panic people

Some people pointed to the record drop of 777 (and change) points on the DJIA (Dow Jones Industrial Average) on the day the House of Representatives rejected the original Encouraging Reckless Activity Bill as evidence of the decision being a bad decision. If you use their logic, the market should be up today. Up a lot. The market should be up this week. Up a lot. Here is a chart of .DJIA for the week. This is what a lot of people refer to when they discuss the market.

Today, Friday 10/03/08, is not showing up on the chart, but I expect that will change later on. Today's close of 10,325.38 is 40 points lower than the close for Monday of 10,365.45 - the lowest point for the day. If that was a justification for listening to the market and passing the bill, what does this mean?

Maybe it all means that paying attention to the short term fluctuations, even when alarming, is a bad idea. Not that a bad idea would stop Pelosi and The Bush.

Pelosi: "Gee Bush, what do you want to do tonight?"

The Bush
: "The same thing we do every night, Pelosi—try to take over the world."

I still am continually amazed at the ability of the Speaker of the House to refrain from saying Narf on TV.

Addendum 17:26 10/03/08 -

The market will probably bottom out about here, but not because of this action by Congress.