While I’m largely sympathetic to Mr. Taleb, I am surprised that he seems to be even more skeptical of models than I am. One can get too wrapped up in empiricism, and it is wholly inefficient to rely only on empirical observations for every decision. At some point, you need to rely on estimations and statistics. His book looks worth a read and I will probably buy it, but a quick look at blurbs in wikipedia indicates that he could be downright anti-scientific. That being said the overreliance on computer models to economics is part and parcel of the problem with the housing bubble. And anyone who despises Ben Bernanke this much is worth listening to. The last two minutes are really good.

He is a complete jerk, and by the way did you know he visited a prostitute? That being said, why is it that he is completely right on the bailout question?

Two responses are possible: One is to accept the need for gigantic financial institutions and the impossibility of failure—and hence the reality of explicit government guarantees, such as Fannie and Freddie now have—but then to regulate the entities so heavily that they essentially become extensions of the government. To do so could risk the nimbleness we want from economic actors.

The better policy is to return to an era of vibrant competition among multiple, smaller entities—none so essential to the entire structure that it is indispensable.

And the conclusion:

It is time we permitted the market to work: This means true competition with winners and losers; companies that disappear; shareholders and CEOs who can lose as well as win; and government investment in the long-range competitiveness of our nation, not in a failed business model of financial concentration and failed risk management that holds nobody accountable.

Why is he totally right on this. He has no power and thus no stake in this fight, so all he has is his opinion. When I first started thrashing against this bailout, my liberal friends remanded me and told me we can’t allow self-correction. Like Spitzer, I don’t support a flawed status quo.

Bold solution proposed by Alan Lammey. His take is that credit default swaps, which is insurance (a type of hedge) against the failure of a business or industry, should only be paid in full to those who have a stake in that industry (i.e. own substantial stock). Ethically and morally, this makes sense. Consider you own beachfront property in the Gulf, and you purchase insurance against hurricanes. You have collateral (a house) and you want to lower your risk. If you lived in the midwest and wanted to buy hurricane insurance on other people’s property in the Gulf Coast, I’m sure there are reasonable laws against that. Apparently if you are rich enough and place a big enough bet, you can profit from such a calamity.

Remember, only a small portion of these positions are actually hedging exposure in the form of the underlying securities, or in other words, CDS’s that are based on REAL HEDGES.

The rest are speculative, in some cases 10, 20 of 30 times the underlying basis. Yet the position taken by Treasury Secretary Paulson and implemented by Tim Geithner (and the Fed Board in Washington, to be fair) is that these leveraged wagers should be paid in full. And folks, that’s the biggest issue. Unless Geithner changes his stance on this, we are doomed financially in this country.

Let me say that again, in case you missed this point — because it’s one of the most important points I’m making here:

Tim Geithner has made it clear that these leveraged wagers should be paid in full. And he is advising this to President-elect Obama.

My answer to this view is that those who participated in the speculative CDS market, needs to be put into bankruptcy. Sounds like a simple solution to a complex problem, but I do believe it would work.

Long but worth a read. I agree with about 90% of the article, and especially the part about letting the speculators get pennies on the dollar on their investment. A lot of rich people will be pissed but the real economy will not be hindered by this outrageous debt, and our sovereignty will remain intact. Hat tip (Conservative Cajun).

A friend told me he met a colleague who insisted he was a libertarian. I bet in 2004 a lot of these guys weren’t saying how libertarian they were…

This was my rant to him on Libertarians and the bailout:

Libertarians are republicans who like to smoke pot.

That’s an old joke.

I voted for McCain and my GOP congressman, but not my Senator, since he voted for the bailout. Soon Kay Bailey Hutchinson, my other senator, will be running for governor. I will be voting against her as well. I hate not being listened to. I wrote and called both senators and my representative against the bailout and received a letter in the mail from my representative. That was pretty cool.

I voted for the libertarians on every other election. Much to my chagrin, most of the democrats won local judge elections as 2-3% voted libertarian in each election. The breakdown was 51-Dem, 49-GOP, 2 Libertarian. That is the way it breaks down when you vote libertarian. My county has had mostly GOP judges forever and that is good b/c they keep the criminals in jail, where they belong.

The sad thing about these elections is that good, smart Senators like John Sununu lost their seat whereas jerks like Ted Stevens win (they are still counting, slowly, the votes in Alaska. The best scenario is he wins and steps down and Sarah Palin nominates a new face).

But this isn’t only a GOP problem. Look at Chicago and New Jersey and see what happens when one party dominates.

The longer this thing goes on the more it becomes apparent the current crisis is due to a lack of transparency and encouraging bubblicious conditions. Sadly, everyone thinks the solution is encouraging more reckless behavior, encouraging yet another bubble, especially now that Obama is taking office. The first thing Obama will do when president is bailout GM, etc., which is corporate welfare at it’s worst, on principle even worse than the current bailout, and not change for the better. We were told that these banks needed 700 billion just to keep afloat and the signal now is that, well, now that we have this money in hand we can use it for helping this industry, which votes democrat (Michigan) and especiallly backed Obama. So I guess we really didn’t need all that money for greasing the wheels at the banks, then, right? Any argument made for the auto industry could apply to Starbucks, or Sun Microsystems, and to some extent American Express. But choosing which industry to save seems rather arbitrary at this point, and is not what gov’t does best. Over 20 American car manufacturers have gone out of business, I don’t see why all of the sudden gov’t has to start bailing them out. If GM can’t make a profit selling 9 million cars a year this is a systemic problem that a few billion free dollars won’t solve. Let them all declare bankruptcy, merge, and renegotiate their terms with the UAW and their creditors. The US auto stocks are now trading at 2$ so I don’t know think most shareholders will just have to eat it at this point. Remember that most execs are compensated mostly with stocks, most of which in their company so their holdings are now zero. So if you let them fail it is much worse on them financially, and much truer to the way a free market operates, than to bail them out and then go through the kangaroo court process of demanding limits on their compensation.

This recession turned my 401k into a 201k.

Bill Ackman is having a great conversation with Charlie Rose.

“Investment banks never had 30-40 times leveraged.”

This guy is making a ton of sense. The problem of easy money, free money without collateral for companies.

In 2003 Steven Strogatz published an incredible book called Sync: The emerging science of spontaneous order, he which he explores the hidden forces that causes phenomena as diverse as pendulum clocks and fireflies to synchronize with each other. In the initial example, the fireflies, Strogatz relays the documentation of 50 years of observations of thousands of fireflies in the tidal rivers of Malaysia. The necessary feature of these synchronizations is that the fireflies oscillated; that is, they shared an on-state and an off-state.

Research on natural biological rhythms leads to very interesting insights into consciousness. For example, in the absence of external cues like sunlight or watches, our sleeping patterns become jagged and eventually line up with our body temperature. Interestingly, body temperature and cortisol levels have a rock solid pattern that is slightly longer than 24 h. Experts in consciousness and neuroscience are currently investigating the contribution of sleep to the encoding of memories, with the broad hypothesis being that the hippocampus, a part of the brain that is involved with learning, replays events of the previous day to the cortex for the storage of long-term memories. It has also been shown that taking a nap immediately after studying improves memory retention, providing further evidence that ideal mental performance requires oscillation in states of consciousness.

Shrewd observers throughout history have noted that these oscillatory states of productivity are by no means isolated to individual organisms. As early as the book of Genesis it was noted that (in chapter 41)

“Seven cows came up out of the river, fine looking and fat; and they fed in the meadow.
Then behold, seven other cows came up after them, poor and very ugly and gaunt, such ugliness as I have never seen in all the land of Egypt.
And the gaunt and ugly cows ate up the first seven, the fat cows.
When they had eaten them up, no one would have known that they had eaten them, for they were just as ugly as at the beginning.”

That is the first description of the business cycle of which I have knowledge, and far more wisdom is in that saying than what is currently in the book of Newsweek.

Consider this whopper by Zakaria:

We just can’t accept the downswings that used to be routine for Western countries in the 19th century, when we saw much less intervention by the government. Can you imagine the political fallout from 20 percent unemployment or 5 percent growth rates? The government must experiment with massive interventions in the market to ensure credit starts flowing smoothly again. These interventions have become part and parcel of modern capitalism.

That “massive” bit of hubris and ignorance aside (remember the first description of business cycles is at least some 40 centuries old now), it isn’t that the professional pundits at Newsweek are ineffective or dishonest, it is just that almost all of their suggestions for long term policy don’t match their support for short term “Massive Government Interventions” Fareed Zakaria’s diagnosis is correct in his article on the silver lining of the crisis.

Every city, county and state has wanted to preserve its
proliferating operations yet not raise taxes. How to square this circle? By
borrowing, using ever more elaborate financial instruments.

***
If there is a lesson to be taken from this crisis, it’s an old rule:
There is no free lunch. Now, debt is not a bad thing. Used responsibly, it
is at the heart of modern capitalism. But hiding mountains of debt in
complex instruments is an invitation to irresponsible behavior.

However, it is Zakaria’s prognosis (and a similar one made by Robert Samuelson), that is dangerous and is only kicking the can down the road, probably only a few months at worst. Newsweek is afraid of deleveraging, that is, that too many people in our society will shift money out of credit and into capital. This is what Samuelson terms the “engine of mayhem”. Both Zakaria and Samuelson treat deleveraging as if it were a republican running for president they way they whip up fear about it. According to them, the only answer to America’s credit problem is extending the credit line (but don’t worry it is only for the short term!), not investing in more capital. Outlets like the NY Times and Newsweek pay lip service to the virtue of saving money while informing us that we could actually be getting paid to take out a loan at these low, low rates. Sadly, the Fed is following this line of thinking, encouraging Americans to save more money while keeping interest rates at near zero.

Early on in this crisis there were many analogies to the emergency room, in which we had to save the patient before we could worry about prevention of the next crisis.

That is the wrong analogy. The American economy is in the emergency room, but because of sleep deprivation. The solution is not several shots of coffee followed by a mainline of norepinephrine. The solution is a nap. Because the longer you sleep deprive a subject the more comatose he is likely to be when he hits the bed.

The Becker-Posner blog is pretty cool.  I like the one labeled “Government stake in private companies: a bad idea.

Governmental ownership of shares, with or without voting rights, opens up possibilities for much greater mischief than controlling executive salaries. For example, a bank or other company may want to reduce its employment in order to regain greater profitability. The government owners of these shares will be under pressure from congressman and senators who represent districts where employment would be affected to try to rescind or modify these cuts.

Thank you for contacting me regarding the Emergency Economic Stabilization Act of 2008. I welcome your thoughts and comments on this issue.

On September 19, 2008, Treasury Secretary Henry Paulson announced a plan by the Bush Administration to stabilize the financial services sector of the economy. This plan included broad authority for the Treasury Secretary to purchase troubled financial instruments with very limited oversight and few protections for taxpayers.

In July, I voted against a similar proposed bailout of Fannie Mae and Freddie Mac because it did not provide taxpayer protection and limits on executive compensation for a government owned entity. For the same reasons, I was not willing to support the Administration’s initial proposal, and I encouraged my colleagues to continue work on a plan that would protect taxpayers, provide strict oversight, and place limits on the benefits to executives who accept taxpayer assistance.

In the days following the Treasury Secretary’s announcement, concerns about the danger to the broader economy deepened. The high-profile failure of numerous financial institutions caused the commercial lending market to accumulate and hold cash. The credit markets effectively froze, making it difficult for consumers to obtain loans for purchases such as homes and automobiles. The lack of lending in these areas began to place further pressure on the troubled housing market and threatened to spread deeper into the economy. Similarly, many small and mid-sized businesses were finding it difficult to obtain financing to meet their payroll obligations and purchase inventory. Many cities were entering the bond market and getting no bids, even with AAA ratings. The current liquidity crisis still poses a real potential for significant job losses. After consulting with numerous financial experts, small businesses, and bankers in Texas, it became clear to me that normal commercial lending activity would not resume without action by Congress.

Despite this realization, I was still not inclined to support the Paulson plan. After weeks of negotiation, however, a bi-partisan compromise was reached. While there are provisions in the bill that I do not favor and would not have drafted, overall the need for action to stabilize the market and to protect the retirement savings of millions of Americans weighed heavily on my mind. Ultimately, I supported the Senate bill along with 73 of my colleagues. The bill we passed was a major improvement over the initial plan announced by Secretary Paulson.

We increased the deposit insurance cap from $100,000 to $250,000 so that families will have added protection for savings and retirement accounts. While the initial proposal authorized up to $700 billion to purchase distressed assets, the measure we passed takes a more cautious approach, initially authorizing $250 billion and requiring the approval from Congress and the President for additional funding. Importantly, the bill we passed includes restrictions on the benefits received by executives whose companies are selling some of their distressed assets to the government. In return for purchasing the assets, taxpayers will obtain an ownership stake in the companies. Many leading economists believe that the real estate market will turn around in the foreseeable future and government owned properties and assets will be sold at a profit. A provision in this bill that I supported requires any profits realized to be placed in the nation’s treasury to reduce the deficit. If, however, after five years the government is facing a loss in the program, the President must submit a plan to Congress recommending how the money will be recouped from financial services companies. I believe that these protections are a dramatic improvement over the Administration’s initial proposal.

The bill passed by the Senate included an important package of tax policy provisions. One of these provisions is an extension of the state and local sales tax deduction, which is a matter of fairness for states like Texas that do not have a state income tax. The average Texan will save $520 when they file their federal income tax forms next year. We also shielded low and middle-income taxpayers from higher taxes associated with the flawed alternative minimum tax (AMT) and included tax incentives to spur energy production and innovation including the wind energy production tax credit and the research and development tax credit.

As Texans, we have learned to take responsibility for our actions and being asked to pay for the mistakes of others is something many, including myself, find deeply troubling. However, after careful deliberation, I believe that the risks associated with doing nothing outweighed the risk of passing a less than perfect bill that nevertheless includes important protections for taxpayers. Economic evidence clearly suggested the problems were spreading into the broader economy. That is why I voted for the Emergency Economic Stabilization Act.

I appreciate hearing from you. Please do not hesitate to contact me on any issue of concern to you.

Sincerely,
Kay Bailey Hutchison
United States Senator

Me: I will not be voting for Kay Bailey Hutchinson when she runs for Governor

subprimeprimer

Beautiful, from Coach.