Perhaps the government did avert a short-term disaster. But it's unremarkable that they distributed billions to companies who effectively held taxpayers hostage, threatening "if we go down, you go down with us." There was no way to not give out money without incurring intolerable short-term pain.
I'll write a thank you letter to the government when the future of our nation isn't tied to the bad judgement of a few irresponsible companies.
because this is not particularly popular opinion in extremely libertarian tech circles, no matter what people more knowledgeable about those things say.
You can find much more if you look a bit. I think outside the libertarian on the fringe, most people agreed the decision was certainly not obvious to make at that time. I am sure it will take time before academics agree (if ever:) )on whether this was a mistake or not.
The Swedes actually solved this by nationalizing all the failing banks, wiping out the equity holders, restructuring and privatizing again. It ended up not costing much. In the US a bunch of bankers got huge bailout funded bonuses and the banks are far from solvent even now.
But they had one incredibly useful attribute that the US government didn't have: time.
They had time to extracted pounds of flesh from bank shareholders before writing checks, time to design policies to force banks to write down losses and issue warrants to the government
2008 was different. After Lehman collapsed, the government had to make it's initial intervention overnight, and the full package took weeks to put together, not months.
There were 7 months between Bear Stearns (Feb '08) and Lehman (Sep '08) events, and things started to go downhill long before that - August 2007 in particular was the turning point.
Many in the US were simply asleep at the wheel, both in government and private sector.
>2008 was different. After Lehman collapsed, the government had to make it's initial intervention overnight, and the full package took weeks to put together, not months.
Looking this up in Wikipedia it seems the crisis started in early 2007 and Lehman collapsed in September 2008. So there was a year and a half to plan a response.
Yes, there were plenty of signs of the sub-prime crisis.
However, no one expected it to cause an investment bank like Lehman to collapse. It wasn't until the day of the crash that the people begun to dig into how the mortgages had been repackaged and sold, and it still wasn't widely know how badly the ratings agencies had failed in their analysis of this.
(Ok, so it seems likely that Goldman had a fair idea and possibly went short Bear Sterns based on their exposure, but they weren't exactly spreading that information around)
The UK government ended up effectively nationalizing monsters like RBS - which as far as I can see has been one big "Get out of Jail Free" card for the relevant organizations and their directors.
`Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. `
Hrmm...so let's see...4% of $14.14T = $565B.
TARP alone was 700B - i.e. approximately 5% and that seems to not have been enough - because the Fed spent an additional $1.4T.
How much more money did you want the US to spend? Obviously if it was as simple as nationalizing every single bank, they would have done that. But the US banking industry is much more complicated than any other country - much less Sweden's (with all due respect).
To whit, so far this year the FDIC has 'nationalized' more banks than they did 2009.
So they are kinda doing what you suggest, but just to show you how difficult such a task really is, they are still winding them down almost 2 years later.
>How much more money did you want the US to spend? Obviously if it was as simple as nationalizing every single bank, they would have done that. But the US banking industry is much more complicated than any other country - much less Sweden's (with all due respect).
If the banks had not been bailed out by TARP they could have been nationalized cheaply, restructured and relaunched. The equity holders would have been wiped out, as they should have been since their banks were broke, and the employees at these banks would not have extracted even more obscene amounts of money. By now you'd have functional banks driving the economy again. The amount of money isn't the issue here, it's the fact that it was used to prop up a failed system instead of used to restructure it.
>To whit, so far this year the FDIC has 'nationalized' more banks than they did 2009.
All of these banks are the small insignificant ones. None of the big ones have been restructured and most are still technically insolvent.
TARP was a form of nationalization. It wasn't complete nationalization in EVERY case, but the government did buy bank common & preferred stocks. In AIG's case, they bought 80% of all outstanding stock - essentially nationalizing them.
Everybody else, it was pittances - a few % here and there.
So that goes to show the amount of money needed. If they spent so much money and only got a few % of each bank, how much more money would be needed to purchase the entire banks altogether.
Not all of the banks the FDIC has nationalized are insignificant ones. It started with IndyMac which is no small bank.
The notion that the banks are still technically insolvent - says who? I think the markets are the best indicator as to the health of the banks. As far as I can see, their bond spreads over Treasuries have fallen significantly in the last few months and their stocks have been rallying.
So are you telling me that the markets (who are extremely sophisticated and thoroughly understand the banking industry) are being fooled by these banks?
I hardly think so.
BOA is up from it's low of $3, to $11.70.
Citigroup (the most damaged of them all) is up to $4.17 from a low of $1.xx - the gov't owns the biggest stake in Citi than most other banks.
Yes, their prices aren't as high as it used to be, but these things take time.
>So that goes to show the amount of money needed. If they spent so much money and only got a few % of each bank, how much more money would be needed to purchase the entire banks altogether.
The banks were propped up by TARP and so their market value remained high. Without it they were probably all insolvent and so the cost of owning them would be basically zero. Otherwise the market would have been able to finance the banks.
TARP was designed to feed money into banks in a very cheap way, the size of the wealth transfer from the taxpayer to Wall Street is staggering. Buffet himself got much better conditions than the Federal Government.
>The notion that the banks are still technically insolvent - says who? I think the markets are the best indicator as to the health of the banks. As far as I can see, their bond spreads over Treasuries have fallen significantly in the last few months and their stocks have been rallying.
There is now a quite explicit assumption that the federal government won't let the banks fail. With that and the Fed helping there's plenty of reason to think banks will continue to make money. That doesn't mean the crap on (and off) their balance sheets has stopped being crap.
>So are you telling me that the markets (who are extremely sophisticated and thoroughly understand the banking industry) are being fooled by these banks?
I'm saying the markets are now useless to value the banks because the value being judged includes the federal government as a crutch. There is no market pricing for the value of the banks on their own.
The fed did not "spend" anything. There are three things to remember here:
* The Fed creates money
* The money supply has shrunk greatly, so the Fed needs to create money anyway
* The money is not given out, but traded for Treasury securities
Saying the Fed spent money on banks suggests a fundamental ignorance on how these things work. If anything, the Fed spent money of the government, but that viewpoint is not accurate either, only less ignorant.
Hrmm...so when the Fed creates money, is it not 'spent' ? Yes. Why? Because there is a bill somewhere. It might be directly on the taxpayer like when the Treasury spends it, but it is on everybody else that holds and uses US Dollar assets - by way of inflation. So yes, they did "spend".
The money was technically given out - because they essentially purchased securities (not just Treasuries, but commercial paper, Mortgaged Backed paper, Gold, etc.) at significant losses to themselves in the short term - so that the banks can shore up their balance sheets.
My broader point was that the US Treasury could spend only $700B, because the Fed was there to further capitalize the banks. If you want to go ahead and be a grammar natzi, then feel free. But at the end of the day, the financial institutions were given approx $2.5T cash - in exchange for a variety of things (some securities on their balance sheets, to warrants for their own common & preferred stocks).
Although the Fed can create money out of thin air, the notion that it isn't spent (i.e. it has no cost to anyone) is a misguided notion because it typically has a greater cost to everyone than the Treasury doing so.
That's the vagaries of capitalism. Can't have your cake and eat it.
Once you believe in Capitalism, there will always be systemically important companies - whether it is Google, Amazon, etc. or Banks - that should something go wrong with them will require a bailout of some nature.
I'm all for capitalism, but if there are companies which fall into the "too big to fail" camp I want them split up and/or their management put on special notice that if the companies do fail then the taxpayers will be coming after the assets of the the executives should the company fail.
NB I really don't think that applies to Google or Amazon.
If Google went down...literally overnight, thousands if not hundreds of thousands of small businesses that rely on AdSense to pay their bills would be in serious hot water.
Not to mention those companies that rely on Adwords to drive traffic through their doors (both online and offline).
I can almost assure you that the markets would get very jittery and irrationality would likely spread to all sorts of other industries.
It is easy to take these things for granted.
Amazon is the same. There are thousands of mini-retailers that earn a living on Amazon. Amazon might even be more so - the equivalent of a Walmart going down....but almost worst.
At it's extremes, the beauties of capitalism lead to large firms that build ecosystems to entrench their positions - whose failure would be significant and potentially systemically dangerous. It is the nature of capitalism - it actually is very healthy for the system. Over time they eventually fade out and other large companies come and take it's place - e.g. the newspaper industry, telecom, etc. So you can't really escape it.
And we have regulations to prevent things like that. Sarbox, for all the bitching about it, does a reasonably good job of insuring that Google won't just fail overnight and shock everyone -- makes it much harder for them to cook the books and stop people from seeing it a year out.
Of course, the libertarian purists argue that we shouldn't have sarbox and shouldn't bail companies out -- which makes me think that if they were in charge the last few years, my electricity wouldn't be working by now.
Generally when a company fails it goes into bankrupcy, where the process is designed to keep the business functioning while things proceed. So even if Amazon or Google declared bankruptcy tomorrow Adsense and Amazon Marketplace would go on. The people who would be in trouble would be the people who Google owed money to, which was very much the concern with Lehman Brothers.
I would generally agree if we never just went through a major crisis and saw the failings of current processes. One of the things that was made explicitly clear, is that for some firms that are too large, the bankruptcy proceedings don't really work like they should.
I do think, however, that if Google or Amazon failed there are some elements that would stay up - but it's more than just those elements.
It's the little things, like email for 200million people disappearing overnight. I can't even imagine the amounts of things that would be lost (receipts from sales, tax information, customer data, invoices, legal contracts, etc.). Much less just a major communication channel going dark. That alone would cause a dip in GDP (in my opinion).
Might be difficult to foresee, but so was the banking crisis.
Where did we see failing of the current process? Not the financial system, which obviously failed, but the bankruptcy process. I'm not aware of any company suddenly closing up shop during the crisis. We didn't use follow the normal rules with the automakers but that was because it would have been bad politically for the UAW to lose their pensions, rather than out of any inability of bankruptcy to keep the automakers going in some form. If you have specific examples of things suddenly shutting down during the crisis apart from debt repayments or people being less willing to spend money, I'd be really interested in hearing it.
What I don't understand is why they didn't break-up any banks that were "too big to fail" into pieces that were small enough to fail. Instead they did the exact opposite, arranging shotgun marriages for failing institutions so they are now part of a bank that is too big to fail.
No government ownership is involved; one day you own 1 share of AT&T and the next day you own 1 share of the new AT&T and 1 share of each of the new baby bells.
I would argue the AT&T break-up allowed the first internet boom to happen. Can you imagine how hard it would have been to get a T1 provisioned if there had been no competition AND AT&T was offering a service just like what you were trying to start
You mean during the crises? Would that have helped? How would you allocate the troubled assets to the baby banks?
If you put them all in one place, that bank would fail and still cause the same chain reaction, except the debt would fail entirely on the customers of the bank instead of the bank itself.
If you spread out the assets, then you'd just have lots of smaller banks fail instead of the larger bank. I suppose doing this could have spread the failures out over time.
By all means put out the fire by doing what they did in the moment. But then respond not by passing ineffectual legislation that will surely be gamed and circumvented but with stress testing the banks to see which ones are too big too fail and breaking them up until they are small enough to fail.
As to who gets the "toxic" assets, who cares? They are all but worthless. Auction them off to whoever will buy them that way we no longer have this fiction that they will ever be worth anything. The US tax payer is now explicitly on the hook for these assets. The sooner we know what they are truly worth the better.
Yes, I'm not sure why the government chose not to do this. My guess is that the large companies effectively have too much influence over reelection of congressmen to allow anything like this.
The government seems to have chosen instead to increase their power in handling these crises.
Nice straw man attack. How does that have anything to do with his argument that Uncle Sam helped calm one of the biggest economic crises in history?
Also implying that Moody is corrupt is asinine. Yes, they made mistakes (what credit agency didn't during the housing bubble?), but they didn't break any laws.
Would hardly call it asinine. There is a difference between illegality and corruption, and many would argue that us lawmakers have legalized bribery in the financial sector. You may disagree, but that doesn't make the viewpoint ignorant.
In the interest of full disclosure, Warren Buffett should have mentioned that he will probably make about $3.5 billion off a $5 billion investment (70% return) in Goldman Sachs.
Goldman Sachs in turn received $13 billion via the AIG bailout.
The assets of Berkshire Hathaway though are US$ 297.119 billion, per Wikipedia. He certainly has the vested interest in GS revenues, but perhaps not as much as you imply.
Sure $3.5b is a lot of money and worth mentioning; but just that alone is somewhat misleading considering it's a very small fraction of Berkshire Hathaway.
No, what I suggested is that Golfman Sachs revenues do not make it or break it for him. The guy is very rich. Thus it is unlikely that mere 3.5 billion would affect his public statements, especially expressed in such an indirect and convoluted way as praising the U.S. government.
Perhaps he should have disclosed it. But at the same time it's difficult to find any serious investor with a mildly diversified portfolio who didn't benefit from the government intervention (from reduced losses if nothing else)
Do you have 401K? I bet that has some money in Berkshire Hathaway and/or Goldman Sachs. Do you need to disclose that?
Not only that, the BRK & GS deal was hugely publicized as were the favorable terms for BRK. Anyone who would care about it probably would have known that already. He is watched with millions of eyes for his every move.
Anyone who who owns pretty much any public equity can say he/she benefited from government intervention.
Full, unnecessary disclosure: Long on BRK, GS, C, BAC and others.
It's probably more accurate to say charities will make it.
Buffett has pledged to gradually give 85% of his Berkshire stock to five foundations. A dominant five-sixths of the shares will go to the world's largest philanthropic organization, the $30 billion Bill & Melinda Gates Foundation, whose principals are close friends of Buffett's (a connection that began in 1991, when a mutual friend introduced Buffett and Bill Gates).
The estate tax isn't a disgrace, it only even kicks in on estates greater than a few million. I'll repeat that -- if your estate is less than a few million, the estate tax doesn't affect you. If your estate is more than a few million, the first few are still exempt.
Used to be people respected earning your own living, now all people seem to respect is compound interest.
As of January 1st, 2011, the estate tax kicks in at $1,000,000. (The law on the books actually kicks in at $10,000, but there's a temporary credit in place.) The actual rate and exemption has varied widely from year to year. This year there's no estate tax, but in 2009 there was a $3.5MM exemption.
Much of the money you have on hand when you die has already been taxed in one form or another. (If it hasn't, your death should trigger the much lower capital gains tax - that's how it works in Canada, for example.) If you've been working hard to ensure your wife and children don't want for anything in life, why in hell should the government take half of what you've earned and already paid taxes on?
I don't understand your bit about compound interest. The people in this community who are affected by the estate tax don't get there through compound interest, they get there through entrepreneurship and job creation. If you want to propose that the estate tax only affects passive income, I'd certainly be in favor.
Ok, so basically I'm right about the few million part. Attempts to say it could be otherwise, but isn't, notwithstanding.
And if your wife and children inherit 3.5 million tax free and half of everything else, they will be fine. I'm more sympathetic to the wife argument, if she was spending time with the kids instead of developing a career - the children have presumably had a good education, they should be able to make their own money if 3.5 million isn't enough.
RE: compound interest, if you don't understand that, then you really do not understand inherited wealth.
You know some die hard capitalists would argue that all of your wealth should be taken away at death. That way, the wealth of an individual can only come from what you build and create during your life. Not that I think it is the correct or fair way of thinking, its seems just so wrong when death was unforeseeable.
"If you've been working hard to ensure your wife and children don't want for anything in life, why in hell should the government take half of what you've earned and already paid taxes on?"
To avoid the creation of an aristocratic class.
The founding fathers had this specific aim in mind. Details here:
[Thomas] Jefferson cited Adam Smith, the hero of free market
capitalists everywhere, as the source of his conviction that (as
Smith wrote, and Jefferson closely echoed in his own words), "A
power to dispose of estates for ever is manifestly absurd. The
earth and the fulness of it belongs to every generation, and the
preceding one can have no right to bind it up from posterity. Such
extension of property is quite unnatural." Smith said: "There is
no point more difficult to account for than the right we conceive
men to have to dispose of their goods after death."
The states left no doubt that in taking this step they were giving
expression to a basic and widely shared philosophical belief that
equality of citizenship was impossible in a nation where
inequality of wealth remained the rule. North Carolina's 1784
statute explained that by keeping large estates together for
succeeding generations, the old system had served "only to raise
the wealth and importance of particular families and individuals,
giving them an unequal and undue influence in a republic" and
promoting "contention and injustice." Abolishing aristocratic
forms of inheritance would by contrast "tend to promote that
equality of property which is of the spirit and principle of a
genuine republic."
In capitalist societies this is less of a problem. Wealthy families generally dissipate their wealth in a few generations, not through taxes or charity, but through consumption, error and incompetence.
Trust babies destroy family fortunes more efficiently than estate taxes.
true, it is the states that get you. I paid Ohio $28k in estate taxes on an amount well under a million dollars, the majority of that being equity in a house that is very hard to sell.
Here's something I only recently became aware of that may change your opinion on the estate tax.
I have three children, ages 3, 2 and six months. If I were to die tomorrow, the cost of raising those kids and sending them to college would be something like $3.5M. So, I have a life insurance policy, as any responsible parent does.
But under the current law, the proceeds of my life insurance policy are subject to the estate tax.
Sure, if you're paining a hypothetical about a 24-year-old Ivy League graduate who just received news that his parents have passed and that he has inherited a $3M estate, it doesn't sound too bad if part of that inheritance is taxed.
But now imagine a toddler who just lost two parents and needs to be fed, clothed, sheltered and educated for the next 20 years... it's different.
Ok, so there's a case that's pretty important and probably deserves an exemption under the law. Or, maybe not, if you think 3.5 million is enough, you already have all the exemption you need. I could see something pushing it a little higher in cases of early death and a life insurance payout.
That makes sense.
You know what doesn't make sense, though? Complaining about a "death tax" on the one hand while complaining about the budget deficit at the same time, yet maintaining that you're the political party of hard work, bootstrapping, blah blah. If you care about the latter two, don't spend your time going to the mat for Paris Hilton. If you consult some charts about income distribution in this country, you can conclude that the vaaaaaaaaast majority of the revenue collected under this tax comes from very large estates where the children would be set for life with 10% of it, and they're doing very very well with 3.5Mil + 45% of the rest.
Exceptional cases may be worthy of exceptions under the law, but that doesn't change whether the law makes sense in the general case.
If I recall correctly, the status-quo-ante estate tax is 55% of everything over $1M. So a $3.5M estate would be $2.125M after taxes. (Note that the Obama Administration is willing to support a $3.5M exemption, but that’s not enough for the Republicans.)
I did a quick check at vanguard.com, and mutual funds that deal in intermediate-term bonds are yielding in the 6.5% to 7.5% range. So whoever gets guardianship of your kids would be able to feed, house, and educate them from an income stream of over $130K per year (presumably that income would be subject to capital gains tax).
I am sure that your untimely death would cause great suffering for your children, but I really don’t see them suffering in a financial sense.
If all the wealth is dynastic and concentrated at the top, there goes the American dream of social mobility. The estate tax is a brake on that process.
We "forget" that Buffet makes a lot of money from the inheritance tax. How?
A lot of Buffet's money comes from insurance companies that sell life insurance intended to pay the inheritance tax. No tax, no need for that insurance....
What a guy. He advocates a tax that he won't pay and that results in money in his pocket....
Berkshire has a market cap of ~200B, buffet owns around ~45 billion of their stock so his actual investment was 5 * (45/200) = 1.125B. It's reasonable to think he might be swayed by 2.5% to 5% of his net worth, but his personal investment is not all that significant (for him).
Your statements are very misleading. Goldman was forced to take TARP, as did other major banks. Goldman then repaid TARP, with 20+ percent interest. That is, taxpayers actually made billions more on the loan to Goldman Sachs. Implying that TARP benefited Warren Buffett in any direct way is absurd.
Goldman didn't directly benefit from TARP money paid to them, but they gained tremendously from TARP money paid to AIG and other counterparties (which neither they nor AIG paid back).
If Buffett hadn't injected that money into GS, it might have failed. That's the only reason why he could get such good terms (preferred shares with a 10% dividend, iirc).
If GS had failed, the taxpayer would probably have had to spend a lot more money on it.
I wish we could do it that easily, but the way the banking system works, if one of those big banks fails, a lot more will go down with it, and that damage would probably dwarf the cost of making cheap loans to banks (but the important part is to plug as many holes in the system after that).
You'd actually be punishing the rest of the US (and the world) more than GS (or any of the other giant banks) if you let them fail. That needs to be fixed, but the time to make a point about that probably wasn't in the middle of a global financial panic.
It really is a wonderful scam. You're so right, if GS failed we'd just be punishing the world.
You're little comment about "THE WAY THE BANKING SYSTEM WORKS" is so insightful.
Everyone that doesn't support taxpayer bailouts of investment banks are ignorant of the banking system and can't comprehend how it works.
I'm not even going to bother with the rest. If you can't imagine any way for the government to fix the problem other than handing out public money to private companies you're a sheep.
Not to mention that there are different ways for the government to bail out the banks, and we happened to take a rather outrageous one. We bailed out the banks without wiping out the current shareholders, because the "capitalists" complained about a government takeover of the banks.
I'm not saying that it was done the right way (personally, I would have preferred to avoid the whole problem in the first place with better oversight, and if that wasn't possible, at least give out very high interest loans that will make a profit for the taxpayers when they are repaid), I'm saying that there are thousands and thousands of companies and individuals that depend directly and indirectly on the big banks and on having functioning capital markets, and that if some of the big ones start to fail, most of them will follow suit (big and small) and they'll take down most of the rest of the economy with them.
If you disagree with that, please explain what you think would have happened if lots of big banks and insurance companies had failed.
I agree with Warren. The government handled the crisis very well, with the possible exception of allowing Lehman Brothers to fail. It's pretty remarkable, really, and it's unfortunate populist cynicism opposed the saving of the economy.
What is the great disaster that was supposed to have befallen us had Secretary of Treasury Hank Paulson and former CEO of Goldman Sachs not gotten his $700 million slush fund?
Certainly many of those placing their bets on the collapse of housing bubble would not have gotten paid by AIG, but how does that cause the rest of the economy to collapse exactly?
Yes, your investments would certainly have experienced losses as the companies doing all the stupid things dropped in value once their folly was fully revealed. But isn't dumb behavior and blind faith in casinos supposed to be punished?
Instead of that righteous outcome, the costs are no being dumped upon millions who had nothing to do with all of the stupidity. And the reckoning has merely been postponed and perhaps will grow even larger now that they have been encouraged to continue taking foolish risks.
"What is the great disaster that was supposed to have befallen us..."
Simply put, the thesis is that the entire world economy would have collapsed. It would have started with most of the investment banks being unable to do business and shutting their doors. This would have caused a chain reaction other parts of the financial system since the big money-center banks provide much of the overnight lending liquidity for smaller banks (and each other). Banks would start failing at an incredible rate.
As the banks started to fail, the equities, bond and commodities markets would have collapsed. All these markets rely on short term lending, not just for leverage, but to underwrite transactions. Even if this were not the case, much trading volume would have dried up. This combined would have led to a crash in those markets.
Finally, and most importantly, most businesses rely on lines of credit and other short term debt facilities to finance day to day operations. They use this to smooth out the cash flow when buying raw materials/inventory, purchasing assets and meeting payroll. These would have all been effectively frozen. You would have either seen paychecks becoming worthless or massive layoffs within a few weeks to a few months of the initial bank collapses. By massive, I mean a spike of an additional 10% to 20% unemployment within a few weeks or months.
I won't go into the effect all this would have on currencies and international trade.
All told, it would probably have plunged the entire world into a depression that would have rivaled or exceeded the Great Depression of the 1930's. It likely would have been worse because of the interconnectedness of the world's financial and commercial systems today.
That I like?!?!? I hated the TARP bailout. The problems were caused by insanely lax government oversight, poor institutional risk assessment and a healthy dose of outright fraud. IMO people need to go to jail.
That said, the government had no real choice. I'm no financial system expert, but used to work in finance and even I can see that something was needed or else the system would collapse. Is it possible that you're letting your distaste of the financial system and players involved color your judgment?
The choice we faced was either cut off the leg or the patient dies when the gangrene spreads. No one likes cutting off the leg, but if the alternative is that you die, I think the choice is obvious.
Is it possible that you're letting your distaste of the financial system and players involved color your judgment?
It's unlikely, since I don't have any distaste for finance. In most threads I'm the solitary defender of the financial sector.
As I said, it's easy to make up a scary story of doom. The scary story assumes that everyone will try to continue doing everything they previously did before the banks collapsed, and then give up rather than do things differently. Or perhaps the assumption is that the way things are now is the only way things could be. Either way, I'm unconvinced.
I wouldn't say he's scaremongering. There is historical precedent for what happens when liquidity in the marketplace dries up or how people behave when banks tighten their lending or go out of business.
It's equally easy to postulate that the actions taken were not necessary to prevent such scenarios. (in other words, your response above is not an argument.)
Critics have concluded that modern Austrian economics generally lacks scientific rigor,[10][12] which forms the basis of the most prominent criticism of the school. Austrian theories are not formulated in formal mathematical form,[108] but by using mainly verbal logic and what proponents claim are self-evident axioms.
[10] Caplan, Bryan. "Why I Am Not an Austrian Economist". George Mason University. Retrieved 2008-07-04. "More than anything else, what prevents Austrian economists from getting more publications in mainstream journals is that their papers rarely use mathematics or econometrics, research tools that Austrians reject on principle...Mises and Rothbard however err when they say that economic history can only illustrate economic theory. In particular, empirical evidence is often necessary to determine whether a theoretical factor is quantitatively significant...Austrians reject econometrics on principle because economic theory is true a priori, so statistics or historical study cannot "test" theory."
[12] White, Lawrence H. (2008). "The research program of Austrian economics". Advances in Austrian Economics (Emerald Group Publishing Limited): 20
[108] Walker, Deborah L.. "Austrian Economics". Library of Economics and Liberty. Retrieved 2010-01-23.
true, there are a lot of axioms in many branches of economics that noone is allowed to touch, some have more, some have less. But AFAIK nowhere as much as in Austrian School today.
Psychology isn't mathematically formulated either. Is it science? Perhaps an Austrian economist would argue that economics is more closely related to psychology than physics.
I have seen several mathematical "proofs" that not only god exists but that he is catholic. Is that science?
What does the artifact of being mathematically formulated have to do with something being science?
of course math is not the only ingredient needed to do science, but it's something you can't do without. If your theory is based on "self-evident axioms" that nobody is allowed to challenge, what you've created is a cult or religion, not scientific branch.
behavioral economics uses quite a lot of math alongside psychology.
Psychology (at least contemporary research psychology) is based on empirical research and judicious use of statistical techniques; Austrian economics is based on philosophical handwaving. Psychology involves observation and allows for an element of surprise; Austrian economics, at least since the days of Rothbard, involves coming up with moralistic arguments for libertarianism. (The early Austrians were important in the history of economics, but being an Austrian economist today is like being a Freudian psychologist today; people do it, but one has to look askance at such a person.)
Ok that makes sense. But if the problem with Austrian economics is its lack of empiricism then say that.
If I sit in my room all day and make up things about butterflies it's not science. But the reason for that is not a lack of mathematical formulas but the fact that I'm ignoring reality.
Are you saying the basis of "mainstream"(non-austrian, keyesian? chicagoean?) economics is empirical research and judicious use of statistical techniques?
in fact it can't. in middle ages (and indeed to this day) it is common sense that heavier objects fall faster than lighter ones, yet it is blatantly false.
When the next round of problems start up this is going to look pretty funny. There is another wave of credit problems coming and the banks are vulnerable to all of the same downside risk they were before all this started.
In 1931 the establishment thought they solved the problem and that things would get better soon. The collapse of the Austrian bank Creditanstalt proved them wrong and started a new series of problems.
Do you know much about Warren Buffett? He is one of the three richest men in the world. He has created an immense amount of value for himself, but also for other people, due to his value based investment strategies. He's not a Carl Icahn corporate raider -- he's a businessman who looks for value and ways to increase value. That's a tremendously valuable individual to society. As a fellow entrepreneur, I have read and found inspiration in his philosophies and accomplishments. And that was before he went and promised 85% of his net worth to charities (Bill and Melinda Gates foundation, I believe) upon his death. Near as I can tell, that's over $30 billion dollars of wealth that he has created that he is now giving away.
I agree that you cannot expect unbiased information from anybody these days. But it's not fair to single out Mr. Buffett, as he certainly isn't the type of rich man you want to paint with that brush.
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Actually, the root cause of the financial crisis was the Federal Reserve's interest rate manipulation. This distortion creates moral hazard, encourages malinvestment, and causes companies to make bad decisions.
The real story here is that government was holding up billions in payments to Warren Buffett from Goldman Sachs as blackmail until he caved in to write an article favoring the governments action. Warren Buffett is the modern day Hank Rearden, where in Atlas Shrugged Hank Rearden assets were stolen by the government and eventually used to blackmail him to work with the government.
I'd rather hear from Uncle Sam's grand children than his nephew.
Dear Sammy
Children have to trust that their elders carry the wisdom of thier age and thoughtfully apply it when faced with trying circumstances. We trust that you will do the right thing and protect and safeguard our future. For each generation to leave a legacy that enables the next generation to continue to have a chance prosper and pursue its dreams. During the financial turmoil culminating in the financial crisis of 2008 you broke that trust. You sold out future generations to save a priviliedged few. You lied to the people to hide your failures and to protect your own fortunes. In order to avoid facing difficult problems and dealing up front with the people of that time, you chose to steal from future generations so you could continue with the graft, greed and lies upon which you and the favored select few built your empires. All the while just shifting the burden of your selfishness to us, your children. Well thank you for bankrupting our future! Now we are now saddled with debt that can not possibly be repaid. We have have limited hope of growing and developing ourselves and providing for our families. There is little opportunity for building our own dreams because we are overwhelmed with tax burdens, failed governement services, scarce and expensive resources, as well as world turmoil and general social unrest. Our currency, tattered and beaten, has been left a former shell of what it once was worth. People have largely given up because there's little incentive to build something of your own when most of the fruits of one's labor must go back to you Sammy to pay for past excesses or to help the masses of less fortunate that now exist b/c jobs and oppotunites are few and far between. So I hope you, your nephew Warren and the other priviledged few got to party it up while it was good because if there is a god you'll all rot in hell for your shamelessness.
109 comments
[ 0.23 ms ] story [ 161 ms ] threadI'll write a thank you letter to the government when the future of our nation isn't tied to the bad judgement of a few irresponsible companies.
Sure there was:
http://www.nytimes.com/2008/09/23/business/worldbusiness/23k...
The Swedes actually solved this by nationalizing all the failing banks, wiping out the equity holders, restructuring and privatizing again. It ended up not costing much. In the US a bunch of bankers got huge bailout funded bonuses and the banks are far from solvent even now.
They had time to extracted pounds of flesh from bank shareholders before writing checks, time to design policies to force banks to write down losses and issue warrants to the government
2008 was different. After Lehman collapsed, the government had to make it's initial intervention overnight, and the full package took weeks to put together, not months.
Many in the US were simply asleep at the wheel, both in government and private sector.
Looking this up in Wikipedia it seems the crisis started in early 2007 and Lehman collapsed in September 2008. So there was a year and a half to plan a response.
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Financ...
Yes, there were plenty of signs of the sub-prime crisis.
However, no one expected it to cause an investment bank like Lehman to collapse. It wasn't until the day of the crash that the people begun to dig into how the mortgages had been repackaged and sold, and it still wasn't widely know how badly the ratings agencies had failed in their analysis of this.
(Ok, so it seems likely that Goldman had a fair idea and possibly went short Bear Sterns based on their exposure, but they weren't exactly spreading that information around)
http://archive.newsmax.com/archives/ic/2007/3/28/110709.shtm...
March, 2007
Hrmm...so let's see...4% of $14.14T = $565B.
TARP alone was 700B - i.e. approximately 5% and that seems to not have been enough - because the Fed spent an additional $1.4T.
How much more money did you want the US to spend? Obviously if it was as simple as nationalizing every single bank, they would have done that. But the US banking industry is much more complicated than any other country - much less Sweden's (with all due respect).
To whit, so far this year the FDIC has 'nationalized' more banks than they did 2009.
https://www.fdic.gov/bank/individual/failed/banklist.html
So they are kinda doing what you suggest, but just to show you how difficult such a task really is, they are still winding them down almost 2 years later.
If the banks had not been bailed out by TARP they could have been nationalized cheaply, restructured and relaunched. The equity holders would have been wiped out, as they should have been since their banks were broke, and the employees at these banks would not have extracted even more obscene amounts of money. By now you'd have functional banks driving the economy again. The amount of money isn't the issue here, it's the fact that it was used to prop up a failed system instead of used to restructure it.
>To whit, so far this year the FDIC has 'nationalized' more banks than they did 2009.
All of these banks are the small insignificant ones. None of the big ones have been restructured and most are still technically insolvent.
Everybody else, it was pittances - a few % here and there.
So that goes to show the amount of money needed. If they spent so much money and only got a few % of each bank, how much more money would be needed to purchase the entire banks altogether.
Not all of the banks the FDIC has nationalized are insignificant ones. It started with IndyMac which is no small bank.
The notion that the banks are still technically insolvent - says who? I think the markets are the best indicator as to the health of the banks. As far as I can see, their bond spreads over Treasuries have fallen significantly in the last few months and their stocks have been rallying.
So are you telling me that the markets (who are extremely sophisticated and thoroughly understand the banking industry) are being fooled by these banks?
I hardly think so.
BOA is up from it's low of $3, to $11.70. Citigroup (the most damaged of them all) is up to $4.17 from a low of $1.xx - the gov't owns the biggest stake in Citi than most other banks.
Yes, their prices aren't as high as it used to be, but these things take time.
The banks were propped up by TARP and so their market value remained high. Without it they were probably all insolvent and so the cost of owning them would be basically zero. Otherwise the market would have been able to finance the banks.
TARP was designed to feed money into banks in a very cheap way, the size of the wealth transfer from the taxpayer to Wall Street is staggering. Buffet himself got much better conditions than the Federal Government.
>The notion that the banks are still technically insolvent - says who? I think the markets are the best indicator as to the health of the banks. As far as I can see, their bond spreads over Treasuries have fallen significantly in the last few months and their stocks have been rallying.
There is now a quite explicit assumption that the federal government won't let the banks fail. With that and the Fed helping there's plenty of reason to think banks will continue to make money. That doesn't mean the crap on (and off) their balance sheets has stopped being crap.
>So are you telling me that the markets (who are extremely sophisticated and thoroughly understand the banking industry) are being fooled by these banks?
I'm saying the markets are now useless to value the banks because the value being judged includes the federal government as a crutch. There is no market pricing for the value of the banks on their own.
* The Fed creates money
* The money supply has shrunk greatly, so the Fed needs to create money anyway
* The money is not given out, but traded for Treasury securities
Saying the Fed spent money on banks suggests a fundamental ignorance on how these things work. If anything, the Fed spent money of the government, but that viewpoint is not accurate either, only less ignorant.
The money was technically given out - because they essentially purchased securities (not just Treasuries, but commercial paper, Mortgaged Backed paper, Gold, etc.) at significant losses to themselves in the short term - so that the banks can shore up their balance sheets.
My broader point was that the US Treasury could spend only $700B, because the Fed was there to further capitalize the banks. If you want to go ahead and be a grammar natzi, then feel free. But at the end of the day, the financial institutions were given approx $2.5T cash - in exchange for a variety of things (some securities on their balance sheets, to warrants for their own common & preferred stocks).
Although the Fed can create money out of thin air, the notion that it isn't spent (i.e. it has no cost to anyone) is a misguided notion because it typically has a greater cost to everyone than the Treasury doing so.
http://en.wikipedia.org/wiki/Obama_financial_regulatory_refo...
Once you believe in Capitalism, there will always be systemically important companies - whether it is Google, Amazon, etc. or Banks - that should something go wrong with them will require a bailout of some nature.
NB I really don't think that applies to Google or Amazon.
Not to mention those companies that rely on Adwords to drive traffic through their doors (both online and offline).
I can almost assure you that the markets would get very jittery and irrationality would likely spread to all sorts of other industries.
It is easy to take these things for granted.
Amazon is the same. There are thousands of mini-retailers that earn a living on Amazon. Amazon might even be more so - the equivalent of a Walmart going down....but almost worst.
At it's extremes, the beauties of capitalism lead to large firms that build ecosystems to entrench their positions - whose failure would be significant and potentially systemically dangerous. It is the nature of capitalism - it actually is very healthy for the system. Over time they eventually fade out and other large companies come and take it's place - e.g. the newspaper industry, telecom, etc. So you can't really escape it.
Of course, the libertarian purists argue that we shouldn't have sarbox and shouldn't bail companies out -- which makes me think that if they were in charge the last few years, my electricity wouldn't be working by now.
I do think, however, that if Google or Amazon failed there are some elements that would stay up - but it's more than just those elements.
It's the little things, like email for 200million people disappearing overnight. I can't even imagine the amounts of things that would be lost (receipts from sales, tax information, customer data, invoices, legal contracts, etc.). Much less just a major communication channel going dark. That alone would cause a dip in GDP (in my opinion).
Might be difficult to foresee, but so was the banking crisis.
The Justice dept. has very successfully broken apart companies in the past: http://en.wikipedia.org/wiki/Bell_System_divestiture http://en.wikipedia.org/wiki/Standard_Oil#Breakup
No government ownership is involved; one day you own 1 share of AT&T and the next day you own 1 share of the new AT&T and 1 share of each of the new baby bells.
I would argue the AT&T break-up allowed the first internet boom to happen. Can you imagine how hard it would have been to get a T1 provisioned if there had been no competition AND AT&T was offering a service just like what you were trying to start
If you put them all in one place, that bank would fail and still cause the same chain reaction, except the debt would fail entirely on the customers of the bank instead of the bank itself.
If you spread out the assets, then you'd just have lots of smaller banks fail instead of the larger bank. I suppose doing this could have spread the failures out over time.
As to who gets the "toxic" assets, who cares? They are all but worthless. Auction them off to whoever will buy them that way we no longer have this fiction that they will ever be worth anything. The US tax payer is now explicitly on the hook for these assets. The sooner we know what they are truly worth the better.
The government seems to have chosen instead to increase their power in handling these crises.
http://voices.washingtonpost.com/economy-watch/2010/05/credi...
Also implying that Moody is corrupt is asinine. Yes, they made mistakes (what credit agency didn't during the housing bubble?), but they didn't break any laws.
Goldman Sachs in turn received $13 billion via the AIG bailout.
http://www.bnet.com/blog/financial-business/how-warren-buffe...
http://articles.latimes.com/2009/mar/21/business/fi-aig-gold...
Do you have 401K? I bet that has some money in Berkshire Hathaway and/or Goldman Sachs. Do you need to disclose that?
Anyone who who owns pretty much any public equity can say he/she benefited from government intervention.
Full, unnecessary disclosure: Long on BRK, GS, C, BAC and others.
Buffett has pledged to gradually give 85% of his Berkshire stock to five foundations. A dominant five-sixths of the shares will go to the world's largest philanthropic organization, the $30 billion Bill & Melinda Gates Foundation, whose principals are close friends of Buffett's (a connection that began in 1991, when a mutual friend introduced Buffett and Bill Gates).
http://money.cnn.com/2006/06/25/magazines/fortune/charity1.f...
Used to be people respected earning your own living, now all people seem to respect is compound interest.
Much of the money you have on hand when you die has already been taxed in one form or another. (If it hasn't, your death should trigger the much lower capital gains tax - that's how it works in Canada, for example.) If you've been working hard to ensure your wife and children don't want for anything in life, why in hell should the government take half of what you've earned and already paid taxes on?
I don't understand your bit about compound interest. The people in this community who are affected by the estate tax don't get there through compound interest, they get there through entrepreneurship and job creation. If you want to propose that the estate tax only affects passive income, I'd certainly be in favor.
And if your wife and children inherit 3.5 million tax free and half of everything else, they will be fine. I'm more sympathetic to the wife argument, if she was spending time with the kids instead of developing a career - the children have presumably had a good education, they should be able to make their own money if 3.5 million isn't enough.
RE: compound interest, if you don't understand that, then you really do not understand inherited wealth.
To avoid the creation of an aristocratic class.
The founding fathers had this specific aim in mind. Details here:
http://budiansky.blogspot.com/2010/10/adam-smith-thomas-jeff...
A relevant quote from the article:
Trust babies destroy family fortunes more efficiently than estate taxes.
I have three children, ages 3, 2 and six months. If I were to die tomorrow, the cost of raising those kids and sending them to college would be something like $3.5M. So, I have a life insurance policy, as any responsible parent does.
But under the current law, the proceeds of my life insurance policy are subject to the estate tax.
Sure, if you're paining a hypothetical about a 24-year-old Ivy League graduate who just received news that his parents have passed and that he has inherited a $3M estate, it doesn't sound too bad if part of that inheritance is taxed.
But now imagine a toddler who just lost two parents and needs to be fed, clothed, sheltered and educated for the next 20 years... it's different.
That makes sense.
You know what doesn't make sense, though? Complaining about a "death tax" on the one hand while complaining about the budget deficit at the same time, yet maintaining that you're the political party of hard work, bootstrapping, blah blah. If you care about the latter two, don't spend your time going to the mat for Paris Hilton. If you consult some charts about income distribution in this country, you can conclude that the vaaaaaaaaast majority of the revenue collected under this tax comes from very large estates where the children would be set for life with 10% of it, and they're doing very very well with 3.5Mil + 45% of the rest.
Exceptional cases may be worthy of exceptions under the law, but that doesn't change whether the law makes sense in the general case.
I did a quick check at vanguard.com, and mutual funds that deal in intermediate-term bonds are yielding in the 6.5% to 7.5% range. So whoever gets guardianship of your kids would be able to feed, house, and educate them from an income stream of over $130K per year (presumably that income would be subject to capital gains tax).
I am sure that your untimely death would cause great suffering for your children, but I really don’t see them suffering in a financial sense.
I'm opposed to an aggressive estate tax too, but I can't believe those numbers; that comes out to more than $50k per year per child.
A lot of Buffet's money comes from insurance companies that sell life insurance intended to pay the inheritance tax. No tax, no need for that insurance....
What a guy. He advocates a tax that he won't pay and that results in money in his pocket....
Berkshire has a market cap of ~200B, buffet owns around ~45 billion of their stock so his actual investment was 5 * (45/200) = 1.125B. It's reasonable to think he might be swayed by 2.5% to 5% of his net worth, but his personal investment is not all that significant (for him).
If GS had failed, the taxpayer would probably have had to spend a lot more money on it.
You'd actually be punishing the rest of the US (and the world) more than GS (or any of the other giant banks) if you let them fail. That needs to be fixed, but the time to make a point about that probably wasn't in the middle of a global financial panic.
You're little comment about "THE WAY THE BANKING SYSTEM WORKS" is so insightful.
Everyone that doesn't support taxpayer bailouts of investment banks are ignorant of the banking system and can't comprehend how it works.
I'm not even going to bother with the rest. If you can't imagine any way for the government to fix the problem other than handing out public money to private companies you're a sheep.
If you disagree with that, please explain what you think would have happened if lots of big banks and insurance companies had failed.
Certainly many of those placing their bets on the collapse of housing bubble would not have gotten paid by AIG, but how does that cause the rest of the economy to collapse exactly?
Yes, your investments would certainly have experienced losses as the companies doing all the stupid things dropped in value once their folly was fully revealed. But isn't dumb behavior and blind faith in casinos supposed to be punished?
Instead of that righteous outcome, the costs are no being dumped upon millions who had nothing to do with all of the stupidity. And the reckoning has merely been postponed and perhaps will grow even larger now that they have been encouraged to continue taking foolish risks.
Personally, I think Warren Buffett knows better.
Simply put, the thesis is that the entire world economy would have collapsed. It would have started with most of the investment banks being unable to do business and shutting their doors. This would have caused a chain reaction other parts of the financial system since the big money-center banks provide much of the overnight lending liquidity for smaller banks (and each other). Banks would start failing at an incredible rate.
As the banks started to fail, the equities, bond and commodities markets would have collapsed. All these markets rely on short term lending, not just for leverage, but to underwrite transactions. Even if this were not the case, much trading volume would have dried up. This combined would have led to a crash in those markets.
Finally, and most importantly, most businesses rely on lines of credit and other short term debt facilities to finance day to day operations. They use this to smooth out the cash flow when buying raw materials/inventory, purchasing assets and meeting payroll. These would have all been effectively frozen. You would have either seen paychecks becoming worthless or massive layoffs within a few weeks to a few months of the initial bank collapses. By massive, I mean a spike of an additional 10% to 20% unemployment within a few weeks or months.
I won't go into the effect all this would have on currencies and international trade.
All told, it would probably have plunged the entire world into a depression that would have rivaled or exceeded the Great Depression of the 1930's. It likely would have been worse because of the interconnectedness of the world's financial and commercial systems today.
That said, the government had no real choice. I'm no financial system expert, but used to work in finance and even I can see that something was needed or else the system would collapse. Is it possible that you're letting your distaste of the financial system and players involved color your judgment?
The choice we faced was either cut off the leg or the patient dies when the gangrene spreads. No one likes cutting off the leg, but if the alternative is that you die, I think the choice is obvious.
It's unlikely, since I don't have any distaste for finance. In most threads I'm the solitary defender of the financial sector.
As I said, it's easy to make up a scary story of doom. The scary story assumes that everyone will try to continue doing everything they previously did before the banks collapsed, and then give up rather than do things differently. Or perhaps the assumption is that the way things are now is the only way things could be. Either way, I'm unconvinced.
Critics have concluded that modern Austrian economics generally lacks scientific rigor,[10][12] which forms the basis of the most prominent criticism of the school. Austrian theories are not formulated in formal mathematical form,[108] but by using mainly verbal logic and what proponents claim are self-evident axioms.
[10] Caplan, Bryan. "Why I Am Not an Austrian Economist". George Mason University. Retrieved 2008-07-04. "More than anything else, what prevents Austrian economists from getting more publications in mainstream journals is that their papers rarely use mathematics or econometrics, research tools that Austrians reject on principle...Mises and Rothbard however err when they say that economic history can only illustrate economic theory. In particular, empirical evidence is often necessary to determine whether a theoretical factor is quantitatively significant...Austrians reject econometrics on principle because economic theory is true a priori, so statistics or historical study cannot "test" theory."
[12] White, Lawrence H. (2008). "The research program of Austrian economics". Advances in Austrian Economics (Emerald Group Publishing Limited): 20
[108] Walker, Deborah L.. "Austrian Economics". Library of Economics and Liberty. Retrieved 2010-01-23.
The most obvious and best known recent example is game theory, which John Nash famously won the Economics Nobel for: http://en.wikipedia.org/wiki/John_Forbes_Nash
The 1947 book "Foundations of Economic Analysis" is worth looking at. The table of contents - replicated in Wikipedia (http://en.wikipedia.org/wiki/Foundations_of_Economic_Analysi...) - will give you a good starting point.
I have seen several mathematical "proofs" that not only god exists but that he is catholic. Is that science?
What does the artifact of being mathematically formulated have to do with something being science?
behavioral economics uses quite a lot of math alongside psychology.
If I sit in my room all day and make up things about butterflies it's not science. But the reason for that is not a lack of mathematical formulas but the fact that I'm ignoring reality.
Are you saying the basis of "mainstream"(non-austrian, keyesian? chicagoean?) economics is empirical research and judicious use of statistical techniques?
Common sense can't be true, because there is no formula for it?
In 1931 the establishment thought they solved the problem and that things would get better soon. The collapse of the Austrian bank Creditanstalt proved them wrong and started a new series of problems.
I agree that you cannot expect unbiased information from anybody these days. But it's not fair to single out Mr. Buffett, as he certainly isn't the type of rich man you want to paint with that brush.
http://www.campaignforliberty.com/article.php?view=650
Dear Sammy Children have to trust that their elders carry the wisdom of thier age and thoughtfully apply it when faced with trying circumstances. We trust that you will do the right thing and protect and safeguard our future. For each generation to leave a legacy that enables the next generation to continue to have a chance prosper and pursue its dreams. During the financial turmoil culminating in the financial crisis of 2008 you broke that trust. You sold out future generations to save a priviliedged few. You lied to the people to hide your failures and to protect your own fortunes. In order to avoid facing difficult problems and dealing up front with the people of that time, you chose to steal from future generations so you could continue with the graft, greed and lies upon which you and the favored select few built your empires. All the while just shifting the burden of your selfishness to us, your children. Well thank you for bankrupting our future! Now we are now saddled with debt that can not possibly be repaid. We have have limited hope of growing and developing ourselves and providing for our families. There is little opportunity for building our own dreams because we are overwhelmed with tax burdens, failed governement services, scarce and expensive resources, as well as world turmoil and general social unrest. Our currency, tattered and beaten, has been left a former shell of what it once was worth. People have largely given up because there's little incentive to build something of your own when most of the fruits of one's labor must go back to you Sammy to pay for past excesses or to help the masses of less fortunate that now exist b/c jobs and oppotunites are few and far between. So I hope you, your nephew Warren and the other priviledged few got to party it up while it was good because if there is a god you'll all rot in hell for your shamelessness.
Signed your destitute and dejected grand child