Wednesday, December 29, 2010

Line in the Sand

Again, the Sony ebook reader strikes and makes me happy to enjoy books. The problem is that I have so many good books on the thing that I can't readily decide what to read. And I have far less time for writing about what I have read.

If you read my earlier entry about how the treasury department drew a line in the sand instead of using a stitch in time, and remember it, this entry is for you.

David Wessel, In Fed We Trust, has come up with an interesting theory as to why the line was drawn in the sand which added the spark to the kindling that led to the financial crises (metaphors make everything just a bit more believable, don't they? Especially when mixed so successfully. )

Wessel believes and provides a great deal of interesting circumstantial evidence that Hank Paulson, then Treasury Secretary, didn't want to be known as "Mr. Bailout" by repeating the same kind of bailout used to entice a buyer for Bear Stearns. When Bear Stearns had needed a buyer, public money had been used as an incentive. No more. Paulson laid down the line internally that public money was not to be used with Lehman Brothers. There is evidence that this was probably just a negotiating position that would be varied from as Paulson was known to change his mind at the "drop of a hat", one of my Dad's favorite cliches. In fact, Paulson historically was known for using this particular negotiating tactic of appearing to be inflexible up to the end when flexibility would come out of the closet. However, his temporary bargaining position was leaked to the press who made a grand announcement that "inside sources" had said Paulson was drawing a line in the sand and that no public money would be used to help with the toxic assets a buyer of Lehman Brothers would have to take on.

Continuing with my love of metaphor or maybe just cliches, the news story took on "a mind of it's own." Paulson was stuck with an admiring press that was quite comfortable making judgements and publishing them. (The unpleasantness the press felt resulting from convincing 96 percent of us that the Iraq War was brilliant became a thing of the past even at the point they discovered their error.) Anyone going against the popular wisdom was in danger of being the whipping horse. The press wholeheartedly agreed with the position that a line must be drawn when it came to Lehman. "In the sand," of course. Paulson and Fed Chairman Ben Bernanke were apparently warned by Timothy Geithner, later to be President Obama's Treasury Secretary, that this was not a wise move. A nonegotiable negotiating position does seem absurd. Unfortunately, due to the leaking of a position meant for negotiation, not policy, nonenegotiable policy was born. In fact the argument was given that Paulson had stated a few months before that "For market discipline to constrain risk effectively, financial institutions must be allowed to fail." Two days after the Lehman fiasco, Paulson, Bernanke and Geithner were busy using public funds to bail out AIG. Before the Bush Administration came to an end, trillions of dollars were being loaned out to bail out the repercussions of this one mistake.

The problem with the concept of "market discipline" and reliance on the free market is the fact that the free market  in bank type organizations really never historically existed, and certainly not since the Great Depression. Sure, they seemed to be all free market and such with their acting in their own self interest to score the largest profits possible. However the government was actually responsible for guiding the process and it was weakened by wave after wave of deregulation. This wave started ominously in 1978 when banks were allowed to bypass usury laws by using the ussary laws of the state they were incorporated in which helped Delaware a great deal. Incidentally, this was a move away from a Christian ethical concept. A steady stream of laws knocked down the regulations which were either put in place after the Great Depression or just assumed as common ethical sense. Both political parties apparently felt the pressure to allow the free market selfishness to blossom in the financial sector. It was a big money maker in terms of taxes and jobs and stuff. Being familiar with the 1929 outcome, didn't seen ti give them pause.

My argument pretty much has always been that the free market leads to terrible things without a backbone of laws that are moral and just  with which to guide this market. I can't understand why a society based on Christianity could also be based on selfishness as the prime motivation for good.

Since the early years of American history the monetary supply has always been assumed to be better regulated and printed and controlled by the federal government. But as law after law placed "financial institutions" outside of the regulatory policies of the Fed and the insurance of the FDIC, trouble was brewing. The fact that banks have the power to increase the amount of money in circulation is a lesson we learn from grade school. The bank doesn't have to have actual money to lend, they just need to have a required amount of reserves and the Fed takes care of problems resulting if the bank goes bust. But "financial institutions" have come to have the same money creation power with less and less regulation. Selfish greed run amok creates distinct problems in businesses this powerful.

It seems to me this is a laziness of thinking. The invisible hand will take care of everything regardless of what we do. It is the very epitome of lack of personal responsibility when cut throat methods of acquiring more and more money are considered virtuous. The axiom that my freedom stops just at the point where my fist hits your nose doesn't seem to apply in this laziness of thought. The collective fist of the market freedom we have given the "financial institutions" has hit everyone. Regardless of how personally responsible they were, they might find themselves out of a job due to circumstances beyond their personally responsible realm of control. When these people need unemployment insurance benefits, they are moochers on the system with no personal responsibility according to advocates of this laziness of thinking. Consideration isn't even given to the fact that thousands of people out on the streets might cause a bit of a tear in the social fabric, not to mention a rapid spiral downward as money effectively left the economy resulting in more business closing, resulting in more unemployment.

The simplicity in the statement "drawing a line in the sand" was apparently invented by a lazy press and passed along from "journalist" to "journalist."  If you think about this long enough you can see this story is popular on both sides of the political spectrum. Conservatives, obviously, want to depend on the free market. Liberals distrust financial institutions and allowing one to go broke seems like a victory to a knee jerk thinker. It must have been considered a winning story that Paulson had drawn a line in the sand and there would be no more Bear Sterns type bailouts. But it was a little more complicated than that. The invisible hand was beat in arm wrestling with the government in two days as AIG became the first of many future bailouts considered necessary in the resulting panic.

Panic is another key part of selfishness engendered by a "free market.". At the beginning of the crash in stocks, I saw no reason to hold on to stocks in this panic climate. I sold the riskiest parts of my investments almost immediately. Personal responsibility meant that I keep my wife and myself safe from exposure. I made sure that the cash reserves would be enough and actually held on to mutual funds I was pretty sure were likely to fall rather than rise. I was dumbstruck when my bonds started falling as I had some misinformation as a child that stocks and bonds moved in opposite directions. On average, yes, but averages don't apply in a panic. In the end I found I had been one of the more conservative investors around and suffered very little loss. I cut the losses even more by buying some stock near the bottom. It seemed smart but obviously not many people thought so. There lack of enthusiasm for the financial products that had cost them their futures was readily apparent as my stock stayed at the bottom for quite some time.

My lack of selfishness in not selling my mutual funds probably helped someone out there, but certainly not me. Selfishness really guided me to join the panic. Such wild swings can be very destabilizing to the market and the government, yet they result from the principles that make a free market free.

If I were choosing invisible hands to trust, it wouldn't be one of the selfishness of the marketplace, it would be one of higher authority based on morality and unselfishness.

[Disclosure of one of my moments of knee jerk responses and lazy thinking: In the aftermath of the first Gulf War, my knee jerk response was almost always to disagree with the Republicans. President H.W. Bush had stopped short of completing the war. Here was a popular wisdom I could agree with. Bush, Sr. had screwed up and had not gone to Baghdad. Then along came a Bush Jr.intent on protecting family honor over country, and who among us wouldn't? Well, except if we suddenly had some fiduciary responsibility by being elected to some Federal Office. However, rethinking my original lazy assessment of the situation seems critical to being honest with myself, in light of the mistakes we have made since.]