I'll Take The Chance If You Take The Blame

From Coyote's Blog how we are being robbed.

Privitizing Gains, Socializing Losses
April 2, 2009, 8:59 am
Nobel Laureate Joseph Stiglitz has a great deconstruction of the Geithner toxic asset plan in the NY Times. If you want to see how the new corporate state works, where the government works with a small group of powerful insiders to the benefit of those insiders and the detriment of everyone else, this is a great example.
Stiglitz walks through how the Geithner plan will operate, and I want to do so as well. I have added a few tables to help illustrate his example a bit better.
Let’s begin with a financial asset that was originally worth $200. To make things simpler, we’ll assume that with the current economy there are now two outcomes for this asset — a 50% chance it recovers and eventually pays off its full value of $200, and a 50% chance it becomes effectively worthless (more realistically, there is a range of outcomes, but this does not really effect the following analysis).
The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.”
This is a classic expected value analysis. At business school, you spend a lot of your time doing these (trust me). Expected value is just the percentage chance of each outcome times the value of the outcome, on in this case 50% x $0 + 50% x $200 = $100.
So Stiglitz hypothesizes a situation under the new Geithner plan where a private entity might be willing to pay $150 for this $100 asset. That’s certainly a windfall for the financial institution that owns the asset currently, since the asset is only worth $100 on the open market. But why would someone pay $150? Well, it starts with this:
Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses
The actual percentages are 8% from the private purchasers, 8% “equity” from the government, and 84% in a government-guaranteed loan (Equity is in scare quotes because most investors learned long ago that if you provide 80%+ of the capital in a risky venture, you can call the investment “debt” all day long but what you have really done is made an equity investment).

But we have already posited how this will come out: a 50/50 chance of $0 and $200 for the final asset value. So we can compute the outcomes.
50% Chance Investment = $0
50% Chance Investment = $200
Expected Value
Taxpayer
-138
+25
-56.5
Investor
-12
+25
+6.5
Bank
+150
-50
+50
So there is a huge built-in subsidy here. Now, I don’t personally think the government needs to be injecting equity in banks. But I understand there are a lot of people who support it. So perhaps the $50 subsidy of the banks in the above example is warranted. But why the $6.5 subsidy of Geithner’s old pals in the investment world? This is a pure windfall for them, like finding money laying on the street. Even Vegas does not tip the odds so far in favor of the house.
I agree with Stiglitz’s analysis:
What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess.
So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.

Bush to Obama = More Of The Same

Here is a good article on how Obama is continuing on with what Bush II did. I really believe that GWB did more for the Democrats cause that for the Republicans. His so called "Compassionate Conservatism" is code for social programing and government growing. That is where many Republicans became disenfranchised with their party, myself included. I for one would like to see a new Libertarian-Republican hybrid party emerge and take over.

from the National Post, by Chris Edwards:

The point here is not to condemn president Bush, but to illustrate that
party labels have meant very little in recent federal expansions. Each recent
president has added new subsidy programs, expanded existing ones and imposed new
mandates on the states. Those changes have been usually retained by later
presidents, resulting in outlays growing ever larger. Recently, Republicans have
opposed some “pork” spending, but unless they challenge programs in a more
fundamental way, spending will be a runaway freight train under President Obama.

President Obama thinks that he can improve federal efficiency, and perhaps
he can somewhat. But he cannot change the fundamental factors that make the
government such a poor allocator of resources. If Mr. Obama succeeds in
expanding the government, it will probably function worse than under president
Bush because it will be even harder for administrators to keep track of all the
spending. Sadly, President Obama’s first budget sets a course for more
government bloat, more economic distortions and ultimately lower standards of
living for everyone who is not living off of federal handouts.

That's the problem with politicians; they all think they can do it better. The only importance to them is staying in office/power.

Green Jobs

This may not be perfect for full time work, with all the bed sores and the what nots, but part time on the weekends, sign me up.

Chinese Exports (other than Yao)

An interesting post from Coyote Blog regarding trade with China and an historical comparison with Japan.

China bashing during the past decade is reminiscent of the Japan bashing that
occurred during the 1980s. It turned out that Japan’s substantial export surplus
with the US, its extensive accumulation of US Treasury bonds, and its purchases
of assets in the US did not hurt the United States, but were for the most part
foolish actions on the part of the Japanese government and businesses. I believe
that similar conclusions will be reached about the parallel Chinese practices.

He posted a hypothetical from a Chinese citizen:

It is important to note that each and every one of these government
interventions subsidizes US citizens and consumers at the expense of Chinese
citizens and consumers. A low yuan makes Chinese products cheap for
Americans but makes imports relatively dear for Chinese. So-called
“dumping” represents an even clearer direct subsidy of American consumers over
their Chinese counterparts. And limiting foreign exchange re-investments
to low-yield government bonds has acted as a direct subsidy of American
taxpayers and the American government, saddling China with extraordinarily low
yields on our nearly $1 trillion in foreign exchange. Every single
step China takes to promote exports is in effect a subsidy of American consumers
by Chinese citizens.

It is an interesting thought. Certainly we know what happened to Japan. Could China really be in store for an economic downfall? It stands to reason that if/when china's economy gets to that point where the wealth in country exceeds that of export productivity the US will find another developing country to feed our insatiable desires for cheap goods. Hencho En Guatemala???

Weapon Ban

At the Cato Institute Blog David Rittgers talks over a renewed assault weapon ban. In the name of Mexico's war on the drug cartells, the Obama administration wants to ban similar assault weapons banned during the Clinton era.

The ban would be a revival of a law passed in the early years of the
Clinton administration that expired in 2004. The law prohibited the sale
of newly-manufactured magazines holding more than ten rounds of ammunition and
having two of five cosmetic features on semi-automatic rifles. If you had
a pistol grip and a detachable magazine, you couldn’t have a bayonet lug. More recent proposals have attempted
to ban “barrel shrouds,” which the rest of the world calls “handguards” - the
place you put your hand (instead of on a hot barrel) to prevent burning it while
firing.
The emphasis here is on the cosmetic - any rational discussion of the
issue ought to note that an “assault weapon” is any object you use to assault
someone with - and banning the presence of a bayonet lug on the barrel of a
rifle is senseless. Knives, tire irons, and bricks can all serve as
“assault weapons.” This is an instance where quotation marks are not just
appropriate, they are required.

Predictably, both Harry Reid and Nancy Pelosi have temporarily quashed the issue. Let’s hope
they keep it out of the halls of Congress, and focus instead on a sensible drug policy that impacts the demand created by an illicit drug market.
Pelosi and Reid realize
that this proposal will do is come back to haunt Democrats in the 2010 mid-term
elections, which historically trend against the president’s party anyway.
Many Democrats attributed the flip of the House of Representatives
to Republican hands in 1994 to the first “assault weapons” ban. Numerous
experts believe that the reason Al Gore could not carry his home state of
Tennessee in the 2000 election was his push for broader gun control.
Blue Dog Democrats that ran on pro-gun platforms in conservative districts must
be rolling their eyes. The rest of the country should do so as well, and
send this proposal to the dustbin

.

It seems Ironic that the gun lobby's faith lies in Nancy Pelosi, and Harry Reid. Apparently staying in power is more important that acting on your beliefs.

Porn in Utah

Over at Reason (Hit and Run) they link to an article that studied porn viewership across the US. Funny enough, they found Utah had the highest rate per populace (except on Sundays).

The biggest consumer, Utah, averaged 5.47 adult content subscriptions per
1000 home broadband users; Montana bought the least with 1.92 per 1000. "The
differences here are not so stark," Edelman says.

States where a majority of residents agreed with the statement "I have
old-fashioned values about family and marriage," bought 3.6 more subscriptions
per thousand people than states where a majority disagreed. A similar difference
emerged for the statement "AIDS might be God's punishment for immoral sexual
behaviour."

Although this study makes a lot of assumptions about the data inferring that it's mostly the religious conservative making the subscriptions, I would think it more evenly distributed throughout society without much difference in belief system. It might just be that conservative states tend to be less open about their porn consumption, whereas in more liberal areas there is just as much or more porn viewership, but done in a more public way. Very interesting none the less.

The Down Turn

An interesting article about what caused the economic down turn

From Cato:
The U.S. Didn’t Cause the World Recession
Posted by Alan Reynolds

In the Washington Post, Ricardo Caballero of MIT has a novel and promising idea about “How to Lift a Falling Economy.” Unfortunately, he echoes the mantra that all the world’s economic problems can be traced to the U.S. in general, and to big U.S. banks in particular. “Already,” he says, “this illness has spread to the global economy.”

Already? Industrial production in Japan began collapsing in November 2007, two months ahead of the U.S., and the Japanese industrial decline has been twice as fast.

Unlike the U.S., real GDP began falling in the second quarter of 2008 in Germany, France, Italy, Japan, Singapore and Hong Kong. By no coincidence, that was when the price of oil rose as high as $145 a barrel. Soaring oil prices raise the cost of production and distribution for many industries, and reduce real household incomes and therefore consumption. Nine of the ten postwar U.S. recessions were preceded by a major spike in the price of oil.

In a piece for the Claremont Review of Books (written last November), I conclude , “This recession is not just a U.S. problem, not just about housing, and not just financial.”

Compare the decline in real GDP over the past 4 quarters (from The Economist):
U.S.
-0.2%
France
-1.0
Germany
-1.6
Britain
-1.8
Italy
-2.6
Japan
-4.6


Does it make sense to blame the largest declines in GDP on one country with the smallest decline? If so, then we need some explanation of how some uniquely American “illness has spread” to so many innocent victims.

If the explanation is supposed to be falling U.S. imports, then the worst decline by far would have been in Canada and Mexico (where real GDP was rising even in the third quarter). If the alleged causality is supposed to be because of some undefined links between financial centers, then Italy would not be among the hardest hit.

When it comes to trade, in fact, the shoe is mainly on the other foot: Collapsing foreign economies crushed U.S. exports.

In the second quarter of 2008, U.S. exports accounted for 1.54 percentage points of the 2.83% annualized rise in real GDP. But falling exports subtracted 2.84 percentage points from fourth quarter GDP. Falling exports, not falling consumption, were the biggest single contributor to the overall drop of 3.8%.

After looking at which economies fell first and fastest, it might be more accurate to say that some foreign illness has spread to the U.S. economy than to assert or assume the causality ran only in the opposite direction.