Sunday, September 21, 2008

Lessons Learned? Nope.

Look, I WANT to move on, but there's so much to talk about, and I have what I think are well enunciated thoughts on the subject.
Barry Ritholtz has a piece today linking to an editorial from the NY Times related to short selling. The beauty of it is, the editorial is from 1930! Almost 80 years ago, in response to allegations similar to what we saw this very week that "short sellers" were causing the market's problems, a committee was formed to analyze the issue. "This committee contained not one member of the Stock exchange; it was made up of such eminent economists, journalists, and practical business men as Mr. Horace White, Judge Samuel H. Ordway, Mr. Edward D. Page and its professor John B. Clark of Columbia." In other words, it was at best an impartial committee, and at worst, a non-market-friendly committee. Their findings?
"In its unanimous report of 1909 the committee found that the greatest evil of the stock market was "pyramiding" of speculation for the rise on the basis of previous paper profits, now used as "margin" for still larger ventures."
Impressive. almost a full CENTURY ago, people who weren't even market participants had the foresight and understanding to realize that it wasn't the short sellers that were the problem - it was the excessively leveraged buyers. Sadly, our officials cannot seem to grasp that concept yet, and still try to pump the bubble at all costs. From Barney Frank, Chairman of the House Financial Services Committee: “we were reaching the point where people wouldn’t be able to get auto loans or home loans.” He foresaw “a very substantial reduction in economic activity.” Now I'm 100% sure Nouriel Roubini has a better understanding of markets than Barney Frank, and this is basically the exact point that Nouriel was making when I quoted him earlier - that you NEED a reduction of economic activity.
Final thoughts today on the bailout plan - there's a little clause in the plan called "Section 8:"
Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency
In plain English, I'm pretty sure that means Treasury Secretary Hank "Don't Fuck With Goldman" Paulson can do, in the words of Teddy KGB: Whatever the fuck he likes. (Don't splash the pot!)
That also means that when Paulson changes his mind and says that he'll allow foreign companies to submit assets to this bailout plan now (whereas initially it was only supposed to be companies headquartered in the US): “The American people don’t care who owns the financial institution,” there's nothing you can do about it. Hey Hank - I care who owns the financial institutions - I'm sure all the naive, ignorant Americans you're lying to about this bailout plan would care too when they find out their taxes are going to bail out Chinese, Japanese, German, English, Swedish, and myriad other investors who made bad investing decisions.
The American people should know that Paulson has been trying to TALK his way out of this crisis stemming from bad subprime debt for AT LEAST 18 months. Back in March of 2007, he called the issue: "contained." Well played, sir. I wrote a mere month ago that you can't talk your way out of issues like this - the tragedy is that the press and our elected officials had ample time to address the problems BEFORE they became financially apocalyptic - but chose instead to pay lip service to the issues, and blindly reassured the public that everything was fine. Turns out, it's NOT fine! Maybe if Henry Paulson had done his job properly we wouldn't be arguing about absurd bailouts today.
They figured this out 100 years ago. Why are we so off base today? I feel like the only guy who gets it now is Kentucky Senator Jim Bunning - way to go Kentucky - YOU have an intelligent man looking out for your interests.
watching, waiting,


Anonymous said...

Thanks for this awesome blog... I started reading months i i ago for poker content, now I look forward to your economic/political thoughts... I even went and bought a book on economics so I can be more informed and hopefully be able to follow more about what's going on... Don't want to be so ignorant, I used to trust the people in charge but I started realizing long ago that I shouldn't.. If you could recommend any good material to read to help me educate myself, that would be awesome... I'm sure others could use that advice. I'm really good at what I do, but this is far from it. I want to be informed, and you're helping. Keep up the good work, you woke me up.

Anonymous said...

In short, where do you think this is all going to end?

Anonymous said...

Interesting but what's your point- life goes on and necessity will bring new financial novelities- out of teh S&L crisis came sub-prime and leveraged finance - something big is right around the corner - you just sound angry cause you didnt profit from the PONZI scheme

Kid Dynamite said...

interesting comment - am i bitter because i didn't profit from the ponzi scheme? well, by definition, i'm smart enough NOT to profit from the ponzi scheme - intelligent people realize it's a scam and abstain... however, when the government changes the rules and CONTINUES to pump the ponzi scheme, not only am i failing to profit from it, but now, as a taxpayer, i'm PAYING for the imprudence of everyone in the scheme! why wouldn't that make me mad?

as for how i think this ends: it's still a ponzi scheme and someone still has to pay for it - now the burden is shifted to the taxpayers. in the end, inflation and dollar deprectiation is inevitable - and that's probably the BEST case scenario

Kid Dynamite said...

oh - and another thing - the previous commenter assumes we'll continue to be bailed out by newly invented leverage products - I have no doubt that at some point we will forget the lessons learned from this crisis- we always do - but for the forseeable future (10 years or so), this leverage bubble is OVER.

that's my point: the Roubini quote - you cannot grow your way out of a debt crisis. you NEED contraction to heal/solve it