Why Not Just Nationalize?

January 11, 2010

OK, so let me get this straight.  When banks lose a ton of private money because their employees made a ton of bad investments, the government bails them out with taxpayer dollars.  And when those banks start to make profits again, they start to pay their employees huge bonuses like they did before those (mostly) same employees made their horrible money-losing bets.  The public gets outraged and wants to do something to capture more of the bank profits or otherwise limit banker bonuses.  Just today, the WSJ tells us, the “Obama administration is considering levying a fee on banks to recoup more of the taxpayer funds spent to rescue the financial system.”

So, if the government provides taxpayer money when banks lose money and takes extra money when those banks are profitable, how is that different from the government owning the banks?  Why don’t we just cut out the middleman and make them public entities?  Or here is a better idea — how about if we don’t give taxpayer money to people who make bad investments and let them prosper or fail with their own money?

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Posted by Jay P. Greene

Bailouts are Bad — For Teachers as Well as Bankers

July 31, 2009

The Wall Street Journal has a front-page piece today on bonuses paid to employees at banks that had received federal bailout money:

Nine banks that received government aid money paid out bonuses of nearly $33 billion last year — including more than $1 million apiece to nearly 5,000 employees — despite huge losses that plunged the U.S. into economic turmoil…. The $32.6 billion in bonuses is one-third larger than California’s budget deficit. Six of the nine banks paid out more in bonuses than they received in profit. One in every 270 employees at the banks received more than $1 million.

Now, I’ve got nothing against banks (or any other organization) paying large bonuses to their employees — if they do it with their own damn money!  Whatever compensation and hiring system they adopt should yield improved results.  If it doesn’t, the shareholders should experience the consequence of having a foolish compensation and hiring system.  But it makes absolutely no sense to insulate shareholders from the consequences of a foolish compensation and hiring system by giving them federal funds to perpetuate their mistakes.

If this is true for banks, then it must also be true of schools.  Local school districts and states around the country have been on a teacher hiring binge over the last few decades, particularly picking up steam in the last decade.  This is a compensation and hiring scheme just like the banks have.  But instead of paying a small number of executives a huge amount of money, schools are paying a huge number of teachers a moderate amount of money. 

At some schools, as at some banks, their compensation and hiring policies have become unsustainable.  They hired more teachers than they can currently afford to pay.  Rather than making those local districts and states correct their mistakes, either by laying off teachers or raising local funds if they are truly convinced that additional teachers are educationally beneficial, we are making taxpayers nationwide enable and perpetuate those mistakes.  Similarly, providing federal money to banks enabled them to perpetuate mistakes rather than reduce compensation, lay off people, or raise additional capital from shareholders. 

We have no reason to believe that the world would have come to an end if some of those financial institutions had their shareholders wiped-out and were forced to reorganize under bankruptcy.  Similarly, we have no reason to believe that reversing some class-size reductions would have a significant negative effect on student achievement.  Class-size reductions have produced no gains in aggregate achievement and have only shown (questionable) gains in small-scale experiments where hiring additional teachers wouldn’t require hiring lower quality teachers to offset whatever benefits are derived from having fewer students per class.

If people want to be consistent, they should oppose both uses of bailout funds, for teachers as well as for bankers.

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Posted by Jay P. Greene

Obama Hearts Wall Street Fat Cats, TLF

March 24, 2009

We had spring break last week, so I’ve been a bit absent from the blog.  No fears, we’ll make up for it. 

I know much ink has already been spilled on the AIG bonuses, but let me add just one thought.  AIG had contracts with executives to pay them bonuses even though many of those executives made catastrophically bad decisions.  AIG also had derivative contracts with other financial companies, including Goldman Sachs, even though those companies never fully considered the risk that AIG would be unable to pay.  Of course, if AIG went bankrupt, then all of its contracts would be nullified and everyone would have to get in line to see if they would be paid anything.  But we didn’t want AIG to break its contracts with Goldman, et al for fear that it would spread a panic, so the public assumed AIG’s obligations and guaranteed Goldman, et al every penny. 

Why should Congress be any more outraged over AIG keeping its contracts with its own executives to pay bonuses than keeping its contracts with Goldman et al to pay for bad mortgage bets?  The bonuses only cost us $163 million while the Goldman et al contracts cost us tens of billions.  And the Goldman et al executives were as guilty of gross miscalculation in failing to properly consider counter-party risk as the AIG executives were guilty of writing bad derivative contracts.

As much as I hate to say it, I have to agree with Paul Krugman that the Obamaadministration appears to love Wall Street fat cats.  They love those fat cats at least as much as the Bush Administration. 

Let’s take a look at the new Geithner plan to count the ways.  The plan creates as many as 5 entities in which the Treasury and private investors put in an equal amount of capital, totalling about $150-$200 billion.  Those entities can then borrow as much as 6 times that amount, or a total of  about $1 trillion, from the FDIC (another branch of the government).  Those would be non-recourse loans, meaning that private investors would have no more than $75 to $100 billion on the line and could not lose more.  Meanwhile they get to buy $1 trillion of assets with highly subsidized loans and almost no down-side.    No wonder the stock market loved this.  It’s a great big smooch from the Obama administration.

One of the supposed benefits of this plan is that it will create a “market price” for the currently illiquid “toxic assets.”  But of course the price that this will establish will be a phony one from a market with five selected bidders playing with the government’s money at highly subsidized rates.  This mechanism sets market prices about as well as handing my kids ten bucks and letting them loose at a flea market. 

And if this whole deal is fair, how about if they let me and other individual investors buy shares in these 5 joint ventures.  I’d like to own a piece of a game where I gamble with the government’s money and can experience 1/12 of the losses.

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Posted by Jay P. Greene

No Consumer Left Behind

December 8, 2008

The news is reporting today that the Republican (last time I checked) Bush Administration and Congressional Democrats are close to an agreement to bailout the auto industry.  The terms of the deal involve a $15 billion bridge loan and a federal oversight board.

It’s now becoming clear that rather than moving K-12 public education to look more like a competitive market, we are moving the competitive market to look more like K-12 public education.  To assist in those efforts (can’t nobody say JPGB never did nothing for the peoples), I would like to propose the No Consumer Left Behind act.  You don’t even need a new acronym!

Under the No Consumer Left Behind act we will provide a system of goals and assistance to ensure that all companies serve their consumers effectively.  No longer will we have stigmatizing terms like “bankruptcy.”  Instead, we will have “companies in need of improvement.” 

All companies will have to achieve profitability by 2014.  And they can define for themselves what “profitability” really means.  Each year they must make adequate yearly progress toward that goal.  If a company fails to make AYP they must offer their consumers the option to buy a different product that the same company sells.  After all we have to have choice!

Companies that are in need of improvement will also be provided with additional resources and professional development.  If we don’t help them, how else can they help their consumers?  We won’t call these additional resources a bailout or reward for failure.  Instead, we will call it technical assistance.  It’s just technical — like a technical foul.

We will also require all companies to employ “highly qualified” workers.  Highly qualified will generally be defined as whoever they currently employ.  Alternatively, highly qualified can be restricted to workers possessing union-approved credentials.

If a company fails to make AYP for several years, it will have to “restructure.”  But restructuring won’t be like the old bankruptcy restructuring, where you have to sell assets or layoff workers.  Instead, it can mean that you held some team-building workshops or hired a new CEO.  This new NCLB will be all about accountability.

And as you can tell from the title of the proposed law — we are doing all of this because we care about the consumer.  By focusing on companies in need of improvement, offering product choice within companies, providing additional resources to companies, requiring highly qualified workers, and redefining restructuring to mean essentially nothing, we are taking all of the steps necessary to help the companies — err, I meant consumer.

(HT: Bob Maranto)

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Posted by Jay P. Greene

Bailout Application Form

December 4, 2008

(Guest Post by Matthew Ladner)

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Posted by matthewladner

They’ll Do Everything But Kiss

November 18, 2008

In the movie Pretty Woman (a movie whose appeal has always mystified me) Julia Roberts plays a prostitute who is as pure as the driven snow.  Sure she has sex with guys for money, but we know she’s pure because she doesn’t kiss. 

The think tank fellows and Republican leaders who supported the bailout are trying to follow this model.  Sure they just handed out over a $1 trillion in cash and loan guarantees to the financial industry, but they are attempting to retain their free-market purity by resisting the $25 billion give-away for the auto industry.  They’ll do everything, but they won’t kiss.  And if they play their cards right, they just might get taken out for a shopping spree!

In case any of you buy the argument that a bailout was necessary for the financial but not the car industry because the former posed a systemic risk to the economy, let me remind you of the hysterical and false claims that were made about the need for the $700 billion+ bailout.  We were told around September 20 that if Congress did not pass the bailout immediately the financial world would collapse.  We heard all sorts of metaphors involving fires, abysses, clogs, freezes, etc…, but almost no actual analysis of why the problem required a giant expansion in government activity in the economy.

As it turns out Congress did not act right away and the world did not end.  They didn’t pass a bill until October 3, almost two weeks later.  And when they were pushing passage of the bill, supporters once again warned that the world was going to end unless we coughed up the money.  Banks desperately needed the government to buy illiquid assets from them to clean up bank balance sheets and restore liquidity.

Guess what?  The feds never got around to buying any of those assets and the world still didn’t end.  Instead the Treasury department decided to buy direct stakes in financial companies, but they’ve been doing it gradually and are nowhere near deploying the full $700 billion.  I thought the world was going to end if those assets didn’t get off bank balance sheets ASAP.  Nope, apparently the issue was being hyped again.

It’s true that Libor rates, the rates at which banks lend to each other, had spiked to very high levels around September 20, indicating that banks were unwilling to lend to each other.  But credit was still being extended to consumers and non-financial institutions at reasonable rates.  Banks had made a ton of bad loans and some investment banks and insurance companies had made some awful bets.  And no matter what, those losses were going to have to be realized eventually and there was going to be a lot of pain.  But the entire credit market had not seized up. 

Some folks were proposing that Libor rates could be reduced and inter-bank lending restored without handing out $700 billion; instead we could address these problems by improving transparency on the health of various banks.  Banks were afraid to lend to each other because they were afraid that some of them wouldn’t be able to repay.  Greater clarity on which banks were going to fail and which were not, could have reduced that uncertainty and allowed the (healthy) banks to lend to each other again.

My point is that we didn’t have to go down the path of the ginormous bailout.  And holding the line on bailing out the auto companies doesn’t atone for the earlier errors.  Bailout backers should be held accountable for pushing us into an unnecessary and huge expansion in government responsibility over the economy.

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Posted by Jay P. Greene

Only Mostly Dead

November 17, 2008

princessbride11

Reliance on markets and the idea of limited government are not quite dead — only mostly dead.  They (mostly) died on October 3, 2008 when Congress passed the ginormous (giant + enormous) bailout bill, greatly expanding the scope and authority of the federal government to own stakes in businesses and financial assets.  And if you are looking for accomplices in the (mostly) murder of market-reliance and limited government, you should probably investigate the DC based “market-oriented” think tanks.

George Will correctly warns that this expansion of government by the partial nationalization of large sections of our economy is unlikley to be either temporary or benign.  (Now he tells us!)

The way back from (mostly) death for supporters of markets and limited government is to undo the bailout as quickly as possible.  Let businesses that made unwise decisions go into bankruptcy (I’m looking at you, GM).  Let their assets be reorganized by their credit-holders so that they move forward with a more efficient structure and more competent management.  Unless people experience the consequences of their mistakes, they can never learn from those mistakes and do better in the future.

I made this exact argument in defense of allowing companies to fail on September 18.  Mike Petrilli made the same argument on the same day.  But we’re just a bunch of lowly education analysts.  Where were all of the limited government Republicans?  Where were the market-oriented think tanks?

Let’s take a look at the period between September 15 and September 22 to see what the national, market-oriented think tanks had to say.  Remember that this was the pivotal week that began the (mostly) death-rattles for limited government and market-reliance.  Lehman Brothers was allowed to go bankrupt on September 15, but AIG received its first $85 billion bailout offer on September 16.  The first proposed $700 billion bailout was circulated around midnight on September 20. 

This was the time when the folks at think tanks could have been standing athwart big government yelling STOP!  They could have bolstered anti-bailout Republicans in Congress, steered the McCain campaign against the bailout (which would have been risky but probably a better hail Mary pass than picking Palin as VP), and they could have laid the foundations for a future defense of markets and limited government.

For the most part, the “market-oriented” national think tanks failed to yell STOP.  In the culminating act of complicity with big-government conservatism, they rationalized and defended a large government intervention in the economy.

Here is what people affiliated with AEI wrote during that period:

Glenn Hubbard called for a Resolution Trust approach of a bailout on both September 15 and September 19, advocating “putting in place a clean-up agency like the 1930s’ Homeowner’sLoan Corp. or the 1980s’ Resolution Trust Corp. would help…. The fiscal costs of inaction would be significant, both in lost tax receipts and in larger ‘crisis’ bailouts down the road.”  This Resolution Trust idea was the foundation for the $700 billion bailout plan of September 20.

Lawrence Lindsey called for a lifting of any cap on depositor insurance at banks on September 17 and then on September 21 endorsed the idea that the government had to provide credit to distressed financial institutions: “But by far the most inevitable economic development will be an expansion of the balance sheets of the government and its central bank.  When credit bubbles burst an enormous hole is formed in private-sector balance sheets…. Government, and only government, inevitably fits the bill as it can both tax and print the resources it needs.”  More support for the bailout.

Vincent Reinhart urged the administration to have “backbone” and resist more bailouts on September 16, but by September 22 he wrote in the New York Times: “The Congress should authorize the Treasury to purchase asset-backed securities in the secondary market and mortgages through auctions. For assets where it might not have all the information it needs, the Treasury could demand a slice of equity in the selling firm as well.”  More support for the bailout.

Alex Pollock wrote on September 17: “When government financial officers–like Treasury secretaries, finance ministers and central-bank chairmen–stand at the edge of the cliff of market panic and stare down into the abyss of potential financial chaos, they always decide upon government intervention.  This is true of all governments in all countries in all times. Nobody is willing to take the chance of going down in history as the one who stood there and did nothing in the face of a financial collapse and debt deflation. Put in their place, you would make the same decision, and so would I.”  More support for bailout.

Desmond Lachman wrote on September 17: “If Main Street is to be spared the painful economic consequences of a financial market meltdown on Wall Street, policymakers have little alternative but to resort to unorthodox interventionist policies to put a floor under the housing market and to prop up the banks with taxpayers’ money.”  More support for the bailout.

Newt Gingrich, writing on September 21, took a very skeptical position on the bailout.  But David Frum strongly went in the other direction, writing on September 22: “What should a free-market believer think about the plan for a government bailout of the U.S. mortgage market? Try this analogy: You have a white carpet in your upstairs hall. The normal rule is that nobody can wear shoes on the carpet. But the house is on fire–and the baby is upstairs. Will you tell the arriving fire department to wait and kick their boots off before dousing the flames?”  Notice that in this analogy, reliance on markets and belief in limited government are just the aesthetic nicety of clean carpets, not the principles that lay the foundations for the house or materials that resist fire.

It’s true that some of these folks called for “smarter regulation” (don’t make me get all Dr. Evil on them!) and advised about how best to conduct a bailout. But the bottom line is that 6 out of 7 AEI fellows who wrote during the pivotal week of September15-22 came out in support of a government bailout, with the 7th expressing skepticism but not outright opposition.

What about The Heritage Foundation?  They supported the bailout.

They issued four policy briefs during the week Sept 15-22.  The pieces all had the same basic message in support of a bailout: “Congress needs to act carefully but quickly in passing this legislation, knowing that it can correct any flaws when it reconvenes next year. Quick action is needed because financial markets remain deeply stressed, and the stress continues to spread to the rest of the economy.”

And what about the Manhattan Institute? They didn’t support the bailout.

Nicole Gelinas expressed even more doubts about the bailout than Newt Gingrich.  Writing in the NY Post she said, “Thing is, it’s not clear this is a solution. There’s no guarantee that even this much cash can buy us out of a systemic financial crisis. Even if it does, we probably face years of necessary financial and economic readjustment.”  And on September 26, just outside of the time period we are examining, she began to actively oppose the bailout, worrying that it might actually delay recovery.

And how about Cato? They also didn’t support the bailout.

Cato behaved more in-line with expectations than AEI or Heritage.  A September 15 piece by James Dorn was typical:“When the US Treasury is raided to defend the government’s credibility to guarantee GSE debt, it may calm markets for a time. Yet, in the long run, the drifts towards socialism and increased government borrowing requirements discourage foreign investment, decrease private saving, increase interest rates and slow US growth. That is a high price to pay for ‘stability.'”

For those of you keeping score, AEI and Heritage were actively in support of a large government intervention in the economy.  The Manhattan Institute and Cato were not.  But AEI is by far the most active and influential market-oriented think tank on this matter, so their support was crucial in shaping events and contributing to the (mostly) death of limited government and market ideas. The Manhattan Institute had only one expert on economic affairs active during the period I examined.  AEI had seven.  I believe that Heritage has, by far, the largest operating budget of any of these think tanks ($39 million as of 2006).  That is more than three times as large as the Manhattan Institute’s $12 million annual budget.

Donors pay for those seven AEI fellows and provide Heritage with its ginmormous budget.  If those donors really do wish to support huge expansions in government involvement in the economy, then I guess they are giving to the right organizations.

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Posted by Jay P. Greene

Feeling Stabilized Yet?

October 10, 2008

Congress passed the Emergency Economic Stabilization Act (EESA), but the markets have hardly stabilized.  Don’t the markets know that it is against the law for things not to be stable now that Congress passed a stabilization act?

I think recent events demonstrate that the EESA was completely unhelpful if not counter-productive.  But others interpret events as showing that the EESA didn’t go far enough.  I’m sure that there are also Marxist academics out there still arguing that full communism has never really been tried because the Soviets didn’t go far enough.  And there are education interest groups saying that the doubling in real per pupil spending hasn’t yielded academic improvement because we haven’t spent enough yet.  Something didn’t work?  Just try more of it!

Well, I came across a very sensible op-ed in the WSJ yesterday that offers an explanation for why the crisis continues and what might be done to really bring about stability.  Manuel Hinds suggests that the problem at this point is that financial institutions are refusing to lend to each other.  The problem is that some of those institutions won’t repay money that is lent to them because they are truly insolvent, but no one knows for sure who those institutions are.  So the safe thing to do is not to lend to any other banks.  But this lack of inter-bank lending is having a negative spiral effect.  Hinds likens the problem to playing poker with ten people knowing that a few aren’t good for their chips.  No one will play until you figure out who can settle at the end of the game. 

The solution is to improve transparency so that we all more clearly know who is and who isn’t able to repay money that is lent to them.  One of the best ways to gain that transparency is to allow insolvent institutions to go bankrupt so that we know the ones still standing are healthy.  Efforts to prop up insolvent institutions just prolong the crisis by disguising who really can repay and who can’t.  It would also be essential for transparency to continue mark-to-market accounting, despite calls to do away with it.  Without mark-to-market we would have much less information about the value of securities held by financial institutions.  More information is the solution and ending mark-to-market subtracts information.  There may also be reasonable regulations that would improve the quality of information about financial institutions.

There are real problems in financial institutions but masking them just makes the problem worse.

(edited for typos)

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Posted by Jay P. Greene

O’Reilly Goes Bananas on Barney

October 3, 2008

(Guest Post by Matthew Ladner)

Ok- so I don’t like Bill O’Reilly, don’t watch his show, etc.

I also think that he should have made a more substantive case against Frank. Anybody who buys stock based on what some Congressman says on CNBC, after all, is asking for trouble, especially if it is Barney Frank.

Having said that, Frank’s story he tries to get out about doing something about the Freddies as soon as he became chairman is simply revisionist spin.

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Posted by matthewladner

Partnership Considers Casino Bailout

October 2, 2008

 

 

(Guest Post by Matthew Ladner)

 

Las Vegas (AP) Casino companies have entered into talks with the Ladner and Loftis LLP regarding a possible recapitalization of select Las Vegas Resorts.

 

Unable to resist economic gravity as in previous economic downturns, Las Vegas casinos have been laying off employees. “Las Vegas casinos are a great American institution,” noted James Loftis “the government got us into this mess, and the free market is going to have to get us out.”

 

“Vegas casinos face a short-term liquidity crunch. We will provide needed financial assistance,” noted Matthew Ladner. “We may even MAKE money on this deal!”

 

The precise assets to be purchased remain under negotiation, but are likely to include many hours at the tables, cigars, drinks out by the waterfall at the Wynn, multiple bets on college football games, and an umbrella drink or three by the pool.

 

L&L partners wouldn’t comment on ongoing negotiations, but rumors say that the bailout weekend may occur on the weekend of October 18th. The L&L partnership are raising funds from potential equity partners, or better yet, taxpayer funding.

 

“If we are going to subsidize real estate speculation, why not blackjack? It’s much more fun,” Ladner stated.

 

UPDATE: L&L officials confirmed the securing of a line credit from the newly formed Strategery Capital Management, LLC. An L&L official anonymously commented “Laissez Les Bon Temps Roulez!”

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Posted by matthewladner

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