UPDATED: Is it Socialism?
August 24, 2008
I know the definition of socialism is far more complex than what I’m about to suggest, but the recent spate of economic intervention enacted by the SEC, Department of the Treasury, and Federal Reserve seems to share a fundamental feature with socialist governance. These three bodies have now made a habit of using the austerity of the government, the power that the voters lend them, and the money they have no right to risk, to insure certain enterprises remain solvent (for at least a while longer). Rather than allow for the death of companies such as Bear Stearns (and soon, Washington Mutual, Fannie May, Freddie Mac, and maybe Wachovia Bank) that may deserve to die, and the birth of companies that deserve to take its place, they have overruled the judgment of the market.
As close as these ‘regulating’ bodies can be with Wall Street, I wonder how much they’re simply being sold on the importance of these financial institutions to the operation of the wider economy? I can easily imagine that the heads of investment banks are fantastic salespeople. And from my experience in sales, academics such as Ben Bernanke make for some of the best marks. If there is anything academia teaches, it is creating seemingly rational explanations for an irrational feeling. All these salespeople have to do is inject that irrational dread of system failure into the hearts of these regulators, and these highly-regarded intellectuals should be able to take it from there.
They are legislating (when they even bother to legislate and not just decree) an outcome meant for a specific emergency situation only, rather than constructing sound policy they believe should be precedent for future actions. There appears to be a willingness to justify any action, no matter how extreme, as if the alternative is inconceivable. The heads of the SEC, Treasury, and Fed act as if the circumstances that brought about the calamity are entirely a product of capricious fate and could never be repeated.
I guess it would be embarassing to admit that this happens all the time...
“Million to one shot, doc. Million to one.”
- Frank Costanza
Frank Costanza will be played by The Federal Reserve, The Assman will be played by The American Taxpayer, and the defaulting-loans-riddled corpse of Bear Stearns will be used to represent The Fusilli Jerry. Now put on your gloves, because The Federal Reserve wants you to pull something painful out of its ass. For the sake of courtesy, try not to ask too many questions about how it got there.
Now I ask all you Assmen: Do you believe that the actions taken today to temporarily head off the collapse of a few financial institutions really can be considered in a vacuum, without creating further imbalances between the fundamental values and qualities of companies (and, in turn, our financial system) that will further crises requiring taxpayer-funded interventions?
UPDATE: The link blog Some Assembly Required (very clever summaries) alerted me to the fact that the question is in the process of being answered.
To quote:
Next time someone calls me a commie, I’m going to insist they refer to me as a “macroprudential oversightist”.
… and the cow with macroprudential oversightist leanings goes moo
Despite that the economic crisis in the US is now beginning to carry over to the Canadian economy (much later than scheduled…), the manipulations set forth by the regulating bodies interest me most in their potential motivations.
Do the regulators in question really believe that the outcome of non-action is too horrible to consider? (Reminds me of the anti-Iraq withdrawal argument which I summarize as “If we stay, things are awful, granted… but if we leave, My God! I can’t even imagine how awful it will become!” )
Are the regulators really being gamed by the heads of the financial institutions poised to suffer or fail from the current recession and global slowdown?
Is it comfort in the familiar? The slow bleed of taxpayer dollars into propping up entities that failed at the fault of their avarice is a known commodity, whereas the just destruction of the wealth created out of thin air is something beyond our charted paths?
Is it a product of systematic affordances and volition that those who will become the face of this intervention (ex. Ben Bernanke) who hold temporary posts in government have no motivation to allow great pain during their tenure, if it can be pushed aside for another in the future?
I pour over financial blog posts and some ‘professional’ financial articles, and I still feel like the reason given to the intervention (that the failure of Bear Stearns could not be allowed as the interconnectedness of the economy would lead to a cascade of failures) is underexplored. I do not blame anyone for not addressing it in a manner that I could comprehend (I can’t imagine how you could prove that Bear Stearns’ failure would NOT have far-reaching consequences), however I feel like the reasons that the leaders of our government keep making decisions that seem to be acts of procrastination in the face of disaster have become a central component of our calamitous lives. It is a subject that deserves far better study than I am capable of. I think the weakness of this post proves that.
… the metacow
The real problem is the counterparty risk. All the agreements, swaps, pseudo-insurance, etc. that these financial entities traded with each other. If Lehman, for example, goes down, who will that weaken because they were on the other side of trades with them.
Plus, no one really knows how much counterparty risk is out there or what to value it at.
I guess that’s part of my complaint, though I failed to articulate it at all. I do 100% agree to you about the difficulty in gauging the results of a major institutional failure with the current level of complexity in relationship between major institutions (and national economies).
It’s this fear of this horrible unknown that keeps those in power opting for a known slow-bleed, even if what seems fairly known about the slow-bleed solution makes it either a non-solution (think: promising to do anything it takes to keep Fannie/Freddie from failing, but in a way that leaves bondholders and stockholders to speculate who among them might be saved), or makes the slow-bleed solution about as horrible as anything we can imagine (think: pumping more air into our bubble, so it just makes a bigger pop).
[...] be allowed to fail? (This question is largely answered by Bob Morris from Polizeros in his comment on my previous post) The interconnectedness certainly adds a tremendous element of unpredictability in outcome, however [...]
They don’t need to be “sold” on the importance of the big and failing banks. Paulson was CEO of Goldman Sachs. He knows they’re important!!
Good point, Anderson. That relationship can probably describe a majority of those assigned to regulate the industry. And certainly little ’selling’ would need to be done for those who are directly from the private financial sector (and likely to return someday).
I actually had Paul Krugman’s pal, Ben Bernanke, in mine when I was thinking of someone who may have been sold on how integral a certain investment bank might be to the house of cards that is apparently the new economy.
[...] prepared this post a week ago, assuming I might as well be ready. For some context, see a previous post of mine (there are some good comments by readers there as [...]