February 27, 2009
The make-believe Macho Man hath a plan:
Here's how Moore's plan works: Buy lottery tickets...
Unlike other lottery games, Moore says the Pick 4 has relatively good odds for a cheap price. If you play the numbers in exact order (in Moore's case 4-0-2-0) your chance of winning is 1 in 10,000. And a 50 cent lottery ticket can net you $3,000. Spend a buck and you'll make $6,000...
If everyone in St. Louis plays their home address in the Pick 4, Moore believes several local people each day will win -- especially considering that the Pick 4 has two daily drawings...
"That's a dozen or so people in St. Louis who could have $3,000 or $6,000 in their pocket each day," says Moore. "And what are they going to do with that cash? They're going to spend it!"
The press snickers at a wrestling impersonator's magic plan to save the St. Louis economy(1), but not only is it no stupider than Obama's stimulus plan, it is based on exactly the same faulty premise.
The bad premise is easy to see: no matter how the money is divided up, no matter what the odds, there is no money coming out of the lottery that did not first go into it. For every person who wins $10,000, there are 10,000 who lose $1. While there is economic activity - we have moved $10,000 around - there is no more value in the economy for it having been moved.
Obama's stimulus package is based on the same fallacy. Obama is going to spend, say a trillion dollars, which we are assured will create so many jobs that every American will be able to have 2 or 3 of them. Where is the money coming from? It is being borrowed from investors - investors who are therefore withholding that same money from some other borrower. Obama is simply borrowing a trillion dollars out of the economy, spending it back into the economy, and pronouncing the jobs thereby gathered into one place as "created."
The make-believe Macho Man's plan is silly, because all it does is move money around, celebrating the end result while ignoring the equal and offsetting costs. Obama's plan is the darling of politicians and economists all along the Potomac. The difference?
With Obama's plan, politicians and economists get to spend the money.
(1) And rightly so. It's actually worse than I let on above, as anyone who takes 1-10,000 odds for a 6,000-1 payoff is on the way to the poorhouse, especially if done en masse as 'the plan' posits. The Lottery is a voluntary tax on innumeracy disguised as a retirement plan.
Comments
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cfdxprt (anonymous) says...
Those investors are broke, just like most 401ks are; the 401ks are one of the biggest investors.
There is no investment, it's all on the credit cards now. Soon, we won't have anyone to borrow from. It's not Obama's fault, it's not GW's fault - the instruments that collapsed everything were created in the 80s, the act that made them almost untouchable was one of the last things Clinton did. GW actually made statements that we needed to regulate them more and was shot down by congress. If I had to place blame on anyone it would be government - they're wholly stupid.
I've seen you post many times (duplenty) and you seem to think it's an us versus them battle. It is, and it's not, it's the fault of stupid regulations that weren't inforced and stupid m'f'ers who could get rich quick without much of a downside. They're not republicans, they're not democrats, they're both - they're users. We got taken for a ride, and we only found out how much it cost at the end...
I'm probably the most conservative person you could ever meet. In real terms that means that I think we should have special forces the crap out of Afganistan, I didn't ever think Iraq was a good idea, and GW was one of the worst presidents ever. What occurred financially wasn't one person's doing; I don't even know that there's a boogyman to go after (and trust me, if I was in charge a lot of people would go from the Hamptons to a Fed Pen - not many questions asked). It was all our fault, even us who knew it was coming didn't do enough to stop it; if we could.
That becomes the problem - how do we fix something that we created? It's not through borrowing from our children and grandkids; it's not placing a tremendous tax burden on ourselves over the next decade. To me it's let it all fail, and as a small business owner that means the last 5 years were for sh!t. To the government, no matter who's in charge it's voodoo Keynesian economics. That theory is going to get disproved soon.
eh...they say I need to start a new message
February 28, 2009 at 4:05 a.m. ( permalink | suggest removal )
cfdxprt (anonymous) says...
You can't borrow your way to wealth - it's never worked. A D or R administration would have the same stupid fix. In a way, that's what Mr. Bill is saying. What everyone has to worry about to some extent is that "the producers" of which I am one, are tired of hearing hundreds of billions of dollars commited this way and that everyday. We don't care who's doing it, we don't like it. At the end of the day, we might up and leave - where does that leave any spending program?
I know you're set in your ways, and I'm set in mine, but we could probably sit down and have a cordial conversation over a beer. Learn everything you can about what's going on, and what could happen. From your leanings I'd suggest starting at Mr. Bill's site (though likely to offend) www.elborak.com. Go to the left and hit Mish, read that and archives for 2 or 3 days and you'll realize how far we are in the shitter...Give me some sites and I'll read them.
I apologize for spelling errors, I'm on the wife's Mac and don't know how to do a right click to correct. I also apologize for being wordy, it's late, I'm seriously not sleeping worth crap anymore and I've wanted to give a what for to someone who thought everything is politically motivated for a long time. Hopefully, I wasn't too much of a douche and you'll take some of my advice - I'll read yours.
How 'bout that the Mac at least worked right for copy and paste - I'm a linux bigot...
February 28, 2009 at 4:07 a.m. ( permalink | suggest removal )
cfdxprt (anonymous) says...
NOTHING! I can hunt, I can garden, I have no problem with eating squirrels and rabbits. The reset button needs pressed. These super smart Harvard types set us up for an epic fail, don't keep going the same direction. Don't keep pissing money down the rat hole. GM, AIG, the lot should be gone, they made bad decisions, in nature if you fail that bad you die. Let it happen. This theory that spending more money after more money, on credit, will make us well is false; it prolongs the inevitable. FDR failed bad with the new deal, so let's not ramp it up on steroids and see if it works this time.
You seemed to have missed one of my main points. People who I know and work with, who are the type of people who contribute to GDP, are about ready to give up and move - it's not the great country it once was, and it gets more surreal everyday. What happens to funding welfare when everyone's on it? Answer, those days eating squirrel and rabbit were great, you'll live in a third world hellhole.
As I advised in a round about way, read Austrian economics. Keynesianism has failed, will continue to fail, but we keep trying it. Where we're going right now there's not an easy return from and the farther we go in that direction the worse it's going to be trying to find daylight anymore.
Not everyone agrees that the stimulus plan has problems. Some know it is the problem, along with TARP, along with GW's stimulus and telling us to spend after 9/11. It's going to take a sea change in attitudes, and trying to make it easier on people isn't going to change the bad behavior that got us here.
February 28, 2009 at 1:29 p.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
"what would you suggest that we do?"
While I agree with CFDXPRT that 'nothing' is what the government ought to do, I do have to disagree that it will result in us eating rabbits. We are not in a recession, we are in a depression, and a depression creates structural changes in the economy that force it to become something more sustainable. So we need to work with it. Protect the depositors in banks - TARP money, all of it, should go to the FDIC. Then the insolvent banks should be closed, the shareholders and bondholders wiped out, and the assets sold off to new banks started from ground zero. GM, which lost 7 times the entire capitalization of the company in the last 3 months, should be liquidated through bankruptcy, with its assets sold off to someone who can build (a lot fewer) cars at a profit. Same with AIG, Freddie and Fannie, and any other organization kept in business solely on government life support.
It won't happen, because people* don't want change, slogans notwithstanding. What they want is to have different consequences from the same actions. They want to tie all the climbers together in case someone falls, well, now they are all falling.
No real value has been destroyed in the financial collapse. None. Every factory, every house, every bridge that represents real American wealth is still standing. What is being destroyed are promises of the transfer of future money from one person to another, and often without their knowledge. That will not last because it cannot last; no generation has the right or (as we will see) the power, to indebt the next one.
The only way we are going to end up eating rabbits is by following the trail we are on. Destroy the currency, which will likely destroy the government, and rabbits will be the best we can hope for.
* especially rich people like Senators and bankers and union officers.
February 28, 2009 at 8:47 p.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
"And what, preytell, will that lead to?"
I've already explained, massive bankruptcies - or rather, a recognition that bankruptcy is here - and default. It will result in massive deflation, massively lower asset prices, and a couple years of serious depression. The end result will be a lower, more sustainable standard of living, while we work to pay off the debt that remains or to make up for all the pensions and investments we've lost. It will mean the end of the stripmall culture, the credit card culture, the consumer culture. There will be a lot more gardening and home canning and a lot less Taco Bell.
It will be ugly for a while, but the problem is that there are no non-ugly choices left. The result will be the same no matter what we do, we simply have our choice of suffering.There is no way out from where we are that does not involve massive amounts of pain, massive amounts of debt default. Everything the government spends at this point is simply adding to the destruction.
What Obama is doing is not smoke-and-mirrors. Government spending on the order of 50% of GDP is banana republic spending, it is Italy-in-the-50s, 20-governments-in-20-years, mustachioed-military-strongman spending. It's why people end up living in mud huts.
People don't realize the government has pledged or spent enough money on the "crisis" since last year that we could have paid off every mortgage in the country. Yet the crisis is worse than it was a year ago. We seem determined to eat our way out of this obesity epidemic because we don't like hunger pains.
Uh, Gaston! Another bucket for monsieur.
March 1, 2009 at 8:40 a.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
"As for your idea of 'do nothing, bottom out, and emerge a better country for', I think it's a laughably naive and reckless suggestion..."
Perhaps it's reckless - there are no plans without risk - but it's the opposite of naive. Just this weekend, our government implemented another "rescue" of both Citibank http://www.cnbc.com/id/29441991 and AIG http://www.cnbc.com/id/29442377. Into each of them has been poured hundreds of billions in taxpayer money in guarantees and loans and, in the case of Citi, buying common stock for the taxpayers at a price twice what they would have paid on the markets. This is the third "plan" for each of them to stop the bleeding, which means that we are now implementing the third-best idea the government could come up with*. Maybe the third-best plan is the one that stops the bleeding, but I think that's a bit naive.
FNMA last week announced that they lost $25 billion for the quarter, AIG will announce tomorrow that they lost $60 billion. Fannie said that "We expect the market conditions that contributed to our net loss for each quarter of 2008 to continue and possibly worsen in 2009..." AIG's latest loss was twice their previous record loss, and since they are now 80% owned by the taxpayer, the taxpayer will shoulder that loss. For all the money being spent, it's getting worse anyway.
Next week Freddie will announce a record loss and Chrysler will announce that they have lost all the money lent to them in December. This is going to happen every quarter until the administration learns this course is hopeless or the taxpayer runs out of money. Then we will bottom out anyway. What Obama is doing is not going to change the end result.
Perhaps I should state my plan another way, as 'do nothing' is not entirely accurate: protect the innocent and those who stayed out of the way, and let those who took the risk accept all the losses, in full force, that they have earned. There is simply no justice in bailing out AIG and Fannie, quarter after quarter; the credit economy has run its course, and it is naive to think it can be brought back by spending our way to prosperity.
* And before anyone says, "yeah, but that was Bush," it must be pointed out that Gaithner was the primary mover behind the *original* bailout of AIG, when he headed the NY Fed. Change, indeed.
March 1, 2009 at 6:11 p.m. ( permalink | suggest removal )
DOTDOT (anonymous) says...
Emerging a better country is the naivete. No one knows what it will look like when the depression hits, when the cops don't get paid, when hospitals close. The coming collapse is on a scale unprecedented in human history. The proper question is whether we will emerge at all.
The United Sates of China?
March 1, 2009 at 8:27 p.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
"The coming collapse is on a scale unprecedented in human history."
Jeez, Dots, now you're scaring even me.
Well, then I guess this won't hurt:
http://www.chicagobusiness.com/cgi-bi...
March 1, 2009 at 11 p.m. ( permalink | suggest removal )
alm77 (anonymous) says...
Okay, you guys have *got* to stop. I've been lurking on this conversation for a few days now, and last night I had nightmares last night about losing our house and trying to survive the eminent financial collapse. I woke up exhausted.
In my dream we managed to get a lot and I kept trying to get information on how to build a cob house! (Which I do think is a pretty cool idea...).
March 2, 2009 at 9:31 a.m. ( permalink | suggest removal )
smerdyakov (anonymous) says...
duplenty—
If not Thunderdome, what do you think's ahead?
For my part, I can't imagine that anything short of Thunderdome-style collapse is going to change this reality: http://www.hulu.com/watch/1389/saturd...
March 2, 2009 at 9:34 a.m. ( permalink | suggest removal )
alm77 (anonymous) says...
Forgive the errors. I'm still on my first cup of coffee...
March 2, 2009 at 9:35 a.m. ( permalink | suggest removal )
DOTDOT (anonymous) says...
"...protect the innocent and those who stayed out of the way, and let those who took the risk accept all the losses..."
And who decides? The unraveling is taking place in unexpected ways. While banks are cutting credit limits and raising interest rates, people with high credit scores are also being affected due to some arbitrary "behavior analysis" filter - which code was likely written by some Phillipino kid in his bedroom. There was one story about a self-employed small business traveler with A1 credit who's credit limit was reduced to $500. Nowadays it's not so easy (or even legal) to pay for an airline ticket with cash.
And this all is just foreplay.
Smerd:
I'm not sure when that SNL aired, but whenever, it's a bit late for that.
March 2, 2009 at 4:07 p.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
"And this all is just foreplay."
Well, the sun came up again this morning. That must mean it's time for the government to dedicate another $200 billion of your money: http://www.cnbc.com/id/29484828
Which made me think about something Duplenty offered earlier: "outside of the stimulus plan, which everyone acknowledges has problems, what would you suggest that we do?"
... and I was thinking about what an American attitude that is. It's not just that the stimulus package "has problems." It's an unadulterated piece of shit made up of projects that have been previously rejected as unworthy. And everyone will admit that it is spending simply for the sake of spending. But we have to do something. We Americans have to do something even if it's worthless or symbolic or counter-productive.
This is not a criticism of "American" thinking. Call me naive*, but I think it's exactly that attitude that will get us out on the other side - once we finally figure out that the problem is not that we haven't spent enough borrowed money yet.
* who would dare?
March 3, 2009 at 9:18 a.m. ( permalink | suggest removal )
MyName (anonymous) says...
There are two ideas about what is happening on the macroeconomic scale. One of them is that the market is a self-adjusting, self-regulating mechanism and that the best thing you can do is leave it alone. The other is that the market isn't always completely restorative. Sometimes, the market can get so out of balance that the point at which the market "clears" is in a non-optimal situation (i.e. 25% unemployment and massive losses for the majority of the people involved in economic activity).
The Great Depression proved that this second type of market can happen. The only thing that got the economy out of that negative spiral was massive government spending (first on works programs, then on WWII). The open question is whether the current situation is one of those instances where the market will fix itself or not. This is not a question that can be definitively answered at this point and may only be decided years from now.
However, the government is doing something now because, if we are in the depression type of market, the cost of waiting is more job losses and a downward spiral in the economy. If you think the cost is bad now, it will be much harder to fix if we wait for a few years. This is just like what happened to Japan in the late 90s.
And for what it's worth, it wasn't "debt" that got us into this situation. Debt is a tool and can be used for good or bad. The problem is simply naked greed. Too many people were chasing after unrealistic returns both legal (with the mortgage market) and illegal (with the pyramid schemes). While ordinarily, it would be good to let the market punish these activities, the reality is that we're all caught up in the fallout from this, even people who put their money in a mattress.
March 3, 2009 at 12:57 p.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
Maybe if we calculated the entertainment value of derision and added it to GDP, we would not have a recession at all.
But now it's your chance, Mr. Sidelines Grenadier. Smerd already asked you what you think is ahead (which you ignored). I've already explained why "mostly nothing" is my preferred approach. So now I ask you what we should do. Not only that, I ask you what you expect the likely consequences of that action would be.
It's easy to point out crocks of shit in repetitive, two-sentence replies. How about either some substance or an admission that you really don't have anything upon which to base your criticism?
March 3, 2009 at 12:58 p.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
Oops, my response was to duplenty, no myname. But I do have one thing I would comment on from above: "Debt is a tool and can be used for good or bad."
Debt is a tool, but it is a specific kind of tool. Debt is the use of future production today. When one buys a house, one borrows the money with the expectation that he will work to pay it back over time or sell it. When one borrows to create buy a machine, the expectation is that the machine will create value to pay it back. When one buys food on a credit card, there is the hope that one will win the lottery. Three very different uses of the same tool, three very different societal results.
However, this tool is a wrench that can only turn one way. It can only be turned so far and will lock - one can only borrow until one's income will not cover the interest. One can only borrow so much from the future.
People are no more greedy today than they have ever been, no more greedy than in the 50s or the 20s or the 8th Century. But we are as far in debt as humanity has ever been, and our charts have gone exponential. Maybe that's not the problem - maybe depressions just sort of happen because of imbalances and lack of confidence - but I rather suspect it is exactly the problem.
March 3, 2009 at 1:12 p.m. ( permalink | suggest removal )
MyName (anonymous) says...
>People are no more greedy today than they have ever been, no more greedy than in the 50s or the 20s or the 8th Century. But we are as far in debt as humanity has ever been, and our charts have gone exponential.
We are also wealthier than we have ever been, and more people have access to credit than they ever have before. Credit cards and consumer financing used to only be tools of the rich, now the majority of people in the U.S. have access to them as well as large numbers of people in the third world.
And if you look back at the economy in the 18th century even, people would purchase small amounts from their local merchants and then pay off the bill in one lump sum at the end of the month. The only difference is that the credit card company has stepped in as an intermediary, which is good for merchants as they are guaranteed payment.
Paying for your groceries by credit could be a symptom of someone who is strapped for cash, or of someone who is paying for their mortgage out of one paycheck and paying their groceries in a lump sum out of their next one.
And economies don't suffer because of bad grocery bills. They suffer when a large number of people involved make a bad speculation and a huge sum of money disappears.
March 3, 2009 at 1:28 p.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
"are pie in the sky, and will never in a million years happen. "
Most of those specifics will within 3 years happen. How many more quarters of $60b+ losses do you think it's going to take until this administration realizes that AIG is a lost cause? How many more Citi rescues until they are busted up and sold off? How many parking lots full of brand new, unwanted Hummers will it take before they realize that we have plenty of cars, and that all we are doing is wasting resources? We would be better off paying autoworkers half salary to do nothing than to continue such an economically ruinous path. Time will decide whether you are right or whether I was just early.
I shit all over the stimulus because it is based on an economic fallacy, that of creating activity and ignoring the activity that doesn't take place because you've taken the resources. You cannot borrow money out of an economy and "stimulate" by spending it back in, no matter the numbers. It didn't work with Bush. It won't work with Obama.
But the plan I'm really interested in seeing is how they are going to find someone who has $2 trillion dollars lying around that they want to lend to the Obama Administration at functionally 0% interest. This year. And next year. And the year after that.
March 3, 2009 at 2:41 p.m. ( permalink | suggest removal )
DOTDOT (anonymous) says...
"And for what it's worth, it wasn't "debt" that got us into this situation. Debt is a tool and can be used for good or bad. The problem is simply naked greed..."
"And economies don't suffer because of bad grocery bills. They suffer when a large number of people involved make a bad speculation and a huge sum of money disappears."
I'm having trouble with the distinctions, Myname. Creative debt manipulation on the upper levels have affected daily operations on the lower levels. Many households or businesses manage spending according to best practices, and some do not. What I see as the problem is that ready availability of credit has led to a culture of debt. I guess my view is relatively narrow - food vs. no food.
I'm with Bill, sort of. I expect that there are hard times ahead whether we commit trillions of dollars in new debt or not.
As far as the armageddon I predict, it is not so fanciful to the people it is happening to now.
March 3, 2009 at 3:26 p.m. ( permalink | suggest removal )
DOTDOT (anonymous) says...
No sarcasm taken, Dup.
I'm not sure I understand the question. But maybe you can try the google on "foreclosures" or "mobile homeless." Hope this helps.
Maybe my hyperbole is not helpful. When I say "unprecedented in human history," I'm talking about the collapse, not the conditions. Not like Thunderdome; more like India or China or most of the former Soviet empire. Most of the world's population already lives in the conditions I see in our future. Calling it armageddon is my answer to what has been referred to here as wealth. Illusions and all.
March 3, 2009 at 4:46 p.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
Duplenty: "F&F were gov't created entities that were made public because the idea that the profit motive would keep them from overexposing themselves to risk...how'd that turn out?"
Well, there's a little bit of mythology in the question. What they were made was a half-assed amalgam of public and private, where the shareholders (banks and insiders) receive monstrous profits via dividends, while you and I get to cover the losses*.
But the answer is that it turned out shitty. And there was no way that it would turn out any other way. Anyone who said that privatizing them while guaranteeing their debt would result in less risk was either a liar or a fool. If you send me to the craps table and tell me my losses will be covered, will that make me more cautious or less? It's not a hard question.
Which is why it's not hard to see that any company the government keeps alive by buying special convertible stock to "recapitalize" them is doing the same thing, it guarantees the losses while telling them to get out there and make some money. But I'm sure they'll have the best interests of the taxpayers at heart. This time.
* If they were truly made public, why is their debt considered a liability of the US**, why does Congress use F&F as an instrument of policy, and why did the US government (Fed included) get foreign governments to purchase their debt? All three of these facts argue against them truly being "made public." Their bonds are not referred to as "agency debt" without reason.
** And before you say it wasn't until recently, explain then how they could lend at lesser rates than other private companies. Everyone knew that when the going got tough, Uncle Sugar would step in.
March 3, 2009 at 5:38 p.m. ( permalink | suggest removal )
matt (Matt Armstrong) says...
Ladies and Gentlemen, I present to you Lawrence.com message board's ooooowwwnnnn hoooometoooowwwnn curmudgeons!! For real. Most discussed topic on the page. 3 guys in a circle of pain with a few guest comments, mainly people that you've done a bang up job of scaring the confidence out of.
I have nothing to add to this, because it's so far in the negative that I can't add enough to come out black (hello, accounting joke!). It's time for me to write on the other side of this, namely how to live your life and ignore the "End is Nigh" signs that so many are throwing up.
March 3, 2009 at 7:32 p.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
Heh. This form the guy whose last blog was titled "Societal Collapse Worked For Me!"
Have at it, Matt!
March 3, 2009 at 7:39 p.m. ( permalink | suggest removal )
alm77 (anonymous) says...
I'm just going to step in and let you all know a couple of things I've been thinking. First of all, dup is right that one of the problems with free market capitalism is that "the idea that the profit motive would keep them from overexposing themselves to risk" is erroneous at best. There are a lot of people out there who make dumb decisions or just plain wrong decisions (we are fallen, are we not, dear Borak?) and there is no safety net against the stupidity and greed that people have and unfortunately wealthy people can hide both their stupidity and their greed for a very long time and that is precisely what happened here.
I'm hoping to hijack your blog Bill, by linking to my own. It was just too long of a post to put here. You see, I was a Secondary Market Processor. I saw this thing go down from Day #1. Enjoy: http://www.lawrence.com/weblogs/melan...
March 3, 2009 at 9:18 p.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
Hijack away! My point in dragging this out has been to spice up the place, which has been a little dead of late. If that means that you take over where I left off, all the better.
I have only one more thing to post, then I'll join your party (and try not to give you bad dreams, dearest ALM ;)
"When banks cannot use [monetary injections] for more than stabilizing their own condition, they are zombies. That's what you get when you give capital to insolvent institutions," said Joseph R. Mason, chaired professor of banking at Louisiana State University...
"Seizure of a bank may not be nationalization. When regulators come in ...It should be to liquidate assets. That's what needs to happen," Mason said...
"If the U.S. nationalizes banks, it should be to clean up a particular institution, get its balance sheet straight and get rid of management," [Hugh Patrick, a professor and director of the Center on Japanese Economy and Business at Columbia Business School] said. "The ultimate goal is to clean up banks enough so that private investors would be willing to invest capital in them.
http://money.cnn.com/2009/02/18/marke...
That's a nice long way of saying, "Then the insolvent banks should be closed, the shareholders and bondholders wiped out, and the assets sold off to new banks started from ground zero." And it's music to my ears.
March 3, 2009 at 11:04 p.m. ( permalink | suggest removal )
DOTDOT (anonymous) says...
Sure other economists are saying other things and there are broken arms across the globe.
Part of the broken arm epidemic is attributable to reducing valid discussions to circle jerks just because someone drops by the room looking for a biscuit.
March 4, 2009 at 11:47 a.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
"Try not to break your arm patting yourself on the back for finding a quote that agrees with your statement."
Given that my statement was pie in the sky, chasing clouds, and will never in a million years happen, you have no idea how hard that was. People would have to be crazy to agree with stuff I just make up as I go along.
But I do have to disagree with Matt, on reflection, that such discussions are "negative." On the contrary, they are essential. The main problem in politics - and make no mistake, all these plans are political plans, not economic ones - is that few and far between are the people who will look at a plan and examine its weaknesses, its bad assumptions, its blind spots. That's bad for their jobs. It is for this reason that no president's economic projections over a year are worth the paper they are written on.
It is also for this reason that we wake up one day to find that housing prices do not always go up and that the entire bloated, overloaded, overleveraged superstructure that we've built. Everyone was making money*, so no one bothered to ask what would happen if they were wrong, and therefore when they turned out to be wrong they did the maximum damage that could be imagined.
In May of 06 I wrote that a leverage-induced crash was "coming in American real estate very soon as well, maybe this year, as rising interest rates start to drive house prices down. Adios, Morons of the 110% Mortgage. You really thought we could all get rich selling our houses to one another?
http://elborak.blogspot.com/2006/05/f...
I don't say that to show how smart I am, but how obvious it was. I'm wrong about plenty of things, maybe more wrong than right most of the time. But I don't have a crowd of people following me around telling me how smart I am. Politicians do, and if we are not willing to stand up and tell them why their plans are crap, then we get crap. And we deserve no more.
* And it was not just banks and real estate agents. When property values go up, property tax revenues go up. Who are the greatest beneficiaries of such revenues?
March 4, 2009 at 1:10 p.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
"It's my understanding that AIG is the #1 insurer of retirement accounts *in the world*. If AIG fails, what happens to those folks?"
That's the problem: AIG has already failed. It is already worthless. It already cannot pay anything. So we have the choice of either acknowledging that, selling those contracts to other companies or at least allowing those insureds to go find another insurer, or pretending it never happened.
The government has already become the de facto insurer of those accounts - it owns 80% of AIG and writes a check every quarter to pay whatever losses come in. It would be far more honest to just make AIG a cabinet position than to pretend that AIG is still a company.
AIG's assets are fine, AIG did not go broke writing insurance, it went broke at the roulette table. So we should ask the question this way: Now that AIG has failed, what do we do with those folks? What do we do with hundreds and thousands of insurance contracts that people send premiums in for, month after moneth, year after year?
March 4, 2009 at 1:57 p.m. ( permalink | suggest removal )
alm77 (anonymous) says...
dup,"who is going to buy those contracts?" People who actually have capitol in case a large majority of the insured contracts go bad. The problem with AIG is/was that they insure with no money to back it up. Insurance is supposed to say, "Okay, I have a million dollars. Give me $100 a month and if your million dollar house burns down, I'll pay for it." But instead AIG says "We have no money, but we'll make money by insuring things we don't own. Surely everything we insure can't go bad all at once." Oh, but it can. And it did.
Starting a bank from the ground up isn't as hard as you think. Small town banks start every day. They'll become more popular than ever. Credit unions have already surged in popularity.
March 4, 2009 at 2:36 p.m. ( permalink | suggest removal )
alm77 (anonymous) says...
I didn't say "easy" I said "not as hard as you think". Banks who have been responsible are not suffering. Potential bankers/insurers who are responsible and reasonable and aren't so stupid or greedy that they lend/insure against their own best interest can succeed here. The only way to solve the problem that some of these are toxic assets would be to couple the bad with the good in a favorable bundle. Although I'm not sure AIG has enough good to go with the bad.... Liquidation as Bill pointed out, may solve part of this problem.
March 4, 2009 at 3:13 p.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
"Again - who is going to buy those contracts?"
Well, here's a start: http://www.hoovers.com/industry/reins... AIG is by no means the only reinsurance company in the world (even Warren Buffet does it). Every one of these companies has people on the payroll right now who have probably been trying for years to get that business. I used to be in insurance (actually have some letters I can put after my name, but I don't) and I can tell you, reinsurance is good business. There is nothing AIG is doing that other companies don't already do. Well, other than losing $60b a quarter.
"The only way to solve the problem that some of these are toxic assets would be to couple the bad with the good in a favorable bundle..."
Oooooh - he said in his best Bill Lumberg voice - I'm gonna have to just go ahead and disagree with you there...
The problem with toxic assets - crappy burritos - is that no one knows what's in them and they are therefore unpriceable. If you combine them with good assets, then you have a bigger pile of no one knows what. Keep the good assets good, sell the crappy assets off at "grab bag" prices. There are plenty of distress funds out there who would just love to take them over. But they are not going to pay full price. They are not even going to pay good prices. But they will clear the books.
March 4, 2009 at 3:46 p.m. ( permalink | suggest removal )
alm77 (anonymous) says...
The only people who would buy crappy burritos are the same stupid or greedy morons that got us into this mess to begin with.
Can't you just price an insurance contract at the value of the asset being insured? I understand that "values" are often inaccurate (we've had that conversation before) but it would be a starting point to evaluate that some burritos are crappier than others and could be bundled with the best assets. I don't mean to say that the good and the bad off-set each other to come out zero, but that one big crappy burrito with ten beef and cheese burritos would be palpable. Not only that, but maybe that crappy one isn't as crappy as it was valued at. Thus, even the crap is "insured" by the good stuff.
March 4, 2009 at 4:37 p.m. ( permalink | suggest removal )
DOTDOT (anonymous) says...
Isn't identifying the crappy burritos the crux of the problem? What about burritos that were perfectly good when they were made but are now rotting? Who, if anyone, is keeping track?
March 4, 2009 at 5:55 p.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
"Can't you just price an insurance contract at the value of the asset being insured?"
I think so. Insurance contracts are different from crappy burritos - the latter are mortgages or default swaps or currency plays all mixed together, separated in tranches, rated, leveraged, and sold all over. They are "asset-backed securities," though it is an open question whether there are really assets "there." To answer Dots' question(s) about them, I have no clue. None at all. Nor does anyone else. None of this was supposed to happen, so no one really asked.
Insurance contracts are just that - contracts between AIG and another insurance company*. Perhaps there's a reason that theirs are special, but I doubt it. If they are no different, then there's no reason the front line insurer couldn't contract with Lloyd's of London, for example, instead. In fact, if I were an insurance company, I would be looking to do exactly that.
* reinsurance is different from insurance. If I'm an insurance company and you come to me wanting a million-dollar policy, I might not consider myself big enough to underwrite it all - when I was in P&C, we used reinsurance to cover auto dealers who were so big they would wipe us out in the case of a hail storm. In that case I write the policy and then contract with a reinsurance company to take the last x% of the risk for y% of the premium, e.g. I cover the first $250k, while they cover the other 750k. If the reinsurer fails or backs out, I can find another one and start paying them y% of the premium every month. In any case, it does not affect the original insurance - that person still has $1m in insurance, but I as an insurance company need to make some adjustments in my portfolio.
March 4, 2009 at 8:20 p.m. ( permalink | suggest removal )
bob_brown (anonymous) says...
"Can't you just price an insurance contract at the value of the asset being insured?"
No. For one, in the grand scheme of things, most insurance doesn't insure assets, it insures entities against liability. IOW, payout under the policy isn't triggered by damage to an asset. It's triggered when an entity incurs loses or settles some sort of litigation. That's a probability that's not anchored to a physical thing with a value. Take your car insurance, for example. It's comprised of several types of coverage. There's collision, which covers the value of your car. And then there's liability, which covers the damage that you cause to others. The value of the car might be $1000, but the insurer's potential exposure could be $100,000 depending on caps on the policy. As Bill indicated, insurers generally reinsure against the liability risk, so that they cap their potential exposure at some number less than the full amount of the policy and share that risk with the reinsurer.
But, from the insurer's perspective, this is only half of the transaction. If you want to value an insurance policy from the perspective of the insurer, you need to value the stream of premiums that the insured is paying you for the coverage and estimate the return you can get from holding the premiums while you're waiting for claims to come in.
March 5, 2009 at 10:08 a.m. ( permalink | suggest removal )
alm77 (anonymous) says...
Excellent point, Bob.
So, I've just decided that I'm going to do what I do best. Put on my Pollyanna glasses and believe the guy I heard from KU the other day saying that this will start getting better this summer and take off again. :) Wish me luck!!
Oh, and if it does, the plan is to make hay while the sun shines and put our family in a better financial situation for the next impending recession. Why worry about what I can't control anyway?
March 5, 2009 at 4:27 p.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
Well, it's not all bad news:
WASHINGTON -- Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department...
http://online.wsj.com/article/SB12363...
Sure, it's another half trillion, but this is what they should have done with TARP in the first place.
March 6, 2009 at 8:16 a.m. ( permalink | suggest removal )