The Goddamn Economy: A Civilized Version - Page 27

On February 13 2009 13:46 fight_or_flight wrote:

Well since we are splitting hairs....So if someone comes up with a model which can make predictions, yet it conflicts with the current model, they should be dismissed. Instead, the phenomena should be explained after the fact in terms of the current model. Sounds like the standard application scientific method to me (unfortunately).

Yet you did not say that just as I did not say that his prediction proves anything.

On February 13 2009 14:47 L wrote:
Can someone explain to me why school renovations are being challenged on principle when infrastructure spending in general has been accepted? I can understand that there's issues with the fact that the legislation is being pushed through the door with fairly general terms, but that's somewhat understandable, given the urgency of the situation and the scope of the legislation.

On February 13 2009 14:56 Jibba wrote:

While his inference predicted an accurate date, it still does not justify his method. The scientific method is based upon repeatability, which may in fact exist, but is certainly not proved by him guessing a date correctly.

I could design a crude model that will conclude the Lions will win the Super Bowl next year, and it could very well happen (no, it couldn't), but anyone that knows anything about football will be able to spot that my model is completely absurd based on current information.

I'm just saying, what you said was a pretty standard logical fallacy.

fight_or_flight:
If P, then Q.
Q
Therefore, P.

On February 13 2009 10:06 Mindcrime wrote:
I wonder why Gregg sought the nomination in the first place.

Nationalize the Banks! We're all Swedes Now.
http://www.washingtonpost.com/wp-dyn/content/article/2009/02/12/AR2009021201602.html

The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s -- or the United States in the 1930s -- the only way to save it is to nationalize it.

As free-market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner's recent plan to save it has many of the right elements, it's basically too late.

The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion -- including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans -- is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages.

Last year we predicted that losses by U.S. financial institutions would hit $1 trillion and possibly go as high as $2 trillion. We were accused of exaggerating. But since then, write-downs by U.S. banks have passed the $1 trillion mark, and now institutions such as the International Monetary Fund and Goldman Sachs predict losses of more than $2 trillion.

But if you think that $2 trillion is high, consider our latest estimates at the financial Web site RGE Monitor: They suggest that total losses on loans made by U.S. banks and the fall in the market value of the assets they are holding will reach about $3.6 trillion. The U.S. banking sector is exposed to half that figure, or $1.8 trillion. Even with the original federal bailout funds from last fall, the capital backing the banks' assets was only $1.4 trillion, leaving the U.S. banking system about $400 billion in the hole.

Two important parts of Geithner's plan are "stress testing" banks by poring over their books to separate viable institutions from bankrupt ones and establishing an investment fund with private and public money to purchase bad assets. These are necessary steps toward a healthy financial sector.

But unfortunately, the plan won't solve our financial woes, because it assumes that the system is solvent. If implemented fairly for current taxpayers (i.e., no more freebies in the form of underpriced equity, preferred shares, loan guarantees or insurance on assets), it will just confirm how bad things really are.

Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end.

Nationalization -- call it "receivership" if that sounds more palatable -- won't be easy, but here is a set of principles for the government to go by:

First -- and this is by far the toughest step -- determine which banks are insolvent. Geithner's stress test would be helpful here. The government should start with the big banks that have outside debt, and it should determine which are solvent and which aren't in one fell swoop, to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong.

Second, immediately nationalize insolvent institutions. The equity holders will be wiped out, and long-term debt holders will have claims only after the depositors and other short-term creditors are paid off.

Third, once an institution is taken over, separate its assets into good ones and bad ones. The bad assets would be valued at current (albeit depressed) values. Again, as in Geithner's plan, private capital could purchase a fraction of those bad assets. As for the good assets, they would go private again, either through an IPO or a sale to a strategic buyer.

The proceeds from both these bad and good assets would first go to depositors and then to debt-holders, with some possible sharing with the government to cover administrative costs. If the depositors are paid off in full, then the government actually breaks even.

Fourth, merge all the remaining bad assets into one enterprise. The assets could be held to maturity or eventually sold off with the gains and risks accruing to the taxpayers.

The eventual outcome would be a healthy financial system with many new banks capitalized by good assets. Insolvent, too-big-to-fail banks would be broken up into smaller pieces less likely to threaten the whole financial system. Regulatory reforms would also be instituted to reduce the chances of costly future crises.

Nationalizing banks is not without precedent. In 1992, the Swedish government took over its insolvent banks, cleaned them up and reprivatized them. Obviously, the Swedish system was much smaller than the U.S. system. Moreover, some of the current U.S. financial institutions are significantly larger and more complex, making analysis difficult. And today's global capital markets make gaming the system easier than in 1992. But we believe that, if applied correctly, the Swedish solution will work here.

Sweden's restructuring agency was not an out-of-control bureaucracy; it delegated all the details of the cleanup to private bankers and managers hired by the government. The process was remarkably smooth.

Basically, we're all Swedes now. We have used all our bullets, and the boogeyman is still coming. Let's pull out the bazooka and be done with it.

On February 15 2009 07:34 gchan wrote:
http://www.mises.org/story/1099

This is an interesting story about the Japanese boom and bust from the mid 80s to today. The eerie part though is that it was written in 2002, and if you replace all the parts about Japan with USA and yen with USD, we get a very similar picture of what the US faces today.

Yes, its conclusions are quite conservative, and yes, it is not exactly what the US faces today, but the similarities are definitely there. I also do think that the scale of speculation/overextension in the Japan one, when isolated to the nation itself, was a lot larger than the US one. Another factor too that differs between Japan and the USA is their economic structure--Japan basically revolves around several oligopolistic companies across the board while USA has a lot more small business growth. That makes Americans a lot more greedier and willing to take advantage of opportunities that did not occur in the Japan incident (resulting in a prolonged recession). Lastly, I think Geithner recognizes the lesson learned from the Japan and is using TARP 2.0 to buy up the bad liabilities from the books of the large banks. While I disagree with bailing out to get out of a recession in principal, at least part of the bailout is targetting the right sectors.

Edit: the article is pretty macroeconomics heavy.

On February 16 2009 12:21 Kerensky wrote:
in retrospect dont u think all of this shit is pretty straight-forward (for the wayman)? just wondering (since what little i've read it appears that way)

On February 16 2009 12:21 Kerensky wrote:
in retrospect dont u think all of this shit is pretty straight-forward (for the wayman)? just wondering (since what little i've read it appears that way)