What Paulson Knew

Daniel Gross devotes his column to a review of Henry Paulson's memoir of the financial crisis. The review, as a review, is good and readable, and it makes me think that the memoir itself would be worth reading. Gross does chide Paulson for being unreflective and for failing to see the big picture. Paulson takes things as they come; he doesn't place them in a larger context, and he doesn't have a grand philosophy to bring to bear on them.

What Gross doesn't, perhaps, get is that a more reflective man, a man with an explicit philosophy about how the economy was supposed to work, might very well have been paralyzed in the face of the financial crisis. Paulson's very pedestrian, task-oriented approach enabled him to deal with one problem at a time.

Gross mentions that Paulson is a birder. Well, there are birders who worry about the ecosystem as a whole and how our winged friends fit into it. But there are also birders who get out to a location, binoculars, field guide and notebook in hand, and just look for the birds that are there. Paulson strikes me as one of the latter.

The book is On the Brink: Inside the Race to Stop the Collapse of the Global Financial System.

Don't Bank On Bankers!

Am I trying to start a financial panic by undermining confidence in the geniuses who run our big financial institutions? Well, no, they already did that. In the Paul Krugman article I posted earlier today, Jamie Dimon, the head of JPMorgan Chase, was quoted as telling the Financial Crisis Inquiry Commission that a crash "happens every five to seven years. We shouldn't be surprised." Isn't that nice? Reminds me of the guys who say that anthropogenic global warming isn't possible because God created the world with the temperature He wanted, and we're not capable of undoing His work.

So, the follow-up to Krugman's piece in The New York Times is this David Gross essay from Slate.com. Gross's key statement is this:

"Rule No. 1: The banks have no idea what kind of regulation is good for them.
"Rule No. 2: If you ever think the banks have a point, remember Rule No. 1."

There's an old saying. "If you believe the doctors, no one is healthy. If you believe the police, no one is honest. If you believe the soldiers, no one is safe." (There's a nice double-edged quality to that line.) So, if you believe the bankers, no one is solvent.

Another Subsidy

I, personally, think we ought to abolish all subsidies. Farm subsidies, business subsidies, housing subsidies, even student loan subsidies. The basic effect of a subsidy is to encourage people to stay in a business that cannot support that number of participants. Subsidies distort the market by steering resources to business that ought to be allowed to die. Here's an article on a subsidy that most of us had probably forgotten about. I don't think that anything about this particular case would lead one to doubt the general principle that subsidies are bad.

Default! Default!

Here's a philosophical principle from Immanuel Kant:

"Act so that the maxim of thy will can always at the same time hold good as a principle of universal legislation." (Critique of Practical Reason)

That sounds really fancy, as translations from the German often do, but it can be reduced to the proverbial mother's question: "What would happen if everybody did that?"

In other words, it's a bad idea to lie to other people, because if everybody lies to everybody else, society cannot function.

So, bankers and financiers are appalled, yes, appalled, that people are walking away from mortgages when they go "under water," i.e., when the value of the house is less than the value of mortgage. The borrowers feel that they shouldn't make $500,000 payments on a $200,000 house. And this behavior is something that violates Kant's principle (known as the "Categorical Imperative"). If, after all, everyone just defaulted on their obligations, your boss could just decide not to send out your paycheck next week, and then where would you be?

So, this article by Daniel Gross is about how common this terrible behavior is on the part of big corporations.

Are you appalled?

The Old Passeth Away

Ferguson, Niall. The Ascent of Money: A Financial History of the World. New York: The Penguin Press, 2008. 442 pages. Acknowledgements. Notes. List of Illustration. Index. $29.95. ISBN: 0-793-67093-4. Read 19 September-15 October 2009.

I reviewed this book back on November 7. It's a good book, and I'm sure it's out there in paperback now for your reading pleasure.

Since I finished it in October, and posted the review six weeks ago, I think it's time to remove it from the Current Reading list.

Flight to Freedom ...

There are some old lines that express the notion that people may do the right thing for the wrong reasons. There was a Chad Mitchell Trio song about the John Birch Society - "Fighting for the right to fight the right fight for the Right."

There is among historians a general feeling that the revolutions of 1848, which starred patriots like Kossuth, were uprisings against imperial governments which were preventing landowning classes (the Magyars, for example) from oppressing their Slavic peasants.

And there's the U.S. Civil War, a fight for the freedom to prevent people from being free.

This article by Daniel Gross is about something similar, if much less profound; it is about banks returning huge amounts of money to the U.S. Treasury, in order to have the right to waste their shareholders' money as they wish. I own stock in Citigroup, and when I consider that my company's management chose to give back billions of dollars, which they could be using to make profits and to straighten out their business, in order to get rid of government criticism of the amounts they pay themselves.

The next stockholders' meeting, I vote to remove the entire board, to cancel the executive compensation plan, and to put Ralph Nader in charge.

Ferguson, Niall. The Ascent of Money: A Financial History of the World. New York: The Penguin Press, 2008. 442 pages. Acknowledgments. Notes. List of Illustrations. Index. $29.95. ISBN: 978-1-59420-192-9.

Niall Ferguson has become a very popular, very well-known, and probably quite wealthy historian. He has gotten into the business of writing television documentary scripts, which he converts into books that can ride the wave of publicity from the TV version. The Ascent of Money is one such, and I should say now that I did not see the television series. In fact, until I read the Acknowledgements at the end of this book, I was unaware that such a program existed. Its origin as a Ken Burnsian voiceover for a television audience helps to explain the simplicity and clarity of the narrative of The Ascent of Money. This is a very readable book, and it contains some charming and well-told stories.

The basic structure of this book is indicated by the title; Niall Ferguson portrays the development of our financial institutions as a matter of increasing complexity and hierarchical evolution. That’s fair enough, although, just as in biology, there are plenty of simple forms being created today, along with the complicated financial products that triggered the recent crisis. It is, by the way, a good thing, I think, that Ferguson wrote this book in early 2008, before the full dimensions of the crisis were known, and before its impact on the “real economy” was apparent.

The chapters reflect Ferguson’s structural assumptions. “Dreams of Avarice” is about the invention of money and the evolution of banking. While one of Ferguson’s first stories is about a mountain of silver, he makes it clear that, even in Sumerian times, money was as much a matter of accounting and marks on paper as of precious metal. A lesson that is clear throughout The Ascent of Money is that money is trust: credit really does depend upon credo. And that is true whether we’re talking about cash, bank accounts, bonds, stocks, real estate, or derivatives.

“Of Human Bondage” is about the development of bonds and the markets for them. “Blowing Bubbles” concerns stock markets and investment bubbles, primarily the grand-daddy of them all: The Mississippi Bubble. “The Return of Risk” takes up the story of the insurance business. “Safe as Houses” is about the real estate market, and the development of securities based on real property. The last chapter, “From Empire to Chimerica,” is the most speculative, but it does give a clear portrait of the interdependent relationship between Chinese productivity and American debt.

This is a very painless way to learn a lot about finance and something about economics. It may also serve to help some of us to understand some of the events that have shaken the banking system over the past two years. How was it that big insurance companies were so vulnerable to the machinations of supposedly private deals among wealthy investor? Why did the banks’ strategy of passing their mortgage risks off to other people through debt-based securities backfire? Why is it that we still do not know the full extent of exposure of American banks to these problems? And why has 2009 seen 99 bank failures, some of them of very large banks, when the government “rescued” the system a year ago?

I’ll recommend The Ascent of Money to those of you who don’t know much about finance. One of the things I have been learning is that you can’t know too much about the stuff that may determine whether you spend your golden years living in a refrigerator box under a bridge. Another is that most of us casual investors don’t have the time, energy, training, or instincts to understand finance on more than a very superficial level. Reading The Ascent of Money is an enjoyable way to get an overview of a subject that many people think of as dull. But the understanding it provides is, of necessity, less than profound.

Chicken or Egg

Here's the deal. General Motors is not doing well. Citigroup is not doing well. General Motors took a lot of government money. Citigroup took a lot of government money. General Motors is about 60% owned by the government. The government has a large - maybe 40% - equity position in Citigroup. See, we told you that the government couldn't run large corporations at a profit! That's the position Daniel Gross is arguing against here. If it had not been for the government bailout, GM would be in a class with Packard, Stutz, and DeLorean - gone, gone, gone. No employees, no pensions, no suppliers, no dealers, just a line of vacant showrooms as far as the eye can see. That didn't happen, so far, and we have the Bush and Obama administrations to thank for it.

Is Your Bank Picking Your Pocket?

I've had the feeling lately that my bank was increasing fees for this and that. $2.00 here, $5.00 there, interest charges accruing 15 seconds after the transaction. Daniel Gross explains why that's happening. Gross's explanation pretty much comes down to "bankers are greedy." Surprise!

Why Is Ken Lewis Retiring?

This is a nice article about the role of ego in the career of the chairman of Bank of America.

As Frank Sinatra sang, "If I can make it there, I'll make it anywhere!" The appeal of New York in various fields - finance, broadcasting, journalism, ballet, classical music, cuisine - is undeniable. So when a kid from Meridian, Mississippi, finds that he can't make it there, it's time to retire.

I've been posting quite a bit from Daniel Gross's Moneybox column. Well, I think it's a good column, and economic and financial affairs have been, and continue to be, critical for the country at this time. Afghanistan, gay rights, and Bo's birthday may be hogging the headlines today, but the economic and financial issues facing this country are going to be driving the real news for a long time.

A Tale of Two Bailouts - II

"The bad news? While the government has pacified the commercial finance, savings, and plain-vanilla banking sectors, it's sending reinforcements into the vast, restive region where the trouble began: housing."

Isn't that just too depressing?

What's worse is that the FHA, the only lending organization in the country to retain some shred of sanity over the past few years, is now buying subprime loans. "In the second quarter, about 14.4 percent of the FHA's loans were at least one month past due."

There may be another shoe waiting to drop in the housing/financial crisis. Can anyone say "Double-dip recession?"

A Tale of Two Bailouts - I

Daniel Gross that we'll be all be out a few hundred billion dollars from the bailouts of the financial system. But what's a few hundred billion dollars among friends? At least, according to this column a lot of money has been collected from the banks in the form of fees and charges based on the amounts the Federal government guaranteed for them. Bank of America, for example, paid $425 million as a fee for a guarantee of $118 billion in loans, which it has now dropped as no longer needed.

I suppose that's the real good news: The banks are doing well enough that they no longer need some of these guarantees. Until the next time.