hi everybody. I haven't been writing lately because it's just too damn depressing. It feels like 2003 all over again. You know, the feeling that all is decided beforehand, and that nothing you can say will change anything.
Except that this time it's actually life and death stuff.
(hah - got your attention with that - yes, this might actually be even more important that the Iraq debacle)
With the Fed promising about a trillion every other week (we were at close to 8 trillion already back in November, and every day seems to bring more news of more mindless waste of taxpayer money), it's hard not to be numb. These amounts are so staggeringly huge that we can't really conceive of them - and yet we'll have to pay for every single cent of it, eventually.
Many people are worrying about the value of assets on banks' balance sheets. Is it 95 cents on the dollar? 60? less? Many people make it as if that were the biggest problem.
It is not. The worst that an happen to an asset is that its value falls to zero, so the maximum size of the problem is known.
What is not known is the size of the liabilities. As Matt Taibbi noted in his (as usual) must-read article on the current crisis, it has become possible to use financial instruments to make multiple bets on the same underlying asset, in effect "bet[ting] that someone else's house would burn down." The Economist had an article last week about John Paulson, a hedge fund manager who bet against AIG and CDSs last year, and made billions in the process:
Another motivating factor for Mr Paulson was the alluring asymmetry of shorting credit. The most you can lose is the spread over some benchmark rate. Yet if the bond defaults, the gains can be mouth-watering. He targeted BBB-rated tranches, the lowest in subprime securities. With credit spreads so low because of a liquidity glut, his possible upside as a buyer of protection using credit-default swaps (CDSs) was as much as hundred times the potential downside. One $22m trade is said to have netted him $1 billion when Lehman Brothers went bust.
Basically, you'd pay one dollar (or much less, in fact) to AIG, and would get 100 from them if Lehman Brothers went bankrupt. For years, AIG took the dollars, and made tons of easy profits (Lehman's would never go bankrupt, right?) ... until things went wrong. Tons of people bet that Lehman would not go bankrupt (and made tons more of simialt bets).
And the fact is: a lot of players bet against AIG that things would go wrong - after all, if it was obvious to more than a few of us peones that there was a massive, unsustainable bubble, you'd expect that some of the smarter hedgies would have noticed it too - and indeed they did: except that, as some noted, instead of screaming about it on blogs, they rather more profitably bet against it.
And now, AIG is paying out these bets - with your money.
Geithner & co are now saying that this is necessary to save the system - which is wholly untrue: what they are doing is trying to save those that bet against AIG (ie Goldman Sachs et al.), by honouring, wihout cause, AIG's commitments with taxpayer money. And what's more annoying is that they're not even talking about that - they're still talking about the toxic assets that banks supposedly hold, and that everybody sane in the financial markets has already discounted down to their true value, ie close to zero - the second-order problem in that mess.
Again: the bigger problem is not worthless assets, it's unlimited liabilities on all the financial bets that were made.
What is so depressing is that money is being thrown at banks in the guise of solving the asset problem, when it goes to not solving the liabilities problem (because it's so much bigger) - and that markets know that it's not solving anything (they have the liabilities on their books, and guess that others have the same).
What is depressing is that this money - staggering amounts of money - is being wasted when it could be used in ways that actually help the economy (hell, giving a $40,000 check to every living American would be a way smarter use of the same money).
What is so depressing is that the goal still seems to be to save banks when it should be to save the economy.
What is depressing is that people are again being steamrolled into "bailouts" - 5 years after being steamrolled into a war against mushroom clouds by essentially the same people - and the Serious People are still wrong, utterly wrong.
What is depressing is that it's happening despite a smart Democrat being president.
What is depressing is that each day that goes by makes the problem noticeably worse. More bailouts. More unemployment. More avoidable economic - and personal - pain. And that this pain has irreversible consequences - people dropping out, people unable to pay for healthcare, people losing their homes, families broken, etc...
What is most depressing is that the problems - and the solutions - have been on the internets for months, but are not listened to, let alone implemented.
What is depressing is that Serious People still see solutions (single payer healthcare, higher minimum wages, investment in infrastructure and smart energy, redistribution) as evil because they sound like Socialism or - gasp - solidarity.
