Hitchens brings me back into the fold

From this month's Vanity Fair:

In a statement on the huge state-sponsored salvage of private bankruptcy that was first proposed last September, a group of Republican lawmakers, employing one of the very rudest words in their party’s thesaurus, described the proposed rescue of the busted finance and discredited credit sectors as “socialistic.” There was a sort of half-truth to what they said. But they would have been very much nearer the mark—and rather more ironic and revealing at their own expense—if they had completed the sentence and described the actual situation as what it is: “socialism for the rich and free enterprise for the rest.”

I have heard arguments about whether it was Milton Friedman or Gore Vidal who first came up with this apt summary of a collusion between the overweening state and certain favored monopolistic concerns, whereby the profits can be privatized and the debts conveniently socialized, but another term for the same system would be “banana republic.”

What are the main principles of a banana republic? A very salient one might be that it has a paper currency which is an international laughingstock: a definition that would immediately qualify today’s United States of America. We may snicker at the thriller from Wasilla, who got her first passport only last year, yet millions of once well-traveled Americans are now forced to ask if they can afford even the simplest overseas trip when their folding money is apparently issued by the Boardwalk press of Atlantic City. But still, the chief principle of banana-ism is that of kleptocracy, whereby those in positions of influence use their time in office to maximize their own gains, always ensuring that any shortfall is made up by those unfortunates whose daily life involves earning money rather than making it. At all costs, therefore, the one principle that must not operate is the principle of accountability. In fact, if possible, even the similar-sounding term (deriving from the same root) of accountancy must be jettisoned as well. Just listen to Christopher Cox, chairman of the Securities and Exchange Commission, as he explained how the legal guardians of fair and honest play had made those principles go away. On September 26, he announced that “the last six months have made it abundantly clear that voluntary regulation does not work.” Now listen to how he enlarges on this somewhat lame statement. It seems to him on reflection that “voluntary regulation”

[It] was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate of the program and weakened its effectiveness.


Yes, I think one might say that. Indeed, the “perceived mandate” of a parole program that allowed those enrolled in it to take off their ankle bracelets at any time they chose to leave the house might also have been open to the charge that it was self-contradictory and wired for its own self-destruction. But in banana-republicland, like Alice’s Wonderland, words tend to lose their meaning and to dissolve into the neutral, responsibility-free verbiage of a Cox.

And still, in so many words in the phrasing of the first bailout request to be placed before Congress, there appeared the brazen demand that, once passed, the “package” be subject to virtually no more Congressional supervision or oversight. This extraordinary proposal shows the utter contempt in which the deliberative bodies on Capitol Hill are held by the unelected and inscrutable financial panjandrums. But welcome to another aspect of banana-republicdom. In a banana republic, the members of the national legislature will be (a) largely for sale and (b) consulted only for ceremonial and rubber-stamp purposes some time after all the truly important decisions have already been made elsewhere.

I was very struck, as the liquefaction of a fantasy-based system proceeded, to read an observation by Professor Jeffrey A. Sonnenfeld, of the Yale School of Management. Referring to those who had demanded—successfully—to be indemnified by the customers and clients whose trust they had betrayed, the professor phrased it like this:

These are people who want to be rewarded as if they were entrepreneurs. But they aren’t. They didn’t have anything at risk.

That’s almost exactly right, except that they did have something at risk. What they put at risk, though, was other people’s money and other people’s property. How very agreeable it must be to sit at a table in a casino where nobody seems to lose, and to play with a big stack of chips furnished to you by other people, and to have the further assurance that, if anything should ever chance to go wrong, you yourself are guaranteed by the tax dollars of those whose money you are throwing about in the first place! It’s enough to make a cat laugh. These members of the “business community” are indeed not buccaneering and risk-taking innovators. They are instead, to quote my old friend Nicholas von Hoffman about another era, those who were standing around with tubas in their arms on the day it began to rain money. And then, when the rain of gold stopped and the wind changed, they were the only ones who didn’t feel the blast. Daniel Mudd and Richard Syron, the former bosses of Fannie Mae and Freddie Mac, have departed with $9.43 million in retirement benefits. I append no comment.

Douchashov: Coward and Historical Revisionist

"You ask for a proactive proposal. In a word, socialism"

No, Douchashov, no one asked for your "proactive" proposal after the bailout failed to immediately garner all the results you believed it should have--we criticized you for not having one beforehand and then parading around afterwards, pretending you saw this coming. Oh, and "socialism" was the solution you knew would work, but were secreting away from us for some reason?

There's a curious lacuna in your thought process that one often sees in vulgar Marxists: Marx viewed fully-actualized capitalism as the necessary precursor to socialist revolution, though most revolutionaries would choke on that scientific interpretation because it clashes with the moral imperative for revolution (which is really why they're revolutionaries to begin with). Similarly, I have't the slightest idea how you thought a plan of flat out nationalization (which I favor) was even a remote possibility until other half measures (like the bailout) had been tried and failed.

"If the economic problem is truly fundamental, a govt. bailout won't solve it. And as we saw it can't even put a floor under it."

I'm not even sure what your hypothesis is about what's causing this crisis. At one point you say:

"The ideology of living beyond our means is why "faith" will not be restored."

Then you say

"Looking for a quick fix is the cause of the crisis. A nice start in getting on track would be punishing off-shoring and out-sourcing, and that could be done immediately."

Putting aside the fact that "punishing" off-shoring and outsourcing is immaterial and completely beyond the realm of possibility at the moment, you seem to be saying that the fundamental problem is that we spend much more than we make, or can hope to pay back within a reasonable span of time.

That's a great meta-critique of US consumerism and over-leveraging in the financial world, but if it is, in fact, the "fundamental cause" of the current crisis (recognizing how quickly this could become a bottomless semantic debate about the term "fundamental"), then surely what we need to be dealing with right now is the proximate cause, which is 1) the information assymetry, to put it mildy, created by the packaging up and securitizing of good and bad mortgages together, 2) the rapid decline in the property values underlying these mortgages, and 3) the seizing up of the credit markets based on the uncertainty created by 1) and 2).

The credit market problems are beginning to have a huge impact on employment--surely you aren't suggesting that we need to sign the country up for behavior modification shock treatment before we attempt to address that. If you are, then I say to you and all the libertarians fulminating about this on the margins: I understand what an important role punishment and pain play in your psycho-sexual constitution, but this really isn't the place to actualize your fantasy lives.

This is going to be a progressive process of varying levels of government intervention, and it had to begin with the highly-flawed bailout that was, by definition, the one that was politically possible at the time. Doing nothing was not a political option--most of the Republican and Democrat no votes the first time around knew that, but felt free to vote against it because they thought there were enough votes to pass it without them.

Republicans were especially loathe to be seen supporting it because it's exactly the type of issue they specialize in demagoguing: one with a complex interplay of costs and benefits that is difficult to explain even in the time allotted on the Jim Lehrer News Hour.

"You're first mistake was in assuming that the bailout was being considered in the best interest of the country."

Which of us thought that? Your first mistake was making the best the enemy of the good (and by "good" I of course mean the necessary first step). Although, then again, you didn't really even do that, did you, as that would have required making a concrete suggestion without the benefit of your retrospectacles.

Now it appears, as you noted, that straight out nationalizations are being considered. That could only have happened once the more moderate options had been tried. Anyone who thinks otherwise is fooling his socialist self.

Mavericks for Ayers

Two thousand plus mavericks and counting. I love how the focus is on the character assassination of Ayers, and not Obama. I wish it discussed the actual accusations against Ayers, but I suppose the aim was to appeal to a wider demographic.

Buffet prepares to lay some pipe

Huffington Post is inviting readers to caption this pic. Another reason to love the Huff Post.

So pocketbook trumps race?

This month's Labor Notes has a good piece on race and the election.

Labor leaders who want desperately to chase the Republicans from the White House are confronting a hurdle in their outreach to members: the question of race. Obama’s record on economic issues, they say, should put him way ahead of John McCain with working-class voters. But will the facts be enough to overcome some members’ deep-seated prejudice?

“We have people disguise it by saying he doesn’t have enough experience, or they’re not comfortable voting for him,” says Kyle McDermott, field director in the Steelworkers’ political department. “And we have people come at us and say, ‘Look, I’m not going to vote for a black person.’ They don’t use as kind words as I just did.” . . .

A September 8-10 national poll of likely voters by Democracy Corps found that in white union households, Obama gets 44 percent of the vote, 8 points below the local Democratic candidate for Congress and 9 points below the number of those who identify as Democrats. In 2004 white union households backed John Kerry by a 52.4 percent margin.

Putting aside people voting against their own interests, I had this pit of dread in my belly about Obama losing due to race. But now that pit's been replaced by a well of nausea due to the economy. It's striking how economic uncertainty has pushed unease about race off the table.

Now union members, military families, and other stereotypes in states as diverse as Michigan and Virginia are turning hard for Obama. A few weeks ago 527's were running race-baiting ads in Macomb county in Detroit suburbs, and now McCain pulls out of Michigan.

But what does this say about race relations? Does this mean that in bad times a visceral response to race doesn't matter, but in good times it does?

I was against it, before I was for it

Here's Paul Krugman on Rachel Maddow's show bemoaning the failure of the bailout. He was one of the morons arguing the bailout MUST be passed. Now he's saying the bill was a terrible idea, time to go back to the drawing board . . . Ooh! He's angry! (Must be all that egg on his face.)

That trillion would have come in handy right about now.

It's official, the bailout is a failure

It’s official! The bank bailout has not worked.
-Peter Morichi, University of Maryland

If policymakers think that adding extra liquidity is going to solve the credit crunch on its own, they are going to be sorely disappointed. This is because upward pressure on interbank rates is a consequence, not a cause, of the crisis.

It is a shortfall of bank capital that has made financial institutions reluctant to lend to one another. Boosting liquidity is therefore only a necessary, but not a sufficient, condition for stabilising the financial sector. In fact, until banks are adequately recapitalised, funding pressures may even get worse.
-John Higgins, Capital Economics

Quick! Let's throw several more trillions down the drain before we have any idea what is really going on. The market needs to finish "correcting," then we can look for solutions. We deregulated and encouraged massive bubbles, and the bill came due. We planted the bulbs, and our tulips are blooming.

All you bushy-tailed optimists that insisted the bailout had to go through, or else: Fuck you! Running around half-decapitated has only made the hole bigger. Bet that last trillion we wasted still goes into bonuses.

The Boss rocks the Parkway

Bruce Springsteen played a great set on the Franklin Parkway on Saturday. You can find the entire seven song set here.

You can also YouTube individual songs. Here he's spoken word, explaining why he was rallying for Obama. It's worth a listen.

Boeing strike looks like a winner

How does labor strife affect business in the current climate? Capital is and will continue threatening workers that it can't meet payroll because of difficulty accessing credit lines, but how does labor strife affect that same access to credit?

I don't know if that had anything to do with it, but Wall Street appears to be pressuring Boeing management to concede to workers' demands. Business Week asked last week, why doesn't Boeing settle? They're losing more money and jeopardizing future production by not settling. And on Friday the LA Times lamented that the strike had postponed the launch of Virgin Australia and was stifling business travel in Southern California.

If Wall Street is blinking on the Boeing strike, it's time to kick them when they're down. I hope the payback's hell.

Why I hate Identity Politics

Palin celebrates Idiocy on national TV and gets away with it. Since her idiocy was made plain, her whole strategy entails proclaiming it from the highest mountain top and gathering the idiot minions around her. She is the Last Unreconstructed American.

I was a little disappointed in Pinker's piece in today's Times. I was expecting a little more psychology, instead it was mostly linguistics. I agree that her abuse of the vernacular is irrelevant, and that her effort to hide behind the vernacular is. But, how do the linguistic tools measure as far as motivating behavior? Any ideas, professor? I don't think they measure up, in part because she is a woman. Sure, she offered a lifeline to everyone that desperately sought a reason to adore her, like Pat Buchanan (proving that it is possible to WILL oneself into idiocy). And, sure, she projects this exciting tension as a potential ball-breaker, but I think watching Biden barely conceal his contempt for her lack of knowledge through a forced teeth-bearing smile (with the accompanying command of details) is what led to polls suggesting he won the debate. If she were known as an intelligent woman, like Hillary Clinton, the contempt would be seen as sexist. But since everyone could see Palin can't answer an unscripted question, Biden's restraint came across as chivalry. Any takers? I think Gail Collins agrees.

I'm still coughing up a little phlegm thanks to my germ-delivery cost-center. I hereby proclaim today the celebration of all phlegm-coughers day. It is only your own unexamined bias that makes you uncomfortable every time I spit in front of you.

The worse it gets, the better it gets. Pt I: Crisitunity!

The Senate passed the awful bail-out bill. As time progresses, my opposition has gelled. More on this later. But, at best, the bailout will keep things from deteriorating further, and at worse it will add massively to the debt while our economy contracts.

Jerry Mead-Lucero at Pilsenprole sees the silver-lining:

So now their lies are clear to all. NEO-LIBERALISM IS DEAD! We must repeat this everywhere and anywhere. It has to permeate all our discussions. The neo-liberal mantras that the ideologues deafened us with for decades finally ring hollow for nearly everyone. We must take the ideological offensive at this moment of crisis/opportunity. Because - beware – the neoliberal spin machine is already hard at work fashioning twisted logic to maintain their lock on the minds of many Americans. Take for instance the announcement today of a rejection of the most recent version of the bailout plan, being attributed primarily to conservative Republicans. Only in America, could the economic elite who have robbed us blind and created the crisis, then come off looking like populist Robin Hoods, rejecting billions for a “greedy few” on Wall Street. And what do they demand as their alternative to the Paulson plan – MORE DE-REGULATION AND TAX CUTS FOR CORPORATIONS AND THE EXTREMELY WEALTHY! It is time to end the surreal madness of U.S. politics . . . So where is the “opportunity” that I refer to in the title of this blog entry? Well let’s take a look at what the last Great Depression ultimately resulted in – Social Security, FDIC, the WPA, the FHA, the SEC, the TVA, and let’s not forget the 8 hour day and the 5 day work week. All the stuff that the ruling class has sought to dismantle in the last 3 decades.

I like how MoveOn.org isn't trumpeting their role in the failure of the bill to pass the House. Grow some cojones, You sent me the numbers to call! But, they had the right idea. Let's get to work on a good, long-term solution. This would be the time to get that done, with Bush in the cellar and the economy tanking, but that WON"T happen if there isn't a strong movement pushing for this. The first step is the left owning its role in tanking the bail-out, and the realization that it took a deep dive into the Depression for all the "progressive" legislation we hold so dear.

Props to the NY Post for their beautiful cover today:

Ask Dr. Farley

He has a Master's Degree in the Apocalypse.

Ask an Apocalypse Specialist

Dear Dr. Farley,

Should I be preparing a boat or a car?

Distressed in DC

Dear Distressed in DC,

The failure of the modern energy transportation network will make such distinctions irrelevant. It would be better to ask "horse or bike?" I recommend the former; horses can swim, and in a pinch can be eaten.

Dear Dr. Farley,

Is cannibalism really as bad as they say?

Preparing in Peoria

Dear Preparing in Peoria,

As in all things, it depends on who you're with.

Can I call you Joe?

Daughter's down to bed, so I just started watching debate. An hour behind rest of my countrymen and womyn. So now this is my first half-assed attempt at live-blogging. Criticism welcome.

I was on the phone with el lechero, and he thought Biden was going to spank Palin. I'm not so sure. The clips I've seen from her past debates--she was smokin' her opponents. She does the Joe six pack thing well, and I think she is better under fire than in these friendly interviews where she's been deer in the headlights.

Can I call you Joe?

Beautiful way to begin! Biden didn't fall for it, so we'll see if she calls him Joe.

The American workforce is the greatest in the world.

She's a great caricature of America. It sounded pretty cynical.

She just criticized Biden's years. She's trying to make him snap, and he definitely looks annoyed.

Palin just blamed the crisis on predatory lenders who sold people mortgages they couldn't afford. If she holds her own, she wins by a mile.

She just spoke directly to camera, "to American people," explaining what taxes she cut as governor. Good tactic, but it will get old fast.

In the middle-class where Todd and I have been paying taxes isn't always patriotic. Patriotic is, "govt. get out of the way."

20 minutes in Joe Biden just called McCain's Health plan, "Ultimate Bridge to Nowhere." The audience laughed. They promised not to laugh!

Biden: Post-office box off-shore tax haven is "unpatriotic."

You know what I had to do in the state of Alaska? I had to take on those big oil companies...break up a monopoly. Those tax breaks aren't going to big corporations...Obama voted for tax breaks, and I had to turn around as governor and undo in my own area of expertise, and that's energy.

Biden owns the facts, but he looks mad.

Good Biden line: "I agree with the governor. We want a windfall profits tax to benefit American people. So I hope governor can convince McCain to support windfall profits tax." Here, strategy needs to be, celebrate your opponent and give her all the rope she needs.

Palin is gritting her teeth. Pushing for domestic supply of energy. "Energy independence is key to our economic future."

Let's talk about climate change!

Alaska feels the impact of climate change... I don't attribute all changes to man's activities, but there are real changes. I don't want to argue about the causes, but about impact. I was first governor to form climate change sub-cabinet. Need to reduce emissions. We have to become energy independent because we care about climate more than other countries do

.
The country's IQ just dropped a few points. She started to run on too long. Started stringing nouns together at the end.

Biden: "Climate change is man made." Clean-coal, clean-coal, clean-coal. What a joke. "Dirll, drill, drill! Drill we must, but it will be ten years before we get any oil out of the ground."

Palin: "The chant is "Drill, baby, drill!" Because people are hungry for more oil."

Both support capping carbon emissions.

Now we're off to same-sex marrriage.
Biden: "We support same constitutional guarantees as heterosexual couples."
Palin, somehow, got to say she was tolerant. Apparently, some of her best friends are gay. They wouldn't prohibit hospital visitations. Palin almost ate her toes, but moderator left her off the hook.

Long on Iraq, Biden is way more detailed, and Palin way more stark and emotional.

As debate goes on, Biden treating Palin with respect is starting to pay off. Everyone knows his knowledge is an order of magnitude above hers, and so as debate wears on, the feather-weight is wearing through. However, her statements are punchy and powerful. She's done a great job prepping for the debate.

Fifty minutes in, we're deep in Iran. Biden: "Our friends and allies are saying, "Talk, talk, talk!"

Nice, Biden just stated: "McCain won't even meet with govt. of Spain! They have troops in Afghanistan." Of course, Palin will not touch that... And she doesn't.

Israel love-fest! Who hearts Israel more? Did anyone see this post: if Israel doesn't eliminate settlements, Israeli democracy is dead. Wonder how long that will take? Palin: "I'm so glad, Senator, that we both love Israel." That was a creepy, creepy line.

Palin: "Too much finger pointing backwards. We will learn from mistakes of past administrations."

Respect, respect, respect. Does Palin respect Biden more than Biden respects Palin? She turned the table on him good there.

Palin appeared to drop some knowledge on counter-insurgency in Afghanistan. Biden refocused on McCain's judgement.

At one hour in, Palin smashed Biden on his support for Bush's war resolution. As an outsider, it's hard to understand: for it, before I was against it. Good. He deserved that.

Now, they're both humanitarians on Darfur, and sweeping away the line on trigger for intervention.

Palin: "John knows what evil is!.. He'll know how to win a war!"

Iffil just asked them, what wil they do if they become President. Heart-beat away, and all that.
Biden, unfortunately in my mind, injected a dab of assasination fear-mongering. "A tragedy of historic proportions. But I would follow Obama's wishes all the way." They should have role-played that question, and had a lighter answer.
Palin: "A tragey, tragedy. [rubbing hands] We're a team of mavericks! We disagree on ANWR, and we will disagree. McCain wants deliberative debate to make good policy... Govt. get out of my way."

Biden spends a lot of time in Home Depot. Why? Apparently, everyone there knows that McCain equals Bush. "Walk with me in my neighborhood. Middle class has got short end. Obama will change it."

Palin: "Say it ain't so, Joe. Pointing backwards, again. Bush administration."
Apparently, her family is full of teachers. Shout-out to 3rd graders at Gladyswood Elementary School. She's got Biden beat on the name-dropping.

Palin just asked for more authority in working with Senate! No!!! She is scary.

Biden: "Every major decision, I'll be sitting in the room... I look forward to working with Barack... "

Palin opened herself up to questioning on Cheney. Can't really give an answer, except says she agrees with Cheney. Again, No!!! "My executive experience will be put to good use in White House."

Biden: "Cheney is the most dangerous Vice-President in American history. He doesn't understand that Article I defines executive role... Preside over Senate only when there is a tie vote. No authority to Congress. A bizarre notion to aggrandize the power of a unitary executive."

Biden is getting emotional towards the end. Palin is sneering almost as much as during the convention. She is the ice queen.

Palin: "We've not got to allow the partisanship... Whether Republicans in charge, I didn't see a lot of progress there, but neither with the Democrats in charge."

Biden: "A maverick he is not."

As with Bush, Palin has no regrets.

Biden is on top of every McCain policy proposal, and is all about selling Obama. Palin is all about selling herself. And she's all cute and folksy. "It's gonna be okay." She is projecting optimism.

So, she had to call him Senator Biden. She's glad to be able to speak directly without "filter" of media commentariat.

As with Obama and McCain, Palin went to Biden's area of expertise and held her own. Even though she did not get specific, I think she wins. But Biden did right by not attacking Palin and always going after McCain.

She did a great job, but I don't think the fickle polls will bounce. Too late for that.

Maddow thinks she was too gimmicky and way-over caricatured.
Buchanan thinks she was phenomenal. Astonished at how well she did.

I think they're both right, but the crisis and bailout are too present in people's minds. Palin was powerful, but you wouldn't want to put her in charge. Not now. Not anymore.

Palin did skip a lot of the questions. If people picked up on that, she didn't win. If they didn't pick up on that, she did. This was Ifill's failure to keep Palin on point. She must have been cowed by the McCain attacks on her role as moderator.

And now we know the next focus of the McCain campaign will be: "We're looking forward, Obama's looking backwards."

Armageddon Trades

Where to put one's money in tough times? As it turns out, Soup and Tasers are decent and familiar standbys. I also have to like the chances of the Vice Fund, since when tough times come, people will still drink, smoke, and gamble.

Ifill's bias

FOX NEWS claims Gwen Ifill is unfit to host the Vice Presidential debate this week, since she has written a book about Obama:

Questions are being raised about the objectivity of Thursday's vice presidential debate moderator after news surfaced that she is releasing a new book promoting Barack Obama and other black politicians who have benefited from the civil rights struggle.

Ifill's book, "The Breakthrough: Politics and Race in the Age of Obama," is due to be released about the same time the next president takes the oath of office.

In her book, Ifill contends that the black political structure of the civil rights movement has cleared the way for post-racial politicians to ascend to new heights.

Now some are wondering whether Ifill can be fair and balanced, and whether she should be the moderator of Thursday's 9 p.m. ET debate.

"Clearly her books aren't going to do as well unless Obama wins, so it looks like she has some investment, literally, in one candidate or the other. And she's supposed to be sitting there as a neutral arbiter during the debate," said NPR's Juan Williams, a FOX News contributor. "I think the world of Gwen Ifill but I know there's a perception problem."

Has Juan Williams always been a wanker and a stooge? He writes the most insufferable pieces for the Wall Street Journal and he is one of the more meaningless of the Sunday morning pundits. Does he get so much face time because he is a Black Conservative? There are others less annoying.

Speaking of annoying:

FOX News political analyst Michelle Malkin argued in a post on National Review that Ifill is "so far in the tank for the Democratic presidential candidate, her oxygen delivery line is running."

Personally I think Gwen Ifill is a fine example of someone with a pretty obvious personal liberal bias who strives to be an objective and professional journalist. And generally succeeds. I only sort of believed this until I read that Malkin post; now I believe it stridently.

"Loss Aversion and the Stock Market"

I thought a lot of the share transfers now occurred automatically following a set algorithm. If that is true, how does that amplify loss aversion? Sell! Sell! Sell!

The Frontal Cortex : Loss Aversion and the Stock Market

Over the next few days, lots of people are going to be poring over their investment portfolio, trying to figure out which stocks to keep and which stocks to sell. Unfortunately, many of these investors will make the exact same mistake, causing them to lose vast sums of money over the long term.

The problem is loss aversion. Kahnemanandtversky stumbled upon loss aversion after giving their students a simple survey, which asked whether or not they would accept a variety of different bets. The psychologists noticed that, when people were offered a gamble on the toss of a coin in which they might lose $20, they demanded an average payoff of at least $40 if they won. The pain of a loss was approximately twice as potent as the pleasure generated by a gain. Furthermore, our decisions seemed to be determined by these feelings. As Kahneman and Tversky put it, "In human decision making, losses loom larger than gains."

Loss aversion also explains one of the most common investing mistakes: investors evaluating their stock portfolio are most likely to sell stocks that have increased in value or, during a week like this, have gone down the least amount. Why? Because it hurts to take a loss. Unfortunately, this means that people end up holding on to their depreciating stocks. Over the long term, this strategy is exceedingly foolish, since it ultimately leads to a portfolio composed entirely of shares that are losing money. (A study by Terrance Odean, an economist at UC-Berkeley, found that the stocks investors sold outperformed the stocks they didn't sell by 3.4 percent). Even professional money managers are vulnerable to this bias, and tend to hold losing stocks twice as long as winning stocks. Because selling shares that have decreased in value makes the loss tangible - and losing sucks - we try to postpone the pain for as long as possible. The end result is more losses.

Take a hint: refuse to panic

“You don’t make the biggest financial decision in the history of this country in a few days’ time without hearings.”

-Rep. John Yarmuth, KY(D)

And in case anyone missed it:

European shares were mixed Tuesday, following a similar pattern in Asia, as investors refused to panic about the failure of American lawmakers to pass a financial bailout and were encouraged by gains in futures contracts on Wall Street indexes.

So nice of them to "refuse to panic." What a joke.

Seriously, the bailout sucks

Uncle Joe Stiglitz has an awesome break-down of the bail-out at The Nation. (Awesome because I agree with it. Nice to have someone of his stature backing me up on this.)

. . . the banks realized that they were about to get a free ride at taxpayers' expense. No private firm was willing to buy these toxic mortgages at what the seller thought was a reasonable price; they finally had found a sucker who would take them off their hands--called the American taxpayer.

The administration attempts to assure us that they will protect the American people by insisting on buying the mortgages at the lowest price at auction. Evidently, Paulson didn't learn the lessons of the information asymmetry that played such a large role in getting us into this mess. The banks will pass on their lousiest mortgages. Paulson may try to assure us that we will hire the best and brightest of Wall Street to make sure that this doesn't happen. (Wall Street firms are already licking their lips at the prospect of a new source of revenues: fees from the US Treasury.) But even Wall Street's best and brightest do not exactly have a credible record in asset valuation; if they had done better, we wouldn't be where we are. And that assumes that they are really working for the American people, not their long-term employers in financial markets. Even if they do use some fancy mathematical model to value different mortgages, those in Wall Street have long made money by gaming against these models. We will then wind up not with the absolutely lousiest mortgages, but with those in which Treasury's models most underpriced risk. Either way, we the taxpayers lose, and Wall Street gains.

Here are the reasons Congress should not hand the Treasury $700 billion.

There are four fundamental problems with our financial system, and the Paulson proposal addresses only one. The first is that the financial institutions have all these toxic products--which they created--and since no one trusts anyone about their value, no one is willing to lend to anyone else. The Paulson approach solves this by passing the risk to us, the taxpayer--and for no return. The second problem is that there is a big and increasing hole in bank balance sheets--banks lent money to people beyond their ability to repay--and no financial alchemy will fix that. If, as Paulson claims, banks get paid fairly for their lousy mortgages and the complex products in which they are embedded, the hole in their balance sheet will remain. What is needed is a transparent equity injection, not the non-transparent ruse that the administration is proposing.

The third problem is that our economy has been supercharged by a housing bubble which has now burst. The best experts believe that prices still have a way to fall before the return to normal, and that means there will be more foreclosures. No amount of talking up the market is going to change that. The hidden agenda here may be taking large amounts of real estate off the market--and letting it deteriorate at taxpayers' expense.

The fourth problem is a lack of trust, a credibility gap. Regrettably, the way the entire financial crisis has been handled has only made that gap larger.

Paulson and others in Wall Street are claiming that the bailout is necessary and that we are in deep trouble. Not long ago, they were telling us that we had turned a corner. The administration even turned down an effective stimulus package last February--one that would have included increased unemployment benefits and aid to states and localities--and they still say we don't need another stimulus. To be frank, the administration has a credibility and trust gap as big as that of Wall Street. If the crisis was as severe as they claim, why didn't they propose a more credible plan? With lack of oversight and transparency the cause of the current problem, how could they make a proposal so short in both? If a quick consensus is required, why not include provisions to stop the source of bleeding, to aid the millions of Americans that are losing their homes? Why not spend as much on them as on Wall Street? Do they still believe in trickle-down economics, when for the past eight years money has been trickling up to the wizards of Wall Street? Why not enact bankruptcy reform, to help Americans write down the value of the mortgage on their overvalued home? No one benefits from these costly foreclosures.

The administration is once again holding a gun at our head, saying, "My way or the highway." We have been bamboozled before by this tactic. We should not let it happen to us again.

Instead, put the gun down, and consider these simple ideas for how to structure the bailout:

The objective of the bailout should not be to protect the banks' shareholders, or even their creditors, who facilitated this bad lending. The objective should be to maintain the flow of credit, especially to mortgages. But wasn't that what the Fannie Mae/Freddie Mac bailout was supposed to assure us?

There are alternatives. Warren Buffet showed the way, in providing equity to Goldman Sachs. The Scandinavian countries showed the way, almost two decades ago. By issuing preferred shares with warrants (options), one reduces the public's downside risk and insures that they participate in some of the upside potential. This approach is not only proven, it provides both incentives and wherewithal to resume lending. It furthermore avoids the hopeless task of trying to value millions of complex mortgages and even more complex products in which they are embedded, and it deals with the "lemons" problem--the government getting stuck with the worst or most overpriced assets.

Finally, we need to impose a special financial sector tax to pay for the bailouts conducted so far. We also need to create a reserve fund so that poor taxpayers won't have to be called upon again to finance Wall Street's foolishness.

Praise the Lord, I finally found someone who looked at what this might mean for the debt. Stiglitz asserts our debt is now $9 Trillion, so my earlier figure was on the board. Looks like NYT was looking at an outdated figure?

If we design the right bailout, it won't lead to an increase in our long-term debt--we might even make a profit. But if we implement the wrong strategy, there is a serious risk that our national debt--already overburdened from a failed war and eight years of fiscal profligacy--will soar, and future living standards will be compromised. The president seemed to think that his new shell game will arrest the decline in house prices, and we won't be faced holding a lot of bad mortgages. I hope he's right, but I wouldn't count on it: it's not what most housing experts say. The president's economic credentials are hardly stellar. Our national debt has already climbed from $5.7 trillion to over $9 trillion in eight years, and the deficits for 2008 and 2009--not including the bailouts--are expected to reach new heights. There is no such thing as a free war--and no such thing as a free bailout. The bill will be paid, in one way or another.

Hat tip to Rdan. Check out the comments if you have steel stomach.

Cutting off one's nose? House rejects Wall St. bailout!

The House just voted down the bailout. Bam! Luckily, I had Veuve Clicquot on ice for just such an occasion.

TV punditocracy is saying the Leadership didn't work hard enough to sell the bailout, and people don't understand this will affect their ability to get loans, etc. While few people truly understand the bailout (I don't), I think most understand there is a serious crisis looming. People are pissed at these fat cats who have been gorging themselves the past eight years, and I think many feel the satisfaction I do at cutting our nose to spite the gluttons' face. We'll see if businesses can't meet payroll because of this, but gauging from Drew Pooters, unpaid labor doesn't cause enough of a stir in this country.

Two cents: there's no guarantee this thing would have worked. If the system stinks, why would this do the trick? And if it didn't, how many more trillions would we throw in the hole? And what about inflation? And the debt?

Congress should cancel its vacation and take the time necessary to figure this thing out. The markets will wait for them.

Buckley's got his grin on

News Flash: Washington Mutual collapsed after Hispanic Business recognized its commitment to diversity.

At least the National Review doesn't consider me a spic. Excuse me while I go smash Krikorian in the goddamn face.