Tag Archives: tarp

The Bailouts Benefited Everyone, Not Just Bankers

From NYT: Bernie Sanders: To Rein In Wall Street, Fix the Fed

WALL STREET is still out of control. Seven years ago, the Federal Reserve and the Treasury Department bailed out the largest financial institutions in this country because they were considered too big to fail. But almost every one is bigger today than it was before the bailout. If any were to fail again, taxpayers could be on the hook for another bailout, perhaps a larger one this time.

To rein in Wall Street, we should begin by reforming the Federal Reserve, which oversees financial institutions and which uses monetary policy to maintain price stability and full employment. Unfortunately, an institution that was created to serve all Americans has been hijacked by the very bankers it regulates.

When the fed bailed out the banks, they, in essence, bailed out the most productive people. By throwing Wall St. a lifeline, the fed and congress sequestered the problem parts of the economy, allowing the healthier parts such as Web 2.0, retail, Silicon Valley, e-commerce, venture capitalism, and biotech to thrive instead of being dragged down by the ailing banking sector. That is something few understand – they think it was just bankers who got bailed out, but pretty much every productive person benefited at least indirectly from the bailout, which by 2011 finally turned a profit despite all the predictions in 2008-2009 of its failure.

Everyone wants to blame capitalism and Wall St., but pity the loser homeowner who thought it was a good idea to buy a 6,000 square-foot McMansion on $40,000 income with zero down.

Financial regulation is doomed to fail because you cannot regulate stupidity, but that doesn’t mean everyone has to suffer for the mistakes and stupidity of some, which is why bailouts have become an unavoidable part of modern capitalism. It’s like choosing the lesser of two evils: risk moral hazard or risk things getting worse?

Sanders also ignores how bank balance sheets are the healthiest they have ever been and that non-performing loans are at record lows, suggesting that banks have reformed their lending practices:

Credit scores for mortgage originations are rising:

Subprime lending has also collapsed, and mortgage debt is back to it’s long-run trend after a bubble in 2003-2008.

If any were to fail again, taxpayers could be on the hook for another bailout, perhaps a larger one this time.

While taxes did rise in 2013, it was not out of economic necessity, but rather due to gridlock and Obama’s refusal to compromise by cutting certain programs (for example, raising the Medicare eligibility and slowing increases in Social Security costs by reducing cost-of-living adjustments). The bailouts turned a profit by 2011, and by 2014 the treasury reported profits of $15 billion on TARP. Can the same be said for welfare programs like disability, Obamacare, free emergency room treatment, social security, and food stamps. I think not. Although some welfare is probably necessary to avoid disruption, it’s disingenuous for liberals to pretend to be looking out for taxpayers, yet simultaneously advocating policy that greatly adds to the deficit and produces negative long-term economic value. Welfare liberalism is reverse Darwinism: throwing more money at the losers of society while at the same time punishing the successful with higher taxes and more regulation. And then they wonder why the economy isn’t growing fast enough or not enough jobs are being created.

Liberals like Sanders think they are ‘saving’ mainstreet, looking out for our ‘best interests’ by attacking the fed, when in reality they advocate policy that would destroy wealth and punish the most successful and productive.

Related: Don’t Blame the Fed – Blame Stupid People, Liberalism, Democracy

Obama Should Give His Nobel Prize to Bernanke

If Obama can get a Nobel Prize for doing nothing (and then later being a lousy president), maybe Bernanke deserves one for merely saving the economy in 2008?

Full employment without inflation is in sight. The central bank did its job. What about everyone else?

Agree, the central bank did a good job by stemming the bleeding. The consumer did its job by consuming. And Silicon Valley did a good job by innovating. But Obama? No. Obama’s presidency has been marred by great failures: foreign policy (Syria, Iraq, and Afghanistan), the economy (cash for clunkers, the Dodd Drank bill which predictably did nothing, and a failed trillion-dollar stimulus that didn’t create jobs, and more), domestic issues (siding with looters and against the police in the Treyvon Martin and Michael Brown deaths, blaming the ‘gun lobby’ and the NRA for shootings), and healthcare (Obamacare, which will greatly add to the deficit in upcoming years at little benefit).

Even Reuters, which tends to be impartial, can’t help but to notice the abject failure of Obama’s Middle East policy:

In Syria, U.S.-trained rebels surrender supplies and ammunition to al Qaeda-linked insurgents. In Iraq, the battle by American-backed government forces against Islamic State is at a stalemate. In Afghanistan, the Taliban seize a provincial capital for the first time since their ouster in 2001.

The administration is also weighing a proposal to scale back its failed $580 million program to train Syrian rebels to battle Islamic State, U.S. officials said.

The Obama doctrine has floundered partly due to weak national governance in Iraq and Afghanistan, and the failure of moderate Syrian opposition groups to overcome their rivalries.

Putin, in taking the initiative in Syria and Iraq, is making Obama look like a bigger wimp than otherwise thought possible.

Even liberals will admit Obama failed, for not being liberal enough, but a failure nonetheless. The overall consensus by economists is that Obama’s policies contributed little, if any, to the post-2008 recovery. It was Bernanke and Geithner (the Competent Duo) who did all the heavy lifting, with Obama taking all the credit similar to how he took credit for the killing of Bin Laden despite the fact all the important intelligence work was done by the prior administration, and that Bill Clinton ignored intelligence warnings about Osama. Had Bush been given another four years, not only would the stock market have surged, but the economic recovery would have been stronger because there would have been no Obamacare or budget impasses.

Does anyone honestly see a light at the end of this tunnel of prosperity, or are we delusional to believe it’s a freight train heading right at us? The 2nd (or was it 3rd? Whatev) LONGEST Bull market in US HISTORY just occurred….F”N history!! And it’s going to keep going, thanks to consumer spending, low interest rates, exports, rich foreign consumers, and the economic and scientific contributions of high-IQ people both in America and all over the world.

Profits, earnings, and stock prices keep making new highs:

Higgs boson today, Grand Unified Theory of Everything tomorrow? All over the world, from Silicon Valley to Manhattan, from Caltech to MIT, smart, high-IQ people are innovating, creating wealth for themselves and the broader economy.

(the ADS/CFT correspondence showing how quantum effects are on a lower dimensional boundary than relativistic/gravitational ones)

Bernanke, in saving the day in 2008, threw a lifeline for smart people, mitigating the mistakes made by dumb people so that the healthier parts of the economy (web 2.0, technology, retail) could thrive without being weighed-down by the ailing sectors (housing, financial).

The bailouts are interesting because it’s an application of pragmatism and consequentialism, both pillars of ‘grey enlightenment’ – the bailouts being an example of policy that is unpopular and anti-populist but a success. The system may occasionally suck, but it works. Things do get better, and those who hold their stocks amid the panic can reap substantial gains. Typically, there is no problem that can’t be easily remedied by super efficacious policy in congress and global central bank coordination, although the growing entitlement spending problem could be a concern down the road. Congress deserves a round of applause for saving the financial system in 2008 and not impeding in the subsequent economic & stock market boom with excess regulation and activism. Bernanke deserves a Nobel Prize for defying all the critics and enacting what may be the most successful monetary (or any policy for that matter) policy in the recent history of the United States, even more so than the lionized former fed chairman Paul Volcker who in the early 80′s caused the market to crash and the economy to enter a severe recession by unnecessarily raising interest rates too quickly.

Part 1. Misconceptions About the 2008 Financial Crisis

The subject of the The 2008 banks bailouts (TARP), which understandably angered both Republicans and Democrats, a pertinent case study in pragmatism, in which other otherwise inviolable free market was temporary suspended for the ‘greater good’ of the economy, but ultimately, in spite of great criticism, the bailouts proved to be a success, or at the very least a Pyrrhic victory. Sometimes, as in the example of TARP, the most effective policy is the one that no one likes, sort of like bad tasting medicine that you want to spit out, and this compromise between short-term sacrifice and pain and long-term success underscores the trio of rationalism, utilitarianism, and pragmatism – in contrast to traditional left/right policy that seeks immediate gratification even if such policies prove useless and wasteful in the long-run. Part two will discuss TARP and its aftermath in further detail.

Although its been seven years since the ratification of TARP, many misconceptions about the program, as well as the 2008 financial crisis, remain, which I discuss in detail in an earlier article, Defending Finance: Why Bankers and Economists Are Not to Blame for the Crisis.

Economists are generally better at fixing crisis than predicting or preventing them. The fact 99% of economists failed to predict the crisis doesn’t render the profession useless or economic policy ineffective. If an oncologist cannot actually prevent someone from getting cancer, or predict when someone will get cancer, does that mean oncology is a useless profession? Doctors can create risk profiles, but this alone cannot predict who will get sick and when.

Homeowners share some of the responsibility in terms of reckless borrowing and not reading the fine print. Did anyone really think it was a good idea buying a 6,000 square-foot mc-mansion on a $40,000/year income? It’s simple common sense, and people who are lacking in it should and do pay the price.

Institutions and wealthy individuals who bought mortgage backed securities, often in search of extra yield, like homeowners, bear personal responsibility for their own bad decisions, poor risk management, and poor market timing. Just because Goldman or whoever sold these products doesn’t mean they were guilty. Is an ETF provider guilty because their ETF falls in value? No, the ETF is created to meet a market demand for the underlying asset, and the ETF creator, as per the prospectus, has no culpability whether the product succeeds or fails.

As I explain in the article linked above, contrary to popular belief, people did go to jail for mortgage fraud. From the WSJ:

In the three years since the crisis peaked in October 2008, the Justice Department has filed financial-fraud cases against 14,843 defendants, according to the letter to Mr. Grassley. Over that time, it said, more than 1,100 people have been sentenced to prison for mortgage fraud.

The letter names 17 CEOs and other senior corporate officers convicted of significant financial crimes. Most of the 17 committed frauds that weren’t directly related to the financial crisis. They include Allen Stanford, convicted in March of running a Ponzi scheme; Raj Rajaratnam, jailed last year for insider trading; and Zevi Wolmark, who pleaded guilty this year to bid-rigging in the municipal-finance market. Courtney Dupree, convicted last year of a $21 million bank fraud, makes the Justice Department’s list.

The left keeps ignoring these details, parroting the same line that no one went to jail for mortgage fraud.

But then why were so few, if any, executives punished? One reason is that it’s very difficult to actually build a high-profile criminal case. Unlike TV and movie crime dramas that are settled in under an hour, government cases take years to build, and even longer in court, exhausting hundreds of millions of dollars and tens of thousands of man-hours. In light of this, defendants will often agree to pay a fine and admit no wrongdoing, even when gilt seems obvious.

As explained by NyBooks, The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?, one reason for the lack of high-profile convictions is because prosecutors are targeting firms rather than individuals; second, since 911, for the FBI fraud has taken a backseat to counter-terrorism; third, that the SEC is going after Ponzi schemes, which are much easier to prove criminal intent than, say, investigating the sale of complicated mortgage-backed securities; and, finally, individuals and firms that bought mortgage backed securities are considered ‘savvy’ investors, as opposed to naive ‘mom and pop’ investors.

Another possibility is that no fraud was actually committed, but rather the system collapsed due to ‘good intentions’ in increasing home ownership, which later went horribly wrong. The crisis also involved mistakes in risk management by firms, and mistakes are not illegal. The sudden failure of the housing market, as well as many financial institutions, was a multi-sigma event that firms were not only unprepared for, but could not have possibly foreseen. Few foresaw that securities which were marked ‘AAA’ would become worthless in less than a year.

The same liberals who want the banks to fail and Wall St. to burn fail to realize that it was their polices that contributed to the mess in the first place. The Clinton administration, as well as various other liberal pressure groups, were complicit in inflating the housing market by forcing lenders to create risky loans to meet quotas. From Wikipedia, Government policies and the subprime mortgage crisis:

The Department of Housing and Urban Development (HUD) loosened mortgage restrictions in the mid-1990s so first-time buyers could qualify for loans that they could never get before.[131] In 1995, the GSE began receiving affordable housing credit for purchasing mortgage backed securities which included loans to low income borrowers. This resulted in the agencies purchasing subprime securities.[132]

The Housing and Community Development Act of 1992 established an affordable housing loan purchase mandate for Fannie Mae and Freddie Mac, and that mandate was to be regulated by HUD. Initially, the 1992 legislation required that 30 percent or more of Fannie’s and Freddie’s loan purchases be related to affordable housing. However, HUD was given the power to set future requirements. In 1995 HUD mandated that 40 percent of Fannie and Freddie’s loan purchases would have to support affordable housing. In 1996, HUD directed Freddie and Fannie to provide at least 42% of their mortgage financing to borrowers with income below the median in their area. This target was increased to 50% in 2000 and 52% in 2005.

“The National Homeownership Strategy: Partners in the American Dream”, was compiled in 1995 by Henry Cisneros, President Clinton’s HUD Secretary. This 100-page document represented the viewpoints of HUD, Fannie Mae, Freddie Mac, leaders of the housing industry, various banks, numerous activist organizations such as ACORN and La Raza, and representatives from several state and local governments.”

Thus, in the year 2000, HUD Secretary Andrew Cuomo increased to 50 percent the percentage of low-income mortgages that the government-sponsored entities known as Fannie Mae and Freddie Mac were required to purchase, helping to create the conditions that resulted in over half of all mortgages being subprime at the time the housing market began to collapse in 2007.

Since the government, particularly under the Clinton administration, played such an important role in the crisis, criminal proceedings would be tantamount to the government being its own plaintiff and defendant. Do you think Eric Holder would go after one of his own? Fat chance.

The left wants fordable housing and high-paying job for everyone – provided that companies and individuals are not allowed to make too much money. And it’s always Republicans’ fault when things go wrong.

Bailouts, Obama, and Debt

From Christopher Cant-think-well:

And Then The Market Crashed Anyway

He writes:

You might recall that incident, when George W. Bush said he had “abandoned free market principles to save the free market system,” don’t you? Lotta good that did.

Last time I checked, it may have done a lot of good. The S&P 500 has surged 100% since TARP, and earnings have more than doubled. There are other factors besides TARP for the post-2008 rally, but the consensus is that TARP was a success far exceeding anyone’s expectations, and the money was repaid in 2011.

That catastrophe was followed by a two term Obama presidency, the Orwellian named “Affordable Care Act” (Obamacare), staggering increases in taxes, regulatory burdens, and government debt.

I agree the Obama presidency has been more or less a failure. It only ‘succeeded’ because it wasn’t as bad as it theoretically could have been, thanks to congress for at least trying to curtail Obama’s power. I opposed the auto bailouts and the Obama stimulus (American Recovery and Reinvestment Act of 2009), arguing that unlike TARP such programs were a waste of money, and most economists agree the Obama stimulus was ineffective. The stock market is rallying in spite of Obama, not because of him. Thank Bush, Bernanke, free market capitalism, low taxes, foreign investment, the tireless consumer, high-IQ, and web 2.0 for the post-2008 recovery, don’t thank Obama. Same for the success of the war on terror an the killing of Osama…thank Bush, not Obama.

The debt is high, but it would have still been high with 8 years of Mc Cain or Money..maybe not as high, but still high. And it wouldn’t matter that much, as inflation is still low and debt repayments as a percentage of GDP are near historic lows:

If you call yourself a ‘realist’, as Christopher Cantwell does, that means having to confront economic reality, even if you don’t necessarily like it or agree with it. You can’t call yourself a realist and then go about picking and choosing the ‘reality’ that confirms your preexisting beliefs and ignoring the ‘reality’ that disagrees.

Alexis Tsipras, the Greek Prime Minister, has resigned and called for snap elections – which he is expected to win – in the wake of abandoning his campaign promises and accepting a third round of European bailouts in exchange for austerity measures he campaigned against. Further adding to political and economic uncertainty in Europe.

This statement has nothing to with stocks, and anyone with a working brain cell knows Greece is a basket case, anyway.

In China, following a massive drop in stocks which occurred in late June, the Chinese central bank responded with a rate cut. That didn’t stop their markets from dropping another 7 percent shortly after. The Chinese government responded with a series of measures aimed at propping up the stock market, like further rate cuts, government backed stock purchases, and halting the sales of some shares. That didn’t prevent their steepest one day drop in 8 years on July 27th. The Chinese government did everything they could imagine to prop up the market.

But that isn’t proof that the programs were ineffective. Instead of falling 7%, without such programs it may have fallen 27% – we don’t know. If the goal was preventing any subsequent decline, then yes it was failure. But when there’s a crisis, due to the ‘flight to safety’, borrowing costs for reserve economies to plunge, making the bailout effectively free. Small economies tend to have the opposite situation of money fleeing during crisis.

Far from securing our futures, our as of yet unborn children are saddled with debts so massive we would never dare contemplate taking them on ourselves

No one actually pays the debt all at once. It’s continuously rolled over. The only reason why taxes went up in 2013 was because of Obama’s refusal to compromise, not out of economic necessity. As I explain earlier, America’s reserve currency status is keeping borrowing costs relative to GDP very low. Here is the debt pie chart:

But a large portion of the debt is held in funds that will never sell even if the dollar does weaken. All interest paid to the Federal Reserve is returned to the treasury. For all the hype over China dumping debt, they control only 8%.

Thee Cheers for Washington: America Stands Alone

From Yahoo Finance: Three cheers for Washington

In case you haven’t noticed, we are in another one of those America-stands-alone moments, at least in terms of our economic strength, (notwithstanding a weakish jobs report for March.) I say moments because it won’t last forever. It’s a state that always comes and goes. But compared to where we were? What a difference seven-and-a-half years makes!

Yet again, smart people save the day; libs lose.

At the depth of the financial problem, the left was ebullient at the prospect of America and its elite going down the tubes – but it didn’t, thanks to pro-growth, efficacious policy, such as TARP, that smothered those leftist dreams of a post-America world. Instead, the rest of the world (except China) went down the tubes, in what has been a rise of the West and a decline of the rest. The cognitive and financial elite have only become more powerful and influential, as signified by the Nasdaq revising 5000 (despite the left predicting in the early 2000′s that Nasdaq 5000 would never happen again in our lifetimes) and the unending, interminable web 2.0 & Silicon Valley real estate ‘bubble’ that leaves the left in fits for its refusal to pop. America’s pillars of economic, cultural and institutional dominance have also been strengthened in the post-2008 world, too. America’s most prestigious, selective institutions of higher learning and intellectualism, the Ivy Leagues, Caltech, and MIT, are meccas of innovation and talent, drawing applications from high-IQ students the world over. Same for America’s most envied, admired tech companies such as Google Facebook, and Snapchat. Google gets over three million job applications a year, but only accepts 7,000. Fed policy has been a success, so much so that the European Central Bank has launched their own QE. US stocks keep going; the S&P 500 is now 200% from it’s March 2009 lows, but fundamentals, not QE, is what is mostly driving this rally. The rest of the world, however, has had much more sluggish stock market performance since 2009. And much more sluggish inflation-adjusted economic growth. Compared to other G-8 nations, America is kicking ass:

Now Russia finds itself in a situation of low growth and high inflation (stagflation), joining the ranks of economic losers like Latin America, Australia, and Turkey. America and China, unlike some of those primitive countries, doesn’t depend on oil for its growth; we have high-tech and intellectual property, which is not subject to the whims of macro fluctuations. And we have reserve currency status.

Related:

The System Worked: How the World Stopped Another Great Depression

America is Still #1

Seth Godin’s Nod to Consequentialism

From The panic tax

1. The cost of ameliorating panic in your system is always less than the cost of the lost productivity when panic hits. In other words, all the other steps are worth it

Agree. That’s my rationale for supporting TARP, in that the nominal cost of the bailout (about $700 billion) was dwarfed by the indirect (staved off panic, rising stocks, improved confidence) value it created. Sometimes the best policy is the polity no one likes, but creates the most indirect value, boosting the ‘common good’. As measured by indirect value, TARP may have had the highest ROI of any government program in recent history.

The System Worked: How the World Stopped Another Great Depression

Found this gem on Amazon that somehow eluded my attention until today, The System Worked: How the World Stopped Another Great Depression

In The System Worked, Drezner, a renowned political scientist and international relations expert, contends that despite the massive scale and reverberations of this latest crisis (larger, arguably, than those that precipitated the Great Depression), the global economy has bounced back remarkably well. Examining the major resuscitation efforts by the G-20 IMF, WTO, and other institutions, he shows that, thanks to the efforts of central bankers and other policymakers, the international response was sufficiently coordinated to prevent the crisis from becoming a full-fledged depression. Yet the narrative about the failure of multilateral economic institutions persists, both because the Great Recession affected powerful nations whose governments managed their own economies poorly, and because the most influential policy analysts who write the books and articles on the crisis hail from those nations. Nevertheless, Drezner argues, while it’s true that the global economy is still fragile, these institutions survived the “stress test” of the financial crisis, and may have even become more resilient and valuable in the process.

Agree. Despite all the whining from the left about moral hazard and printing money, economic policy during the 2008 financial problem – and after – has been a resounding success. And don’t think for a second that I’m giving Obama credit for it – this is still the Bush boom because his policies (along with Bernanke and Paulson), not Obama’s, saved the economy. But not only thank the ‘four musketeers‘, thank the cognitive elite who create innovative companies like Facebook, Tesla, Uber and Snaphap, as well as the spendthrift US consumer. The evidence of America’s economic comeback is overwhelming: stocks keep making new highs, profits & earnings, exports, and consumer spending – all at record highs. Given all these positives, in retrospect, TARP was a bargain and succeeded beyond anyone’s wildest expectations. The left, including Peter Schiff, Taleb, Roubini, and Shiller all got it wrong – there was no relapse of 2008, no double dip, no bear market, no hyperinflation, no dollar collapse, an no ‘Greece-like’ collapse of the system. Even Krugman was wrong in that the sequester and cutting entitlement spending didn’t lead to a double dip recession; the economy and stock market just laughed it off. Other libs, such as Joseph Stiglitz and the vertically challenged Robert Reich intimated, incorrectly, that widening wealth inequality would lead to a crisis – wrong again. What gets lost in the partisan finger pointing is that policy makers are better at solving economic problem’s than predicting them, and Drezner writes, whether it’s TARP, QE, or the maligned but necessary bailouts an austerity in Europe, they, the global central banks, did indeed rise to the occasion.

This review is better than my own:

“If you find yourself disagreeing with Drezner, you need to take a good hard look at yourself and what you are doing with your life… this detailed, knowledgeable and cogent book is required reading for everyone in the global governance field — and anyone who wants to know how, bad though things have been since the global financial crisis, they might have been a hell of a lot worse.” –Alan Beattie, Financial Times

Agree..instead of being a liberal who whines about things like too big to fail, the fed, wealth inequality and the debt being too high, you need to take as look at your own life an ask yourself, ‘Am I projecting my own personal failings, frustrations, and cognitive shortcomings on the otherwise strong economy?’ No one forced these losers to sell their stocks at the bottom in 2008 or buy a crappy overpriced home in the exurbs in 2006, nor is it the fault of Wall St. bankers, the Fed, and Washington that millions of Americans are simply not smart enough to participate in the strong economic recovery and the post-2008 wealth creation boom. If you have a room temperature IQ or you majored in ‘stupid shit’ in college and cannot find a job with your worthless degree, tough luck. There’s always going to be winners (cognitive elite) and losers (the left side of the Bell Curve); makers (the cognitive elite, the creative class) and takers (the growing underclass that Charles Murray writes about in Coming Apart and The Bell Curve).

The events of 2008 could have been worse, and the left wanted things to get worse to, first, get Obama elected and, second, destroy the wealth of the rich. That’s why you have the Schiff-tards allying with Barrack Sanders in attacking Wall St., web 2.0, and the fed. Their approach is different (the welfare left wants higher taxes and more regulation, the other left wants high interest rates and to somehow eliminate the national debt), but the end result is the same: the destruction of wealth that mainly hurts the 1%. If the fed were to come out and heed Schiff’s advice to raise rates to 4%, the stock and bond market would be annihilated, and although things would probably recover, there is no need raise rates when virtually every economic indicator is signaling low inflation. It’s just bad policy that would hurt millions of Americans who have equity in stock and real estate. Prematurely raising interest rates would also push the economy into a recession, hurting business owners and causing all sorts of problems. Despite being a proponent of Reaganomics, my only criticism is Volker’s unnecessary and economically deleterious crusade on inflation, which pushed the economy into a severe recession.