The beautiful and the damned

[Ash1972]

Quote from darkhorse:

Size is not irrelevant by any means. The get out of jail free card is "systemic risk." There is a reason why they bailed out AIG and Citi and not the Bumbershoot Bank of Kalamazoo Kansas.

As for two easy things, as Mencken observed for every complex problem there is a solution that is neat, simple and wrong.

You're talking about a number of different things here:

1. Citi needed to be bailed out precisely because it was a deposit taking bank gambling in the markets with depositors' money. My suggested 2 steps would have prevented the need for any bank bailout. Its size truly *IS* irrelevant.

2. Once bank bailouts became necessary BECAUSE my 2 steps had not been implemented, why then bailout Citi but not Kalamazoo? My guess is because Federal deposit insurance will probably work for K but clearly won't for Citi - it will simply be overwhelmed.

3. AIG was not a bank and didn't hold any depositors' cash. So why the bailout? The standard response was that the sudden disappearance of such a large player would cause a liquidity crisis in the markets - an argument that clearly didn't apply to Lehman for some reason. A man more cynical than myself would say that Treasury Seccy Hank wanted to make sure Goldman got payed on all those OTCs AIG owed it.

Simple solutions may not be 100% effective but the big thing in their favour is that they're better than nothing and also SIMPLE. They stand some chance of being put into force.

 

[MarkJC]

Quote from Scataphagos:
"Let them die"? We wouldn't do that in America. However, forced "wealth redistribution" is BS. Nobody deserves a middle-class lifestyle... paid for by others.... simply because they were born. Rather, I'd like to see more of an Darwinistic environment.

Right. The system should be set up solely so that people have the opportunity to work hard, better themselves, and climb the ladder of prosperity. This is how America once was and what attracted so many immigrants at one time - not free welfare benefits for all, but the opportunity to make a living by the sweat of your brow. It was the generations of people, many immigrants, with strong work ethics that built America, and it's people with that mindset that we need in our country once again.

Many of the asian country cultures have this inherent mindset of a strong work ethic, and as their economies become more and more capitalistic, their hard work is earning dividends. Their economies are growing at blistering rates while our own continues a stagnating decline as the principles that made this country great are thrown to the wayside more and more.

 

[Eight]

Quote from Locutus:

What you don't seem to get is that there's such a thing as undeserved wealth. The problem I have is that EMPLOYEES (of financial institutions, CEO's and executives in general) are being paid in terms that are disproportional to their productivity, not in the least due to a little gem known as establishmentarianism. The upper levels basically decide each other's wages and they have chosen to enrich themselves in ways that I - and others - consider unfair in relation to their contribution to society.

In the "old days", the only real way to become that rich (in proportion to the mean) was to increase the value of your equity in a smart way (very cunning investing, entrepreneurship etc) but certainly not by being an employee. This is one of the things that is gobbling up the entrepreneurial soul of the US.

I'm not against disproportionate wealth in general - provided it is not being generated by employment.

I don't get this "undeserved" thingy... who they hell are you to tell us what people deserve? Rockefeller Republicans believe that freedom is only for the "deserving" and they gave us things like the War On Drugs where "undeserving" people get their property confiscated without a trial... and the poor deserve more money? Bullshit, they deserve good working conditions, freedom from crime in their neighborhoods, etc. but more money going to them just because somebody else has more.. wow, that's theft of the rich man's property by way of Government!! THEFT!! My Bible says theft is a bad thing and one evidence of that is the meltdown of Russian Communism and the current worldwide meltdown of Socialism.

 

[nooby_mcnoob]

Quote from Ash1972:

A man more intelligent than myself would say that Treasury Seccy Hank wanted to make sure Goldman got payed on all those OTCs AIG owed it.

FTFY. No way it went down for any other real reason.

 

[1prometheus]

"It was the generations of people, many immigrants, with strong work ethics that built America, and it's people with that mindset that we need in our country once again."

I here this all the time, and to some extent I disagree. The people who created America (English) were colonists and explorers, not immigrants. Immigrants come to someone else's country, the former CREATE countries.

 

[darkhorse]

Quote from Ash1972:

You're talking about a number of different things here:

1. Citi needed to be bailed out precisely because it was a deposit taking bank gambling in the markets with depositors' money. My suggested 2 steps would have prevented the need for any bank bailout. Its size truly *IS* irrelevant.

No, Citi had to be bailed out because of systemic risk, which is a size issue. If Citi had been smaller, the bondholders could have been told to go pound sand.

To say size is irrelevant based on your 2 rules is like saying a fat man's eating habits are irrelevant to heart attack risk because all one has to do is make him live a healther lifestyle. It's a tautology.

Quote from Ash1972:


3. AIG was not a bank and didn't hold any depositors' cash. So why the bailout? The standard response was that the sudden disappearance of such a large player would cause a liquidity crisis in the markets - an argument that clearly didn't apply to Lehman for some reason. A man more cynical than myself would say that Treasury Seccy Hank wanted to make sure Goldman got payed on all those OTCs AIG owed it.

Yes, re, Hank and Goldman, a man more cynical than yourself would be closer to the truth. The system is not neutral, it is deliberately rigged in favor of the largest and most connected players. This is a natural Darwinian result as enabled self-interested parties act aggressively in their own best interests and accumulate back-room advantages over time. The tendency for special interests to accumulate undue power and influence in the shadows is precisely the reason why both capitalism and democracy fail in the absence of vigilance, given a long enough period of time. Google an article from The Atlantic called "The Quiet Coup" by Simon Johnson; it is one of the best things written in the past few years and will give more insight into this dynamic.

Quote from Ash1972:

Simple solutions may not be 100% effective but the big thing in their favour is that they're better than nothing and also SIMPLE. They stand some chance of being put into force.

The value of a simple solution is in proportion to how realistic the odds are of said solution being implemented. To the degree that simple solutions are severely restricted, impossible, or more end goals than solutions with no clear sense of practical first steps, they are not real solutions at all.

Obesity again provides a natural example. America is fat; America's health is in endangered; the health of America's woefully immobile children is endangered. The "simple solution" is for everyone (on average) to eat less and exercise. But is this really a solution? No. It is a desired transition state, of blindingly obvious utility, with the real obstacles and problem-solving issues being in regard to how to facilitate that transition state -- getting people to consistently eat less and exercise in the first place.

 

[darkhorse]

Quote from 1prometheus:


I here this all the time, and to some extent I disagree. The people who created America (English) were colonists and explorers, not immigrants. Immigrants come to someone else's country, the former CREATE countries.

 

[1prometheus]

The Indians were a displaced and conquered people. The settlers who populated the west did not "Immigrate" to a nation built by Indians. Rather, they displaced them and took their land. Big difference.

For at least the past 100 years, most all immigrants have come here to capitalize on (and contribute to) an already created nation. They did not create the nation, as such they were immigrants.

Quote from darkhorse:

 

[denner]

Quote from darkhorse:

Volcker had some ideas. They ignored him and then turfed him out of town.

The odds of facing such a situation again have increased, and deliberately so. The number one lesson learned from the global financial crisis was "bigger is better." Bigger asset bases, bigger coverups, bigger bailouts, bigger risks.

Also, it's not really a matter of creativity. The answers are not complicated or especially creative. It's more a matter of struggle. How do you get the mob out of the sanitation business? Multiply that problem by an order of magnitude.

Exactly. The timeline spans decades I'm certain, but by the mid-1990s the real evidence of embedded moral hazard became apparent. The 1994 Mexican crisis with the following tidbit:

"The Mexican "bailout" attracted criticism in Congress and the press for the central role of the former Co-Chairman of Goldman Sachs, U.S. Treasury Secretary Robert Rubin. Rubin used a Treasury Department account under his personal control to distribute $20 billion to bail out Mexican bonds, of which Goldman was a key holder."

In 1998 we had LTCM and the unprecedented leveraging of illiquid debt instruments, which required more intervention to make the counter parties whole.

By 1999 the repeal of Glass Steagall enabled an enormous concentration of risk and massive leveraging with GUARANTEED bailouts in the event of another financial crisis as depositor institutions would be held hostage towards more subsidy.

From 2002-07 we witnessed exponential growth in OTC derivatives amongst the concentrated group of investment banks and insurance companies with ties to consumer deposit bases. The transformation of once private investment banks into publicly traded companies..All of it a move towards the furtherance of this embedded moral hazard play.

So here we stand today with a few less investment banks, a number of less retail oriented banks and a bevy of Chase, Bank of America and Citibank branches on each and every street corner. The coup is complete.

 

[darkhorse]

Quote from 1prometheus:

The Indians were a displaced and conquered people. The settlers who populated the west did not "Immigrate" to a nation built by Indians. Rather, they displaced them and took their land. Big difference.

For at least the past 100 years, most all immigrants have come here to capitalize on (and contribute to) an already created nation. They did not create the nation, as such they were immigrants.

It's a matter of perspective really.

Apart from natural resources, a great strength of countries like the United States and Australia has been the ability to benefit from cultural assimilation, i.e. welcoming in new cultures as such that creative dynamism increases on the whole. (For instance, when an outflux of brilliant Russian scientists fled the broken USSR post-Berlin Wall, where did they go?)

In sum, one could counter the implied thrust of your argument with a credible claim that America on the whole is a nation of immigrants and a country made great by immigrants. Contrast this to the sclerotic societies of, say, Europe or Japan or the Middle East, where immigration assimilation efforts have largely been an exercise in cultural segregation and a costly failure.

Another way to look at it is in terms of opportunity cost. Can a competitive multi-strategy hedge fund afford to discriminate on the basis of anything but performance? Does it matter whether a star trader or analyst is from Croatia, South Africa or Bangladesh? Not at all. In the same way America has long benefited from its historical discrimination blindness in terms of providing opportunity to those who seek it. In fact things really got going (circa turn of the 20th century) when influxes of immigrants came in waves to fill those huge opportunity gaps. Read Gladwell's "Outliers" and the specific chapter on New York's garment district for an example of this.

At any rate, this comes round to defining the problem again... a significant problem with "crony capitalism" or "connected capitalism" is not the fostering of an us vs. them mentality or a locals vs immigrants mentality, but instead a gradual depletion of opportunity for those who are not plugged into the system. Consider, for example, why large and well-staffed organizations actually tend to favor expensive bureaucracy rather than shun it. They see it as a competitive barrier that makes it harder for upstarts to compete. Socialistic efforts to preserve a bloated financial power structure have the same pernicious effect. We just aren't used to recognizing the problem because it feels counter-intuitive to observe that the biggest welfare queens ply their trade in Washington and on Wall Street.