By HARM follow 2007 Aug 27, 4:25am 2 links 46,844 views 201 comments
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First came Jim Cramer's incoherent rant on the hedge fund/Wall Street meltdown, then came Bill Gross's semi-coherent plea to POTUS for a federal bailout of his struggling PIMCO bond funds the overleveraged U.S. homedebtor. Given that these are two of the most vocal and public commentators in the sphere of media finance/capitalism, it seems fair to ask: are these men true capitalists?
Now, I am not one to lecture others on the tenets and/or history of capitalism. I was studying literature and journalism, while many of the regulars on this board were immersed in B-school. Nonetheless, given my limited exposure to macro/micro economics, I vaguely remember a lecture or two about the virtues of creative destruction (i.e., the healthy, natural market process whereby businesses that are poorly run and/or engage in excessive risk tend to go out of business). I also recall a cautionary tale or two about the moral hazards created when government attempt to impede this necessary process. It's been a long time since macro-econ 101, but I distinctly recall Adam Smith saying something about an invisible hand that rewards good financial risk management and penalizes poor risk management, and that this was a *good* thing --not a bad thing, as Mr. Cramer and Mr. Gross both seem to think.
This begs the question: if capitalism is *only* allowed to work freely in ONE DIRECTION (up), is this really capitalism? If the people who habitually make poor financial decisions are always bailed out by those who did not, what sort of behavior does this encourage in the future? Are these Wall Street "Masters of the Universe" who are clamoring for a taxpayer/Fed bailout really capitalists, or something else?
I leave you to ponder this along with one of my personal all-time favorite truisms:
PRIVATIZE PROFIT, SOCIALIZE RISK
P.S., kudos to Jim Grant for his excellent Op-Ed in the Sunday NYT: "capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich".
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This begs the question: if capitalism is *only* allowed to work freely in ONE DIRECTION (up), is this really capitalism?
In a word, NO.
However, "real" capitalism is also incompatible with democracy.
"Bill Gross's semi-coherent plea"
Man, ain't THAT the truth! Although not nearly as pyrotechnic as Cramerica's meltdown, it was equally unhinged. It all but assured there will be no cooperation from Washington. You can't just go around using the most derogatory term you can get your hands on, shout it from the roof tops and then expect to gain favor with same said person?
At least... "I've" never had much luck with it.
We don't call him Helicopter Ben anymore. We call him B52 Ben. That much is going to be dropped to save the banks, funds, GSEs that will go under in coming days...
Some modestly good news for Randall & Co:
Marin can't shake fallout from mortgage meltdown
The 'news' coming out of DinOR country is a little different, though:
Local broker: Market here ‘alive and well’
Lessons for today: Get rid of the shag carpet and stop thinking the national news about housing markets applies to this side of the country.
First, take a look at national headlines. They’ll scream, “Is the housing market getting worse?” or “Has the housing market bottomed out?”
Maybe it has everywhere else but not in Oregon — and definitely not in Portland or its surrounding communities, including Tigard, Tualatin and Beaverton, according to local agents.
The trouble seems to be that not very many people realize this.
“What’s going on nationally is not necessarily relevant to the local market,” said Brian Bellairs, principle broker at Meadows Group.
Thank God for those valiant professionals at the Tigard Times, tirelessly toiling to clear up common misperceptions, like the national credit crunch affecting the oh-so-special and local OR markets. Especially nice the way they rely on those industry 'professionals' for unchallenged and unsubstantiated opinions. Never mind those Gloom-n-Doomers at the WSJ or NYT, corporate journalism and perma-bullishness is alive and well in Tigard!
Randy's Theory of Capitalism and Free Markets (condensed version):
Nearly everyone living in a democratic, free market capitalism hates it. What they enjoy is the spoils of capitalism and the efficiencies of the free market. But when that system demands changes or concessions on their part, they are socialists to the bone.
The above is true irrespective of political ideology. It makes no difference whether one is a so called liberal or conservative. Even self proclaimed libertarians most often turn out to be socialists at heart.
And the more one relies upon free markets as either a god or a devil, the more likely they are to be socialists, usually without even knowing it. And certainly without ever admitting it.
Listen carefully to those who shout most loudly on either extreme. The practical ramifications of their rhetoric is almost exclusively socialistic in nature.
It's easy to pick on Ayn, but this is one area in which she had the contemporary body politic nailed.
Too funny! One of the comments from "Leo" ( just above your's ) was spot on as well. He noted that this "feel good" piece had all the ear markings of other market's sentiment 6-12 months ago! He's right, we're just late to the "party".
Marin can’t shake fallout from mortgage meltdown
Funny funny funny. A realtor(tm) from a house I looked at months ago just called Sunday and told me that XXX had been reduced on final time -- yes for a big whopping 0.875% -- and that this is your last chance to buy it before they take it off the market for good!
So now it's "buy now or be locked out forever because the seller won't sell to you, mister mean, cheap, greedy buyer".
Did you ever wonder why the NYSE has "curbs" when it goes down but not when it goes up? And isn't That the same Jim Cramer who was just recently on you-tube going on about how easy it is to manipulate the market?
But when that system demands changes or concessions on their part, they are socialists to the bone."
Capitalist with my money, Socialist with yours
Build mass transit for others to use, freeing up he roads for me
Curbs go both directions, up and down. They limit program trading volatility.
Program Trading "Collars"
A collar on program trading firms instituted by the NYSE is most commonly referred to on CNBC as "curbs in". The NYSE applies program trading curbs whenever the NYSE Composite Index (NYA) moves 190 points higher, or 190 points lower than the previous day's closing price.
Are these Wall Street “Masters of the Universe” who are clamoring for a taxpayer/Fed bailout really capitalists, or something else?
Randy H Says:
Curbs go both directions, up and down. They limit program trading volatility.
And IIRC, the upside trading curbs did go into force for a while on the day of the cut in discount rate.
Great thread topic. I think Randy H has it pinned down - when push comes to shove, we all look to Uncle Sam for a bailout. It's human nature. When you can't handle the pressure, you ask mommy or daddy for help.
IMO, the only real way to create a true capitalistic society, or for starters, one that at least has some semblance of free market principles, is to seal off the deciders from the masses. That means the HF managers, IB CEOs and what not have no direct line to Bendover Ben and pals. Of course this is impractical, but on the other hand, it doesn't help when Hank Paulson is the ex-CEO of Goldman Sachs. I'm sure HE's not influenced by his Wall Street pals...
Curbs go both directions, up and down. They limit program trading volatility.
I thought delta-hedging is no longer fashionable...
A true capitalist society is as rare as a true communist society. None of these ideologies are truly compatible with human nature.
To me, the difference has always been about one thing and one thing only: Force (or coercion).
A truly free person (capitalist, if you will) will detest force. Everything is voluntary. You have a service to offer or goods to sell; the buyer either wants that or not.
A socialist, on the other hand, uses force and feels that is the solution to problems. Take someone;s money away by force and use it to "solve problems".
Imagine if the federal government didn't have the authority to do all that coercion.
Scene: ['World' News show on local telly]
Bryan, The Personal Finance Reporter: "And so, at this point, the direction of the stock market depends on whether the expectation of a rate cut in September will turn out to be real."
Katherine, the talking mannequin: "Well, thank you Bryan - let's certainly hope for the best, come September."
WTF? Has the notion of stocks going up all the time become such an article of faith that news-anchors are now openly rooting for it as "the best" outcome no matter what?
[Not their real names, I didn't care to figure out what they were.]
Katherine and Bryan have side businesses as Realtors. :)
"Quentin Hardy says Wall Street is looking for the Federal Reserve to be its `love monkey`."
I don't know how many of you out there are interested in this sort of thing, but here's a nifty new Google maps plugin for calculating your neighborhood's relative "walkability": http://walkscore.com/
Unfortunately, my neighborhood scored a poor 26/100 :-(. On the bright side, though, Rob Dawg would probably say the tool is hopelessly TOD-biased and therefore irrelevant.
Thanks for the link to the OpEd in NYT. As much as the moronic calls for a bail-out are coming out, we are also seeing some nice rebuttals. Grant is a well known person and NYT is widely read. All hope is not lost.
We all said many times that Bernanke is in an unenviable position. The man seems to be doing a decent job. The cries for rate cuts have been going on forever and the rate has not changed for a year now. The discount rate window stuff is not a bail-out. The problem with that was the timing - that it happened on an option expiration day.
But of course with housing downturn picking momentum and election getting closer it's showtime for BB. We will know soon.
It is amusing that Bill Gross, "Mr. Bond Trading Master" has turned out to be a Pinko Commie.
It is even more amusing how "free market" enthusiasts preach the gospel of the free market untill it decides to punish them for their own mistakes, then they come crying to their hated Government to bail them out.
A bailout would only make the situation worse. The housing bubble was fueled by the same thing that underlies all asset bubbles: rampant creation of credit/debt. The only reason real estate prices rose so much is because people were willing to take on the largest debt burdens in history in order to bid them up. And the only way they could "afford" their houses was to take on interest only and adjustable rate loans. When borrowers need to take out such suicidal loans just to service their debt, especially in a period of extremely low interest rates by historical standards, it should raise red flags for the astute observer.
The downside of this bubble is the same as all historical asset bubbles: the market punishing bad decision making. Because the boom occurred on a massive scale, the punishment will also be applied on a massive scale. Those that took on mortgages they could not afford will default, those that invested in the asset backed securites holding said mortgages will not have all their principle payed back to them, and the pain will ripple though the system. The dark side of Capitalism -- Joseph Schumpeter's "Creative Destruction."
So what exactly are we to do about the people who are going to lose their homes? Admittedly, some of them are likely victims who were lied to by unsrupulous lenders, but the majority of them just wanted to get in on the boom and make a whole bunch of money on a real estate "investment" like their neighbor did. We could certainly use our tax dollars to pay their mortgages, but what kind of message does this send to the people who made the correct decision not to jump on the bandwagon and buy an overpriced house? It creates moral hazard and undermines the functioning of the system by tacitly encouraging stupid decisions.
Obviously, I think that we should let the market work its course and clean out the bad debt. It most certainly will destroy the bad debt that has no chance of being paid back, that is unless we have the Government go into even more debt to pay it back. The Government attempting to help with housing "affordability" is a big part of what started this whole mess in the first place--and housing doesn't look so "affordable" right now, does it? History has shown that it will be a lot easier on the majority of us if we take the pain now rather than trying to keep pushing it off into the future. The reason Japan had a deflation for 15 years after their stock bubble followed by a real estate bubble (sound familiar?) was because the Bank of Japan did everything it could to prop up all the bad debt that was taken on during their boom years. It all defaulted anyway, but the pain was spread over 15 years in a slow motion train wreck rather than having a quick crash and getting it over with.
There used to be a joke that "A conservative is a liberal who got mugged and liberal is a conservative who got arrested."
Adapting this to be the punchline for this topic is an exercise for the reader. :-)
I was talking to a friend about this bail-out topic and it suddenly struck me that there is an excellent analogy for this.
Imagine if the government did for everyone gambling in Las Vegas! Would it be better for the common good? Would it even be better for the gamblers in the long run?
How is the wall street any different?
When it comes to the market, don't you need to have a loser so you can identify who the winner is ? I mean, what we call money is just a number that is used for keeping score. The smartest guys in the room can only play their games for so long before it all unwinds. Just once I would like to see the financially responsible win. Let's hope.
One might consider this an extension of Randy's point above---I'm often amused at how conviniently people define "financially responsible" in their own image. Who's to say that the savers are the financially responsible ones? Defined in traditional measures like putting down a 20% downpayment, that's the cultural notion of "responsible", as defined by the last few decades. In other cultures and time periods, a 20% downpayment would probably be seen as ludicrously small. Today maybe it's too much.
Perhaps the bulls, brokers, gamblers and hedge fund managers think they are the financially responsible ones. Instead of piling up money in dead assets, they are investing in the economy, which in turn creates wealth and jobs. They deserve to see that success protected. And there is nothing wrong with lobbying the government. It's a democratic republic, after all---every citizen can have their voice. Should wealthy people not exercise their additional influence simply because Joe Saver lacks such means?
Reserve your moral outrage for the people who lied on loan applications or deceived their clients. Getting busted for taking excessive risks is just a part of capitalism. But you can't expect the busted parties to just bow their heads and shuffle out quietly. Fighting to keep your assets is part of capitalism, too. So long as they don't break the law, that is a proper functioning of our economy.
Unfortunately, we will probrably have enough of a bailout to stop houses from falling in price to the proper level. This artificial higher level will increase house costs for future buyers/renters, since the pressure to sell or rent out will be relieved.
If new loans require down payments, that will put take people out of the buyers pool and add them to the supply of renters. Thus rents will go up for the houses that are available for rent.
People may have to realign their thoughts on home expense. A house cost that was typically 1/3rd of a families take home pay will now become 1/2 of the take home pay.
I know that higher mortgages should lower demand for house purchases and thus add to homes available for rent, but this is the factor I think a bailout will suppress. I say this because I live in a 1 million population metro area that has 5 large military bases. The military quarters allowance acts as a mini-bailout for this area. Asking rents here have increased, homes that were $1400 last summer are now $1800.
Interesting point of view.
It reminds me of a newspaper article about credit cards. The article refuted the idea that people who paid off their credit card bills every month were acting responsibly. Instead, such "thrifty" folk were said to be merely freeloaders, using for their convenience a system supported on the backs of the minimum payment crowd. Exploiters. if you will.
Defined in traditional measures like putting down a 20% downpayment, that’s the cultural notion of “responsible”, as defined by the last few decades. In other cultures and time periods, a 20% downpayment would probably be seen as ludicrously small.
Right. The ancient Aztecs required 30% down, and the Babylonians required 40%! (However, they had a base 60 numbering system which makes comparisons more difficult.) Further, the Trobriand Islanders require a pigskin full of conch shells AND high tide insurance, and that's no small potatoes...
The word 'mortgage' is feudal Anglo-Norman meaning 'dead wage' basically, an amount that was going to pay off your pitiful homestead and 1/4 acre farming lot to the guy you bought it off. The borrowing aspect has come about as banking products have evolved, and the 20% is a prudential amount set by the banks to cover their asses in the event of a property downturn of up to 20% where they also have to foreclose on you and they can therefore recover 100% of their costs at your expense. The banks have adjusted their risk profiles over time to the point today where we see 0% deposit loans with self-reported income and no docs, both inflating prices and setting up a credit disaster waiting to happen... and no-one in the banking or govt finance sector saw any of it coming! Amazing.
HeadSet: My objection is mostly to the emotion and moral overtones of these conversations. In your example, if paying off the credit card debt was the highest financial return activity for that person, then they made the financially responsible choice. They have certainly not deceived anyone by paying off the balance. However, a person carrying a balance hasn't deceived anyone either. They have simply made a different choice. We can argue the merit of that choice based on math and common sense, but not on moral grounds.
"The word ‘mortgage’ is feudal Anglo-Norman meaning ‘dead wage’ "
I noticed the "mort" (dead) in "amortize" also. I assumed it meant the loan "died" after a series of payments.
Getting busted for taking excessive risks is just a part of capitalism.
But you can’t expect the busted parties to just bow their heads and shuffle out quietly.
And why the hell not? When I went close to 4 years with mainly marginal/temp work in the early 90s recession, I ended up with thousands in late/collection fees tacked onto my already large student loan balance, which I had to repay with interest. I faced what (at the time) appeared to be lousy future prospects of ever paying it off, and felt incredibly depressed and quite hopeless.
At the time, I was told by many a more fortunate Boomer/Silent Gen (who themselves had little or no college loan debt at my age) that I should "suck it up" and "stop whining". I was told that learning to repay my debts was a character-building experience and would teach me the downside of leverage. In the end, of course, I did just that, and I later realized that they were basically right. Took me 11 years and much in the way of fogone gratification, few luxuries like eating out/movies, vacations, no new cars, etc.
If I had to make good on my debts, why should parasitic motherf*ckers like hedge fund managers and Ponzi scheme specuvestors get a free pass courtesy of taxpayers?
"they are investing in the economy, which in turn creates wealth and jobs. They deserve to see that success protected.
I hope you were being tongue-in-cheek with this. What "wealth" have these debt-pushing parasites created? What product/service have they produced that was of any benefit to society? What have they accomplished except lining their own pockets via asset speculation, with the added "benefit" of bankrupting a sizeable chunk of the middle and working class?
You were joking here, right?
here used to be a joke that “A conservative is a liberal who got mugged and liberal is a conservative who got arrested.”
Even more OT, but a variation on this I've heard is that, "if you're young and not a liberal, you're heartless. If you're old and not a conservative, you're stupid."
The word ‘mortgage’ is feudal Anglo-Norman meaning ‘dead wage’
I've heard that, too. However, I was always hoping that the real meaning for "mortgage" re: mort = death was that you paid the thing until you were basically dead.
My post was intended to be in the same spirit as your post.
Instead of logos, the newspaper article used good ol' ethos. The article claimed it was immoral per se to pay the balance each month.
HARM says: If I had to make good on my debts, why should parasitic motherf*ckers like hedge fund managers and Ponzi scheme specuvestors get a free pass courtesy of taxpayers?
Let's separate the emotional aspect from the financial mechanics. You can't argue that your life sucked thanks to your finances, and thus all financial failure must result in peoples' lives sucking. Sometimes people get lucky and sidestep a bullet, and you can't really begrudge them that.
From a pure financial mechanics perspective, if you had access to a method of curing your debts via your contacts and influence, would you not have done so? These guys have the importance and means to tap their powerful friends for favors. Unless it's outright corruption, what moral flaw exists there? The printing presses don't run for Senor HARM, but they might run for Bernanke's buddies. Is that wrong? Money is just a tool, after all, and it can't be "fair" to everybody at every moment ("fair" in quotes because that's subjective anyway).
HARM says: What “wealth” have these debt-pushing parasites created? What product/service have they produced that was of any benefit to society? What have they accomplished except lining their own pockets via asset speculation, with the added “benefit” of bankrupting a sizeable chunk of the middle and working class?
They used their cleverness to generate very large returns on their investments. Isn't that what all of us aspire to financially? A great many VCs, private equity firms and hedge funds have invested into sectors like biomed, tech, industrial, financial and real estate. Those investments create jobs and keep the economy moving forward. Sure there are a few real jerks, but for the most part these guys are straight-up investors who become employers and producers in the U.S. economy.
I fail to see how anyone has "bankrupted a sizeable chunk of the middle and working class." You're going to have to fill me in there.
Appreciate your contrarian point of view. But pimping houses to each other does not CREATE real wealth, only an illusion of wealth.
Now how much of the responsibility rests with borrowers, mortgage brokers, brokers of MBS, buyers of MBS, rating agencies, politicians, Fed etc will be an eternal debate.
It was all probably perfectly legal. If no one broke the law, no one gets punished. Clamoring for the bail out is also their legal right. Ridiculing them as cheap un-capitalistic is our right and we are right in doing so.
So "might makes right" then? The end justifies the means, especially if your rich/well connected enough to be above the rules and basically buy your way out of debtor's prison?
Hmmm... questionable ethics, there.
I fail to see how anyone has “bankrupted a sizeable chunk of the middle and working class.” You’re going to have to fill me in there.
In case you haven't heard, a lot of people out there took on some dodgy mortgages to buy houses they could not afford --some by choice, others due to questionable bait-n-switch tactics and/or outright fraud by commission-hungry brokers. Foreclosures and bankruptcy filings --despite so-called BK "reform"-- are up and rising. As we get further into the current multi-year cycle of option-ARM resets, we can reasonably expect these levels to rise even higher.
A great many VCs, private equity firms and hedge funds have invested into sectors like biomed, tech, industrial, financial and real estate. Those investments create jobs and keep the economy moving forward.
Conflating actual entrepreneurs (like Randy) who add real value, create real jobs and build real products with toxic-debt pushers insults the real entrepreneurs. These assholes (brokers, neg-am/NINJA lenders, MBS/CMO pimps) are the Wall Street equivalent of neighborhood drug pushers.
Changing tracks here a little bit.
Isn't Evergreen area of San Jose part of Bay Area ? It was another "hot" area which the rich Asian immigrants were supposed to keep high forever. It seems to be in a bit of trouble though.
The inventory id over 500 now ! It never went above 400 in 2006. ZipRealty shows over 100 reduced listings for prices less than 1M.
One sad case is for MLS 743115.
Desperate situation. Running out of time. Divorce sale huge house with a pool and spa.
And an interesting case where the cut the price by 40K after one week on the market. MLS 744952.
It's time to officially declare Evergreen as not part of BA. Prices can never fall in BA.