Wednesday, September 17, 2008

"Look at Me, I'm a Billionaire!"

I’ve thought long and hard about what I plan to do with my stakes in Fannie Mae, Freddie Mac, and AIG, and I can come up with only two answers:



But then those are my answers for how to spend every unexpected windfall. I guess I could use my ownership of so many foreclosed mortgages to set myself up with a home. Or at least go around my neighborhood foreclosing on some poor neighbors (like the people on Harvard Rd. somewhere around the intersection with Summerfield Way who park at the very back of their driveway so their rear bumper always extends over the sidewalk, even thought they have, like, 30 feet between the front bumper and the garage door). It turns out I get a lot of mileage out of this “Napoleon Dynamite” quote: “There’re just so many choices.”

The Friendly Jerk has a big problem with government seizing private businesses. He said they should be allowed to fail to make the decision-makers pay the price of their poor decisions. He said, “People need to learn a lesson.” I said, “There’s a scale of responsibility. How much are they going to have to bear, and at what cost? They aren’t getting away from this without having any pain; the government owns 80% of AIG now, and they insisted on a price for Bear Stearns of two dollars per share when the market value was something around $20. But they are getting something out of it, and that’s because the collateral pain required to make them pay the full price would be too great. You could make AIG bear 80% of the pain, and only 1,000 people lose their jobs, or you could make them bear 100%, and then the business’s failure pulls down other businesses and tens of thousands of people lose their jobs. What good does a failed AIG do the economy? Now thousands of people no longer have life insurance or homeowner insurance? And you can’t even argue that’s fair because they should have done due-diligence before selecting their insurer, since a lot of insurers use AIG as a reinsurer. So a private individual might have done a great job picking a sound insurance company, but then that company used AIG as their reinsurer, and now you want that guy to lose his insurance to learn a lesson? What lesson is there to be learned by those people? The people who have to learn the lesson are learning it from the terms of the loan.”

He said, “I don’t like the government taking over segments of the economy we’ll never get back.” I said, “They already took over those segments. This isn’t new policy; this is the result of 70-year-old regulations from Roosevelt and Glass-Steagall, from the Depression. Fannie Mae and Freddie Mac were a problem 60 years in the making, since the government allowed the public to view those companies as publicly-backed. When they had problems, the government had to seize them. But Stearns was screwed on the terms of its sale, so much so that a few weeks later it was renegotiated up to $10 a share, which was still less than half the market price.”

He said, “Detroit’s next on the list.” I said, “I think financial service businesses have more of a claim to public bailout than manufacturers. You have to look at connectedness. GM isn’t financially connected to enough other segments of the economy. If they failed, it wouldn’t really be a problem. That was the government opinion about Lehman.” As an aside, though, I think if Lehman Brothers hadn’t happened over a weekend, there would have been a bailout. Luckily for us, it didn’t go that way.

Now, the thing is, even with all this conversation at work today, I hate bailouts. I hate government ownership of anything. I think roads and the postal service should be privatized, and in a perfect world, the government would lease its buildings and own no land (instead of owning over 80% of Nevada). I watched this clip of Jim Cramer this morning (he’s only yelling for the first ten seconds; after that he calms way down), and I thought it was incredibly accurate when he paraphrased Nixon to say, “We’re all Communists now.” But the alternative is a Great Depression to honor principles. I can make that decision for myself, maybe, but I would have a hard time arguing that someone else should lose his job for the idea of a free market, and I think most Americans would take a dim view of that as well. I mean, look how much everybody hates Hoover, and that guy tried everything he thought he was allowed to do to get us out of the Depression. (It took someone like Roosevelt, who didn’t care what he was allowed to do, to turn the Depression into a decade-long fiasco).

(Aside: listening to this MSNBC clip again, I want to stab most of the panel in the neck. The one guy brings nothing to the table but a lame "optimist/pessimist" joke, the lady seemed to get her job because she can respond to everything with, "Oh, geez! Oh, no!" and someone just said, "This was the result of greed." Well, duh. But not the greed he wants you to believe it was. This was the greed of the average American, who wanted to own homes he couldn't afford and take equity out to buy jacuzzi bathtubs and tall lattes. Without that, these problems don't exist.)

Title quotation from Homer Simpson.


Cristin said...

The problem with making roads, etc. private is that what about people that can't afford to go on them? I guess those people would have to work, which sounds nice in theory and I agree that everyone should work, but we both know that there are people who can't or are just lazy.

Anyway, I can't wait to hear what your wife thinks about your great plans with the money.

Erik said...

"We are all communists now"
True true...The more the government owns, the more Socialist we all become. "To big to fail" is not an acceptable attitued, and I agree with Crammer that the Head of the SEC needs to be removed and redone. The folks that were in charge of overseeing Fannie and Freddi also need to get thrown under the bus.

JT said...

Excellent clip. I feel better now about my concentrated investment portfolio in the 'good banks' of Wells Fargo (horrible customer service) and Bank of America. I hate the idea of bailouts even if the lack thereof creates economic failure. I can say that only because I have never lived through a total failure. Your argument about bailouts makes much more sense than my total justice driven perspective of market failures. Your argument is that these bailouts are not bailouts for micro-level failures, but prevention of macro level failures. Isn't the basic premise of the open market is that micro level failures will occur, but macro level failures won't?