Life, Liberty & The Pursuit of Happiness

Enticing private capital? Call it a rescue effort, not a bailout.

by Rakinder Grover

Some information on the "toxic assets plan" expected to be announced by the Treasury next week has begun to surface.  It includes a lot of enticements to get private capital to participate in the purchase of "troubled mortgages".  One of the biggest potential obstacles in getting this all to "work" is politics.  An excerpt from an article in the NY Times:

"Still, the Treasury Department’s biggest obstacle may be the current political environment in Washington, where Democratic lawmakers are furious about the pay packages and bonuses received by executives at companies being rescued by taxpayers.

Many investment executives said they were worried that participating in any bailout program would expose them to political wrath and potentially steep new restrictions on their own pay.

Treasury and Fed officials have remained firmly against imposing any restrictions on pay for companies investing money in the rescue effort rather than receiving money from it."

Is there much of a difference between highly subsidized "investing" and just receiving money?  I expect some polished sales talk from the Treasury and the Administration to try and prevent the populist anger from rising as it did this last week. Oh, the sad circus continues....  if only the government would just stay out ...

A Lynch Mob! ... and the disengagement of private enterprise

by Rakinder Grover

A good article by David R. Kotok in The Big Picture compares the recent action in the House of Representatives with that of a lynch mob.  Besides the issues of the violation of the rule of law, the abrogation of contracts and property rights, that have been raised by some over the last few days, he also highlights the real and immediate risk of businesses becoming extremely cautious.  Careful, lest their profit seeking activity attract the ire of a populist lynch mob, private enterprise is likely to try and stay as far as it can from government. With the expanding scope of government, that is becoming increasingly harder to do, so the risk translates to a retrenchment of private enterprise unsure of the rules, risks and rewards.  This does not portend well for economic recovery, innovation and freedom in general.

AIG: Moral Hazard and Corporate Looting

by AW

AIG is the mother of all TBTF ("too big to fail") institutions; it has already received 180 billion dollars of taxpayer money so far. This bailout is larger than that for any other financial institution, and it is widely expected to go higher. How could a staid insurance company be in the center of this?

James Hamilton in his EconBrowser blog explains the moral morass of "selling insurance" like snake oil. Here is an interesting story line that is emerging.

Bad Banks: The Road To Economic Hell

by Anurag Wadehra

Simon Johnson, of the brilliant blog Baseline Scenario, made two posts of exceptional clarity:

How to save the banks proposes a clear solution, the best one I've heard so far. Simply put, it is:

• Government should fire the bankers and maybe the board
• Then mark all illiquid assets to market value
• Sell all or parts of the bank to new private equity investors
• And then get out.

To do this, government shouldn't use stock with voting rights but warrants which convert to common stock after the restructuring, giving taxpayers the best shot at upside. 

Satyam Gets Eaten By The Tiger: Reality

by Anurag Wadehra

By now, the spectacular flameout of Satyam, the fourth largest Indian IT firm, is front page news. The obvious irony - Satyam means truth in Sanskrit - has not escaped the media.

What is more instructive however is the utter lack of irony or remorse in the CEO's letter to the board, in which Ramalinga Raju brazenly defends his actions to procure more funds by duping fresh victims right till the very end. This brief letter offers a remarkably clear insight into Raju's ethical framework, or rather the lack of it.

Celebrating Creativity

by Anurag Wadehra

A way to kick-start the new year, and buck the gloomy news all around, is to spend 10 minutes on this inspirational 10X10 list: Top 10 Innovative Business Ideas in Top 10 Industries.

From zany, funny and absurd to curious, profound and serious: they are all here.

Some of my favorites: balloon-enabled pizza delivery, miniature tennis for tots, private banking by a shoe-box, and urban helmets that fake a cap.

  

No point ruing the fact that most of these ideas won't make it - that's just the law of innovation. Celebrate the creativity and the zeal behind them.

Astute Contrarian Thinking by Peter Schiff

by Rakinder Grover

For 2 years, I've been hearing Peter Schiff on TV with his predictions
and he's been laughed at by most people.  Look who's laughing now.

Lesson: the laws of economics always hold - you eventually have to pay
for your reckless behavior. Government intervention in the form of
printing money may seem like it's solving the problem but it's an
illusion for the short term.  It makes the problem much worse when the
bubble eventually (and it always does) bursts.

Here's a good recent interview with Peter Schiff:
Part 1: http://www.youtube.com/watch?v=TP_aJ7LcAAA
Part 2: http://www.youtube.com/watch?v=coaI3d89kuA

And its' worth watching these videos showing what he's been saying for
years and how he's been laughed/ scoffed at:
http://www.youtube.com/watch?v=2I0QN-FYkpw

http://www.youtube.com/watch?v=T1_Yo2BGdUk

Moral Hazard Debate

by Anurag Wadehra

According to Wikipedia, "Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions."

In an article on Uncle Sam As Sugar Daddy, Bill Brown a former Wall Street executive correctly identifies the moral hazard at the heart of the financial bailout: 

Gold: Back in Fashion?

by Anurag Wadehra

It is time to call on the mat the shenanigans of central bankers. Their primary skill is in fiddling with interest rates first to dampen "irrational exuberance" when an asset bubble forms and then to "stimulate" our economy with easy credit when it bursts. Central bankers across the world, after all, are the final arbiters of their fiat currencies that seesaw as "overvalued" or "undervalued" against one another. 

This behavior of central bankers has only abetted the financial artists and the havoc caused by their exotic debt instruments. In her article on stable money, Judy Shelton raises the question: Why can't we just have money that works -- a meaningful unit of account to provide accurate price signals to producers and consumers across the globe?

General Motors, Please Go Bankrupt

by Anurag Wadehra

In his WSJ article, Michael Levine states simply: GM should be allowed to go bankrupt.

If GM were told that no assistance would be available without a bankruptcy filing, all options would be put on the table. The web could be cut wherever it needed to be. State protection for dealers would disappear. Labor contracts could be renegotiated. Pension plans could be terminated, with existing pensions turned over to the Pension Benefit Guaranty Corp. (PBGC). Health benefits could be renegotiated. Mortgaged assets could be abandoned, so plants could be closed without being supported as idle hindrances on GM's viability. GM could be rebuilt as a company that had a chance to make vehicles people want and support itself on revenue.