AskDong

Last night, I watched Clinton’s and Obama’s speeches after the Pennsylvania primary. There wasn’t too much new in the speeches. Watching Obama’s speech, however, I couldn’t help but notice three young men in a row sporting very prominently Abercrombie and Fitch T-shirts. At first, I didn’t think too much of it.

As the crowd cheered and banners were raised, I became suspicious. Thoese three men were less than enthusiastic. They lifted their Obama signs half heartedly, and clapped without vigor. I started thinking about the recent incident when Comcast paid attendees to take up the good seats at a FCC hearing. That was bad, but this if Abercrombie plants are in my opinion worse. Here’s a link to a video from CNN, and make your own judgment.  I just wrote the other day of the blurring of entertainment and advertising.  What I saw last night was the blurring of politics, public discourse, and advertising. If I were Obama, I would be immensley upset that my stage had been co-opted for product advertising.

If it were any other clothing company, I probably would not be as suspicious. However, Abercrombie and Fitch has a history or controversy, ranging from nudity to racism. I wouldn’t be suprised if that the three Abercrombie men were intended to stir controversy and free advertising for which I too am guilty of as I write about it.

I think there is a place for advertising, and consumerism even. There’s nothing inherently wrong with companies wanting to spread knowledge of their products. In the same light there’s nothing wrong with people wanting to buy those products. However, I increasingly feel that we as a society have crossed an invisible line in which consumerism has become an ends on itself.  Andy Warhol would be proud.

The recent of bailout of Bear Stearns have fanned the flames of class warfare. Personally I’ve yet to make up my mind if the bailout is a good thing or a bad thing. I don’t know enough about how Bear was tied up with other firms, and what it’s failure would’ve implied for the market as a whole. Without knowing all those facts it’s impossible to know what effect the collapse of the firm would’ve had on the entire financial market.

I’m not opposed to government intervention despite my seeming rant on the Fed’s Term Auction Lending Facilities. I think the Government has important role to ensure the market behave smoothly and fairly. I believe that role includes helping the neediest Americans so that they can get a leg up, and assisting the financial markets when they run into trouble that has the potential to cripple not only the US economy but the world economy.

Many people like to view bailouts of financial institutions through the prism of class of warfare, just as some of differenint political stripes view government assistance programs through the other side of the same lens. I certainly have my own politics, but see problem with neither. I believe what’s good for the goose is good for the gander. However, I’m probably more worried about moral hazard than treasury secretary, Henry Paulson.

Moral Hazard is typically used when talking about Insurance (and that’s really what Government intervention is). The classic example is that drivers may drive more dangerously when they know they’re covered by auto insurance. Moral hazard is not isolated to insurance. Moral hazard exists in many different situations in which the person or institution does not bear the full repercussions of risky behavior. In the case of Bear Stearns and other financial institutions, the moral hazard is that they will take on too much risk in lending and investing because they know the Government will bail them out in the end. Personal and Corporate Bankruptcy laws offer the same kind of perverse incentive to take too much risk.

I argue that moral hazard exists and is something that we need to be vigilant about. I do however agree with Paulson that we shouldn’t avoid action only in order to avoid moral hazard. Safety nets such as the government guarantees of Fannie Mae and Freddie Mac benefit consumers by lowering borrowing costs. Other insurance such as unemployment benefits help American workers stay on their feet in times of need. The crux of insurance and the conundrum of moral hazard is that risk is potentially socialized from the reckless to the prudent. This is the cost of being in tightly knitted and constructed society. Most of the time, I believe the benefits outweigh the costs.

I’m sure many of you noticed the nice “blip” up in the Market on Tuesday March 12th, and the subsequent tumble on Friday.  Wall Street reacted with joy and elation to the Fed’s most recent move. The Fed has been trying to pump money into the financial institutions over the last 6 months. It’s lowered the short term discount rate.  It’s held auctions to effectively lend money to banks at very low rates. It first announced these auctions Dec 12th.  The new Term Facility is only marginally but importantly different from the “old” auctions.  The Fed is now accepting mortgage backed securities, but only “highly” rated ones.  Previously the Fed in it’s TAF (Term Auction Facility) only accepted mortgage backed securities from Fannie Mae and Freddie Mac.  Those two financial institutions which are in business of securitizing mortgages are already guaranteed by the Federal Government. In addition the TSLF will be extending this lending to Investment Banks and not just commercial banks.  I didn’t realize this distinction until March 14th when the Fed via JP Morgan had to bail out Bear Stearns.  Bear Stearns would’ve been able to borrow directly from the Fed in 28 days when the new term facility became available for Investment Banks like Bear to use.  I find it somewhat odd that the market rejoices when the term facility is announced on Tuesday, and then on Friday when banks effectively use such a facility, it’s panic.

So what does this new term facility do exactly?  The government is now accepting as collateral any willy nilly mortgage backed security from any institution.  Yes, these securities must be highly rated, but we already know the whole ratings game is a bit of scam.  So who pays when many of these mortgages end up defaulting?  The American Tax Payer. The actions by the Fed is nothing but a bailout of the industry by another name.  Term Lending! My Ass!

Before I sound like all I’m doing is ranting, I’m really not.  I support the moves by the Fed. I believe that Government can and should play an important role in the smooth operations of the financial markets through both regulatory policy and intervention.  The current crisis at Bear Stearns is a classic bank run except instead of individual consumers, it’s other financial institutions making the run at Bear.  Any bank is susceptible to a bank run regardless of what the actual financials might be, and a bank run is self-fulfilling prophecy.  No bank has enough in liquid funds to pay out all the people to whom they owe money to, so as result when everyone clammers to get their money because they’re worried about the bank, the worried become real leading inevitably to collapse.

The one problem I have is that too many people decry federal assistance for individuals, but support institutional bailouts.  In the end they are no different except institutional bailouts tend to help the top of the income distribution.  Both individuals and institutions can lose footing in ways that endanger the whole economy.  Ultimately the need for Government bailouts should not be driven by any particular desire to help specific institutions, investors, or individuals, but rather by a desire to ensure the smooth operation of the market as whole.

n.b. As I finish writing this I just learned that Bear Stearns just got acquired by by JP Morgan chase at about $2/share (Bear closed at around 30 on Friday and as high as 170 in the last year). I don’t know what this mean for the loan that was just extended the other day. It’s certainly interesting times on Wall Street.

With the passing of Super Tuesday, the Republicans have a pretty clear front runner in John McCain. The Democrats have settled nothing as Obama and Clinton are running neck to neck. I do believe either Obama, Clinton or McCain be will our next president.  I rather not belabor political points too much, but I thought I’d contrast the leading candidates on the most basic of fiscal/economic issues.  I decided to look first at what the decidely conservative, Club For Growth had to say about each candidate on some of the issues. T he Club for Growth hates democrats and is unabashedly idealogically biased, so their opinion and stated facts need to be taken with a a bucket of salt.  However after reading what the Club had to say, I’m not sure what was true and what wasn’t as it was too difficult to parse fact from bias.  I did some more basic research. Obama and Clinton are pretty much the same page while McCain, not suprisingly as Republican, tilts more fiscally conservative.

Taxes:

• McCain - Opposed Bush’s 2001 Tax cuts, though supports them today
• Obama - Roll Back the 2001 Bush Tax cuts on the top brackets, increase capital gains tax
• Clinton - Roll Back the 2001 Bush Tax cuts on the top brackets, increase capital gains tax

Spending
No candidate says they’re are fan pork, and will nilly spending. It’s hard to say who is truly more fiscally responsible. Democrats and Republicans like spending alike, just on different stuff. That said McCain in his time in office has been good about trying to trim pork. Both Clinton and Obama do not really have enough history to say one way or another if pork is something that concerns them.

Free Trade
McCain - Supports CAFTA
Obama - Against CAFTA, and wants to Revise NAFTA
Clinton - Against CAFTA

Immigration

• McCain - Amnesty for existing illegal immigrants
• Obama - Amnesty for existing illegal immigrants
• Clinton - Amnesty for existing illegal immigrants

Energy Policy

• McCain - Believes that climate change is real, supports nuclear power and alternative energy
• Obama - Supports Alternative Energy and is a reluctant supporter of nuclear power
• Clinton - Support Alternative Energy

Politics is politics. Economics is Economics. While too often cross paths, nary do they go in the same direction.  Now that people are speaking of recession in less than hushed terms, politicians of all stripes and colors have raised their no so collective voice in a cacophony of proposals.  I’m personally less than impressed.

We’ll start from the top with Bush proposed tax rebate. While personally I’d welcome a tax rebate, I also question a) how much good it will do the economy and b) how are we paying for it? There’s no question the economy is sputtering. While there’s still debate amongst experts if we’ll hit an actual recession, there’s not no debate in mind.  A recession at this point is inevitable.  I hope it to be mild, and more importantly that Americans will learn some valuable lessons on over consumption and bubbles.  A tax rebate will certainly help prop up consumer spending which is the largest part of the U.S. Economy, and potentially help get the economy sped up again. However, I find the tax rebate to be a short term fix, a short term fix that will not address fundamental problems.  The biggest long term problem is that the U.S. Savings Rate is too low.  Americans spend more than they can, saving much less than they should.  The tax rebate exacerbates the problem because the U.S. Government is one of the more profligate borrower and spenders. The money to fund the refund isn’t appearing from thin air.  The Government will have to borrow to fund those checks.

Hilary Clinton also made some headlines for her proposal to deal with the housing meltdown. The thrust of her proposal are:

• 30 Billion Fund to Help with the Foreclosure Fallout
• 90 day moratorium on foreclosures, and 5 Year rate fix
• 25 Billion Emergency Energy Assistance Fund
• 10 Billion in Extended Unemployment benefits

The majority of the press has been pretty merciless on attacking point 2, the 5 year moratorium on interest rates.  This would effectively be government price fixing. While there are merits to some price control like minimum wage, and caps on interest rates, this would be price fixing after the fact.  The fact is that consumers need be reminded that they should not borrow more than can afford, and banks need to recall that good underwriting means not lending to those who can’t afford to pay the loan back.  The current housing crisis has hit banks and consumers alike, but to reward bad behavior sets a bad precedent that will only lead to more pain the future.