7/14/2008

The Lessons of History – and Moral Hazard

"Olim habeas eorum pecuniam, numquam eam reddis: prima regula quaesitus"
(Once you have their money, you never give it back: the 1st rule of acquisition)

The U.S. Savings and Loan crisis of the 1980s and 1990s was the failure of 747 savings and loan associations (S&L's) in the United States. The ultimate cost of the crisis is estimated to have totaled around USD$160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government -- that is to say, by you and me, the U.S. taxpayers, either directly or through charges on our savings and loan accounts. This contributed in a major way to the large budget deficits of the early 1990s. The resulting taxpayer bailout ended up being even larger than it would have been because moral hazard and adverse-selection incentives compounded the system’s losses.

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. This is why many Republicans in Congress are very reluctant to give the Fed the kind of "blank-check" freedom to step in and open the Discount Window with "Free money" for Fannie, Freddie and every other Tom Dick and Harry financial firm that's gotten it's ass caught in the wringer because they don't understand financial risk (and because the Fed, which was supposed to be watching them, was asleep at the switch!).

With the Federal Government bailout of Bear Stearns and now imminently of Fannie and Freddie, compounded  with huge losses in banks like Washington Mutual; with BOfA having no choice but to swallow Countrywide whole, and IndyBank going down the crapper with an FDIC bailout because of their ridiculous exposure to sub-prime debt instruments -- we can see that the lessons of history haven’t made much of an imprint either on the financial community or the Government that is supposed to be monitoring it.  I think Allan Greenspan must have retired in the nick of time!

Let's take a quick math review on how much this stuff is actually costing us: The Federal Reserve printed $29 billion in new money and gave it to JP Morgan Chase to finance the Bear Stearns buyout.

According to the Federal Reserve, in February 2008, the M2 money supply was $7.57 trillion. Divide $29 billion by $7570 billion, and you get 0.38%. All outstanding dollars lost 0.38% of their value when the Federal Reserve printed the $29 billion in new money.  Now actually, that's inaccurate, because the US has a fractional reserve banking system. So when the Fed prints $29 billion in new money, that technically causes $290 billion of inflation.  So the Federal Reserve really caused $290 billion of inflation when it bailed out Bear Stearns. That means  all outstanding dollars lost 3.8% of their value instantly when the Federal Reserve printed new money to bail out Bear Stearns.  We all pay, it's just that it's a hidden tax in the form of lower buying power of all our dollars. Is it any wonder why the U.S. Dollar is down the crapper on the world market?

The following custom chart clearly illustrates that inflation (red line, as measured by the Consumer Price Index) closely tracks the broader M2 Money Supply (blue line):

M2 vs CPI

It’s gonna take a while for all this to wash out – at least two or three more years. Heads will continue to roll; the guilty will continue to go unpunished. You and I will continue to pay for it -- because it is WE who are asleep at the switch and do not hold our elected representatives accountable!  And – twenty five years from now, when it all happens again because everybody is asleep at the switch once again?

Heh-- I’ll post about it then.

 

Satire Takes an Uncertain Turn

I heard about the New Yorker's cover cartoon about Barack Obama and his wife Michele in the Oval Office; there was an NPR interview I listened to:

41005748

Editor David Remnick says, more or less, that "This is a satire, we are making fun of all the rumors". The NPR interviewer hardly challenged this guy at all.

Look, I grew up in New York City. I started reading the New Yorker when I was about 14 years old. I learned a lot about cartoons and satire. I learned that the New Yorker was a sophisticated, challenging magazine that made me stretch, and think. I can tell you without equivocation that this cartoon cover page sinks the New Yorker into the journalistic toilet. It SUCKS! This guy Remnick is a complete,tasteless MORON, he has no viable concept of what constitutes the long tradition of highbrow New Yorker - style satirical cartooning, and HE NEEDS TO GO BYE -BYE.

I find this highly offensive, and so should you. You put this CRAP ON THE COVER of your fine magazine? Shame on you, you TASTELESS MORON!  Remnick needs to take early retirement in a BIG HURRY.