According to CNBC:
In a 250-page quarterly report to Congress, TARP’s special inspector general concludes that a private-public partnership designed to rid financial institutions of their “toxic assets” is tilted in favor of private investors and creates “potential unfairness to the taxpayer.”
In related news, the National Academy of Sciences released a report saying that water runs downhill.
Last week I pointed out that I had started saying “more than a year” ago what Chicago economist Casey Mulligan just recently realized, namely that the hope of government bailouts caused or at least exacerbated the frozen market in “toxic” assets.
Because I was far too lazy to document my bold claim, I promised a signed copy of my new book to the reader who could find the earliest online example of me saying this.
The deadline for submissions was last Saturday, and by my reckoning Dave F. is the winner. He found me saying the below in the June 2008 Freeman (and note that the first sentence is one element in a list of bad policy moves that I am describing):
Accepting mortgage-backed securities as collateral for short-term loans. On March 11, the Federal Reserve announced the Term Securities Lending Facility, authorized to lend up to $200 billion of the Fed’s holdings of Treasury securities to primary dealers in 28-day loans. The Fed agreed to accept MBS as collateral for these loans. The move promoted “liquidity” because it is much easier to raise cash in the market with bonds issued by the federal government (Treasurys), rather than securities tied to mortgages at risk of massive defaults.
There are several problems with this arrangement and others like it. First, it obviously puts taxpayers on the line if the primary dealers default and the Fed is stuck with (grossly overvalued) MBS. Second, it intensifies the moral hazard discussed above; it benefits those who hold a large amount of MBS—precisely the investors with poor foresight. Finally, it perversely encourages holders of MBS to keep them off the market, since the Fed will accept them at an unrealistic book value.
To repeat, the problem in the credit markets isn’t simply the massive losses from bad loans. It’s also the uncertainty caused by the large holdings of derivative assets tied to mortgages. Only when institutions bite the bullet and begin selling these assets, presumably at large losses, can realistic market prices be established. Only then will banks be able to assess each other’s creditworthiness, and only then will they begin lending freely to one another. Government efforts to prop up the MBS market perversely stall this shakeout.
So I will let this sit for a day in case there are any challengers. (I had to get up at 5:15 this morning so my blog analysis skills are not in optimal condition.) But barring any challenge, Dave F. is the winner!
So far I have done 7 radio interviews today, and in a few moments will begin the 8th. But I have time to post the link [mp3] to my interview on “Trunews” with Rick Wiles. This was a very interesting show; I sounded like the moderate!
Wow I’m really shocked. The federal government is using the financial crisis to enlarge its power over the private sector. The NY Times reports:
President Obama’s top economic advisers have determined that they can shore up the nation’s banking system without having to ask Congress for more money any time soon, according to administration officials.
In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.
Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.
Meanwhile, some other of our top economic thinkers in this country are baffled (here and here). And let’s not forget poor Larry Kudlow, who loved the TARP when Paulson proposed it, since we taxpayers would make so much money on the deal.
Why is this so surprising, fellas? Just for a fun intellectual exercise, pretend for a moment that the politicians and bureaucrats in DC care about power, rather than getting a single mom in Boise off unemployment. Now in that mindset, look back at everything the feds have done since last September. Makes perfect sense, doesn’t it?
Another good review on EPJ. I think I will from now on tell credit card companies that my occupation is “master slayer.”
Because of the launch of my new book, there are many new visitors here. Ironically, this is the one week when I can’t really post much new material, since I am so busy with radio interviews.
If you’re curious about my new book, here is my infomercial on LewRockwell.com.
If you are curious about the Austrian School of economics, and want to know why you should waste your time giving these outsiders any of your attention, I would point you to this article on the importance of capital theory in understanding the current financial crisis.
Finally, why should you continue to visit this blog? Besides the stream of wisealeck commentary, it also provides recommendations for how to navigate your household through the coming hyperdepression. And for those of you who are Christians, you may appreciate my Sunday “religious posts,” such as this.
In my (intended) daily chapter reading of the Bible,* I am now in early Deuteronomy. I have always thought this part was hilarious. Moses is near the end of his days, and he is recounting everything that the Israelites have experienced since leaving Egypt. He reminds them of how the Israeli spies came back after viewing the Promised Land and told of how formidable the current occupants were, and thus everybody chickened out. Moses continues with the story:
29 Then I said to you, “Do not be terrified; do not be afraid of them. 30 The LORD your God, who is going before you, will fight for you, as he did for you in Egypt, before your very eyes, 31 and in the desert. There you saw how the LORD your God carried you, as a father carries his son, all the way you went until you reached this place.”
32 In spite of this, you did not trust in the LORD your God, 33 who went ahead of you on your journey, in fire by night and in a cloud by day, to search out places for you to camp and to show you the way you should go.
34 When the LORD heard what you said, he was angry and solemnly swore: 35 “Not a man of this evil generation shall see the good land I swore to give your forefathers, 36 except Caleb son of Jephunneh. He will see it, and I will give him and his descendants the land he set his feet on, because he followed the LORD wholeheartedly.”
37 Because of you the LORD became angry with me also and said, “You shall not enter it, either.
I have put the humorous part in bold above. That is a very interesting spin that Moses has given to the story. Here is the way it really went down (Numbers 20):
2 Now there was no water for the community, and the people gathered in opposition to Moses and Aaron. 3 They quarreled with Moses and said, “If only we had died when our brothers fell dead before the LORD! 4 Why did you bring the LORD’s community into this desert, that we and our livestock should die here? 5 Why did you bring us up out of Egypt to this terrible place? It has no grain or figs, grapevines or pomegranates. And there is no water to drink!”
6 Moses and Aaron went from the assembly to the entrance to the Tent of Meeting and fell facedown, and the glory of the LORD appeared to them. 7 The LORD said to Moses, 8 “Take the staff, and you and your brother Aaron gather the assembly together. Speak to that rock before their eyes and it will pour out its water. You will bring water out of the rock for the community so they and their livestock can drink.”
9 So Moses took the staff from the LORD’s presence, just as he commanded him. 10 He and Aaron gathered the assembly together in front of the rock and Moses said to them, “Listen, you rebels, must we bring you water out of this rock?” 11 Then Moses raised his arm and struck the rock twice with his staff. Water gushed out, and the community and their livestock drank.
12 But the LORD said to Moses and Aaron, “Because you did not trust in me enough to honor me as holy in the sight of the Israelites, you will not bring this community into the land I give them.”
Hmm now that I reread this, it’s not jumping out at me. But I am pretty sure that the Lord was mad because Moses struck the rock twice, instead of just once. (“Is this thing on?!”) So the reason Moses doesn’t get to enter the Promised Land is his own lack of trust, not anything the other Israelites did.
* By the way, I didn’t comment on it at the time, but for all the Old Testament critics out there, check out this chapter, in particular verses 15-18. Yikes. And for those of you who believe, let’s not sweep that under the rug. That is serious stuff.