Why Wall Street’s Economic Philosophy Is Like John McCain’s

This is disgusting. In fact, as far as I’m concerned if the man who did this had any honor, he would resign:

US Treasury Secretary Henry Paulson was humbled as tempers rose and threatened to scupper a deal to prevent world economic meltdown.

In a dramatic gesture to keep hopes alive, he got down on bended knee to plead with Democratic leader Nancy Pelosi to stay and keep talking.

From the moment I first heard talk of this “bailout”, I had my suspicions. This little episode does nothing to dispel them.

Henry Paulson got to his position as Treasury Secretary by way of Goldman Sachs. Now he “gets on his knees” to “beg” members of Congress – personally beg – them to throw taxpayer money at….well, at Goldman Sachs and other Wall Street firms. Throw money at them in exchange for their junk.

On the face of it this is disreputable, dishonorable, nauseating, sickening, corrupt, and shameless.

Paulson is clearly too close to the issue. Wall Street folks are cloistered in their little world, which they think is the whole world. Indeed, they mostly tend favor a bailout. Why wouldn’t they? It will probably help them. That’s understandable enough. Steelworkers favor steel tariffs and Wall Street workers favor bank bailouts.

My problem is that the people – like Paulson – who are salivating over a bailout are so self-deluded they actually tell themselves their position comes from a genuine concern over the country. To sheltered, privileged Wall Street, Wall Street is the country.

I have seen chicken little article after article over why a bailout is so necessary from Wall Street insiders and followers (and heard the same thing in private conversations), and it always boils down to things like, The commercial paper market will seize up!

There are two fascinating observations to make here.

One is just that when people spend their daily lives highly focused on one aspect of the economy – be it commercial paper, or last-cash-flow senior tranches of subprime HELOC deals that take losses pro rata, or whatever – they often seem to start deluding themselves that whatever they’re focusing on is the entire world. And this is not a knock against Wall Street because it’s not only true of Wall Street, not by any means. Medical doctors think that medical-research funding is the most important thing in the world. Physicists think that funding for particle accelerators is the most important thing in the world. And so on. I’ve seen this pattern recur time and time again, and it always makes me uncomfortable. Get out of your little circle and look around, it makes me want to say.

But the second point is something I hadn’t previously suspected about Wall Street types: they don’t believe a free market works. They really don’t.

They’re all scared that commercial paper, or whatever, will seize up and stop. And then companies who need to roll over debt won’t be able to? at all? ever?, and the economy will…come to a grinding halt? Forever? In other words, the story they’re telling themselves is: supply will not surface to meet demand. What kind of people believe this?

People who don’t believe a free market works.

Don’t get me wrong, I’m not disputing that the credit bubble can and has and will lead to disruptions in the market. But the idea that companies will need to roll over debt and won’t be able to because somehow no one on the earth will be willing to lend to anyone else (at any price??) strikes me as ridiculous, dystopian, and economically illiterate.

In fact, it is John McCain-style economic reasoning.

John McCain, you may recall, rather famously (and idiotically) made the argument, in the context of the immigration issue, that if Mexicans weren’t imported to pick lettuce, lettuce would not get picked.

Do you agree with the economic philosophy of John McCain? Because Wall Street does. McCain was claiming that the whole lettuce industry would undergo a meltdown – lettuce won’t get picked!! – if that particular price for labor weren’t available. Paulson, and Wall Street in general, believes something precisely analgous: that the entire economy will undergo a meltdown – commercial paper won’t sell!! – if they don’t get the particular price they desire for asset-backed securities.

Two of a kind, in my book. Equally economically illiterate. And equally embarrassing. But between McCain and Paulson, one of those guys has no economic training or background, so it’s understandable. The other guy, though, should know better.

Super Rad

And if we die before the battle’s through, tell your mom, tell your dad, we were super rad.

Party At Ground Zero

Cheerful little song, eh?

“I Have A Bracelet Too”

Didn’t watch the debate (don’t have the stomach for such things), but from what I understand the primary topic of conversation was which guy had more jewelry.

Yes folks, it’s Lincoln-Douglas all over again.

Most Thought-Provoking Sentence I’ve Read All Day

Whiskey’s Place, “Modern Romance”:

Most important among the factors that create new generations of middle class people is the nature of romantic choice.

Do I agree with this? I need to think about it.

Uninvited Comment IV: Reverse Auctions = Reverse Logic?

I’ve made another comment on the bailout somewhere random (note: may not be approved; ‘awaiting moderation’). This time it’s a paean to the magical ability of reverse auctions to make prices go up (?) that has rankled me.

I’m not sure how resolving “ambiguity” as such is supposed to help banks’ balance sheets if the resolution of that ambiguity ends up being: “Yes, indeed, these bonds are worth pennies on the dollar. Now you know”.

The winning bidder in a reverse auction (correct me if I’m wrong) is the one who offers the lowest price. In practice, such a bid will likely come from whoever is most desperate to shed its balance sheet of the bond in question. As you say, that bond now becomes market data and establishes a price for that bond and all similar bonds (which, whatever they were before, will now have to be valued as Level 2 assets). This is so even if banks were carrying those bonds at a higher mark – and regardless on whether they bid in the auction.

So I’m not sure I understand how such an auction achieves any other result besides a flood of writedowns. Is that the goal? If so, how does that help banks? If not, why won’t an auction cause this result? What kind of reverse auction leads to “rising prices” exactly? A rigged one?

Perhaps the belief is that the winning bid in these auctions will somehow tend to be above the marks at which banks are currently carrying their toxic waste, and this is why “resolving ambiguity” is a good thing and will “lift prices”?

I question the basis for such a belief. Where does it come from? Certainly not from people who have actually looked at the collateral behind these deals, and the cashflows of the bonds we’re talking about, in detail.

See if you can spot the typo.

“Foreign Policy Experience”

The issue of how much “foreign policy experience” Governor Palin does/doesn’t have still seems to come up an awful lot. (How much “foreign policy experience” did Bill Clinton, Governor of f**king Arkansas, have prior to running for President in 1992, I wonder? But I digress….)

What I wanted to say here is just that “foreign policy experience” is one of those phrases that maybe sounded meaningful the first time I heard it, but with repetition I become less and less sure just what the hell it’s supposed to mean.

So please, someone, tell me, just what in the heck is “foreign policy experience”?

All I can really tell is that supposedly Joe Biden has it (whatever it is) while Sarah Palin doesn’t. But what is it?

I’ve given it some thought and from what I can tell, it probably boils down to going to International Conferences in exotic locales like Brazil, and stuff like that. You sign up for an International Conference (taxpayers pay the fee), you’re flown there first class, get picked up from the airport, you stay in a nice hotel, during the day you’re given a bunch of glossy brochures and papers, you get a bit of swag (tote bag, etc.), every night there are fancy dinners in restaurants and such, and there’s a few Important Keynote Speakers such as Henry Kissinger or, like, Dominique de Villepin on the schedule. You probably skip a few of the talks but go to the most Important one (de Villepin).

In the process, you learn all the important International Relations buzzwords, the latest research into solving poverty, you clap for whatever great work this or that UN organization has been doing. During the cocktail-parties or afternoon wine-and-cheese breaks, you shake some hands of people with French accents. Do all this and voila, you now have “foreign policy experience”.

Is there any more to it? Because if there is, I can’t imagine what it would even be.

UPDATE: Bottom line, I’ll admit it’s a bad thing that Sarah Palin “has no foreign policy experience” just as soon as someone either (1) explains to me just where the f**k a freaking STATE GOVERNOR is supposed to get “foreign policy experience” (or even, why they should do so, even if they could), or (2) admits that Governor Bill Clinton, 1992, was supremely unqualified to run for President of the United States.

Go ahead, (1) or (2). You choose. I’ll wait.

Uninvited Comment III: Bailout Idiocy

For whatever reason I put my thoughts on the self-contradictory nature of the Paulson bailout proposal near the bottom of some random Patterico thread that no one’s going to read, so I may as well reproduce it here as a post rather than having to write a whole new one:

Bailout supporters need to pick a story and stick with it. WHAT PRICE IS TREASURY GOING TO PAY? Everyone’s acting as if that’s an afterthought. But it’s crucial.

Are they going to pay the actual (i.e., low) market price? (Which is, after all, what an auction would imply.) If so, then yes, as per the above analysis a ‘make money’ scenario is conceivable (although not inevitable..), but the scheme will not help banks at all so what would be the point of the exercise?

Or are they going to pay a higher price they consider to be the ‘held-to-maturity’ value, as mentioned by Paulson? If so, maybe this would help banks, but then this talk of the scheme as a potential money-maker for Govt is nonsense.

Which is it?? Honestly I don’t know because details of this ‘plan’ still seem sketchy to me. But what I do know is that, unless Treasury is going to somehow magically discover the ‘perfect’ sweet-spot price for each security (which is rubbish), you can’t have it both ways. It will either help banks free up balance sheet at non-loss-inducing prices, OR it can be discussed as a potential moneymaker for Govt.

But not both, for crying out loud!

Almost Beautiful, Really

ABBA vs. 50-cent.

The Forgotten Conceit

Watching The Office premier, it occurred to me, I bet that camera crew that’s been filming in the Dunder-Mifflin Scranton office for like four years now (and also, following some of the employees to their homes or other off-site excursions) is getting pretty stir-crazy. Just imagine if your job were to film those employees all day and sometimes weekends too.

Also, you’d think they’d have more than enough footage for the documentary they’re shooting by now. But I know very little about documentary filmmaking. Anyway, I can’t wait till the finished product comes out.

Why Do So Few People Know What The English Word “More” Means?

A commenter chimed into this thread with the oft-emphasized, well-beloved, populist-sounding, yet utterly boneheaded, point that “the rich should pay more” income taxes. So I thought now would be a good time to give my reader(s) a simple test in use of language. (In fact, it’s really a test of whether you know what the English word “more” means, but let’s not get ahead of ourselves.) It is a very brief test with only 2 questions.

Warning: Unless and until you can answer both questions correctly, you have no business whatsoever opining about income taxes.

First, here is a possible tax scheme. The x-axis is one’s income, and the y-axis is how much they are to be taxed. Click for a bigger picture, if you need to, but the overall shape of the curve should be illustrative enough.

This is the sort of tax system that is called progressive: earnings are taxed at a marginally-increasing rate. It is the sort of system typically favored by the left.

Reader’s note: Under this tax system, as you can hopefully see, the rich pay more taxes than the poor (at least if we’re measuring by income, which in context we kinda have to if we’re going to discuss the income tax this way).

For example, a person making $25k pays $500. A person making $150k pays $15,000. Understand? In this tax system, the rich pay more than the poor. Which is what we all want, right? The rich should pay more than the poor!, says you. Therefore any tax system we have must be like the above graph.

Or must it? Now begins the test.

THE TEST

Let’s look at another possible tax system, the hated and disgusting flat tax favored by rich misers. In a flat tax, one’s earnings, above some standard deduction, are taxed at the same rate (a “flat” rate), regardless of income (cue “boo!” from the audience). Well, here is a picture of what such a Dickensian system looks like:

Question 1: Does a rich person pay more taxes than a poor person under this tax system?

If you’re done with question 1, congratulations. Go back and check your work, and if you’re ready to proceed, let’s move on. For this question we will focus on a tax system that is so evil and right-wing that only Nazi fascist slaveowner spawns of satan could possibly favor it^*: a regressive tax (!!!).

Question 2: Does a rich person pay more taxes than a poor person under this tax system?

Take all the time you need and use scratch paper if necessary.

Again, if you can’t answer both questions correctly, you have no business opining about income tax systems, and I really don’t want to hear from you. Here without further ado is the answer key:

1. Yes

2. Yes

---

^*actually, the Social Security “payroll tax”, which Democrats favor more than Rethuglicans, is basically like this. But let’s try not to think about that.

UPDATE (Extra Credit): One more problem for those few of you who got the first two right. Here’s a crazy uber-regressive tax scheme I just made up. There is a standard deduction like the others ($20k), then there are only two marginal tax brackets:

50% on marginal dollar between $20k and $60k
0.0001% (one dollar per MILLION) on every dollar above $60k.

Here’s what it looks like:

Question 3: Same as questions 1 and 2.

Answer 3: Same answer.

Freudian Ghosts

This is the plot of many modern horror films.

• Protagonist (often a cute girl) gets into a new situation or tries out a new thing (like, technology).
• Triggered by this, visually scary stuff starts to happen, involving ghosts/dead people/creepy children with big eyes/whatever. Although the protagonist always comes out ok, (s)he gets repeatedly really freaked out, yet is believed by few.
• Starts to investigate, generally with a cute member of the opposite sex (who does believe).
• It turns out to all trace back to some trauma suffered by someone now dead (perhaps this is the main ghost). The movie’s drama culminates with the trauma being fully revealed in flashback.
• Uncovering the trauma in and of itself is basically what kills the ghosts and makes everything ok.
• The movie ends with the opposite-sex couple paired off and implicitly together (it’s understood they’ll now be regularly having sex, etc.) indefinitely.

In other words, the modern ghost story is a thinly-veiled metaphor for a psychotherapy hero-fantasy, from the point of view of an immature, lonely, libidinous psychotherapist.

I noticed this pattern most obviously when watching The Eye (the original, not the Jessica Alba remake, which I haven’t seen), since it is so utterly pedestrian and fulfills every standard cliche and pattern of this subgenre I’m describing in every way imaginable. Its plot is literally what is above. (Mini-review: it’s not bad.)

I’m thinking maybe this is why I appreciated The Ring so much more, because although for most of the film it seemed to be playing out the standard ‘psychotherapy fantasy’ arc, it really did a 180 at the end. And the creepy-kid stuff was really, really creepy. Dark Water, meanwhile, obeyed every cliche & was totally predictable, yet it had no romantic arc and ended on a real down note, so it was like the worst of both worlds: cliche and unenjoyable.

I’m Against It

What do I think about the financial bailouts? What do I think about the Treasury proposal to buy up toxic-waste ABS/MBS? What do I think about Fannie & Freddie? What do I think about unregulated CDS and 30+ leverage ratios?

These are all complex issues requiring serious thought and sober analysis. All the details are not yet known. The problems (and dollar figures) seem too big for any one person to really grasp. And I am certainly far from an expert on such matters.

On that note, let me just let the immortal words of the Ramones speak for me:

UPDATE: And that goes for the change of status of Goldman and Morgan Stanley as well. I’m. against. it.

In fact that’s my new blanket policy on all new developments from the world of finance. GET USED TO IT PUNKS.

The Politics Of Cool: On Cowboys

Instapundit linked to Bill Quick asking why ‘cowboy’ has become an epithet:

STERLING, Va. (AP) – Democratic vice presidential candidate Joe Biden says part of the solution to the country’s financial crisis is “ending the cowboy mentality of the Bush-McCain era.”

I like cowboys. They are one of the greatest American icons.

Why do Obama and Biden hate America and her greatest icons?

The answer, of course, is that cowboys aren’t cool. They used to be, but then their brand of independence, gunslinging, and honor became old-fashioned. So now they’re not, and thus folks on the left have a burning need to dissociate themselves, and the country, from anything resembling ‘cowboys’.

For one thing, having the whole cowboy thing going, it just makes us look really uncool in front of the Europeans. Like in the first couple seasons of 90210 when the Brian Austin Green character had a cowboy friend from Oklahoma. Man, that guy was uncool. Wisely, 90210′s writers killed him off by having him play stupidly with a gun.

We need to kill off our ‘cowboy mentality’ in a similar fashion to how 90210 did, for the ratings. Er, I mean so that we look cooler in front of the Europeans. After all, the Europeans are way cool. They seem to take better drugs, dance to techno in cool clubs, and have sophisticatedly-casual sex with each other all the time, in historic locations and efficient metros. So, let’s all ixnay on the owboy-kay stuff in front of the cool Euros, shall we? It’s just tres gauche.

It’s telling that the metaphor the left reaches for when they feel the need to criticize something they dislike/wish to change about America (which is, inevitably, something they find uncool about America) comes from movies. After all that’s where our – and, one might add, Europeans’ – image of ‘cowboys’ comes from.

Indeed, it’s where Europeans’ image of Americans comes from. But I digress. The point is that the cowboy image is just that, an image. It’s the image that Biden is talking about, not tangible actions or policies.

Because that’s what he, like most lefties, cares primarily about.

P.S. Actually, on reflection I should revise my claims here slightly. Not all cowboys are uncool. It’s pretty cool when cowboys have self-doubt and hang up their spurs, giving up violence in the name of a simpler life, like Clint Eastwood tried to do in Unforgiven. And when cowboys are gay, that’s very cool. Even the Europeans like that kind of cowboy.

I think if we could all work together to end the cowboy mentality in America, and nurture the gay cowboy mentality instead, then folks on the left would be pretty happy.

Hellzapoppin

Unbelievable.

Summary of modern political fault lines

(A further follow-on to this.)

• Democrats and the left are for the cool people and their mascots. The cool people are interested primarily in showing how cool they are. One method of doing this is to adopt mascots (i.e. poor people, minorities) and make a big show of ‘helping’ them. The mascots play along and even get excited about the partnership in the hopes that they’ll benefit. At the same time, the cool people have to constantly be on watch to make sure that the uncool people don’t get attention or their way (which threatens the cool peoples’ self-image, as being exclusively cool).
• Republicans and conservatives are for the uncool people and people who value things besides coolness. They are therefore traditionally bad at showing themselves to be cool, and none are good candidates for cool peoples’ mascots. (This is why Sarah Palin bothers the left so much: she’s a female, which could have (and in their minds, should have) made her a good lefty-mascot, yet she’s independent-minded, has a family, and doesn’t need them, so the left has no use for her as a mascot.) Thus people who don’t value coolness (because they value e.g. independence, liberty, family, and boring stuff like that) have to try to argue for the things they do value (please don’t take all my stuff, please don’t prevent me from defending myself) by way of trying to minimize the importance of coolness and keep the focus on things not related to being cool, which is an uphill struggle.

Western politics are basically the plot of a John Hughes movie writ large.

Too Late For Us Now

It’s a Jellyfish triple-shot! Sort of.

This is from Roger Manning’s solo album.

Hey, Beatlesque!

Meanwhile, far as I can tell, this really is Jellyfish, pretending to be in Japan. Or something.

Joining A Fanclub

Wacky Japanese remark of the Jellyfish song.

Fighting Al Qaeda Instead Of Al Qaeda

Michael Totten is making sense:

The war against Saddam Hussein in Iraq can plausibly be described as a distraction from the war against Al Qaeda. But the war against Al Qaeda in Iraq cannot possibly be accurately described as a distraction from the war against Al Qaeda.

I can’t believe we’re still dealing with the whole ‘distraction’ canard in 2008. If you had told me four years ago that the (D) Presidential candidate four years later would still be wheeling out ‘distraction’, I’d have killed myself ten times over. Or at least, I would have written sarcastic stuff on the internet.