[lbo-talk] Dodd bill

Julio Huato juliohuato at gmail.com
Wed Sep 24 14:01:57 PDT 2008


Doug wrote:


> Since your plan has little chance of adoption under
> the present political circs, let's talk utopias for
> a moment. Your scheme would help out debtors, but
> not really change the institutional structure or the
> preposterous fetishization of homeownership - in
> fact, it'd reinforce the latter. A bailout of the
> financial institutions with lots of strings attached
> (remember I said this was utopian) at least offers
> the possibility of creating new instituions - public
> and/or regulated-like-a-utility private. If the gov
> gets warrants on the bailees, it could make some
> money, and even become a voting shareholder. And if
> restrictions were placed on the kinds of mortgages
> that Freddie or Fannie or their descendants could
> purchase (e.g., not more than x% above the previous
> sale price), it might be possible to put a damper
> on speculative price increases in the future. And as
> a condition of participation in a bailout, banks
> could be required to offer relief to distressed
> debtors.

I may not have a good understanding of the social or political toxicity of home ownership fetishism. But when I talk about home ownership, I'm not arguing in favor of McMansions, each with an Olympic size swimming pool and a 10 acre backyard to keep the neighbors out of sight. I'm talking about people at the bottom of society. If you told me that Warren Buffet's craving Goldman or my craving an iPhone is making us complicit to the status quo, I'd agree with you, although in different measure. But if you told me the same about the desire of a low-income manual worker in Brooklyn, LA, or Oklahoma -- nickled and dimed, without a credit history -- of owning her apartment, I'd disagree strongly.

It is true that owning anything, any type of property, from tooth brushes to stereos to specialized knowledge to motorcycles to stocks and bonds, involves a socio-psychological trap that ties us to the status quo. It's what Rudolf Bahro captured with his concept of "compensatory interests," the use of wealth (physical or human, including time) not for the universal development of our human capacities, in cooperation with others and in a workable metabolism with nature, but in ways that corrupt and shackle us to the status quo. However, a certain amount of individual wealth and economic security are indispensable for poor working people to expand their political involvement. Poverty is the worst trap. It atomizes and paralyzes people. Appropriating all productive wealth to place it under our collective control requires that we act as proprietors, a behavior we acquire and refine by actually *owning* things. In principle, it'd be better if the workers' economic security resulted from their collectively owning wealth (e.g. a workers' self-managed health care system). But we start where we can.

Note that my plan (actually I shouldn't say it's mine -- I didn't know it, but Charles Brown and raghu apparently proposed the same thing before on PEN-L) doesn't exclude stricter regulation of financial firms, banks or non-banks. The upfront cost of regulation is next to zero.

In principle, I don't see anything wrong with the government buying bank warrants in exchange for taking a current bad (the toxic assets).

The least we can expect is the government to charge them a fee for garbage collection. But even if the $700b translate into a big premium paid for warrants, at the end of the day, whether that's good or bad will depend on how much the government pays for each warrant and how much it is worth at the end. Or, since it's apparently planning to spend at least $700b, it depends on how much it gets for all that money.

Clearly, there's a feedback loop (a chicken-and-egg situation) here: If the government buys the warrants, then the chance that the warrants will have a positive value between the time they are acquired and maturity increases. If the government doesn't buy them, the chances that the warrants will be worthless later is greater. But just because the government buys the warrants doesn't *guarantee* that their value later will be positive. Warrants are like (American) options. So, their premium or price, (S_T - K)^+, depends on the strike (K) being small and/or the price of the assets later (S_T) being large. Otherwise, at maturity, they die unexercised and worthless. Anything turning out less than 700b*(1+r)^n, where r is the expected market return rate on assets of similar risk, will entail a loss.

IMO, reinforcing home ownership fetishism, as politically reactionary as it may be, would be a small price to pay to narrow a little the distribution of wealth. Fighting home ownership fetishism, like fighting religion, doesn't strike me as a top political priority in the context of the U.S. today. So, seeing progress in the handing off $700b to Wall Street, even in principle though not in practice, because -- among other things -- it doesn't feed home ownership fetishism sounds contrived to me. I'm not sure that the preference for dealing at the top doesn't involve another (politically worse) kind of fetishism. It seems to me as a version of what Mexicans refer to when they say, "What's joy in the rich, it's depravity in the poor."

Re. the charts:


> The assets were juiced up by leverage? But they have to deleverage now. So what do these charts prove exactly?

The charts show that credit created by the broker/dealer arms of financial institutions to leverage their portfolios behaved differently from other types of credit. It ran wild. To put it a bit differently, in theory, rational markets should note the difference and increase the cost of capital to the former without necessarily punishing the latter. The de-leveraging of those financial firms is largely a *relative* re-balancing of the credit markets. That really points to the contributing role de- or a-regulation and so-called "financial innovation" to the whole mess. To the extent credit markets are all linked, this creates turmoil across the board. But allow time for things to settle, and you can expect a more drastic and permanent shrinkage of said segments of the market while the others recover their current size more rapidly. Or if you prefer, we can say that there was an overall credit bubble, small by comparison to the huge super-bubble in dealer/broker segment of the market. If what I'm saying makes sense, that validates, partially at least, Bernanke's and Paulson's decision to let Lehman fall while taking over AIG. However, the latest Paulson plan seems a move in contrary direction, because it seems like an overreaction to the super-bubble popping (note that the plan is about rescuing *financial firms in trouble*, that means above all those over-leveraged!). What the charts show is that the popping of the super-bubble doesn't have to drag everybody down permanently, especially if the other parts of the credit market are duly propped up. And those other parts of the credit market do not appear to be in the worst shape.



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