Saturday, March 28, 2009

Critics galore ...

In recent days, people on the left and the right have been coming out of the woodwork with advice galore for the administration. Obama has found friends in strange places. First, we have David Brooks expressing hope in Obama's Afghanistan strategy and declaring it a winnable war. This view gets support from Rachel Maddow at the other end of the spectrum. In her recent TV spot, she talked it up so much, it seemed like she was trying to sell it to herself.

Then we have Krugman declaring emphatically that Summers and the Obama team aren't taking the true lesson of the current mess - i.e. a fundamental repudiation of the market mystique.

Meanwhile, we have Michael Gerson defending Obama's use of the teleprompter, pointing out that a leader's attempt to express himself with precision is not a sign of a lack of genuineness, and neither is a politician's attempt to wing it anything but shallowness.

Michael Gerson's article I wholeheartedly agree with. The idea that a leader who thinks through what he or she is about to see is somehow less of a leader for relying on a script is laughable. It would be different if the assumption was that Obama wasn't intellectually able, but even his critics have to acknowledge his intellectual prowess.

On the war, I am less sanguine than these more upbeat assessments. Afghanistan is definitely where the US should focus, but remember that this is the region that handed the British and the Soviets their defeats. A protracted engagement in Afghanistan could be worse than both Iraq and Vietnam. Furthermore, wars are and always been massively draining on the national coffers. So, I would be more cautious in singing Obama's praise. The question in my mind is whether he can stay focused on achievable goals, or whether he will get distracted by idealistic fervour. As long as he is pragmatic, it should be fine.

Finally, on Krugman and the economy. I know that Krugman is not happy about the market mystique dominating. True market's need regulation. However, you have to only look at highly regulated markets around the world to realise that enabling the heavy hand of government is a cure that may be worse than the disease it attempts to cure. So, am I unhappy about Obama's hesitance? No. In fact, I am more concerned that he may be tempted to allow many of the more radical ideas proposed by Congress to pass. The question is whether he will be able to stand up to a Congress dominated by his own party, while still building consensus for his agenda. My guess - doubtful!

Monday, March 23, 2009

Spitzer on the financial mess ...

OK ... so Elliot Spitzer proved to have questionable sexual morals and marital fidelity. But, in this interview, he makes some fascinating points. The basic point he is making is that there is no legislation that can compensate for regulatory incompetence or lack of will. If the executive does not enforce the laws, then the laws are moot. Ironic, but very true.

TARP version ... how many has it been again?

Timothy Geithner just announced his new TARP plan: $75BN to $100BN to back $500BN of funds to buy troubled assets. How is this different from the Paulson plan? It is a little more specific. It does leverage private capital. However, in essence, it is the same plan.

Here's how it would work:
  • Let's say a Bank seeks to sell pool of mortgages worth $100;
  • A private auction decides that asset is now worth $84;
  • The private investor and government put up $6 each;
  • They then borrow remaining $72 from government;
  • That loan is guaranteed against any losses;
  • If asset is later sold at higher price, government makes profit and private investor pays back loan and pockets profit;
  • If asset is sold at lower price, government and private investors could lose initial investment.

Am I missing something, or is this really saying:

  • The government and the private investor share equally in all the gains on the entire $100;
  • The government and the private investor share equally in losses till 14% of the market value at the auction, and
  • The government foots the bill for any loss in excess of 14% of the value.

If this is right, it seems like a pretty good deal for investors if the market valuations now are relatively fair.

Krugman, meanwhile, is railing against the plan. I didn't quite follow his logic. His main argument seems to be that the banks will still have lost the money they have, and no amount of taking stuff off the books will help. True. But wouldn't the lack of exposure to further downside risk reduce the inter bank solvency issue somewhat? If Krugman has a reason to believe it won't, he didn't explain it in the article.

Krugman has pointed out that history has shown that some amount of nationalization is necessary.

Couple of points.

  • Firstly, Krugman is right. Some form of nationalization is probably the most effective answer. Government guarantees / nationalization gives people confidence about the solvency of their counterparties. Geithner's plan does that too. However, the degree of confidence inspired by the former is far more and so, I would argue, it is a much quicker fix. Obama, however, needs to weigh the political expediency of nationalization and what it might do to his ability to get other policies passed. So, the fact that we haven't gone there may be just as much a political calculation as an economic one.
  • Secondly, at one point in the article, Krugman writes: "And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing." [emphasis added] In so saying, Krugman betrays his political biases and, dare I say it, his naivete. Firstly, how can pouring $500 BN to $1 trillion into the banks in addition to billions already spent suggest that anyone in government think there is anything, fundamentally or otherwise, sound with the banks? But, maybe Krugman is reflecting on the competence of bankers, particularly senior management. In this context, I too have concerns, but is Krugman's idea any better? If we nationalize, who can we replace everyone in these organizations with? Would the bank actually operate better? Yes, they made bad bets, as did everyone else. Does that mean the government will do better? The same government who regulated these industries so 'brilliantly'?

I too am concerned that those who caused the mess are not paying a high enough cost. Having said that, there seems to be a tendency on the left to assume that just because one option is bad, the others are necessarily better. That's a logical fallacy. Krugman and others need to explain why they believe so. Also, nationalization may indeed solve the immediate crisis faster. However, would it really be the long term interest of the nation? Are nationalized banks really better banks?

My guess is that before this is over, a number of these banks and financial institutions are going to be nationalized. AIG and Citi effectively are already. Political expediency aside, more probably would have been already. However, I am not as convinced as Krugman that Obama's reticence to nationalize is necessarily a bad thing.

Saturday, March 21, 2009

Obama was on Jay Leno show a couple of days ago. Like Domino mentioned in a recent blog, it is an irony that we need to tune in to comedy shows to see some meaningful journalism.

The interview covers most of the pressing topics of the day. I like the fact that Obama is attempting to connect with the American people in uncommon ways like going on Jay Leno.


Monday, March 16, 2009

Ben speaks ...

It's almost unheard of for a sitting Fed Chairman to give an interview of any kind. This 60 Minutes interview with Ben Bernanke is an exception. Nothing startling, but still very interesting.

Sunday, March 15, 2009

Cramer vs. Stewart

Cramer decided to brave The Daily Show and answer Jon Stewart himself. The result is one of the best interviews I have ever seen. I don't know about anything else, but why do we have to look to a comedy show for this interview? (For context you can scroll down or or click here to watch the previous clips about Cramer that prompted this visit by Cramer).





Wednesday, March 11, 2009

Law abiding citizen?

To some, what Cramer says may be shocking, to others, it may remind us why we think the blind belief in the rationality of markets is foolhardy. Can't say I was surprised. Here are some gems from an interview with Cramer.

Tuesday, March 10, 2009

Fun stuff in depressing times

Last week, Jon Stewart decided to rip into CNBC. By the end, I was left with more faith in astrology than the talking heads. It's one of his best segments this year ... hilarious!






Then, Cramer complained. He felt he was taken out of context. Huh? Baiting The Daily Show? Well, here's Jon Stewart's response. Poor Cramer. Why is he allowed on TV again?

On the subject of faith in things that are completely unsubstantiated, like "experts" on TV, here's Joel Stein critiquing the lack of faith in science of liberals. It is hugely entertaining and so very accurate.

Finally, I have been depressed of late of the complete dearth of conservative ideas that address the current economic woes. I was so relieved, therefore, to read David Brooks, finally, critique Obama's policies in an intelligent way. If only conservatives could have adopted such a posture, we might have the response we needed to the crisis instead of the response we settled on, which will probably prove inadequate (I hope I am proved wrong in this).

PS: I must give a shout out to Grain of Sand, who had presciently predicted in November that we would see the type of shocking performance of GM we have witnessed in recent weeks. It might have been cheaper to put the GM staff in the US on a government payroll and start from scratch! Chapter 11 anyone? It's what its there for.