g m g D e s i g n . c o m

Regarding the current financial woes, the Freakonomics blog poses the question of why, if the troubled securities are truly bargains, hedge funds or non-risk-averse investors aren’t buying them up?

Also on that blog, Justin Wolfers writes about deep concern that 100+ well-known economists have with the bail-out plan being devised. They boil down to:  fairness, ambiguity, and long-term effects (my top concern).

Paul Krugman has an analysis as well. In his “four-step view” on the situation:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”

Krugman doesn’t like the current “bail-out plan” (for lack of better words). He ends with this:

But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.

I’m already sorry. I foresee many years of unnecessary government intervention in the name of “running the economy.” The government has a role in the market, but not in micro-managing it. I hope our luminaries in DC keep that in mind.

Thomas Friedman, in summary, argues for regulation–but not too much regulation–in the financial markets. Last para:

In sum, government’s job is to police that fine line between the necessary risk-taking that drives an innovation economy and crazy gambling with other people’s savings in ways that threaten us all. We need to make sure that what happens in Vegas stays in Vegas — and doesn’t come to Main Street. We need to get back to investing in our future and not just betting on it.

Yep. The neighborhood effects of the banking/insurance/mortgage/lending industry means that other, non-involved parties are affected by the actions of others, meaning that government action/regulation/what-not might be appropriate (and is, in this case). Regulation, as always, should go far enough, but not too far. (Else, we’re left with the potentially worse bail-outs that we have now.)

David Ignatius – “Palin Pick Shows a Reckless McCain.”

Not flattering for McCain. I agree w/ him. Palin’s certainly not the most qualified to be VP. That’s not good for America (oh, yeah, and not good for women, since Palin’s performance will be generalized, fair or not). McCain pandered to women and to evangelicals (the latter being a recurring Republican mistake in recent times, it seems). Just sad to see McCain doing this sort of thing. Palin may be a quick study, but the VP position isn’t one you learn on the job.

From the NY Times Economic Scene…

If Chrysler had collapsed, he argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions. “If Chrysler goes belly up,” he says, “it also might have forced some deep introspection at Ford and G.M. and might have changed their attitude toward fuel efficiency and manufacturing quality.” Some of the bailout’s opponents — from free-market conservatives to Senator Gary Hart, then a rising Democrat — were making similar arguments three decades ago.

[...]

Speaking of which, Detroit’s Big Three have come back to Capitol Hill lately, lobbying for billions of dollars in handouts. This time, their executives insist, they’ll use the money to solve their problems.

Not saying the Feds were wrong to bail out Bear Stearns, Fannie, Freddie, and AIG (and others?). Failing financial/mortgage/insurance companies might have far more troubling rippling effects than a failing car company. Still, bailouts aren’t free, and the consequence of a bailout can be long-term, and not always in a good way.

Kiplinger’s forecasts that an exodus of foreign investment from Russia by the US/Europe will curtail Russian expansionism and aggression abroad. Excerpt:

Capital flight may prove the most effective check on Russian aggression in Georgia, as well as a means to prevent similar moves by Russia elsewhere in the “near abroad” of former Soviet republics. Moscow will ignore diplomatic efforts by the U.S. and Europe to persuade it to back off and give its neighbors room. But it’ll be harder for the Kremlin to ignore the more immediate and harsh discipline of the market.

I’m sometimes told (by people who don’t understand economics) that I put too much stock in economics and the role of the market in shaping world events. This is but one example of the efficient global market in action–for good.