Thursday, April 2, 2009

President Obama’s Ersatz Capitalism & the Politics of Wall Street

"What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess."--Dr. Joseph Stigliz


As the famed 2001 Nobel prize winner in Economics Dr. Joseph Stiglitz clearly points out, the current economic plan by the Obama administration's Treasury department for dealing with the banks and general Wall Street chicanery is deeply flawed and is politically attempting to avoid the dire need for nationalization of the entire U.S. financial sector. As Dr. Stiglitz makes clear in the article below (and as his fellow 2008 Nobel Prize laureate in economics Paul Krugman also consistently points out) trying to ideologically sidestep the hard and necessary governmental decision of making the banks fully accountable for their own massive theft, mismanagement, and fraudulent behavior is ultimately only going to make the present crisis far worse for the general taxpaying public in both the near and long term future.


April 1, 2009


Obama’s Ersatz Capitalism

New York Times

THE Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win — and taxpayers lose.

Treasury hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal marked by overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency.

Let’s take a moment to remember what caused this mess in the first place. Banks got themselves, and our economy, into trouble by overleveraging — that is, using relatively little capital of their own, they borrowed heavily to buy extremely risky real estate assets. In the process, they used overly complex instruments like collateralized debt obligations.

The prospect of high compensation gave managers incentives to be shortsighted and undertake excessive risk, rather than lend money prudently. Banks made all these mistakes without anyone knowing, partly because so much of what they were doing was “off balance sheet” financing.

In theory, the administration’s plan is based on letting the market determine the prices of the banks’ “toxic assets” — including outstanding house loans and securities based on those loans. The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets.

The two have little to do with each other. The government plan in effect involves insuring almost all losses. Since the private investors are spared most losses, then they primarily “value” their potential gains. This is exactly the same as being given an option.

Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!

Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That’s 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest — $12 in “equity” plus $126 in the form of a guaranteed loan.

If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.

Even in an imperfect market, one shouldn’t confuse the value of an asset with the value of the upside option on that asset.

But Americans are likely to lose even more than these calculations suggest, because of an effect called adverse selection. The banks get to choose the loans and securities that they want to sell. They will want to sell the worst assets, and especially the assets that they think the market overestimates (and thus is willing to pay too much for).

But the market is likely to recognize this, which will drive down the price that it is willing to pay. Only the government’s picking up enough of the losses overcomes this “adverse selection” effect. With the government absorbing the losses, the market doesn’t care if the banks are “cheating” them by selling their lousiest assets, because the government bears the cost.

The main problem is not a lack of liquidity. If it were, then a far simpler program would work: just provide the funds without loan guarantees. The real issue is that the banks made bad loans in a bubble and were highly leveraged. They have lost their capital, and this capital has to be replaced.

Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.

Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).

What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess.

So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.

But we are already suffering from a crisis of confidence. When the high costs of the administration’s plan become apparent, confidence will be eroded further. At that point the task of recreating a vibrant financial sector, and resuscitating the economy, will be even harder.

Dr. Joseph E. Stiglitz, a professor of economics at Columbia who was chairman of the Council of Economic Advisers from 1995 to 1997, was awarded the Nobel prize in economics in 2001.

Copyright 2009 The New York Times Company

Michael Moore On The Case!

Subject: "We the People" to "King of the World": "YOU'RE FIRED!"
A letter from Michael Moore



Nothing like it has ever happened. The President of the United States, the elected representative of the people, has just told the head of General Motors -- a company that's spent more years at #1 on the Fortune 500 list than anyone else -- "You're fired!"

I simply can't believe it. This stunning, unprecedented action has left me speechless for the past two days. I keep saying, "Did Obama really fire the chairman of General Motors? The wealthiest and most powerful corporation of the 20th century? Can he do that? Really? Well, damn! What else can he do?!"

This bold move has sent the heads of corporate America spinning and spewing pea soup. Obama has issued this edict: The government of, by, and for the people is in charge here, not big business. John McCain got it. On the floor of the Senate he asked, "What does this signal send to other corporations and financial institutions about whether the federal government will fire them as well?" Senator Bob Corker said it "should send a chill through all Americans who believe in free enterprise." The stock market plunged as the masters of the universe asked themselves, "Am I next?" And they whispered to each other, "What are we going to do about this Obama?"

Not much, fellows. He has the massive will of the American people behind him -- and he has been granted permission by us to do what he sees fit. If you liked this week's all-net 3-pointer, stay tuned.

I write this letter to you in memory of the hundreds of thousands of workers over the past 25+ years who have been tossed into the trash heap by General Motors. Many saw their lives ruined for good. They turned to alcohol or drugs, their marriages fell apart, some took their own lives. Most moved on, moved out, moved over, moved away. They ended up working two jobs for half the pay they were getting at GM. And they cursed the CEO of GM for bringing ruin to their lives.

Not one of them ever thought that one day they would witness the CEO receive the same treatment. Of course Chairman Wagoner will not have to sign up for food stamps or be evicted from his home or tell his kids they'll be going to the community college, not the university. Instead, he will get a $23 million golden parachute. But the slip in his hands is still pink, just like the hundreds of thousands that others received -- except his was issued by us, via the Obama-man. Here's the door, buster. See ya. Don't wanna be ya.

I began my day today in Washington, D.C. I went to the U.S. Senate and got into their Finance Committee's hearing on the Wall Street bailout. The overseers wanted to know how the banks spent the money. And many of these banks won't tell them. They've taken trillions and nobody knows where the money went. It certainly didn't go to create jobs, relieve mortgage holders, or free up loans that people need. It was so shocking to listen to this, I had to leave before it was over. But it gave me an idea for the movie I was shooting.

Later, I stopped by the National Archives to stand in line to see the original copy of our Constitution. I thought about how twenty years ago this month I was just down the street finishing my first film, a personal plea to warn the nation about GM and the deadly economy it ruled. On that March day in 1989 I was broke, having collected the last of my unemployment checks, relying on help from my friends (Bob and Siri would take me out to dinner and always pick up the check, the assistant manager at the movie theater would sneak me in so I could watch an occasional movie, Laurie and Jack bought an old Steenbeck (editing) machine for me, John Richard would slip me an unused plane ticket so I could go home for Christmas, Rod would do anything for me and drive to Flint whenever I needed something for the film). My late mother (she would've turned 88 tomorrow if she were still with us) and my GM autoworker dad told me in the kitchen they wanted to help and handed me a check for an astounding thousand dollars. I didn't know they even had a thousand dollars. I refused it, they insisted I take it -- "No!" -- and then, in that parental voice, told me I was to cash it so I could finish my movie. I did. And I did.

So on that March day in 1989, as I was driving down Pennsylvania Avenue, my 9-year-old car just died. I coasted over to the curb, put my head down on the steering wheel and started to cry. I had no money to take it in to be repaired, and I certainly had nothing to pay the tow truck driver. So I got out, screwed the license plates off so I wouldn't be fined, turned my back and just left it there for good. I looked over at the building next to me. It said "National Archives." What better place to donate my dead car, I thought, as I walked the rest of the way home.

Though it wasn't easy for me, I still never had to suffer what so many of my friends and neighbors went through, thanks to General Motors and an economic system rigged against them. I wonder what they must have all thought when they woke up this Monday morning to read in the Detroit News or the Detroit Free Press the headlines that Obama had fired the CEO of GM. Oh -- wait a minute. They couldn't read that. There was no Free Press or News. Monday was the day that both papers ended home delivery. It was cancelled (as it will be for four days every week) because the daily newspapers, like General Motors, like Detroit, are broke.

I await the President's next superhero move.

Michael Moore
(Go State!)

P.S. Please know that it has not been lost on any of us from the Rust Belt how our corporate bigwigs were treated (remember, the auto companies wanted a loan, not a handout) compared to how the titans of Wall Street got trillions of free cash, lunch at the White House and a photo op with the Prez. Trust me, we get it. And, if there is a God in heaven, the thieves of Wall Street will soon pay. Also... the sight of our president having to promise that he would back every GM warranty and give consumers a bonus if they trade in their old Grand Am for a hybrid, was alternately sad, hilarious, and just plain weird. This is what it's come to: the Commander in Chief of the Free World is now Mr. Goodwrench. Jeesh.

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Michael Francis Moore is a critically acclaimed and Academy Award-winning American filmmaker, author, social activist, and political commentator. He is the director and producer of Bowling for Columbine, Fahrenheit 9/11, and Sicko, three of the top five highest-grossing documentaries of all time. In September 2008, he released his first free movie on the Internet, Slacker Uprising, documenting his personal crusade to encourage more Americans to vote in presidential elections. He has also written and starred in the TV shows TV Nation and The Awful Truth.

Moore has openly criticized globalization, large corporations, gun ownership, the Iraq War, former U.S. President George W. Bush and the American health care system in his written and cinematic works. In 2005 Time magazine named him one of the world's 100 most influential people. In 2005, Moore started the annual Traverse City Film Festival in Traverse City, Michigan. In 2008, he closed his Manhattan office and moved it to Traverse City, where he is working on his new film.