Instead, we got bailouts and crony capitalism and ad hoc intervention, and today the global system is in many ways in worse shape now than in 2008. (Banking is more concentrated and national balance sheets are a mess from the bailouts)
Please tell us how that works in practice rather than in theory. I really, really want to know how you just 'reboot' the financial system without massive disruption to retail banking or the payments system. How do you 're'capitalize a new bank? If you just mean create new banks, who is running these banks? I mean, I'd like to have seen a complete reboot of the system as well, but it looks like the sort of thing that is much easier said than actually done. If you're going to mention Sweden, provide specifics of how long it took and how much capital was involved.
It's possible there will be much more suffering as a consequence for not acting now - by letting the core problem persist.
It could have major implications that last for decades versus a few years of hardship.
Most complex problems can't be fixed from constantly patching the top surface. They need to be broken down and rebuilt into something better.
Don't feel bad that no one else believes it, heh. Throughout history, the world has been literally insane -- this is just another example of an insane view that's spread into popular culture. ("The system is too big to fail" / "Postponing the disaster is better, because the pain will be distributed over a longer period, rather than shocking us all at once" / whatever other crazy, impossible thing.)
We may, individually feel the need to break it all down. But most people don't care or understand. Not until bread cost $250 a loaf. Then the herd stomps it's feet and waves it hands screaming, "OMG what happened? Whose to blame?".
Then something might get done.
The bigger problems are the bankers themselves. Bankers NEVER change unless they have no choice. And our government (the US) had that chance, to force them in a different direction. For one moment Bush and Obama had the chance to really change things. They didn't.
Actually Bush had two chances to shake things up; 9/11 was his other. For one moment, he had the attention of the entire planet. Everyone. And what did he say? "SHOP".
There will be massive disruption in any case. It can come in the format of recapitalization (Iceland) or inflation due to inflating their insolvency away (Latin America).
> How do you 're'capitalize a new bank?
OP meant recapitalize the failed banks. Short version:
1. Fire the board of directors.
2. Fire the management. (The question here is how many levels: At least the C-level execs, but probably another level below that.)
The above people have FUBAR'd the bank in the first place. Leaving them in place and expecting a different result is insanity.
3. Wipe out the shareholders.
4. Haircut the bondholders. Subordinated debt is probably 100% wiped out, preferred is probably 50%.
5. Inject treasury capital, and subordinate the formerly preferred. Nobody gets ahead of the treasury.
Total time is probably 1 week for the BoA sized guys. Declare a bank holiday if you wish, like 1933. Guys smaller than BoA are a weekend, as evidenced by FDIC takeovers.
6. Prepare for steps 1-5 for all the idiots that depended on the bonds from this bank as Tier 1 capital because they thought this bank was too big to fail. The system will be better without those idiots too.
Clearly the ones currently running the bank are unqualified, which is why it is insolvent. Leaving them in place and expecting a different outcome is not sensible.
But directly to the point you ask: Yes, I believe there are many candidates who will perform better and for less money. (In the words of Charles de Gaulle: The cemeteries of the world are full of indispensable men.) Probably a fair fraction are inside the organization already, but if I were the regulator in charge, I would cross fertilize and take folks from outside the organization because internal allegiances are probably in the way of a thorough reorg.
There are plenty of people that could have run the banks. Sheila Blair perhaps? I'd be okay with Elizabeth Warren. Hell I'd even take Jim Cramer at this point.
You're telling me the government could have rebooted BofA, AIG, Wells Fargo, CitiGroup and Chase (to name just the top 5 - http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program#P...) in the space of a week or two. I would love if that were possible, but I don't see how it is. Proposals like this were debated at some length back in 2008, after all, and I distinctly remember them being decried as Communism, for understandable reasons.
Understandable that they are actually communist, or understandable that bankers and regulators would say any old bullshit to at least barely legitimize to the public massive transfers of wealth into their pockets?
> I distinctly remember them being decried as Communism, for
> understandable reasons.
No, they were not. The proposals were about how to avoid doing the above list.
Firing the management and BoD would take less than a day. Wiping out the shareholders and bondholders would also take less than a day. Injecting new capital would take less than a day.
All of those could be done on the same day. I'm alloting a week in order to find/promote the correct caretaker CEO.
In Sweden, the government demanded steep losses from equity holders before it took over a large part of the financial system (unlike US officials, the Swedish government officials were not afraid to use their superior bargaining position to get an excellent deal for the government). The upfront cost for recapitalization was 4% of GDP, the net cost in the end was less than 2% of GDP (based on different computation methods some even say 0%). Following asset sales in 1995, the Bank Support Authority went into a dormant role in 1996, 4 years after the crisis.
http://www.nytimes.com/2008/09/23/business/worldbusiness/23k...
Japan handled things differently and ended up with debt totaling 200% of GDP. See this excellent YouTube video from economist Richard Koo that explains the Japanese experience:
Economic/political discussions on HN are painful because people who are capable of generating meaningful insights when the topic is technical are reduced to wishful thinking and trotting out tired, simplistic misrepresentations of economics.
Let the country's biggest banks become insolvent, then "reboot" them in a week? When you start proposing that the world's largest economy model itself on theoretical notions only tested in a country 3% it's size, ideologically oriented in a completely different direction, and founded on a radically different social contract, then you are not arguing anymore.
It's not an argument, in the sense of debate and intellectual exchange, it's dogma.
> The idea that we can just lift one bit of regulatory policy from
> there, apply it to our financial sector, and call our problem solved
> is not just misguided, it's flat-out magical thinking.
This is from a Wikipedia article you could have found in 30 seconds; if you had, perhaps you would have changed your mind about posting, saving us all the pain of knowing that someone on HN is capable of posting such a glib, worthless comment:
Several thousand newly homeless and jobless Argentines found work as cartoneros, or cardboard collectors. The 2003 estimation of 30,000 to 40,000 people scavenged the streets for cardboard to eke out a living by selling it to recycling plants. This method accounts for only one of many ways of coping in a country that at the time suffered from an unemployment rate soaring at nearly 25%.
_Twenty-five-fucking-percent and people selling cardboard for a living_
Is this the example you crazy people aspire to when you pine about your pure free markets and how the economy should have been allowed to undergo massive correction?
[1] http://www.nytimes.com/2011/09/02/opinion/argentinas-turnaro...
That opinion piece talks about how Argentina recovered from the crisis, and it definitely does not say that defaulting on their debt was the right step. If anything, it is a resounding endorsement for the Obama plan and a rebuke of austerity in times of crisis.
Argentina has regained its prosperity partly out of dumb luck: a commodity price boom has vastly benefitted this soy, corn and wheat producer.
The government intervened to keep the value of its currency low, which boosts local industry by making Argentina’s exports cheaper abroad while keeping foreign imports expensive.
It then taxed those imports and exports, using the money to pay for a New Deal-like public works binge, increasing government spending to 25 percent of G.D.P. today from 14 percent in 2003.
Why have Argentines embraced bigger government? In part because the preceding era showed how poorly austerity measures — the sort now being pushed by conservatives in the United States — promote growth. In the late 1990s, Argentina cut government spending drastically on the order of its lenders at the International Monetary Fund.
For one thing, extreme cost-cutting during a stagnant economic period will only inhibit growth. And government spending to promote local industry, pro-job infrastructure programs and unemployment benefits does not turn a country into a kind of Soviet parody. It puts money in the pockets of average citizens, who then spend it and spur the economy.
Did you read craig's short comment? It talks about devaluation, not default. Now, it so happens that Argentina chose to pay just what it owed the IMF and effectively get out of "the world credit establishment" with a big, unpaid debt. Guess what? No Argentinean government could have set in motion state intervention/"stimuli" of any kind had most of its resources been devoted to pay an unbearable foreign debt. (Debt interests, in fact.) As you surely know, even though Argentina's debt is proportionally [2] smaller than the that of the US, the payback rates it gets are prohibitive, unlike America's 3%.
Just for clarity, what was your point? That Argentina would have been better off without default? Without devaluation? Both? Let me reiterate, there is nothing stupid about thinking otherwise...
[1] http://en.wikipedia.org/wiki/Argentine_peso#Peso_convertible...
[2] https://www.cia.gov/library/publications/the-world-factbook/...
crag suggested that the mere fact that Argentina recovered from such a staggering blow to its economy was indicative of something -- the implication, it seems, is that the fact of recovery is enough to warrant severe measures such as default.
That's stupid, for the reasons I laid out above.
You, however, seem to be supporting the original reasoning by employing an appeal to authority and suggesting that certain credible thinkers agree with crag's premise. However the one example you provided did not bear evidence of that. I don't know what else your point is -- I don't care to debate Argentina except that you seem to be using it as an example of something.
I don't know about "what if" and the hypothetical situation in which Argentina did not default. I know what did happen --default, followed by an IMF-imposed austerity program, led to 50% poverty. It's only when people got behind so-called "big government" measures that they actually started to see real recovery.
You see, Argentina's unemployment [1] and poverty [2] rates soared during Menem's worship-the-system 90's. These rates happened to peak, respectively, in 2001 and 2002, basically around the time Argentina defaulted, among many other measures.
Now, with a discipline as complex as economics, given all the variables floating around, it is hard to conclude rigorously that defaulting contributed to reversing this trend, but it sure is harder to claim the opposite!
[1] http://www.wolframalpha.com/input/?i=argentina+unemployment+...
[2] http://www.wolframalpha.com/input/?i=argentina+poverty+rate+...
Not only that, you've conceded the only point I had about it:
it is hard to conclude rigorously that defaulting contributed to reversing this trend
You're having a conversation with yourself at this point. Please follow more closely the points being made before following any compulsion to chime in.
What a stupid thing to say. Have you ever read about the currency crisis?
This is from a Wikipedia article you could have found in 30 seconds [...]
I don't give a fuck about Argentina for the purposes of this conversation [...]
[...] follow more closely the points being made before following any compulsion to chime in.
Edit: For the record, you have conceded in the points of substance, particularly considering the minutiae you are addressing and all that you are surprisingly leaving out. You stated earlier:
I know what did happen --default, followed by an IMF-imposed austerity program, led to 50% poverty.
This is what you have been in this thread: an arrogant, cocky lawyer who gets his most vital piece of evidence hilariously backwards.
The fact is that this was a thread about how Argentina's crisis provides evidence supporting the positive benefits of allowing economic collapse. The initial post was intensely stupid in that it reduced the complex effects of economic collapse to a simple if-this-then-that causation. The only relevant point is causation, which I argued was not the case, and which you conceded -- despite you neither having made the original point, nor any attempt whatsoever to defend it.
You don't seem to be arguing the initial point, or the counter point. You only want to talk about Argentina, without taking a moment to understand the context in which it was mentioned. So congratulations on nailing me for reversing the order of the austerity program and the default -- great job, I feel really dumb for failing to correctly order a sequence of events related to a tangential point.
Here's what you have been:
Two guys are arguing on the street, and during that argument one of the guys mentions the name of a sports team. A drunk, walking by, happens to be a fan of that team. Despite not knowing in what context that team was mentioned, or whether it was mentioned positively or negatively, the drunk gets in a fight with one of the men. And not necessarily the one who uttered the team's name.
You're the drunk.
I was born and raised in Argentina, though this should not matter, nor does it need to be "disclosed". I knew what the WolframAlpha plots would look like because I have lived the situation. Look, Argentina has been an exceptional country for many reasons (mostly bad), and it's not a too-big-to-fail state such as the US or Italy, so clearly its experiences need not apply to other countries.
In that respect, I do not agree with crag's suggestion that anything applicable to Argentina in 2002 could be applied to the rest of the lot in 2011. The thing is, though, that instead of raising your valid points about simplistic causation, etc., you mistakenly pointed (and in a snarky way) to Argentina's "currency crisis", i.e., devaluation, then to default, in turn linking them to social distress. Please convince yourself: in Argentina things got way better after default, devaluation and big spending, which took place at the same time. Argentina's real currency collapse can be found here [1] (with relatively little unemployment and poverty, by the way). There was no IMF-imposed austerity after the default: most of that austerity was recommended in order to meet debt obligations up to 2002, and leaving that cycle was the whole point of the default! Even though Kirchner was smart enough to pay the IMF debt, following the steps of Russia and Brazil, just to get them off his back, there was no state austerity after the default.
As for my first link, I thought (mistakenly) you implied that Argentina had gotten worse since the default, and I provided a recent article with a snappy reply. Not very constructive, I admit and concede.
Beer in hand, I salute you!
So congratulations on nailing me for reversing the order of the austerity program and the default -- great job, I feel really dumb for failing to correctly order a sequence of events related to a tangential point.
Well, it's not a minor point to this thread, though this thread sure is, I agree, completely inconsequential in absolute terms: reversing the order means that the culprit could be the austerity measures, not the fuck-the-system default, which happened right before the first derivative changed signs!
Let me repeat that you have referred almost interchangeably to default, devaluation and an austerity program, which is really confusing. The first two are easily marked on a timeline: December 2001 and January 2002. By now I don't know what austerity measures you refer to, but again all this would take you very far from your statements linking default and/or devaluation and poverty. So, however tangential this thread is, it is based on the core of your original statements. Currency crisis and/or default did not, in any conceivable way, lead to the inception of cardboard collectors, nor to the 50% poverty rate. These issues had been building up steadily for a decade by the time the default happened, and this is not an interpretation or factoid.
As an aside (not countering any point!) be aware that for countries like Argentina big-government initiatives and fuck-the-system approaches go almost hand in hand, because comply-with-the-system plans means that you have to put aside a lot of your GDP to pay outrageous debt interests (forget about capital), leaving you little money to spread. I mean, look at the US debt ceiling fight the world witnessed last August. With a fraction of that spectacle any Third World country would have been left paying >30% annual rates, while the US is not (yet?) susceptible to speculation and still pays its cozy 3%. Fair or not, don't expect countries to behave the same "serious" measures under such a varied array of conditions. [No references for all this data. Feel free to grill me with factoids.]
As a final note, a few comments on:
Have you ever read about the Argentine crisis, or is your knowledge limited to Wolfram Alpha's graphs and Googleable factoids?
Have you? Should it ever matter in a debate? I'm presenting facts based on Wolfram Alpha, and you on Wikipedia. Why should we consider them factoids and not facts? Because we don't dig all the way for primary sources? We are both supporting our points with factoids, then. So? Should we support them with "reason alone"? Incidentally and ironically, you seem to have never read about Argentinean economics in depth: nobody with the lightest acquaintance of contemporary Argentinean economics could have honestly been unaware that poverty was, for almost a decade, sharply on the rise up to the default, and make the basic mistake of saying "look! default led to poverty". But boy, do you have a hard time accusing others!
Such a response has only been politically infeasible in the US because the financial industry has such a stranglehold on US political discourse. (See Confidence Men, and in particular its description of the resistance Obama faced when he tried to do this kind of thing with Citigroup.)
-- Andrew Mellon, Secretary of the Treasury, 1929
Once he had become the most hated president in American history, Herbert Hoover wrote caustically of advisers like Mellon whose "prediction that it would right itself was not based on any studies he did or any evidence he presented."
Krugman was right to call this the return of Depression Economics. Note the conservative obsession with debt and US credit worthiness at a time US borrowing costs are FALLING to about 1% over 30 years (!!!), a figure at which there is basically no cost to pursuing fiscal stimulus and at which the spending pays off immediately in greater tax revenues and less spending on social services for the unemployed. Run the numbers yourself:
http://www.project-syndicate.org/commentary/delong118/Englis...
While the greater point may be true, it does have the benefit of hindsight to a certain degree.
At the same time - after seeing the effects of Lehman's collapse, the regulators really didn't have any other choice than saving those banks. The option of not acting really wasn't there.
The financial collapse was caused when other banks realized how bad Lehman's balance sheet was. Because their own balance sheets were also bad and they deduced all the other banks out there are probably in just as much trouble.
So banks stopped lending to each other and that's what caused the collapse.
But those circumstances wouldn't have changed if we bailed out Lehman. Because the realization would still have been the same.
Beyond a few thousand job losses (likely temporary, and about 0.01% of the US economy).
- Credit markets seized up because no one could tell who
was insolvent.
- Massive outflow of foreign capital from the US as
investors realized what a mess the US financial system
must be in.
I recall reading (think this was in Too Big To Fail) that the deciding powers were afraid that if there was another Lehman, cash would stop coming out of the ATM machines. This is what prompted AIG and a few of the other shotgun marriages.
You're ignoring the money market here. I just looked up some numbers, and Forrester research peged the amount of deposits at FDIC insured banks at $6.9 trillion at the end of 2007 (http://www.forrester.com/rb/Research/industry_essential_us_r..., although the number of insured dollars is probably a fair bit lower than that due to limits on the size of insurable deposits), while the Institutional Money Market Funds Association gives $3.6 trillion in money market funds. Money market funds are marketed as being equivalent to bank deposits (down to the ability to write checks against them) and many retail investors don't understand that they aren't insured.
No, bold actions by financial instrument designers, sellers and buyers created much of the current mess. Agreed on the crony capitalism and ad hoc intervention, and the real shame is that the cowboys who got us here did great out of the deal, but let's lay the blame appropriately.
The problem is a lack of boldness. Bold regulation on banks and insurance companies is necessary. If we're going to do bailouts, we had better make sure the same misbehaviors can't happen again.
In the U.S., we're fucking up my trying to fix failing institutions in-place. No management changes. No meaningful regulations. Often the laws are written by the industry they're intended to police (cf. health insurance). That's a horrible strategy. We need to become outright liberal again and double down on boldness, not play around with this compromising corporate-friendly chickenshit nonsense.
If we'd just cleared the pipes by letting the banks fail, recapitalizing new banks, and basically rebooting the financial system, we'd be much further along.
This sounds like a quote by Herbert Hoover. Contrary to history's view of him (which is intensely negative) he was a very intelligent and probably a good-hearted man. He, however, believed that there was absolutely nothing government could do to save the economy, and that letting the beginnings of the Great Depression go unchecked was the least evil action. He was wrong.
Instead, we got bailouts and crony capitalism and ad hoc intervention, and today the global system is in many ways in worse shape now than in 2008.
That is true. The bailouts were a necessary evil, but the way they were handled was ridiculous. Top management at the bailed-out banks should have been fired, and real regulation should have been put in place to prevent the behaviors that made the bailouts necessary.
What ultimately is destroying the U.S. is not the conduct around our banking system. That's bad, I'll give you that. It's the two astronomically expensive wars we are fighting that are unlikely to end any time soon.
> This sounds like a quote by Herbert Hoover.
The current approach by Ben Bernanke of printing money is a reaction to the Great Depression, in which the money supply contracted. There seems to be little attention paid to the Hoover phase before it, in which many institutions failed. This purged many of the weak institution, and probably more than a few not-so-weak ones.
Purging weak institutions before making cheap money available to the banks would have been a helluva lot more sensible than the Great Giveaway that occurred.
Hoover wasn't evil as you point out, but nor was he an ideologue who refused to choose the best policy because of prior beliefs. Believing that story line makes us blind to learning from his failings to better ourselves. To wit, his great vice wasn't lack of compassion or intellectual arrogance; it was simply a... lack of boldness.
What about bold regulation on the regulators and the politicians? You remember them - they thought that subprime mortgages were a good idea, that everyone should own a house, so any bank that wouldn't play ball didn't get to play.
You remember Fannie and Freddie - they lied about the fraction of the market that was subprime, so everyone's risk calculations were wrong.
> Often the laws are written by the industry they're intended to police (cf. health insurance).
Actually, they're always written by the relevant industry.
> That's a horrible strategy.
However, like gravity, it's how things are. Any plan that assumes otherwise is doomed.
> This sounds like a quote by Herbert Hoover. Contrary to history's view of him (which is intensely negative) he was a very intelligent and probably a good-hearted man. He, however, believed that there was absolutely nothing government could do to save the economy, and that letting the beginnings of the Great Depression go unchecked was the least evil action. He was wrong.
And, you're completely wrong. Hoover tried stimulus after stimulus; he dramatically increased spending. FDR actually campaigned against the spending and changed course upon taking office.
Both Hoover and FDR believed that the great depression was caused by excess production, so they both tried to restrict it. FDR didn't give up until it became apparent that an "arsenal of democracy" had to actually produce lots of stuff.
This "war on production" is now credited with putting the "Great" in "Great Depression", that is, with making it last as long as it did.
http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonge...
However, his stimulus programs were tiny compared to the size of the hole. FDR's programs got progressively bigger over time, until he blinked in 1937, but were still quite small compared to what was required. When WWII came along is when things got serious.
Here's a nice table:
http://www.presidency.ucsb.edu/data/budget.php
That's the basic Keynesian view as I understand it. I find it credible, but the fact is that I don't actually know that much about economics. One thing that I am quite sure of, however, is that nearly no one else talking does either. Or if they do then they usually have got several axes to grind and are selective in their data, disingenuous in their arguments, or too emotional to be trusted.
Wow, I'm getting pretty cynical about the whole thing.
We've been bailing out too-big-to(should)-fail, crony corporations ever since Chrysler in 1979. And they die slow deaths regardless of how many taxpayer dollars line their executives' "golden parachutes". Let the strongest survive and the weakest find new careers. That's how you get "management changes".
[Hoover] believed that there was absolutely nothing government could do to save the economy, and that letting the beginnings of the Great Depression go unchecked was the least evil action. He was wrong.
Well, if he believed that, he had a funny way of showing it. Maybe he didn't intervene as much as FDR, but he was a lot closer to FDR than Coolidge: http://www.eurekalert.org/pub_releases/2009-08/uoc--hps08190...