The Choice Wasn't "Do Bailouts" or "Do Nothing"

Barry Ritholtz provides a very succinct summary of what were the alternatives to the bailouts of 2008, and takes to task those who want to defend the bailouts as if doing nothing were the alternative.

Don't miss it here.

WHERE BANKS' BAD PAPER GOES TO DIE

The taxpayer-backstopped Fanny and Freddie, of course:

The Obama administration is continuing one of the more horrific policies of the Bush administration: Using the GSEs as a back door bailout for the rest of the banking sector: These banks are selling their garbage to the GSEs — and according to some anecdotal evidence, are getting pretty close to full boat (100 cents on the dollar) for these bad loans.

Hence, Fannie and Freddie have become a dumping ground for all manner of bad bank loans.

The GSEs have had their own problems over the years — accounting fraud, recklessly chasing market share, lowering loan quality, etc. — but they have now become . . . the last stop for every crappy mortgage ever written.

Ritholtz has more here, on the story from Bloomberg.

The Bailouts Still Do Not Add Up

Ritholtz gets it right on the bailouts, bringing up what others would still like us to forget. Notice the little problem of toxic assets he includes on his list of six things which today's happy talkers ignore. Those non-performing assets remain spread all over the place like so much pig manure, stinking up the springtime air. It's the huge problem which STILL remains unresolved, even though the public and Congress were fervently pitched the story that TARP was necessary and designed to address it, until a couple of weeks later when it wasn't. The old bait and switch. These bastards should all hang for it, starting with George Bush and Henry Paulson, and every member of Congress who voted for it.

The following appeared here, with supporting links:

- The Big Picture - http://www.ritholtz.com/blog -

An Improved Version of Bailout Math

By Barry Ritholtz

April 13, 2010

The New York Times one ups the Wall Street Journal, taking a more philosophical — and broader — look at the Treasury’s Bailout Math.

It is still incomplete, but a significant improvement. Recall yesterday we criticized the WSJ’s wide approach (Light At the End of the Bailout Tunnel) as so much happy talk.

The Times' Andrew Ross Sorkin followed our advice. In addition to a snarkier tone (Uncle Sam down $89 billion? “It’s enough to make us all feel rich, isn’t it?”) his article included the following bullet points:

• Probable losses from American International Group = $48 billion

• Losses from Fannie Mae and Freddie Mac = about $320 billion

• The Federal Reserve virtually interest-free loans to Wall Street = $1 trillion dollars

• Moral Hazard: Numbers don’t help avoid another financial mess in the future

• Last, its about right and wrong.

It's a more skeptical improvement over other less critical takes on the success of the Bailouts. Still, Sorkin’s piece is also incomplete, leaving out:

• Depleted FDIC reserves;

• FASB 157 suspension allowed banks to hide losses

• Bad loans on bank balance sheets

• General Motors & Chrysler Bailouts

• Ongoing Foreclosures and Housing Problems

• Highly concentrated banking sector/lack of competition

I believe the best we can honestly say about the bailouts (without any spin or bias) is that, so far, the worst case scenarios have not played out, and that the return on investment is in the top quartile of expectations. Further, we still do not know what the final costs will look like, given a variety of factors such as housing, economy, etc. Also, we have no idea what the longstanding repercussions and moral hazard will end up doing in the future. Lastly, we have created a less competitive banking system, and allowed banks to fabricate their balance sheets.

But other than that Mrs. Lincoln . . .

That Was My Line, says Barry Ritholtz

"Two items are noteworthy (besides his lifting my 'If you want less of something, tax it.' line)."

-- Barry Ritholtz, January 20th, 2010, referring to former Reagan Administration Office of Management and Budget Director, David Stockman, in The New York Times

The famous maxim, "If you want more of something, subsidize it. If you want less of something, tax it," has been circulating since before the time when Barry Ritholtz was perplexed in college, trying to figure out whether he was preparing to graduate or matriculate. The meanings of things elude him still, for which he supplies the appropriate expletives in proportion to the want of knowledge. At any rate, he's no more the author of it than he is of "It was the best of times, it was the worst of times."

This is an annoying sort of narcissism which usually emanates from New York intellectuals at The Times, but that's obviously not the case here. David Stockman is from Michigan, of course, just as Rush Limbaugh is from Missouri, whom Michael Savage routinely accuses of stealing lines. Must be something in the water, there in New York, that creates visions of grandeur from an early age.

The maxim, for what it's worth, is variously attributed to either Milton Friedman, Jack Kemp, or Ronald Reagan, but without chapter and verse. A little tough to nail down. I suspect it may predate them all. Ronald Reagan expresses the ideas explicitly in his farewell speech of 1989, but not in the identical language. Stockman, of course, knows the lines from that era, not from The Big Picture blog.

It just goes to show that the free for all of the internet is no substitute for publications vetted by the knowledgeable.

The Keynesian Moment: "Markets Can Stay Irrational Far Longer Than You Can Stay Solvent"

Very thoughtful and wise words of warning today, making sense of the nonsense, from Barry Ritholtz over at The Big Picture. For the original as it appeared go here.

What Does the Economy Have to Do with the Market?

Posted By Barry Ritholtz On October 6, 2009 @ 7:33 am

“There’s a lot of risk going ahead of some big bumps. There’s a very big risk that markets have been irrationally exuberant.”

-Nobel Prize-winning economist Joseph Stiglitz

Far be it from me to challenge the 2001 economics Nobel prize winner, but sometimes, indeed, quite often, markets decouple from the economic fundamentals.

I can show you many eras in history when the economy was awful, and nonetheless markets rallied strongly.

There have also been times when earnings did not matter, and profitability was irrelevant. There are times when animal spirits run the show, when irrational exuberance was in charge.

Such is the result of giving two million primates lots of money and keyboards and a belief they can make a living based on numbers and letters moving around — on a screen, in a futures pit, on an exchange floor, or even under a buttonwood tree.

Most mainstream economists — with notable exceptions like John Maynard Keynes, Richard Thaler, and Robert Shiller — have traditionally paid little attention to this reality. To a trader or investor, rationality matters far less than what the tape was doing.

Indeed, prices matter a great deal more to traders than theories or annoying things like “Objective Reality." To a trader, prices ARE the objective reality; to them economic theorists are peripheral players trying to rationalize reality.

I believe you can describe and explain what the market is doing, but in doing so, we must acknowledge Keynes' terribly accurate observation that “Markets can stay irrational far longer than you can stay solvent.”

I’ll have more on this later in the week . . .