naked capitalism

Walther von Reinbach says:

Dark musings, 2009-03-24 Steve Waldman. Today’s must read. I must confess I missed this angle COMPLETELY, and it’s bloody obvious.

link doesn’t work

try this one

correct link

John Rosevear says:

“Legacy banks.”

An excellent coinage. Worth propagating.

BDBlue says:

Thanks for the link to the Dark Thoughts post, although I think Waldman is missinig one additional reason why the bankers would agree to take losses, if there are any, as part of the Geithner plan – the lack of criminal prosecutions and any accountability. It avoids receivership and/or nationalization which is accompanied by a change in management. Management that will not have the incentive to hide the massive fraud and looting that’s been going on in the financial sector.

It’s the same reason why there’s no calls to find out the real size of the problem or potential taxpayer exposure. The more light that shines on this mess, the worse it – and by extension the Masters of the Universe – look.

Under the proposed plan they get to keep their secrets at a relatively small cost. The taxpayer gets to stay in the dark and pay the biggest share. What’s not to love!

Timo says:

That panda looks suspiciously happy…maybe he just received his AIG bonus?

Richard Smith says:

Huh? Yves, you didn’t miss the dark musings angle at all – you said it back in Feb, here:

http://tinyurl.com/b3ayml

We can just see a bit more of the mechanism now, that’s all.

Eleanor says:

The panda is very nice, but the plumed dinosaurs yesterday were truly wonderful. More dinosaurs! Fewer bankers!

Though I suppose, while the bankers are around and doing harm, we need to pay attention to them…

Anonymous says:

I actually like the Waldman analysis, though I too am doubtful that PIMROCK would not make money up front, but I assume they will gin up fees to cover any losses plus ensure a place at the trough to profit wildly down the road.

I see the comments on the Waldman piece mention conspiracy. There need be no overt conspiracy here. This is the genius of the market at work. Of course, it is a market of looting.

Hundreds of independent actors do not necessarily collude in setting up this system, but (by various actions of commission and omission) they each act in their own self interest and collectively help engineer a system that allows each individual the maximum opportunity to loot. Why do you think so many subprime zero-down mortgages were written? The few in charge had huge incentives to be paid up front and the many to later be burdened with any possible catastrophic unwinding had (on an individual basis) minimal incentives to be proactive in stopping it.

I like The Road to Serfdom as much as anyone, but even Hayek acknowledged that collective action was necessary in cases of clear market failure. Obviously, a man so enamored with the benefits of competition and the efficient allocation mechanism that competitive markets can provide would hate any market dominated by a network externality that created a monopoly. There are such things as market failure. Deal with it.

Markets do exceptionally well allocating goods and services that are tangible and consumed immediately. Markets has proven less adept in the financial arena with intangibles and especially in allocating intertemporal risk.

I wish this were easier for people to understand. Markets require vigilance. Democracies require vigilance. There need be no conspiracy, just skewed incentives.