Years of Poems and Spirits

Just some random thoughts on the financial crisis. Actually, there is a lot. Not sure if I can link them altogether. Otherwise, I would be doing something else for a living.

1. A very good article on WaPo about the different reform ideas advanced by Geithner and Volcker.  The core of Geithner’s theme is to put a requirement on reserves. Volcker’s is stiffer by shifting back to Glass-Steagall.

2. The article also says,

government guarantees designed to spur lending by letting banks borrow cheaply were instead funding banks’ speculative investments and fueling soaring profits

I was amused while reading this part. I can imagine how maddening this must be to Geithner: on the one hand, he’s taking the flak for protecting the status quo on Wall Street. On the other hand, the very people he’s protecting just can’t stop undermining his position.

3. I have my own doubts on whether it is possible to go back to Glass-Steagall. The input I received was very mixed. I still remember the momentum behind the drive to repeal it in the 1990s. The way it was portrayed in the media was that it was out-dated. The repeal itself seemed like just a formal recognition of what “everyone on Wall Street” already knows. Then I heard Chris Dodd saying voting for it was one of his biggest regrets, which implies he had other choices or repealing G-S wasn’t that inevitable.

4. I don’t know enough about Volcker. But I really liked his idea of nationalizing the big banks during the crisis (early last year). It seemed fair and reasonable. But Volcker doesn’t have many supporters in the establishment. Yet there has to be some balance between being the best solution and being a likely solution.

5. Another source of doubt (about going back to Glass-Steagall) comes from my earlier thoughts on adding a tax to all financial transactions so that the public has a control nub to turn. After some thoughts, now I am not sure that is workable solution. There are so many types of “financial transactions” that it is really hard to demarcate what is speculative transaction and what is not. In a way, it comes back to the difficulty of defining Mark-to-Market rule in GAAP guidelines.

6. If it is hard to discriminate “speculative” from “non-speculative”, isn’t it equally hard to separate commercial banking from investment banking? Like what do you with the deposit in a commercial bank? You have to invest it somewhere. Do you allow a commercial bank to buy financial products or to use a middleman to manage the capital? And how do you define a “financial product?”

7. I may not be asking the right questions. But at the same time, I am not convinced either that putting the firewall back up is a proactive way to stop speculation once for all. After all, we tried it before.

8. The GOP’s idea–don’t intervene on the means, but set an clear boundary on the outcome, then the market will correct itself, doesn’t fly either. Garrett from NJ was saying, if you tell the banks that there is not a public safety net, they will behave. That is a pretty lame presupposition. Not even Greenspan is on board this time.

9. So it becomes somewhat an intellectual challenge, kind of like, how do you treat cancer? Cancer cells are normal cells gone rogue. Credit/market liquidity is kind of like that: you need a vibrant source of credit for the economy. But some times, the source (i.e. Wall Street) produces so much liquidity that causes bubble (tumor).

10. Maybe that is why financial reform appears so appealing but so difficult to carry out. It is like when people see cancer, they think it is a disease. But it is not (at least not in the sense that the body is attacked by external organisms). It is part of us, like aging.

1. Feel somewhat vindicated when I saw Time’s “Decade from Hell” soon after I posted the last entry on the gloomy 00’s. One thing I forgot to add: the constant talk of Global Warming–just another example of how pervert scientific advancement feels in this decade. Sometimes I wonder how I would look back at the last 10 years when I am really old. It was exciting, but what does it mean?

2. Liked Krugman’s idea about taxing financial transactions, a.k.a., the Tobin tax. Tobin thinks such a tax will “throw some sand in the well-greased wheels” of speculation. Keywords: “well-greased”–the Monetarists always compared credit to “engine oil fir the economy”. And “speculation”. It is a word few mentioned in the current debate. But during the Depression Era, it was the received wisdom that excess speculation was what caused the Wall Street crash and the subsequent economic melt-down.

Now we do have a much more sophisticated understanding of why we should not use the S word as a catch-all phrase to describe all financial activities. Yet I am still at a loss at why people are not seeing the obvious: whatever the apologists say, there are speculations that are so rotten and everyone knows it. By taxing financial transactions–all of them, not just a few, the State can establish a framework within which it regulates an activity with not only economic but profound socio-political importance. I hope one day people will wake and say, hey, credit market is a public asset!

For this reason, I am very disappointed at the makeup of Obama’s economic team. The Monetarists dominate the decision-making (e.g. Geithner, Summers, Bernanke and their supporters vs. the likes of Paul Volcker) in a time their theory is fundamentally questioned. The rise of the Wall Street Gang is closely linked to the rise of the Monetarists.  Yet at a time when the Wall Street is totally discredited, the Monetarists protects them with the same tactics the NRA uses to let drug gangs keep their assault rifles.

3. The question about excessive debt. First read James Surowiecki’s column, soon after heard an interview of an author on private equity. The gist: the tax code that allows deduction on interest payment unintentionally created a debt-happy society. Particularly, the code that applies to business enables LBO. The consequence is that heavy interest payment (vs. flexible dividend) depleted several industries. Something I never really thought about. Thoughts now -

a. If LBO is such a risky proposition, why there are banks still willing to lend money to the buyers (or is junk bond still a viable alternative to bank lending)?

b. Are there industries that, for better or worse, call for this type of attack? E.g. mature industry,  fixed competitive landscape, good cash flow, etc. In other words, are there situations where earnings are better distributed to investors through interest payments than dividends?

c. How do I look at this issue using capital structure theories? e.g. M2 theory? Or they are not related at all?

d. Can I look at national finance using capital structure terms? Say credit/liquidity as equity and public debt as debt? Wish I can catch Jennifer K. in the hall way and ask her that …

Things I posted somewhere else but worth recording …

Rants against Daniel Snyder and the Redskins’ front office -

Winning, to Snyder, takes too long, requires too much investment, which distracts operational focus and thus incurs too much uncertainty. That is no way to make a quick buck.

Take a minute to ask yourself, why does Snyder choose to endear himself to LaVar Arrington, or Clinton Portis, but never to his QBs? If he cares about winning, wouldn’t he bond with his franchise players first? But why LaVar and Clinton, the perennial underachievers? Does Snyder have a whole lot in common with those two dudes? Did they grow up in the ‘hood together? Or were LaVar and Clinton present at his bar mitzvah?

Or is it because those two are “characters” and their jerseys move faster than others?

Can’t you see, people?! Go ahead, call yourself a true Redskins fan and go on talking about Campbell’s throwing action or why the blocking scheme doesn’t work for Portis, if that makes you feel so much a football insider. Or go on talking about why free agency wasn’t the way to go but building from draft choice is, as if Snyder is so dumb that he still hasn’t figured it out after so many years.

In fact, every free agent he brought in is just a billboard in the stadium. Every one of you who think you have an insight to the game is just a pixel in his demographic bar chart.

Enjoy the game. Life is too short to worry about someone else’s business.

My thoughts on the financial industry, excess compensation and the cause of financial crisis:

What is the mission/nature/function of the American financial industry – to make the overall economy more efficient or constantly generating liquidity for liquidity’s sake?

Why do we need so much liquidity for the economy to function at all?

Isn’t excess liquidity the root of our over-borrowing, over-spending and speculation?

Does any one think this tax-payer funded bailout will change the financial industry’s “reason-for-being”?

Does anyone really think there exists a set of regulation that can reign in the creativity of the financiers on the Wall Street?

If I have to pay sales tax for buying a hot dog or selling a used car, why are the financial transactions not taxed? What makes selling and buying derivative contracts so beyond taxation?

For those who decry such a tax would cost every Joe investor – did Joe investor get rich from not having to pay any tax? Was he able to escape from the financial ruins for not paying any such tax?

The more I live, the older I am, the more absurd a world I feel I live in.

Remember in a Jon Lee Anderson article he described walking in a neighborhood in Kabal, Afghanistan talking to people he can barely comprehend, then a guy walks up, speaking to him in English and telling him what a nonsensical world he’s living in. Then disappeared after that. That scene left a deep impression with me, although I didn’t know why then.

Now, I feel the same way as that guy does.