September 23, 2008

The Mother of All Management Buyouts

Martin Kelly writes from Scotland:
You're dead right to describe the bailout as a coup - in fact, it's worse than that; to all intents and purposes it's a management buyout of the American financial and political systems.

And done with Other People's Money!
I've been blogging about this since last Tuesday (to anyone who's willing to listen) - there is absolutely no normative difference between the proposed operation of Paulson's bailout and Gaetano Salvemini's description of Mussolini's economic theory as being that 'profit is private and personal, loss is public and social'.

My published articles are archived at iSteve.com -- Steve Sailer

17 comments:

Doug_S said...

Here's what I think happened. The masters of the universe (MOTU) on The Street were watching the climate change people scare the pants off the public with tales of global warming, saw that the press had no ability to evaluate the claims, and watched the climaters belly up to the trough and about to take over all transportation and industry with the help of carbon allowances. The MOTU said to themselves, the next time a financial panic strikes we all get on the same page, tell everyone it is the end of the world, the press being ignorant will not be able to evaluate our claims, then we belly up at the trough and make the taxpayer take all the losses.

Only thing people are more scared of than accidentally destroying the Earth is another Great Depression. Now the climaters are in the back seat. Everyone is worried about financial meltdown.

That 700 billion bailout is a made up number. It will take infinite money to stop the present asset price bubble from deflating.

rightsaidfred said...

doug-s has truly nailed it:

>>>>It will take infinite money to stop the present asset price bubble from deflating.

Learn it. Love it. Live it.

dearieme said...

It seems odd to call it Capitalism when there isn't any capital. Transferring the lack of capital from the banks to the government won't create any more capital. Where has the capital gone? Where it came from - thin air.

Chief Seattle said...

I've bet on the bailout by buying financials and commodities. No one would be happier than me to lose some money if this thing failed. But I have a feeling this "show trial" is going to be over in a few days and Wall Street will get basically whatever it wants and by Christmas time the public will have moved on to something else so that they can continue to give themselves $10,$20, $40 Million bonuses with taxpayer dollars.

testing99 said...

We had this problem before. I give you the Savings and Loan crisis of 1989:

http://en.wikipedia.org/wiki/Savings_and_Loan_Crisis

Taxpayers on the hook for 124 Billion USD.

The solution, the Resolution Trust Corporation:

http://en.wikipedia.org/wiki/Resolution_Trust_Corporation

The problem is real. It's not good for all sorts of financial organizations to fail at once, and leave the financial trading environment polluted with the leavings. Which would include any of the nastiness involved in the 19th Century bank panics.

It's worse than "Wouldn't be prudent. Not Gonna do it." It means that almost any business or sound credit consumer would be unable to get loans. Among other things, laissez-faire folks, that means the collapse of auto sales in this nation. Which alone could tip us into full blown depression.

Now, buying up the assets, having firms in a private partnership taking some of the burden, and parceling out the assets of the bad mortgages and such is probably a good idea. So not all the inventory gets dumped at once, and markets get stability, so there is time to adjust.

Let me remind you that most of the Houston area coast is wrecked -- so having credit available does indeed matter to about a couple of million of Texas residents.

Is it wise to pay out $700 billion? No. Any more than paying out $890 billion for Obama's "global poverty tax" to send money from poor Americans to rich third world dictators. But something along the lines of $400 billion or so, with the RTC structure, is wise.

We've been before. We've got proven tools to get out of it. Let's use it.

Proofreader said...

Neo-fascism has done wonders for the Japanese economy before and after the war.
But it will fail in the USA.
Read the following piece:

"Japan, Refutation of Neoliberalism

Robert Locke"

http://www.paecon.net/PAEReview/issue23/Locke23.htm

Doug_S said...

Old Wall Street adage: when something is too complicated for you to understand "follow the money". Money is going from your pocket to Goldman and you should not like it.

Anonymous said...

That article on Japan is outstanding - thank you for posting it the link.


It seems that Japan is able to get the benefits of capitalism without many of the negatives - in other words without a class of super wealthy business owners that capture much of the wealth and without a class of super wealthy CEOSs that capture much of the wealth.

Essentially, the most talented people in Japan are willing to work just as hard as their counterparts here in the USA, and to produce just as much good, for much less compensation.

Let's accept for a minute that this is true. Could we implement something similar here?

As an admirer of the Japanese system, my hypothesis is that it would not work here - the most talented business people in the USA have no special loyalty to this nation or its people. perhaps that is regrettable, but it is the case. So if someone build a spectacular small rapidly growing company, and the USA tells him that instead of him being able to put 50% of the wealth he creates in his pockets he can only put 5% in his pockets, he will respond by moving the company to Hong Kong, Dubai, Singapore, Ireland, or some other tax haven.


So my personal theory is that Japan is able to persuade the most productive people there to share their wealth with all of society because these people have no choice - there is no place in the world they can move to and still feel good.

In the USA, our most productive people feel comfortable moving to other places. Hence we in the USA have to allow people like Bill Gates and Larry Ellison to put $20 billion in to their own pockets - if we tried to persuade them to share it Gates and Ellison and those like them would leave the USA

but i am open to alternate points of view and in fact in my heart i hope that someone on this board will prove me wrong

Martin said...

"testing99 said...

The problem is real. It's not good for all sorts of financial organizations to fail at once, and leave the financial trading environment polluted with the leavings. Which would include any of the nastiness involved in the 19th Century bank panics.

Good for whom? That's always the thing left unsaid by politicians, policy experts and all the others who make their livings telling us proles what to do. When they tell you something along the lines of "free-trade is good because....", you should always ask yourself, "Good for whom?"

Well, it's clearly good for AIG. And perhaps Merril and Goldman, too. They are still standing for the moment, but they will probably avail themselves of this tax-payer funded sin-eater corporation and dump their bad debt on it too. Paulson used to be CEO of Goldman-Sachs, too. No conflict of interest there.

They invested poorly. The penalty for that is that they loose their investment. Letting those bad debts go bad will financially hurt thousands of foreign investors, including foreign governments, oil sheiks, and chinese businessmen-slash-colonels.

Sounds good to me. Maybe they won't be so keen to lend us money in the future. And maybe we will stop pawning our nation to buy imported crap from Walmart.

Captain Jack Aubrey said...

Is it wise to pay out $700 billion? No. Any more than paying out $890 billion for Obama's "global poverty tax" to send money from poor Americans to rich third world dictators.

Hey now - the actual figure is $845 billion. But then what's $45 billion between friends?

Of course even the $845 billion is based on GNP - 0.7% annually to foreign potentates - so that number too will be shrinking under Obama's proposed policies.

Anonymous said...

It means that almost any business or sound credit consumer would be unable to get loans.

No, Mr. Jennings Bryan, it just means they would be unable to get loans at below-market rates. And enterprises that require constant infusions of credit are simply not viable.

Among other things, laissez-faire folks, that means the collapse of auto sales in this nation. Which alone could tip us into full blown depression.

Auto prices are distorted by the very fact of artificially cheap credit.

The asset-owning class enjoyed a run up in paper wealth for which they did not save. Now, the wage-earning class can take shelter from the correction in falling prices. Consumption unfunded by prior savings always, always ends. Ron Paul and the Austrian school are vindicated yet again, and the Keynesians and neo-classicists are proven wrong. And the bottom line for you, Comrade Trotsky, is that there isn't enough ink and cotton fiber paper in the world to prop up the US hegemon at this point.

--Senor Doug

Born Again Democrat said...

The word "credit" means "to believe." Once confidence is lost, credit disappears. Without credit, the money supply implodes, prices plunge, and most business grinds to a halt. This is what Paulsen and Bernanke are worried about.

Printing money and giving it to bankrupt institutions so they can pay off their debts is one way -- the only way? -- to head off the crisis.

Expect a lot of inflation in the years ahead, with falling real wages and a transfer of wealth from creditors to debtors. American homeowners with fixed rate mortgages -- the vast majority -- will profit, provided they can maintain their mortgages.

A lot of winners and a lot of losers.

VoodooMan said...

dearieme said...
It seems odd to call it Capitalism when there isn't any capital.

It's not capitalism, but corporatism.

Anonymous said...

Expect a lot of inflation in the years ahead, with falling real wages and a transfer of wealth from creditors to debtors. American homeowners with fixed rate mortgages -- the vast majority -- will profit, provided they can maintain their mortgages.
A lot of winners and a lot of losers.


I wonder about this. A lot of formerly well-paying jobs moving overseas to low-cost places. How do you keep the jobs here? Either smaller wages or high infation to deflate the actual value of those big paychecks.

And does the bailout amount to propping up the wealth of the investment class? What we're saying is that there is no big downside risk to investment.

What this bailout then does is just help continue apace the growing wealth disparity, that would naturally be correcting itself about now w/o the bailout.

Just speculation, all.

Anonymous said...

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves, I intend to rout you out, and by the Eternal God I will rout you out! If the people only understood the rank injustice of our money and banking system there would be a revolution before morning." -- Andrew Jackson

Doug_S said...

"It seems that Japan is able to get the benefits of capitalism without many of the negatives - in other words without a class of super wealthy business owners that capture much of the wealth"

I'm a business owner and I assure you that I do not capture the wealth (as if wealth exists out there and we each just put out our arms and grab a big measure for ourselves).

I buy everything my business uses at market prices on a free market. I buy T-1 internet connectivity at the same price that you could. I buy Dell computers and Linux operating systems. I buy some shareware and some shrinkwrapped. Everything I buy could be bought by you at the same price I pay. I learned unix and about the internet by reading USENET. The info was free for anyone who put in the effort.

I mixed the things I bought with my judgment and vision and I can sell the services I provide at ten times what my costs are. No one requires my customers to buy my services, each customer finds my services a good value and beneficial for them. In fact there are many competitors who offer similar services to those I offer. My customers may chose among all of us.

I created value. I bought things at their fair price available to anyone and combined them to produce something worth more. That people freely pay me more than my costs shows I added value. Just as a good violin is worth infinitely more than the cost of the wood, glue and strings.

The idea that there is some social wealth that just exists and that I somehow grabbed a bigger share than I deserve is, frankly, bunk.

Anonymous said...

I buy everything my business uses at market prices on a free market...Everything I buy could be bought by you at the same price I pay.

Nicely said, Doug, mostly, but...I think what many resent is the fact - yes, the fact - that the business lobby has been jiggering the rules for quite some time to work in its favor. Little things, like, ya know, not enforcing the immigration laws that work in favor of some people - business owners - and against others - workers.

Now they want the taxpayer to bail them out of their lousy financial decisions. We may very well have to do something to prop up the financial sector, but any solution should avoid helping those who got us in the mess. Execs need to go to jail. Compensation needs to be returned to the shareholder. Those execs who don't end up in jail should be permanently barred from the financial sector, via some rule, old or new (no working for an FDIC insured lender, etc.) I'm sure there's plenty up and coming talent available to replace them.