Why Conservatives don't care if the bailout was a success

[tongodeon]

One of the best things I've written in the last year (if I may say so) is this post on John Haidt's Five Moral Dimensions. I keep coming back to that post, mentally at least, because it explains why people have such a hard time seeing eye to eye politically.

Take the TARP "bailout", often inaccurately characterized as a $700 billion giveway to

Comments

[ctd]

>TED started coming down as soon as it became clear that the Feds weren't going to let the rest of the system go the way of Bear by passing TARP.

This should be your first clue - the TED spread wasn't high because a lack of liquidity, but rather a lack of confidence. Why? Perhaps because the man saying, "everything's fine" had suddenly started telling everyone he needed a trillion dollars, immediately, to solve the worst.crisis.evar

Confidence timeline, bankruptcy and counterparties, TARP and markets

[tongodeon]

the TED spread wasn't high because a lack of liquidity, but rather a lack of confidence.

False choice. It was a lack of confidence brought about by lack of liquidity.

Why? Perhaps because the man saying, "everything's fine" had suddenly started telling everyone he needed a trillion dollars, immediately, to solve the worst.crisis.evar?

What's funny about your speculation is that it doesn't even fit the evidence you present in support of it. Lehman's troubles became apparent in early September, when TED was at 100 or so. "The Man" allowed Lehman to fail on September 15 2008, which brought TED up to 201 the next day - the biggest spike ever - and continued to climb. "The Man" formally proposed TARP on September 20, at which time TED was already declining because it was clear that the government wasn't going to stand idly by and watch the whole system collapse. Everything - the pre-existing concerns, Lehman's collapse, the panic, the TARP proposal, and its passage - stemmed from the problem of toxic assets and their liquidity

Re: Confidence timeline, bankruptcy and counterparties, TARP and markets

[ctd]

>"The Man" allowed Lehman to fail on September 15 2008, which brought TED up to 201 the next day - the biggest spike ever - and continued to climb. "The Man" formally proposed TARP on September 20, at which time TED was already declining because it was clear that the government wasn't going to stand idly by and watch the whole system collapse.

This is a hilariously subjective take on things, but whatever. It only serves as more evidence of the placebo effect in action.

>which brought TED up to 201 the next day - the biggest spike ever

How did you research this? It's false, and your link to the WSJ doesn't even mention TED btw.

>The tens of billions of money in toxic investments would *not* have "gone away".

? It's called taking a loss. Taking a loss is OK. A couple of banks going under is OK. The total amount of toxic assets, from your link to propublica, was 19.2b. Looking at the Fortune 500, this is between the annual revenues of Delta Airlines and Staples Office Supplies. Not really a big deal.

>New Rule

This is not

Re: Confidence timeline, bankruptcy and counterparties, TARP and markets

[tongodeon]

This is a hilariously subjective take on things, but whatever. It only serves as more evidence of the placebo effect in action.

New Rule: you can't discuss the placebo effect until you demonstrate that you understand the placebo effect.

The placebo effect accompanies sham treatments. People get better if they think that they're receiving a real treatment. The placebo effect also accompanies real treatments, and effective allopathic practitioners perform their treatment so that the placebo effect will be working with them.

There was an element of TARP that was political theater, designed to instill "hilariously subjective" confidence in panicked investors and markets. But the market itself was badly undercapitalized, as you can see in any bank's prospectus or the aggregate tables in any of the Problem Bank Lists or this table here. TARP solved both problems: the objective problem of undercapitalization, and the subjective problem of investor confidence caused by the undercapitalization.

>which brought TED up to 201 the next day -

Re: Confidence timeline, bankruptcy and counterparties, TARP and markets

[ctd]

Here's what you should do when I tell you you're wrong - think to yourself, "well, I've certainly been wrong about plenty of other things - perhaps ol' CTD has a point here!" Then you should look up the historical TED spread and find that it's indeed been above 201 before. Then you should admit you were wrong.

The advantage of this is that you are now free to be right. I want you to be right, because then you can apply your rhetorical abilities and prodigious typing skills to supporting positions which have been critically considered rather than wasting them.

Re: Confidence timeline, bankruptcy and counterparties, TARP and markets

[tongodeon]

I was wrong to say "the biggest spike ever" in relation to September 15 2008, but that's a very minor semantic point that's irrelevant to what I'm trying to explain.

The Lehman failure happened on September 15, and it was a very important milestone, but the financial crisis did not begin there. Evidence of the most recent crisis begins in August 15 when Ted went above 100. Bear Stearns had its troubles in March which the Fed brokered a takeover for, then Fannie and Freddie started looking for rescue in July, which completed in September. Lehman was a trial of the "let it fail" plan - your plan - with disastrous results that I've already gone over many times. Congress passed the plan on October 3, and by October 13 when Paulson had his meeting with nine bank CEOs TED was on its way down again, and the commercial paper market gradually unfroze. And TED has stayed down, with commercial paper continuing to flow freely. TARP was a success by any subjective or empirical standard, accomplishing what it set out to accomplish, at a fraction

Commercial paper, Liquidity, and Systemic Collapse

[tongodeon]

In the course of this, some companies continually dependent on loans might have gone under. This is again fine. Loans are for companies who have discovered how to send chocolate cake over the internet, not for companies whose revenue barely covers the interest.

New Rule: you can't talk about the commercial paper market until you understand what it is. It is not "loans for companies who have discovered how to send chocolate cake over the internet". It's the corporate equivalent of the credit card that I don't carry a balance on but use for buying groceries and Amazon purchases. Commercial paper is to corporate balances what just-in-time shipping is to warehouses. You can explain it the way you did, but it shows that you don't understand what you're talking about.

and with the Fed's own rate near zero, that would be a tough standard to match.The Fed was already happily lending to banks at close to 0%. AIG had just been nationalized on September 16 for $85 billion. Bernanke proposed TARP because the trend saw no sign of stopping, and

Re: Commercial paper, Liquidity, and Systemic Collapse

[ctd]

I'm not conflating commercial paper with business loans. I should clarify that I don't give a hang about any particular bank. The thing that would worry me, that would make me think there was a crisis, is if this greatly affected actual businesses that do things - Cake over IP, or as this contemporaneous account had it, CAT, which would have had to pay an extra 1.5% on its bonds. Quel horreur! Non.

And yes, if the rising cost of borrowing money caused hundreds of businesses to go away, that would be fine and indeed healthy. There are millions of businesses in the US. There's no reason to support the most reckless and foolish, even if their campaign contributions are bountiful and dependable in inverse proportion to their wisdom.

Re: Commercial paper, Liquidity, and Systemic Collapse

[tongodeon]

The thing that would worry me, that would make me think there was a crisis, is if this greatly affected actual businesses that do things

Do you understand what the commerical paper market is? It serves actual businesses that do things. It completely stopped, which greatly affected actual businesses that do things.

And yes, if the rising cost of borrowing money caused hundreds of businesses to go away, that would be fine and indeed healthy.

It was far worse than simply the "rising" cost of borrowing money. That would have been fine. The price of commercial paper didn't increase, the ability to borrow money in that market ground to a halt. Suddenly realizing that they were teetering on failure, undercapitalized banks didn't want to let go of any of their remaining capital. Commercial paper, being the most agile and shortest-term, was simply a leading indicator. They could have waited until that panic trickled down to every business loan, home loan, and credit card in America but the whole point of TARP was to not let it get that far

Re: Commercial paper, Liquidity, and Systemic Collapse

[ctd]

The company NPR focused on, Servicemaster, is exactly the kind of company I was talking about earlier when I said, "Loans are for companies who have discovered how to send chocolate cake over the internet, not for companies whose revenue barely covers the interest." (although I should have said operating income, not revenue) If we look here we see their income is about -5% of revenue. If we grab their quarterly report on 8/29/08 from EDGAR, we find income of 2% after interest costs of 8.8%.

Would you buy stock in that? You can't, because they went private in 2007. Who bought them? From EDGAR again, "Clayton, Dubilier & Rice, Inc. (“CD&R”), Citigroup Private Equity L.P., BAS Capital Funding Corporation and J.P. Morgan Ventures Corporation".

Oh man, those poor banks can't catch a break, can they? This poster child for suffering from the sins of large investment banks was owned by large investment banks.

Now, regarding the nature of its suffering, the WSJ has it here that commercial paper was available but had gone to 8% at one

Re: Commercial paper, Liquidity, and Systemic Collapse

[tongodeon]

The company NPR focused on, Servicemaster, is exactly the kind of company I was talking about earlier when I said, "Loans are for companies who have discovered how to send chocolate cake over the internet"

Only you can know for sure what you meant about such an absurd example, but "a lawn care company, Merry Maids and Terminix" have nothing to do with the internet or sending cake anywhere. Lawn care, maid service, and pest control are basic traditional service-oriented companies. The ones directly impacted by commercial paper markets freezing.

And regardless of the financials of that particular company you're not seeing the forest for the tress. Servicemaster and every other company in the world couldn't use the commercial paper market, because trading had stopped. The most liquid part of the market stopped being liquid. Everything was on hold.

the WSJ has it here that commercial paper was available but had gone to 8% at one point

Your WSJ article has it that commercial paper soared to 8% when it was available, which it wasn't

Re: Commercial paper, Liquidity, and Systemic Collapse

[ctd]

I figured you would be able to figure out that ServiceMaster was the company on the other side of that comma, "barely covering interest payments". I apologize.

Is your "everything's on hold" link humor, or poor sourcing?

You are reading part of the WSJ article I linked to. Money market funds weren't buying, but someone was (and they made 6% off IBM - probably a good deal). Nothing you link to shows that the buying of commercial paper literally stopped.

Re: Commercial paper, Liquidity, and Systemic Collapse

[tongodeon]

ServiceMaster was the company on the other side of that comma, "barely covering interest payments".

So you're saying that "Loans are ... not for companies whose revenue barely covers the interest Servicemaster." You're wrong. That's exactly what commercial paper is. A short term unsecured loan to cover shortfalls in the day to day operating costs of regular companies like Servicemaster - "actual businesses that do things". That was the point of the NPR story about Servicemaster, who were selling commercial paper because that's what companies like Servicemaster do. That was the whole point about the WSJ article that you cited. Without commercial paper, "short-term IOUs that companies issue to pay for operations". Actual businesses that do things "struggle to finance their daily operations".

You are reading part of the WSJ article I linked to. Money market funds weren't buying, but someone wasI should clarify what I mean by "frozen markets". The North Pole is a "frozen continent", even if you can find a dixie cup of liquid water

Re: Commercial paper, Liquidity, and Systemic Collapse

[ctd]

Previously, you said, "That's why the Fed had to step in and buy commercial paper on October 7 - because nobody else would. Period. Not at 8%, not at 80%. Nothing." Those were the facts as you had them. So now we know that the facts are different, you are changing not your beliefs, but your valuation of the relevance of those facts.

I think it is time for me to ask if there is a situation where you _wouldn't_ see the immediate necessity for the seizure of hundreds of billions of taxpayer dollars. Would you ever find a certain percentage dip in commercial paper volume acceptable, or should corporations always be able to borrow money, no matter what?

Re: Commercial paper, Liquidity, and Systemic Collapse

[tongodeon]

So now we know that the facts are different, you are changing not your beliefs, but your valuation of the relevance of those facts.

Now we know that the facts are very slightly different. I said "Nobody else would." The reality is that almost nobody would. A ridiculously small number of businesses were able to sell very small amounts of paper at usurious rates 8x higher than normal. Whether commercial paper was 100% frozen or 99.9% frozen doesn't change any part of the big picture. You might as well say climate change scientists are wrong because the temperature has risen .72 degrees instead of the .74 degrees claimed.

Remember, the whole reason why we're discussing this is not the problem of the commercial paper market freezing, but with that event being evidence that banking institutions were undercapitalized - mortally undercapitalized - and that systemic failure was imminent. The TED spread is similar evidence. So is the string of previous large failures due to the same undercapitalization that existed in very large banks that

Re: Commercial paper, Liquidity, and Systemic Collapse

[tongodeon]

Those were the facts as you had them. So now we know that the facts are different, you are changing not your beliefs, but your valuation of the relevance of those facts.So I was thinking about this on the way home