The Best, Most Lucid Explanation of the Financial Crisis

Courtesy of Richard Posner at The Becker-Posner Blog.

To me, Posner’s post is probably the most lucid explanation of the current financial crisis, written in language that an educated layman can understand, while not overly simplifying what is essentially esoteric knowledge.

In other words: everyone should read this to get a basic primer on what the fuck is going on in this country.

I also agree with Posner’s conclusion:

“A more palatable approach would be for the government to drive a Warren Buffett style hard bargain, in which, rather than buying anything from banks, the government would invest in them in a form, such as purchase of newly issued preferred stock, or bonds with a long maturity, that would augment the banks’ capital and thus enable banks to make more loans. That would avoid conferring a windfall on the banks by overpaying them for their bad securities; no one thinks Buffett is conferring a windfall on Goldman Sachs. After the industry was back on its feet, the government could sell the bank stocks or bonds that it had acquired.”

I agree for the same reasons that Posner outlined: 1) no one really knows how much those mortgaged-based securities (MBS) are worth, and 2) the government creates problems of moral hazard of varying degrees if it overpays for those MBS.

If what we are experiencing is a lack of capital (an uncontroversial claim to me), then the solution would seem to be capital injection. Now the Treasury’s proposal does do this, but it has the potential to create moral hazard. Another way to inject capital would be to buy equity, but somehow the politics of this does not play, because buying equity is seen as government’s taking partial ownership in private firms, and by God, all patriotic, red-blooded Americans know that THAT IS FUCKING COMMUNISM!!!

But that political claim is ridiculous: whatever the Treasury does, it is essentially shifting the risk of those MBS onto the public. In other words: privatize profits, socialize risks, which runs counter to everything that a “free market” ideology stands for. So to claim that buying equity from banks is too socialist is sort of absurd.

And finally, on a side note: what is the fucking point of lowering capital gain taxes when banks have no capital?


One Response to “The Best, Most Lucid Explanation of the Financial Crisis”

  1. Mark T. Market Says:

    Nassim Taleb spoke out in Davos about banks and the moral hazard of bailouts.

    He and Nouriel Roubini were both interviewed at CNBC recently, but soundbite journalists are incapable of handling their views sadly.

    Zimbabwe citizens know very well what kinds of horrors hyperinflation can bring, but this kind of phenomenon is considered remote from occuring elsewhere.

    Glenn Beck’s hockey stick makes me think again.

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