Sunday, September 28, 2008

The Liquidity Crisis

I realized after discussing the liquidity crisis today that I really hadn't read an explanation of the banking crisis that I thought was particularly good. Doesn't mean it isn't out there, but I hadn't seen it.

So, long story short, I gave it a crack. I'm no expert, but I have a basic undergrad background in economics and I think I basically get it. There are probably some details that I've screwed up so I welcome constructive/destructive criticism. If someone points out something substantive I can fix in the analysis, I will try to clean it up.

First, read this.

This page gives a good discussion of a liquidity crisis in corporate finance. A macroeconomic "high finance" liquidity crisis is essentially the same thing, only happening with large banks. As in everything in high finance, high-finance liquidity crises are more complex.

One key reason high-finance liquidity crises are much more complex and potentially disastrous than regular corporate liquidity crises is the meshed nature of the problem. When one big bank experiences a liquidity crisis, the bank seeks relief from its creditors in the same way a regular company would. But if the bank's creditors are close to a liquidity crunch themselves, they aren't really capable of making the calculation described in the linked example. The cost of forcing the illiquid firm into bankruptcy and allowing the illiquid firm to borrow additional money while you wait for them to shape up is the same - your own bank enters a liquidity crisis because you needed the cash from the illiquid firm to make your own debt payments.

Once this happens, the banking system has become a bag in search of a bagholder.

That bagholder in this case is the traditional banks, which are theoretically capable of absorbing the problem due to their tightly regulated debt-asset ratios that are much, much more favorable than those of the investment banks that are failing.

What Paulson and Bernanke are saying, and maybe they are right and maybe they are wrong, is that the traditional banking system may not actually be strong enough to absorb the fallout from a liquidity crisis that destroys the investment banking system.

If they ARE right, then it's correct for the government to step in, because the alternative is that they are on the hook as the bagholder for the ENTIRE banking system, unless they want to allow a whole hell of a lot of money to just disappear into thin air.

So that's the impetus for trying to bail out the entire investment banking system - because it's cheaper than bailing out the entire traditional banking system. Once again, of course Bernanke and Paulson could be wrong. But that's their argument, and at least in Bernanke's case he has no real personal stake in the call other than wanting to be right.

Now, that doesn't speak to HOW to step in. In fact, it doesn't even prove you SHOULD step in. There are other questions in that regard. One that's very important is "Is what we are doing going to work?"

On that I think there's great cause for skepticism. Even if Bernanke and Paulson think that there's very little reason to believe their plan will work, if they are worried that the banking system may fail they will obviously feel a strong subjective responsibility to try SOMETHING.

The Paulson plan does, on its face, make sense. If the investment banking system is failing, the problem is large but finite. All you have to do is provide enough liquidity to allow the failing firms to make it to the point where they've successfully taken enough of their "problem debtors" through the process described in the linked example that they've made it out clean on the other side.

The problem is, the original Paulson plan is not a particularly good deal for Treasury, because they are taking on a lot of risk and they aren't really on the hook to reap any windfall for that risk if the plan works and the banks recover. All they get in that case is the interest on the money they loaned out (which isn't nothing, but it's not commensurate with the amount of risk that's being taken on.)

The compromise the House Democrats cobbled together was a pretty good one in that regard – they are essentially buying a mix of toxic mortgage securities (which may be perfectly decent at the price they are paying, or they could be worth much less than the price they are paying) and stock options (which theoretically could wind up being worth a great deal of money, giving the government at least some upside in exchange for the big risk they are taking.)

The main problems remaining are tied up in the question of the actual solvency of the investment banks. If there are a significant number of INSOLVENT investment banks, meaning that they actually have more debts than assets, then there's not a heck of a lot that can be done.

The big problem for the next president is going to be what to do when the 700 billion allows the banking system to, say, limp along for a year before slipping into another liquidity crisis. If that happens, we'll be at a real crossroads because no one will want to accept that we wasted all that money, but you also have to draw the line somewhere.

Now that a deal has been reached, we'll never really know, at least anytime too soon, whether this deal was necessary. We'll know fairly soon whether it was sufficient.


A Foundation I Can Believe In

The Poor Man breaks down bipartisanship.

Folks who are offended by graphic language (HILARIOUS graphic language) should not click through.

Friday, September 26, 2008

NFL Parlay Picker - Week 4

I missed week 3 because of my sister's wedding, but rest assured that I would have won my parlay had I picked one.

Anyway, this week's picks:

CAROLINA -7 over Atlanta

Matt Ryan - shaky QB. Carolina - good defense, playing at home. Atlanta's running game is the wild card here, but I smell a blowout.

Washington +11 over DALLAS

Seriously, a 2-1 team with a decent defense is +11 in a rivalry game? This stinks to high heaven. Something corrupt is afoot here. I am picking this game just so I can complain about it when a shaky call results in a last-minute TD to put Dallas up 34-17.

Buffalo -8 over ST LOUIS

St. Louis is winless against the spread this season, but so far Vegas is slow to adjust. This line should be double digits. The Rams are atrocious. Here's a fun stat - the modern NFL average for yards surrendered per opponent's passing play is about 7. A very good defense gives up about 6 yards per pass. A very bad defense gives up 8 yards per pass. The 2008 Rams are giving up 9.6 yards per passing play. It's almost impossible to overstate how crappy that is. It's very crappy! In fact, what Buffalo receivers are available in my fantasy league?

Denver -8.5 over KANSAS CITY

This is exactly the wrong pick, but I don't see a better one. I actually like the money line on this game as this seems like a letdown game for Denver after a couple of emotional wins.

Friday, September 12, 2008

NFL Parlay Picker - Week 2

Well, my picks last week were Teh Suck. But the nice thing about picking parlays is that you don't get way behind when you miss a bunch of picks. It's the same as missing one pick! Just try again the following week. So here goes.

CHIEFS -3 1/2 over Raiders

JaMarcus Russell on the road, against a hated rival. I predict a sub-50 passer rating and a double-digit loss.

Bears +3 over PANTHERS

Last week, the Panthers eeked out a last-second road win over a discombobulated Charger team while the Bears had their way with the Colts at the RCA dome. I'm much more impressed with the latter performance. Yes, I'm backing Kyle Orton on the road. No, I do not have a good excuse for this other than a gut feeling that the Bears are MUCH better than people realize. Let's move on.

REDSKINS +1 over Saints

This line has moved two points during the week, which tells you that the gambling public is massively backing the Saints. The gambling public is very stupid! I'll help Vegas balance that action and predict the Skins win this one outright, getting a late turnover to seal an ugly victory.

Colts +1 over VIKINGS

This is the pick that scares me a bit, because the Colts let Matt Forte run wild on them last week, and I don't like betting against Adrian Peterson. At the same time, I've gotta stick with my idea that the Bears are better than we realize, which means the Colts home loss in Week One doesn't look like quite such a stinker.

How Modern Capitalism Works - A Screed

You see a ton of bloviation at all times online about the market capitalist economic system. People on the left often see it as a necessary evil, or even a villain of sorts. Folks on the right revere it as some sort of God. This stuff gets even worse, devolving into the coarsest sorts of crass propaganda, during elections.

Yet it's not particularly often that you see someone, from blog commenters all the way up to highly paid economics commentators who work for big publications, actually describe how the modern capitalist system works. It's an interesting system, and worth discussing!

The rightist view of the market system is that it's essentially perfect, and they are right. Well, right in a sense. The market system is a perfect model for rational behavior in the market run. What that means is that as long as there aren't any significant externalities (that is, factors that the model doesn't account for) and we're dealing with a sufficiently short run of time, then the market system does its job, without any need for outside intervention.

There was a time, many decades ago, when the government regularly tried to monkey with the price system, and the results were not very encouraging. Even the big success stories of government price manipulation (rent control is an example) had negative consequences that offset at least some of the gains.

Fortunately, it's now quite rare that the government actually tries to intervene in the price system as such. There are certainly crisis moments when things go horribly wrong. During the California blackouts, for example, FedGov should have intervened to fix a price system that had completely failed and was being gamed by a malign actor, Enron. But for the most part, the government now stays out of the price system. And that's good!

Big, modern capitalist countries, however, do have an important role for government. In fact, there are many important roles. The anarcho-libertarian idea that government can just "butt out and let the market handle it" neglects the fact that there are major areas of modern capitalist economies that have nothing to do with the price system. "The market" doesn't apply! Not every store is a supermarket, and not every market is like the market for wheat.

For instance, finance markets have to be tightly regulated. Ron Paul is right in that if you did away with the central bank and went back to the gold standard that you wouldn't need tight regulation of financial markets. Unfortunately that describes an economic system that no longer exists and makes no sense in the modern world. It can't happen. So it's a bit silly to talk about it as if it could.

So in finance you need government for oversight, and also for insurance. That's one of the big, important roles government plays in the economy - the role of bagholder. The idea is that the government is supposed to prevent breakdowns in the financial system. When that oversight fails, the government is left holding the bag. If you didn't have that, the people left holding the bag would be whoever didn't have the power to hand the bag off to someone else (which generally means poor people.)

Right now you see that, of course, with Fannie Mae and Freddie Mac. These were government entities originally designed to grease the wheels of the mortgage system, and they were privatized on the theory that this would make them run more efficiently. In that sort of situation, if the privatization experiment fails (as it has done) then the government has to step in because you can't allow a giant piece of the finance system to just fail. If you did, it would cause investors (we often say "foreign investors" but really it's all investors; nothing's stopping Merrill Lynch from putting its money into German bonds instead of American ones) to pull capital out of the US economy, further destabilizing the system until it collapsed.

Another important government role, and one that gets a lot less intelligent attention in the press, is that of dynamic technology investor. There is a sort of pleasing myth about market capitalism that it is a "great driver of innovation." Even leftists who are grumbling about the excesses of evil capitalists will often make some basic obeisance to this idea. Unfortunately, it's not really true in the sense that most people seem to mean it.

In a market system, competition for "rents," which is the word economists use for the money you make over and above what you would make if did something else instead of what you're doing now, is fierce. That fierce competition does drive innovation - rent-seeking innovation! In the short run, firms try to position their capital such that they will continue to collect rents and make profits.

The problem is that in the long run, eventually this model of capitalism will run aground. Rent-seeking innovation doesn't create any long-term benefits to the economy. Those long-term benefits have to come from technological innovation.

Advances in technology were why Malthus' predictions of famine and doom never came true. Most people who pay attention to economics know that. What people don't know is that market economies systematically underinvest in long-term technological innovation. Left to its own devices, technology doesn't move fast enough because everyone is using their money to seek rents, and not enough people are using their money to develop new technology.

In the US, we have a couple of dynamic areas where the government plays a big role. One is the university system, in which state governments run big higher education institutions, turning out vastly more scientists and other technological innovators than would otherwise be the case, and then paying some of them to do academic research.

The other is the Pentagon system, which includes DoD but also other high-tech government entities such as NIH and CDC, where the government pays scientists directly (or through the university system, e.g. MIT) to develop technology the government wants, and then grants licenses to private companies to manufacture and market the results.

These dynamic innovation investments are really, really expensive, and a lot of them are, depending on your perspective, wasteful. (For example, the new jet fighter the Pentagon developed is completely unnecessary for war fighting.) But the money needs to be spent on something. It's an important part of the economy.

The main argument for serious people to have is how much of the government's innovation bankroll should be spent on what type of innovation. Right now, in my view, we spend way too much on tanks and boats and not enough on creating an engineering infrastructure for switching off of fossil fuels. But my view isn't necessarily correct - we should, like, vote about it or something!

In a functioning public square (unlike the silly TV-driven media environment we have) it would be questions like these that we would have in mind when we were driving to the polls to elect leaders. The long-term impact of who called whom a naughty name is, I would imagine, much less.

Too bad for us.

Thursday, September 11, 2008

GOP Predators Take Aim at People in Financial Distress

(via Atrios)

The Republicans in Michigan have announced a bold new strategy for keeping poor people from voting - they are going to challenge the voting rights of people whose homes are in foreclosure.

If experience is any guide, they will do this overwhelmingly to black people.

If you're a Republican reading this, don't worry, I know that you can easily justify this, so save your breath. But if there are any non-Republicans thinking of voting Republican this cycle, just make sure you understand what exactly it is you're voting for.

Sunday, September 07, 2008

NFL Parlay Picker

A couple years ago Stevo and I used to try each week to pick a 4-team NFL parlay. A parlay is a bet where if all four of your picks come through, you get a large payout (but not nearly so large that it makes it worth it to actually bet them - the book gets a big premium on parlays.)

As far as I remember, neither of us ever hit one, which means... we're due!

So this year I'm going to give it another go. For the non-handicacppers in the audience, the format of the picks is [winner] [spread] OVER [loser], with the home team in CAPS. Thus if I'm picking the Colts to beat the Browns in Cleveland and cover an eight-point spread, that would be Colts -8 OVER BROWNS.

I'll also give a mini-explanation as to my reasoning for the pick.


I like the Tampa bay running attack and their defense.

St. Louis +9.5 OVER PHILLY

Philadelphia is aging and overrated while St. Louis is much healthier than they were last year during their run of misery. 9 1/2 points is too many.


The Steelers are ferocious in home openers.


It seems like with a veteran QB and good running game San Fran is put together pretty well to win home games against marginal teams like Arizona.

Saturday, September 06, 2008

Baseball Trivia

Since the football season is about to kick off and crowd out my interest in baseball for a while, I thought I'd post a trivia question that concerns one of my favorite odd baseball statistics. I like the stat because it is a record that, among all records in all of sports, has the least chance of ever being broken despite there being no specific practical reason that it can't be broken.

The trivia question is this:

The record for most grand slams in a career by a major league pitcher is held by six men, all of whom hit two grand slams in their career. One of those six men did it in a special way. What is his name, and what was unusual about his grand slams?

Answer tomorrow.

UPDATE: As t mentioned in comments, the man's name is Tony Cloninger, and on July 3rd, 1966 Cloninger hit two grand slams in a single game for the Atlanta Braves. The reason this record will never be broken is that the likelihood of a pitcher hitting three home runs in a single game is miniscule (pitchers rarely come to the plate more than three times in a game, and they can't hit) and since a single-digit percentage of home runs are grand slams, the likelihood that a pitcher will hit three grand slams in a game in the next hundred years is probably somewhere on the order of 10e-5.

The really wild part about Cloninger is that he actually was on deck with two runners on when the #8 batter struck out to end the game. Had the previous batter walked, Cloninger would have had a shot for a third grand slam. `That's probably as close as any pitcher will ever come to three.

Imagine the Possibilities

One thing I think that's happened to us as Democrats in the last 8 years is that we've developed a habit of constantly being on guard for all the slings and arrows that fate (aka Karl Rove) is inevitably going to loose in our general direction.

Far be it from me to discourage anyone from staying vigilant. I'm not predicting anything this election, as my handicapping record for 2002 and 2004 was not particularly good. (In 2006 I was more accurate - it was a good year for optimists.)

Based on what I'm seeing on's radar map, I think a lot of us blue folk are sitting inside riding out a rainstorm this morning. So allow me to suggest that for as long as this storm lasts we forget about all the terrible things that could derail the Obama/Biden ticket and just sit inside and listen to that calm place inside us that can see things the way they ought to go and just... imagine the possibilities.

That is all.

Friday, September 05, 2008

Deep Thought of the Day

Anarchy is the foundation of all government.


Not much to say about the speech that hasn't already been said. The parts about his war record were pretty inspiring, even to someone like me who's disinclined to be too impressed by warrior stuff. His description of those experiences was heartfelt and quite moving.

Everything else was serviceable but weak and artless. The Maurice Morris of speeches. Overall I give it a C+; in part because my expectations were quite low going in and I felt he could get a C as long as the wheels didn't come off.

The wheels didn't come off. That's about all there was to it.

Tuesday, September 02, 2008

Big McSamey Ad Bombs

Following up on the earlier post "Poll Drollery," here's a new ad from the Obama campaign (via Atrios:)


It's not an awesome ad, but I like the part with McCain bragging about voting with Bush over 90% of the time. And of course I approve of the direction of the attack. More please!

John McCain, Backup QB

There's an old principle in football that the most popular guy among fans on any team is almost always the backup quarterback. Almost no matter how successful the starter is, there is always a large and vocal contingent of fans who think the backup should be starting. If the starter ever gets hurt in a game, these fans will cheer at the sight of the second-stringer entering.

Unfortunately for the hopes and dreams of these folks, there are usually good reasons that the backup is the backup and the starter is the starter. After a few games with the #2 guy at the helm, those reasons start to surface, and people realize things were not so bad under the top guy. It can be easy to get used to tight spirals and laser-beam medium-range throws to the point where you sort of forget why those skills are important.

It doesn't take too many quarters of watching a noodle-armed backup throwing two-yard square-ins to the tight end to remember that, while pluck and derringdo are laudable characteristics, it's often nice to have a skilled professional at the helm, somebody with a big arm who knows how to use it.

For all John McCain's positive qualities, there's a reason the guy lost to George W. Bush. He's got backup-quality skills. He's fun to root for! But you know deep down you don't really want him running the team.


One thing that I find interesting is that in our culture, we have an accusation that gets flung around a great deal both on the national stage (generally, journalists accusing politicians, or each other) and in interpersonal relationships "down here."

That accusation is that of "cynicism."

What's interesting and even humorous is that I'd bet if you polled 100 people who regularly use the word, very few (single digits would be my guess) could give a particularly useful or informed definition of the word.

I say that not at all as a "people are stupid" sort of observation - indeed, what prompted this post was that I read an article that contained an accusation of cynicism and I wondered "what does that actually mean?" I had to look it up on Wikipedia.

Equally interesting is the stuff about the Greek philosophical school called "the Cynics." Read about it, but remember that often modern history tends to record information about philosophical schools that reflects degenerated forms that came after the original teacher's school had disbanded.

Poll Drollery

I'm normally loathe to play the "this poll shows that X voting block is a crucial battleground" game because just about any poll, including a poll of people's favorite breakfast cereals, can be overlaid on a two-way presidential race and made to seem significant.

However, I do think that this particular poll concerning overall voter attitudes gives a good idea of what the task is for Obama in this race.


Basically, 64% of people are concerned that McCain will pursue policies similar to Bush's. That's a large enough chunk that you have to figure things are looking good for Obama. However, when you break it out into "very concerned" and "somewhat concerned," the "very concerned" number is under 50%.

Obama's campaign should be focused more or less exclusively on getting those 17% of people who are "somewhat concerned" over into the "very concerned" category.

The nice part about this strategy tactically is that these people are almost by definition predisposed to the idea that McCain is like Bush. After all, they are "somewhat concerned" about it already. A big McSamey ad-bomb should sway at least a few of them who might be wondering if their concerns are enough to push them to vote for Obama.