Economics & Finance

Their Mistake Was Trusting the Government

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A story about  Maxine Waters    [h/t Instapundit] and Barney Frank’s intervention on behalf of a minority owned bank on whose board Waters sat, has this little gem:

In January, Ms. Waters acknowledged she made a call to the Treasury on OneUnited’s behalf. The bank’s capital, which was heavily invested in shares of Fannie Mae and Freddie Mac, was all but wiped out with the federal takeover of the two mortgage giants, and the bank was seeking help from regulators. [emp added]

For leftists, OneUnited should represent the perfect bank. It’s small. It’s minority owned. The “socially responsible” Maxine Water’s invested in the bank and sat on its board. There’s no evidence it made predatory loans.  

Yet, it failed.

It failed not due to any short-sighted greedy  decisions  that the bank’s  management  made but rather because the bank’s management, including board members like Waters, trusted that the mortgage-backed securities issued by the government sponsored enterprises (GSEs) Fanny  Mae and Freddie Mac were worth the paper they were written on.  

OneUnited is a microcosm of the entire financial collapse. Over the past 40 years the GSEs have piled up a vast store of toxic assets created by the attempt to get something for nothing by fooling the market about the risk of residential mortgages. Ratings firms gave the GSEs top ratings because of their implied government  guarantee  and oversight. Banks like OneUnited bought into the political myth and now they and everyone else are paying for it.  

Leftists need to explain why we shouldn’t regard the failure of OneUnited and other institutions as the results of government action. They won’t, of course.  
 

Costa Rica Economy

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Recently I had an opportunity to travel to Costa Rica. Being a rather boring blogger / analyst type, I thought a lot about the Costa Rica economy.

The Costa Rican dollar is known as the “colon“. Being the finance type, I went out to exchange money into local currency prior to entering the country. Most big local banks like JP Morgan didn’t have colones on hand – although they said that they could order the money and I’d have it in a few days – so they sent me to a specialized currency exchange. At this currency exchange there was a pretty wide “bid / ask” spread, or the difference at which they would purchase currency back from you against what they’d sell it to you for, indicating a rather thinly traded currency. I gave them 300 USD and received a big wad of Costa Rican currency – the common denomination I used was the 2,000 note which was a bit over 4 USD. This is a rate of about 500 colones to the dollar, or each one is worth about 2/10 of a cent.

I spoke to a settler from the US who was a Quaker who opened a cheese factory in Monteverde in the 1950s – he said that the colon was worth about 5 to 6 to the dollar in the 1950s. Thus even while the US dollar has depreciated against other major currencies, such as the Yen, the colon has plummeted from 20 cents on the dollar to .2 cents on the dollar, or to 1% of its “relative” value from the 1950s.

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Too Big and Failed

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Three   Government Sponsored Enterprises (GSEs) stand at the heart of the financial meltdown: Freddie Mac, Fanny Mae and the Federal Home Loan Banks (FHLBanks). Like most people, I knew they were large organizations, but I had no idea how large until I read this article.

From a 2006 conference on the GSEs [PDF-Original,Local Archive] logical page 17:


The report notes (logical page 6):

Make no mistake, these Enterprises are huge.(#10)   As of September, their combined guaranteed MBS and debt outstanding of $4.3 trillion was not much smaller than the $4.9 trillion publicly held debt of the U.S.   If you add in the FHLBanks’ debt, the total of $5.2 trillion well exceeds the publicly held debt of the U.S.

So we had these giant GSEs issuing mortgage-backed securities (MBSs) and generating a level of debt obligation bigger than that of the government that secured them. This was never going to end well.

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Why Don’t We Just Cut China a Check?

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The really stupid thing about Obama’s carbon cap-and-trade system  [h/t Instapundit] is that it will simply relocate more manufacturing to countries that don’t give a damn about global warming.

The growing economies of China, India, and other parts of the world still have people living the lives of preindustrial  subsistence  farmers.  Right now, today, they have people in dire need of food, clothing, shelter, medical care, education, transportation and every other facet of modern life we take for granted.  They don’t give a crap about hypothetical dangers that will hypothetically manifest a century from now.

Such areas will use dense, rich, reliable sources of energy like coal and nuclear to power their factories while we try to smelt iron with windmills. We will be poor and eventually powerless in the face of such competition. Worse, if global warming is a problem, it will happen anyway. Our sacrifices will simply mean we have fewer resources to deal with the problems posed by global warming.  

Obama plans to shut down our carbon-emitting power sources today, decades before we bring their hypothetical  replacements online. If the technology doesn’t work as predicted, where will we be then?

Obama’s plan will be a massive wealth transfer from America to China and India. We will simply be handing them our current and future economic productivity on a platter.  

“Rational” Behavior

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This post and the subsequent discussion prompt me to make a point about the use of the term “rational” in economics and game theory.  

I think the people in the linked posts confuse the common definition of “rational” with the way that economists and game theorists use the term. Economists and game theorists axiomatically define a “rational” choice as one that will give the highest chance of accomplishing a previously defined goal given a specific set of parameters. That choice is defined axiomatically as the “rational” choice. Rational in this context does not mean wise, intelligent, most-good-for-the-most-people or any of the other concepts attached to the word in common speech. For example, in poker, game theory defines a different set of choices as rational depending on whether you want to make a killing, come out even or use the game as a pretext to transfer some money to a friend. Game theory does not comment on which of the three goals constitutes the most rational choice.  

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