The Real Whiners and LosersPosted: July 14, 2008
If there are whiners in the U.S. economy, it has to be the American Investor who is never satisfied with a normal rate of return. These investors frequently ‘rent-seek’. In Financial Economics, this is akin to finding some way around the market by gaining power over market regulators or lawmakers, or decision makers. It is best understood as a form of political bribery or executive extortion. The majority of investors and businesses are looking for monopoly profits and ways to earn them. They really don’t want to be part of a competitive market and true market capitalism. They are simply seeking monopoly and the extraordinary profits that come from having monopoly control of a market.
Monopoly profits are way beyond the ability of the normal investment and are usually due to some kind of manipulation, control, or problem (which we call friction) in a market. It is due to something other than a market behaving as Adam’s Smith’s invisible hand would suggest. It is a form of winning from something other than fair play. Frequently, it is due to capturing regulators or gaining advantage by forcing some kind of law using lawmakers eager to support business but ignorant of economics.
No group is more guilty of this than investors in Financial Markets. In the theoretical realm, most financial markets would not exist if everything were perfect in markets. This is especially true of banks. They exist because of imperfect information. They make profits by taking advantage of weaknesses in markets. However, many are not satisfied with skimming a small fee for providing information and some services that make life easier for the financially ill-equipped. They want to make WHOPPING FEES. The greed goes up and down Wall Street. Their enablers are both Democrat and Republican Senators and Congressman that allow them to operate without restriction, give them tax breaks for any whim, and turn a back when they engage in grossly speculative behavior but seek bail out at the slightest turn of the market.
My Market Watch Newsletter hit my email even before the markets could open in the U.S. and well after the Asian markets reacted badly. As well, they should. Government should NEVER allow businesses to gamble when it comes to house loans or folks’ life savings. They’re bailing out the predators. Now, will they help the prey?
WASHINGTON (MarketWatch) — The implicit government guarantee of Fannie Mae and Freddie Mac is now explicitThe Senate passed its version of the legislation last week and sent it back to the House of another vote. It is expected to get to President Bush for his signature before Congress leaves town for its summer recess at the beginning of August.It would be logical to attach the lifeboat for Fannie and Freddie to the housing rescue measure.It is not clear how Congress will react to Paulson’s request. The Treasury secretary said he has been in close contact with the Congressional leadership over the weekend, so his request will not come as a surprise to lawmakers.That would be a bitter pill for Fannie and Freddie, which have been at loggerheads with the central bank over the capital issue for years.
In a dramatic statement released Sunday, the White House and Federal Reserve moved to give the mortgage giants the capital they need to survive the depression in the housing market and turmoil in financial markets that had left them dangling over a cliff.Of most immediate importance, the Fed’s board of governors voted to open up its emergency discount window to Fannie and Freddie.In addition, Treasury Secretary Henry Paulson announced that he will seek Congressional authorization to by stock in the two companies and increase the government’s credit line.At the moment, each company may borrow only $2.25 billion.In return for the capital, Paulson said that the Bush administration would ask Congress to grant the Fed a “consultative” role in the capital standards of the companies.The housing rescue package that is nearing final approval by Congress would put in place a strong independent regulator for the companies is slowly moving through Congress. Paulson says he wants a new provision allowing the Fed to work hand-in-hand with the new agency.
Both of these agencies are chartered by Congress but owned by private stockholders. In a continuing melodrama where investors insist on unrealistic REAL returns, CEOs and CFOs buy special treatment in Washinton and seek surreptitious ways to circumvent regulatory responsibility as well as responsibilities to the customers they serve. Financial Institutions serve a special role in the economy. They not only return profits to investors, they are the keyholders to the American Dream. They hold funding for college, for homes, and for a secure and stress-free retirement. If they do not live up to both their fiduciary responsibilities as well as their responsibilities to function as proper underwriters, they deserve to be nationalized and to have their for profit status stripped from them.
I know this is a somewhat radical view. However, this is hardly the first time this sort of thing has happened. We have lived through the excesses of the period leading to the great depression. We have lived also, through the period of greed known as the 80s with its financial excesses and the dot.com bubble. If executive officers are not rewarded by investors for taking prudent and long run view points to their investments, perhaps they should be nonprofits when the stakes are so high they will fall to the taxpayer when bad management prevails.
We can not afford investors that wish to profiteer extraordinarily from the least among us. Nor can we afford, as a citizenry, to tolerate management that will cave to pressure to produce above market rates of return from investments that should NOT perform thusly. High rates of returns come from high risk assets which frequently tank. High risk usually comes from uncredit worthy or highly speculative investments. If we learned anything from the Great Depression, it is that some management decisions can not be left to the weak minded and ill-informed asset manager who makes fees based on volume and return. They can leave with their profits. The duped borrower becomes homeless or pensionless. Bad underwriting leaves a mess that taxpayer cleans up one way or the other.
I ask Barney Frank, Ben Bernanke, and all those with regulatory responsibilities to ask themselves this question. When is it that certain financial decisions, when made by the market, are so incredibly hurtful that they can not be allowed? After all, this is not the market for beer, or jeans, or some kind of stinky perfume. When it involves the financial devastation of ordinary Americans seeking homes, college educations, and secure retirements, is NOT their interest as important as the profits of the risk takers? It is TIME for regulation to catch up with the twists and turns of these new derivatives markets and of the investors who ask for more profit than they are entitled. It is one thing to make a profit from competitive advantage or from creating a better mouse trap, it is nothing but chicanery to make a profit from stealing from information asymmetries which is the souped up way that we financial economists say the customers are generally uninformed and vulnerable.
It is time to QUIT bailing out the managers and the investors and time to start protecting the customers and borrowers. When lenders turn making loans into a game of charades, the borrower cannot be blamed for misreading the signals. When lawmakers turn their back to one side of the market and are complicent with the other, they are as bad as the perpetrator of the fraud.