Gautam Mukunda <[EMAIL PROTECTED]>
> But
> such a stampede could cause lots of otherwise fine companies to go under,
> which
> would cause still more companies to go under, and so on,
> It's hard to imagine _anything_ worth the risk of going
> through that when interventions can prevent it.
So, you imagine a problem, make it plenty scary, then imagine a solution,
and say that a few people can magically do it. It is a good thing you guys
are so much smarter than the rest of us dumb market peons, what would
we do without you?
You may not be a politician, but you have the mindset down perfectly.
Let me try one. My god, there are thousands of asteroids in the solar system and
one could slam into earth at any time. Billions would die! Mass hysteria! Dogs
and
cats, living together! But I have a PLAN! I can save us all! Just give me $700B
and I will avert the disaster! Whadya say?
> Sure, that's fine. The problem is that when everyone does it these actions
> can
> _cause_ a bankruptcy that will not otherwise occurred.
Would not have occurred if the firms were not excessively leveraged and invested
in toxic loans.
> No, but _putting on my seat belt cannot cause an accident_. This is the
> fundamental problem with your analogy.
That certainly is not a fundamental problem with my analogy. Difficulty with
the
money markets was only the latest problem for the big investment banks. The
main reason people feared for their solvency was because of high leverage and
bad assets.
> If the run on the money markets had continued,
> we would have seen strong companies go under. Like, for example, Goldman,
> which
> probably was in some danger for a while there.
And if so, was not as strong as you claim.
> That's fine, but I don't think you've thought through the implications of
> such a
> definition in a period of extreme ambiguity. You can have situations where
> _no
> one knows_ if you're solvent or not.
No, you have not understood what it means to have no margin of safety from
insolvency. It means by any practical measure, you are insolvent. And plenty
of people know. Of course, if you have a vested interest and know, you do not
admit it.
> Well, it's not that uncharted. Barclay's and Deutsche Bank are both over
> 50x, I
> believe.
Those are not pure investment banks. They derive some funding from deposits.
That is why the investment banks have been merging with commercial banks or
becoming bank holding companies. Having deposits mitigates some of the risk
of money market problems.
> Now I absolutely think
You're fond of absolutes, aren't you?
> - and have thought for a very long time - that
> we need regulatory limits on leverage, probably around the 12x range. But I
> doubt that's what you think we should have - I hope I'm not misinterpreting
> you.
I don't know what we should have. Clearly the government does not, either,
since they increased the allowable limits on the big 5 and then they all got
into trouble. Certainly the insurer should have a lot of
say in the matter. If the government is going to keep bailing out investment
banks, then the government is the implicit insurer. But obviously I have little
faith that the government will lead us down the path to stronger firms if they
keep bailing out excessive risk takers.
> That's a problem, and the only
> institution that can do something about it is the government.
Possibly true. I can imagine a few ways, involving consortia of private
insurers,
that it could stabilize the system without government imposed leverage limits.
But I don't think it is likely that such a system will be started.
> But on what do you base
> your belief that the track record is otherwise? You haven't cited a single
> case. Not one.
Heh, yeah. Considering that the government just bailed out Bear, Fannie,
Freddie,
and AIG, and still you feared armageddon last week, and Paulson says we need
another $700B, I'd say you are the one who needs to cite examples of $700B
bailouts being successful.
> But you know
> that, in his shoes, you would have made the same decisions, because money
> market
> funds _never lose money_.
Anyone who thinks that way should be kept far, far away from managing my money.
> I'm afraid I'm not clear on what basis - either theoretical or empirical -
> you
> disagree.
Quite simply, ego. You don't know nearly as much as you think you do about what
will happen and how you can control it. You run around wild-eyed telling us how
the world is ending but don't worry, you know how to save us. Then you do
something, the world
does not end, and you claim you saved us. Sorry, I have much less confidence in
politicians and people like you than I do in the collective self-interest and
creativity
of a large group of talented people to solve problems competitively.
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