Beyond Understanding

Ironic, isn't it, that proponents of federal overhaul of financial services industry regulation criticize structured finance transactions, derivatives trading and the interconnectedness of national and global financial systems on grounds of complexity. The implication is that mortgage backed securities and other collateralized debt obligation deals were so complicated that even the most sophisticated investors couldn't understand the risks they were incurring.

The bill before the conference committee, Restoring Financial Stability Act of 2010 (H.R. 4173), is over 1600 pages long.

"Debt Is The Slavery Of The Free" - Publilius Syrus

I emerge from studying to quickly draw our readers' attention to a recent fact noted by Bloomberg.com. "The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago."

This fact is placed in greater perspective by an additional fact: the national debt (accrued from the late 1700's until today) as of 6:30 p.m. GMT on November 24th was $10.6 trillion plus. A little more perspective: the national debt has continued to increase an average of $3.93 billion per day since late September 2007.

For more on the national debt, check out this foundation which is presided over by David Walker. Walker served as Comptroller General of the United States and head of the Government Accountability Office (GAO) from 1998 to 2008. According to Walker, the "real" national debt is closer to $52.7 trillion. Considering his position within the government for the past ten years, I consider him a reliable source.

Back in September I wrote a post, to which I commented that my preferred course of action is: Let Them All Fail. In other words, do nothing (from the government's perspective). Click here to watch Peter Schiff, again on Bloomberg.com, make a similar argument in light of the fact that we are already so deeply in debt.

Suddenly Under Water

The Wall Street Journal reported yesterday that nearly 1 in 6 homeowners is "underwater"-- they owe more on their mortgages than their homes are worth. How does it feel to be underwater in your own house? Well, you don't feel like shoppping at the mall.

About 75.5 million U.S. householders own their homes. About 12 million householders, or 16%, owe more to their mortgagee than their homes are worth, according to Moody's Economy.com. Among those who financed their homes in the past five years, 29% are under water. (In 2006 about 4% were under water. Last year the rate rose to 6%.) Moody's Chief Economist, Mark Zandi, noted: "it is very possible that there will ultimately be more homeowners under water in this period than any time in our history."

The water is not equally deep everywhere. The WSJ online hosts a cool interactive map showing regions in the US that are knee deep, swampy, and bone dry.

It's Only Bankruptcy

The other day, Alison quoted from economist Jeffrey Miron who suggested that the current financial crisis might best be managed by letting troubled financial institutions seek refuge in bankruptcy. In today's Washington Post, columnist David Ignatius made a better point. Instead of firm by firm failure and either bankruptcy or bailout, wouldn't it be fantastic if the whole world economy could seek relief under Title 11 of the US Code?

Although the word bankruptcy is scary, the analogy to bankruptcy process is quite comforting. Ignatius writes: "Bankruptcy doesn't mean a company has run out of good people or ideas, or that it's going to stop making products. It means that it's out of money and must seek the protection of the government to continue operating. Bankruptcy, if properly managed, is a workout process that provides a pathway back to solvency. A company seeks protection from its creditors through bankruptcy court, which appoints a trustee to supervise an orderly unraveling of its debts and other obligations. Sifting through the claims can take years and creditors often receive less than full value, but there's a reliable process. Companies often reemerge from bankruptcy healthier than before; often, some assets are sold to other companies that can make better use of them."

That doesn't sound like a global financial crisis of historic proportions. That sounds like bankruptcy litigation, and entirely within the province of lawyers -- bankruptcy lawyers to be specific.

Sadly, there is no bankruptcy court that can take jurisdiction over the global economy. For the U.S. financial system, the equivalent of the bankruptcy court is the rescue operation cobbled together and headed by the Federal Reserve and the Treasury. Ignatius notes that these bodies traditonally supply liquidity where it is needed to lubricate a balky system. This problem, however, is bigger than just a little unexpected friction in the machine. Ignatius recommends a bankruptcy trusteeship as a new metaphor for the solution: "the task of trusteeship -- of supervising the orderly clearing of debts in an economy where trust has vanished, as is often the case in an ordinary bankruptcy."

The global economy has no ready trustee. Ignatius notes that the institution that was supposed to protect the global system, the International Monetary Fund has been "utterly impotent in the crisis." He calls for the establishment of a "Global Clearinghouse, a public-private consortium of the biggest financial institutions and central banks, that can ensure that trades get completed and losses are covered while the system works its way out of bankruptcy."

Law and Collective Responsibility

Tonight the PSU Law and Philosphy Society will meet to take up the question of collective responsibility for the current financial crisis. I regret I cannot attend the meeting set for 6:00 PM at Webster's Cafe on Allen Street. My role in collective responsibility for kids, dinner and laundry interfere with my freedom to sip coffee and talk about philosophical implications of just about anything.

If I could be there, I'd add to Plato's reflections, those of columnist George Will on the financial crisis appearing yesterday in the Washington Post and elsewhere. Will observes that "[w]e are waist deep in evasions because one cannot talk sense about the cultural roots of the financial crisis without transgressing this cardinal principle of politics: Never shall be heard a discouraging word about the public."

The public, he notes, typically admonishes government to run its budget the way households supposedly do, matching expenses with income. This time, though, the public decided "it would be jolly fun to budget the way the government does, hitching outlays to appetites." This time, it is painfully clear that all of us not-so-secretly delight in deficit spending, both for our household budgets and for our collective big one.

The usual populist riposte to government action, to contrast the virtue of the people with the vice of some unpopular minority, falls flat. The rhetoric that would in the past elevate the wisdom and thrift of Main Street above the greed and excesses of Wall Street belies the new truth that the folks on Main Street have been just as greedy and excessive. They bought real estate on speculation with borrowed money for more than they could afford. They knew exactly what they were doing. Now their only pretense at preserving virtue is the last defense of scoundrels, the devil made us do it.

This time, we are all in it together, the collective and the individual. The proposed legislation snaking through the House of Representatives today marks what may be a new era in our understanding of justice, freedom and the scope of government relative to individuals.

Best wishes Law and Philosophy Society. May the wisdom of the ages be with you.

The Feeling is (Washington) Mutual

Yesterday, JPMorgan Chase acquired the banking operations of Seattle-based Washington Mutual Bank. The Office of Thrift Supervision (OTS) closed WaMu late in the day after a run on its deposit accounts. The Federal Deposit Insurance Corporation (FDIC) took over as receiver. The FDIC sold nearly all of WaMu's operations to JPMorgan for $1.9 billion. The acquisition is expected to wipe out WaMu stockholders.

The JP Morgan web site hosts the deal docs for the asset acquisition. More info about WaMu's failure and receivership are at FDIC and Treasury. No insured depositor will lose a dime.