September 22, 2008
Random Thoughts on the Financial State of Affairs
Posted by Christine Hurt

I have been traveling all week, but trying to keep up with the biggest U.S. government bailout since, well, since Wednesday.  Thanks to the rest of the Glom for keeping us all informed ("the depression will be liveblogged").

Is this bailout a good idea?  That's the question I was asked by my fellow conferees at my non-corporate conference.  My answer has to be "compared to what?" as my friend David Hyman likes to say.  The market seems to think it's a good idea, but that could be short-sighted.  However, not being a macroeconomist, I can only guess that the alternative was worse than the (attempted) cure.  Is it a great thing to have the federal government increase the national debt (in a time of a very expensive war) to bailout private institutions with taxpayer money?  No.  Would the market be able to right itself, after breaking more than a few Wall Streeg eggs, eventually?  Not sure.

Do either of the candidates seem to know what's going on?  No.  As little as I know, the candidates seem to know less.  What with McCain calling for Chris Cox's resignation (huh?) and Obama saying the AIG bailout was necessary to protect AIG's insurance policy holders (who are not at risk), it seems clear that a little information can be dangerous.

Is restricting short selling a good idea?  Before the bailout began, there had been an outcry to regulate "speculation" more heavily.  Short selling, particularly naked short selling, is an easy target for those who think that speculation (as opposed to investing and hedging) makes the markets more volatile and produces inefficient pricing.  However, that thesis is far from proven or accepted -- but the rhetoric seems to work with the public and the regulators.  If there is any time to restrict short selling, it would be when the markets are in freefall and there is some sort of "snowball" effect -- similar to reasons why trading is suspended from time to time.  However, I would think that the window for this would be very short (not two weeks), similar to a temporary suspension in trading.  In both hedging and speculation, there is a winner and a loser, and picking and choosing when to favor the loser is usually indefensible.

What's the easiest prediction to make from the financial crisis?  More law school applicants.

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Comments (6)

1. Posted by Morgenstern on September 22, 2008 @ 12:13 | Permalink

Cox's performance has been poor - the SEC was the chief regulator of the failed investment banks under the consolidated supervisory scheme, and the Commission capitulated to rating agencies when given limited authority to regulate them in 2006 - but I agree that his resignation is hardly the cure to our woes.


2. Posted by pwb on September 22, 2008 @ 16:16 | Permalink

Everything I've read indicates that policyholders could face risk.

Google "aig policy holders"


3. Posted by pwb on September 22, 2008 @ 16:22 | Permalink

I'm not in favor of the short-selling restriction (since it forces shorts to use less public vehicles).

But I think the restriction is supposed to address the downward pressure on stocks that shorts have an incentive to stoke. I'm not sure that it's related to pure "speculation".


4. Posted by fedgovernor on September 22, 2008 @ 17:38 | Permalink

Selling something that you do not own, or haven't even borrowed, is illegal in every other walk of life.

In every other walk of life, doing that is called "fraud."


5. Posted by Jake on September 22, 2008 @ 20:58 | Permalink

Fedgovernor states:

"Selling something that you do not own, or haven't even borrowed, is illegal in every other walk of life. In every other walk of life, doing that is called 'fraud.'"

I certainly see the point, but the plain fact is there are many sorts of derivative financial instruments in the marketplace that fit the description given.

Maybe that is the point.


6. Posted by Bruce Boyden on September 22, 2008 @ 21:43 | Permalink

PWB, I did what you said, and everything I saw indicates policyholders are not at risk. E.g., this from NY State regulators: http://readme.readmedia.com/news/show/AIG-Policyholders-Should-Be-Careful-If-Approached-To-Replace-Policies/290957

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