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Archive for September, 2008

No More Corporate Welfare for Wall Street

This bailout was a terrible idea. Here’s why.

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This “moral hazard” generates enormous distortions in an economy’s allocation of its financial resources.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Largest Bank Failure in U.S. History

Sept. 26 (Bloomberg) — Washington Mutual Inc. was seized by government regulators and its branches and assets sold to JPMorgan Chase & Co. in the biggest U.S. bank failure in history.

WaMu became “unsound” after customers withdrew $16.7 billion since Sept. 16, the Office of Thrift Supervision said yesterday. Branches are open today and depositors have full access to their accounts, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said.

The failure of WaMu, which has $188 billion in deposits, ratchets up pressure on lawmakers to piece together a rescue package for the nation’s financial system. The government’s inability yesterday to reach agreement on a bailout and the seizure of the biggest savings and loan sparked a sell-off of bank stocks, led by a 27 percent tumble in Wachovia Corp.

“We are going to see a lot more bank failures before the cycle is all over,” said Brian Horey, president of Aurelian Management LLC in New York, which had bet on a decline in Washington Mutual before a ban on such so-called short sales was imposed. “There are sufficiently large clusters of bad assets on a fair range of banks out there.”

Federal Reserve is Bailing Out A.I.G. to the Tune of $85 Billion

The decision, only two weeks after the Treasury took over the federally chartered mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history.

A major concern is that the A.I.G. rescue won’t be the last. At Tuesday night’s meeting. lawmakers asked if there was any way of knowing if this would be the final major government intervention. Mr. Bernanke and Mr. Paulson said there was not. Indeed, the markets remain worried about the financial condition of major regional banks as well as that of Washington Mutual, the nation’s largest thrift.

The decision was a remarkable turnaround by the Bush administration and Mr. Paulson, who had flatly refused over the weekend to risk taxpayer money to prevent the collapse of Lehman Brothers or the distressed sale of Merrill Lynch to Bank of America.

Earlier this year, the government bailed out another investment bank, Bear Stearns, by engineering a sale to JPMorgan Chase that left taxpayers on the hook for up to $29 billion of bad investments by Bear Stearns. The government hoped at the time that this unusual step would both calm markets and lead to a recovery by the financial system.

But critics warned at the time that it would only encourage others to seek bailouts, and the eventual costs to the government would be staggering.

Oil Fell Below $100 a Barrel on Friday Yet Gasoline Continues to Rise

NEW YORK (AP) – The worst oil shock since the 1970s has put a permanent mark on the American way of life that even a drop in oil’s price below $100 a barrel won’t erase.Public transportation is in. Hummers are out. Frugality is in. Wastefulness is out.

Although oil prices dipped beneath the $100 mark Friday for the first time in five months, it still isn’t cheap and Americans have long memories. They are saddled with debt, high food costs and home prices worth far less than two years ago.

Experts say some relief at the pump is probably coming within weeks after light, sweet crude fell to $99.99 before closing later at $101.18, up 31 cents. But the era of “staycations,” four-day work weeks, airline fuel surcharges and costly commutes could be here to stay.

“We’re not going back to $2-a-gallon gasoline,” said Stephen Schork, an analyst and energy trader in Villanova, Pa. “Consumers have to appreciate that the low prices we had before didn’t reflect the price of crude, so there will be a limit to how much prices will come down.”

And some more bad news: Food prices, plane tickets and plastic goods made from petrochemical products aren’t expected to get much cheaper either. The softening U.S. economy means food makers, airlines and manufacturers are unlikely to roll back recent price increases for goods and services anytime soon.

Although the hurricane is keeping gas prices high, it’s not doing the same for oil, as it has in the past. Neither are geopolitical flare-ups involving Russia and Venezuela.

Many analysts say that’s because speculative investors—not rising demand—pushed oil prices to record levels this summer.

The Worlds Largest Superconducting Particle Collider Was Switched On in Switzerland Today

Even though some apprehension led up to the device’s launch, the Large Hadron Collider was switched on today and it successfully fired protons around a 17-mile tunnel. Physicists celebrated all over the world as the “white blips” flashed across the control screens, indicating the protons had successfully completed their journey.

The LHC has been in planning stages since 1984 and cost $10 billion to make. But now with the first test out of the way, the scientists hope to discover brand new things about our planet and the universe.

The first real experiments will begin in a few weeks, where significant collisions are expected between protons. The protons will be fired at speeds nearing the speed of light in opposite directions around the tunnel and then magnets will be used to smash them into each other.