Are Americans worthy of being saved?

Are Americans worthy of being saved?

During this financial crisis I have been wandering the halls of academia, blog space and the business world and I’m shocked by our people’s lack of comprehension about what is going on in the economy. The misperceptions about the current banking crisis, its seriousness, the implications, and potential solutions defy understanding. There are times when I just shake my head.

I have found that the groups of incomprehension fall into four camps:

It’s a bailout

Even the capitalists in the room get this piece of PR wrong.

Folks, the plan is to buy assets; that’s not a bailout, that’s an investment. We could make a lot of money on this plan, we meaning the citizens of the country, at the expense of the evil bankers that everyone is so enraged about.

This is because these assets are not worthless, they are just mispriced. Sweden went through a similar bank asset rescue and made a nice profit on the deal. If the sovereign (that’s us) can’t make a buck at a time like this, well, then we really get what we deserve.

We should build bridges instead

…or hospitals, or roads, or schools. All of a sudden fiscally conservative people have found all sorts of stuff they want the government to do. Granted I hear this most from the ultra-liberal faculty over at the New School, but otherwise sensible midwesterners are saying it too.

Have we all forgotten how many years (yes, years) it takes to build a bridge, even if the designs, permits, plans and materials are already available?

This is the same argument that in variation goes: “Just give Paulson $5 or $10 billion this month and we’ll see how he does. At the end of a year of so we’ll know better.”

This month? A year or so? The banks may have two or three days left. Maybe. The whole system probably failed last week except for the heroics of the Fed. We certainly do not have two or three months, much less years to fix this.

Most people just will not believe this, first because they don’t watch Bloomburg terminals completely spaz out showing numbers never before seen in history, and second because they don’t believe the people who do. That may well be our greatest tragedy.

Let ’em fail

I can’t tell you how many people actually say this out loud, like it will not affect them or their children if the financial system collapses.

The difference between a depression in 2008 and the one in the 1930’s is that the violence would be so much greater. I don’t think folks appreciate the implications of dramatic unemployment, lowered standards of living, and a collapse in governmental infrastructures when the means of simple people to do vast damage with powerful weapons and contagions is unprecedented. 

I was actually accused of being a socialist (!) in the comments section on another blog because I offered the idea that intervention in the banking system could prevent firestorms. (Actually I was called a socialist because I have an MBA, but go figure. It must be the New School t-shirt) 

Letting Wall Street fail today is like saying that the best way to make a city’s buildings fire proof is not to enforce building codes and retrofit, but let them all burn down in a conflagration – kind of like the great fire of London. Then we can rebuild. 

Yep, that’s what they are saying out there. Funny, on the West Coast they say fire, on the East Coast they say earthquake; it’s a ‘do unto others first’ thing I guess.

I shudder when these people talk.

They did this to us

I’m all for tarring and feathering a few execs for being stupid and actually spending time complying with SOX when they should have been running risk models. But the root of this mess is not them, it’s the vast over borrowing by the average American. We did this, all of us. Wall Street just let us wrap ourselves up in piles of crappy debt. 

We’ve forgotten about personal responsibility in our safety net, social securitized nation and while our presidential candidates are leading the finger pointing charge, creating boogie men for us to hate, the only people who need to “change” are all of us. We did this, and that’s why we need to use our tax money to fix it.


So I ask myself, is the nation worthy of saving? And I’m having trouble with the answer. I want to think that the land of Franklin and Hamilton, Twain and Edison would be able to see through this mess, but when I listen to Republican congressmen and vast swaths of the American public say they will not support the purchase of assets on the cheap to bring calm to a major social institution in our economy, I wonder. 

Maybe we should just let it burn and start over. How sad, because that doesn’t have to happen.

More from on the Financial Crisis

Congress to America: Drop Dead

Comments of the current crisis

Comments of the current crisis – Regulation

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  1. Stez
    Posted September 28, 08 at 8:00 pm | Permalink

    hey doug, this is my favorite thing ive read yet about the current crisis. well played.


  2. Posted September 29, 08 at 2:41 pm | Permalink

    So… now what? I feel like I’m SO in the dark about this issue, yet it’s going to be me (the general public) that’s affected.

  3. Doug
    Posted September 29, 08 at 7:13 pm | Permalink

    Yes Ash,

    You will be affected. Credit is the lifeblood of business, its like the air that the economy breaths, and right now its being cut off.

    Congress’ actions today were ridiculous. They acted like a doctor withholding a bottle of oxygen that a patient needs and saying…

    “I’ll get this to you just as soon as I figure out how to get a deposit refund system for the canisters, because you know, recycling is important”

    “Dr: The Patient just died”

    “Really! But I got his refund for the tank all set up!”

    I’m usually a very positive guy, (right stez?) and I really didn’t want to have to even think about this stuff anymore. I was just going to go off and live in my world of fiction. I really gets me mad that the guys in charge are not taking care of the ship.

  4. Clayton McKeon
    Posted October 3, 08 at 8:28 am | Permalink

    The problem with your assumptions here Doug, is you think the bailout/asset buy plan is going to work. The models I have seen suggest that not only will it not work, but the economy will still crash even with the bailout only leaving us 700 billion dollars farther in debt in the process.

  5. Posted October 3, 08 at 8:33 am | Permalink

    But what if it turns out that these “assets” are overvalued junk that nobody wants to buy? If we snap up $700 billion of them isn’t there a very real risk that we’re not going to to find anybody to pawn them off on? I mean, that what’s happening now, right? Companies with billions in these things realized they were close to worthless and couldn’t find anyone to seriously look at buying them at their dangerously inflated prices. So where’s the security that in a year or two when we’re over this mess and the Federal government starts looking around for buyers for the $700 billion of trash, all the banks aren’t just going to say, “No thank you!”

    You seem to know what you’re talking about. I’m really curious to hear your response, since I’ve never gotten a good one. Thanks!

  6. Doug
    Posted October 3, 08 at 10:25 am | Permalink


    The key element in the models that are being run are the exogenous variable of time and confidence. The first is easy to put into an equation, the second very difficult. Even more difficult is that they are both linked. As time dwindles, confidence is fading. Had Treasury been able to act quickly without the additional $110b of earmarks added to the bill, and the delay that ensued the impact on confidence would have been much greater.

    I’d also say that it easy for a model to under/over estimate the confidence variable based on the perceptions of the modeler and produce the result they desire.

  7. Doug
    Posted October 3, 08 at 10:36 am | Permalink

    Nathaniel Gottlieb-Graham,

    On Monday night I was asked a similar question over on another discussion board and rather then re-create the wheel I’ll post it here. I’m sorry that the answer is long but unless you really want to talk about derivative tranches this will have to do…

    ——–My post on Monday——— Whew, thats a lot of questions. I guess I can’t get away with “Senator, I have no recollection” so here goes…

    Assets: I had along and colorful story about how black coffee with any milk in it is no longer black coffee, and if you are lactose intolerant the difference is a big deal. But since you seem to be asking a technical question I’ll try to answer briefly with a kind of heavy answer. (I apologize for the jargon, but the Ravens are winning and I want to get back to the game)

    The size and status of risky asset cohorts in compost derivatives are almost invisible. To everyone. Even to the guys who built them. The total security was bundled including multiple risks, most of high quality, some less so. It seem like some proportion of the assets are not performing, but no one can tell what part, where or by how much. With that uncertainty the whole security, good part and bad part are being priced at a huge discount sometimes at $0. There are thousands of these in every bank’s portfolio. (they are in a lot of other portfolios like pensions and cash accounts too but the crisis has not spread that far yet, maybe)

    The discount is wrong, but because of the hideous complexity of the models used to build these things no one trusts TODAY what parts are worth what. Even the good stuff that is bundled up in the security is being stained by being associated with the other securities. If anyone could parse out just the bad debt there wouldn’t be a crisis. What Treasury has to to do is buy the stuff that is at a discount, regardless of performance. Some of that stuff will continue to fail, most will recover. That’s why its an asset.

    I think you are assuming that Treasury will only buy the bad cohorts. If that could have been done there would not be a banking crisis. It’s the discount on the good stuff because of its association with the bad stuff that began the erosion of bank balance sheets. Now if Treasury goes out and picks through the derivatives and gets just the defaulted loans, then all you “this program is bad” folks are right. I’m not that close to the actual securities any more, but I don’t think that is possible. A $1,000 derivative is composed of 95% performing loans and 5% non performing loans, it is currently priced at $500 because no one can get the 5% out. (completely illustrative numbers, guys… don’t go run to your Bloombergs and argue my quotes. I’m just making a point)

    Short answer: Because all the stuff is mixed up, it’s miss-priced. And it can’t be un-mixed. Eventually it will work itself out, but before then the bank will be seized. And if there is a risk of it being seized, no one will lend to it, which means it will fail long before the derivative unwinds,and recover back to their real value.

    (Since the Steelers just scored I’m not going to go into credit swaps, but the idea is about the same, but with a counter party twist. No one trusts the valuation of these assets, but they are probably all worth more than $0)

    Foreclosure: If you followed my story above you would see that while mortgage defaults were important originally, now we are in a whole different place. This is about good assets priced at a discount. Restructuring the micro-assets one mortgage at a time would have been interesting a year ago, but has almost nothing to do with the liquidity crisis banks are facing today. Mortgage mediation is a Policy Issue and I hope that all the congressmen who knew nothing about banking yesterday and who know a little more today will take up the issue.

    Just to be clear: Banks can handle defaults, foreclosures and restructuring. They are designed to do that. This crisis is about balance sheets that cannot be priced because of the immediate crush of confidence on the system. Think of it this way: The IRS shows up at your house and says “Unless you justify every deposit into every account for the last three years you are going to jail.” You say, “No problem sir I have it all here in these 27 unsorted boxes” (and you do). You say “I’ll get back to you in a month.” And the IRS guy says, “Nope, You have 15 minutes or you’re getting cuffed”.

    OK…Baltimore is driving …I’m going back to the game…

  8. Posted October 8, 08 at 10:37 am | Permalink

    Great post Doug. And of course Americans are worthy and must solve this crisis — for the sake of the rest of the world as well as yourselves. We are all interconnected now. (I write from Ireland)

    Thanks for your blog – I’m learning a lot from it — I’m interested, as you know, in creativity and how the business world has squeezed it out (although the financial world’s ability to create opaque assets for high fees is pretty genius!).


  9. Doug
    Posted October 8, 08 at 12:08 pm | Permalink

    Hi Orna…

    Last week, on another site it was ‘esplaind to me that corporations are “feudal institutions” and “the alienation of the workers cause them to be facile, blagh, blagh, blagh”. I don’t buy it.

    Workers in institutions can be very creative. The larger questions is if they can be effective with their creativity – those are two very different things. One of the core themes of my fiction work is the oppression of others from institutions and by organized groups. The greatest terror only emanates from institutions.

    But I am still thinking about the levels of oppression inside the walls of the organization. My current thinking is that control is exerted inside institutions and oppression is inflicted outside them…. but that’s for another day.

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