June 30, 2009
A 20-Year Bear Market?
by John Mauldin

http://www.nakedcapitalism.com/2009/07/is-new-affordable-fhfa-loan-program.html

Actually, very easily. We could leave most of the company intact (along with many assets that are hard to recreate, like IT infrastructure, call centers, brick-and-mortar banks, etc.) but still punish those responsible by prosecuting individuals directly.

The political problem with the argument about long tails in statistical distributions is that it places the blame on something that can’t be predicted. Thus it’s no one’s fault. When in fact it can be predicted, but it may not be locally rational for any individual to take it into account. Often, I think, this is because those who have the power to change it do not reap 100% of the benefits.

Consider the energy supply. There are many black swan events that could cause disaster, but if this were to occur, would the oligopolistic energy companies (who have the most direct power to prepare for the black swan event) be harmed? Quite the contrary, they would benefit. They have NO incentive to build robustness into the system.

The same is true with agriculture. The country has good reason to ensure excess production to guard against catastrophe. But in any given year, sustaining excess production is not rational for farmers. It’s hard to imagine a market-based solution to this problem for many reasons. One is liquidity constraints. Companies that spend lots of money to guard against 200 year events are doomed to be beaten by competitors over any given 20 year stretch.

It’s hard to imagine a market-based solution that naturally evolves to deal with this.

This is certainly one thing they can do that would be appreciated by all, and would probably take away a lot of the popular pressure for resolution. Still, they can’t bring themselves to do it. It would reveal too much, and, although it would probably, as Kashyap suggests, be extremely useful as a “financial war game,” to the institutions themselves, it will be fought by them tooth and nail, only because it would promote the transparency that they all so dread.

The piper, however, will be paid sooner or later, that is a veritable certainty.

Simon, I so appreciate bringing these things out. A shame that (I believe), so few of the general public are paying attention!!!!

For a good obituary you need a good life.

Anli Kashyap in “A sound funeral plan can prolong a bank’s life” writes about “the rapid resolution plan” that systemically important financial would have to file indicating what arrangements they have made for their demise.

It sounds so right and so utterly responsible (even Angela Dorothea Merkel would be expected to endorse that) but, do we not really need more a little mission statement about what they are going to do while living? We still keep on worrying too much of keeping the costs of the funeral down instead of making certain that the living has been worth it. In these financial regulatory reforms, where do they really discuss the purpose of the banks?

The possibilities of a “rapid resolution plan” being useful depends also much on what kind of disaster hits them. For instance what is the “rapid resolution plan” for a bank if all the credit rating agencies turn out to be wrong (again? Suing the regulators for forcing the banks to heed so much the opinions of these risk surveyors?

As I understand it, the black swan is an extremely improbable (though inevitable) event. You have a flat line, then a single spike, then a flat line again — rather as if a cosmic ray caused your server to fail, and it was then rebooted.

By contrast, the financial crisis (The Big FAIL) was predicted by many for quite cogent reasons, but the people who called their shot accurately were shunned as Cassandras.

The fault is not in our math, dear Brutus…

“The jury is out on what the political identity of the Obama presidency will ultimately be, and the handling of the financial crisis does give reason for pause, hesitation, and even, I would say, some concern.

“So what would another approach look like? Well some people say that nationalising the banks in the public interest would have been a better, more frontal, and ultimately simpler, cleaner way of doing it.

“It would have had one advantage, which would be to make explicit that the purpose here is the public purpose and however we resolve the financial crisis, we should do so in a way that minimises the unfair advantage to be enjoyed by bankers and investors whose conduct of their companies got us into this mess in the first place.

“And nationalising would at least send that message in a way that a complex, public-private partnership involving yet more leverage doesn’t.