The Baseline Scenario

I was thinking the exact same thing when I heard that.

I want to dedicate this link to Charles Calomiris. Title speaks for itself. http://www.youtube.com/watch?v=hwxbsVd15-I

The bailout’s COST is not $20 trillion (140% of annual output). That might be the sum of the SIZE of all programs, but a dollar spent on extending unemployment benefits (stimulus) or a $1 guarantee of a Wells Fargo bond are not money that is lost the same way that losses on Maiden Lane or permanently lost capital are.

So what is the cost?

I think you have to integrate the output gap over the duration of the recession (as yet unknown), and add the PV of the interest on the added debt, or something like that. Perhaps to be fair we should add back some of the benefits of the bubble that preceded the bust.

IMF and Rogoff+Reinhart have done studies on the costs of bailouts…

I’ve listened to and read Mr. Calomiris’s stuff. His argument depends on the listener not knowing anything about the “plumbing” of financial markets. Large financial institutions do not provide lower-cost risk-management services via derivatives hedging. Nor, as trading counterparts, do they need all that heft to operate efficiently in global markets. Every hedge fund that succeeds in the rough-and-tumble global markets — without an explicit guarantee against failure by a host government that’s been compromised by the indigenous banking industry — demonstrates the contrary position.

The plumbing works like this: Every bundle of risk a bank takes on is broken down into component risks, which are hedged by the individual desks tasked with trading in particular markets. So someone looking to off-load, say, interest rate, FX and maybe equities risk, will be crossing bid-ask spreads on all three desks. The traders running the books into which these separate risks will be dumped all have their own P&L and have to know the cost of laying off whatever risk they take on in the OTC derivatives markets. So when they make a price, they’ve already included a liquidity premium and their own P&L in whatever price they provide on the individual piece of risk they’re responsible for. While “brownie” points may be garnered for being a “team player” — e.g., pricing part of the overall hedge at mids instead of on the bid or offer — this doesn’t cover the particular desk’s “nut.” At the end of the year, every trader is comp’d by the P&L of their individual books. You’re only paid if you make money.

The bottom line: A “customer” is better off going to the market and getting the best bid and best offer on the components of the risk bundle and transacting on that basis. As an aside, this is one reason the banks are fighting the push to get everything on to an exchange: Once the bids and offers are totally transparent, the “value added” of risk management services approaches zero. The really easy money will be gone.

All of this back-and-forth by the apologists of big-is-best banking is so tedious. The folks making the argument have to demonstrate a tangible benefit where none exists. So they have to cloak their assertions — and they are, at the end of the day, nothing more than assertions — with unsupportable claims about the benefits of economies of scale. It’s as bogus as the claims made by the same apologists that these firms are too important for their fates to be left to the market.

These apologists are just banal. So meticulous and self-serving. Mundane, trivial and boring. We and they would all do well to re-read Hannah Arendt. Particularly our executive-branch functionaries, who grant these clerks standing.

Sorry, I already donated blood this week.