A colossal game of “Chicken”

The clip above shows Franklin D. Roosevelt campaigning for the US presidency in 1933, using eerily familiar rhetoric. The clip opened the second portion of last week’s episode of The Explainer (which you can watch on YouTube), which focused on the Great Depression (in it, I asked my guest to expound on his blog post, Smartly protectionist). The Great Depression has provided a lot of grist for the mill in recent years, for example see A history lesson from the Great Depression – How the World Works – Salon.com

Today, I was going to focus on what’s going on in America but I’m down with the flu so it will have to be for next week.

For the past couple of weeks watching Bloomberg’s been a riveting experience as experts try to grapple with the goings-on in markets in the US and elsewhere. Non-experts, too: Question for a Management Class makes for quite interesting reading.

On the eve of the US House of Representatives voting on the bailout, a group of American economists released an open letter calling on representatives to reject the bailout plan. Columnist Will Hutton in The Guardian pointed out the argument at the heart of the economists’ opposition (and, by all accounts, among US voters who had House Republicans spooked about a popular backlash if they voted for the White House-proposed bailout plan):

And although some conservatives in Britain and America continue to make the ideological case against any government action as a response to the recent turmoil – governments necessarily do everything worse than the market – they have no alternative proposal about how to restore trust once it has gone. Trust is a reciprocal relationship, dependent upon a desire to be considered decent and honourable. Even in the dog-eat-dog financial markets, trust and integrity are matters of self-interest. However amoral you may be, it is in your interest to care about your reputation, because if you behave badly you will not do business with me – or others – on favourable terms again.

But the scale of the personal rewards now available in London and Wall Street – £15m-£20m at the top is the norm – along with the greed-is-good doctrine associated with extreme laissez-faire economics, has trashed the need for individuals to worry about integrity. They don’t need to be concerned about their reputations; they just need one deal or one year at the top and they need never work again. The incentive structure has so departed from one of the principal norms of fairness – proportionality between value added and reward – that it has eviscerated trust relationships and integrity.

Everybody tries to ‘game’ the system on their route to vast personal fortunes – whether short-selling, packaging up dud mortgages as prime mortgages or telling lies about their financial viability – and the result is that the system is getting wise. The best course today in any financial transaction is to presume zero integrity. Credit is drying up and with it the very lifeblood of the economy.

Worse, now that the system is in trouble, financiers are turning to taxpayers in the US and Britain for help without understanding the other key principal of fairness – that we will consider helping those who for no fault of their own get into trouble, but not those who freely created their own bad circumstances.

Hank Paulson certainly acted decisively in launching his plan, but the former Goldman Sachs CEO, who negotiated a special exemption from tax when he took the job, like his former Wall Street colleagues is not well endowed with the fairness gene. It polluted the very design of the scheme.

He knows that unless the US government does something comprehensive, the entire financial system is at stake, but his original plan was designed to bail out the system intact. It made no demands that any financial executives sacrifice pay or bonuses despite having driven their firms and wider economy to the point of bankruptcy. He does not want the government to provide new bank capital to help recapitalise a bust banking system. Instead, he wants the government to buy their toxic debt and so leave the banks unreformed. On top he wanted complete discretion to act as he chose without any oversight.

American economists of every persuasion signed a joint letter complaining not at the aim of the bail out, which is plainly vital, but for its lack of fairness. Conservative papers and politicians echoed the complaint. Suddenly, Wall Street is coming back to earth. The transactions from which it skims such riches are built on the savings of ordinary Americans to whom it has obligations, as it has to other Wall Street firms. What we know now about the yet to be agreed compromise is that Paulson has accepted Congressional oversight, will offer direct help to distressed US homeowners as well as banks, and will accept some constraints on the worst excesses of executive pay.

But the core proposal remains. The government will buy toxic debt rather than inject government funds into the banks’ capital base, in other words, reject even partially nationalising the entire US banking system as the Swedes had to in 1992. I don’t know – nobody does – whether the Paulson plan would be sufficient or whether ultimately the Americans will have to go for nationalisation. What I do know is that unless there is a radical and government-led change in ownership, structure, regulation and incentives so that the principles of fairness are put at the heart of the Anglo American financial system – proportionality of reward and fair distribution of risk – there is no chance of the return of trust and integrity upon which long-term recovery depends.

In the end the House of Representatives rejected the White House plan. FT.com / In depth – House rejects US bail-out bill, stitched the news together with failures and rescues in the UK, Benelux and Germany; and in House to Wall Street: Drop dead – MarketWatch says the Republicans were the ones who blinked:

Republicans voted against the bill by a two-to-one ratio, and in the process rejected their own leadership, who had worked for nearly a week to craft a bill that could gain a majority. Nearly 100 Democrats also voted against the bill, spurning their leadership.
Many Republicans in the House were never persuaded that the credit crunch in the financial system is an impending disaster deserving of taxpayer aid. Politicians who had cut their teeth on free-market principles couldn’t accept the idea that the federal government should back up the banks who had foolishly bet everything on the housing bubble.
Or they didn’t want to face the voters in six weeks and explain why a Republican would vote for the biggest government bailout ever.
The result was that markets previously poised to celebrate, engaged in an orgy of selling instead, with something of an atmosphere not only of cutting already heavy losses, but of vengeance. In the days leading to the House vote, the weekend negotiations took place against a backdrop of analysts warning that if the market didn’t get what it wanted -a bailout anaylists previously said the markets viewed with unease- then the market would crash.

In his blog, Howard Lindzom put it bluntly:

The market has been demanding a large scope bailout plan for weeks. The market has been chewing through financials one by one until it gets what it wants.

Let’s not kid ourselves, the markets are rigged. The bailout is a wimpy ass way to deal with the problem for sure, but a $1.2 trillion loss in market cap was just TODAY’s tradeoff. The market wants some extra rigging short-term and a meltdown is/was the trade-off.

The people in Washington know very little about a lot of things. That is their specialty, their claime to fame. They know shit ass less than nothing about the stock market and the MOOD of America that matters (money). Today, you saw what a bad mood can bring from traders. Tomorrow and for the next week you will see what panic brings as the selling accelerates.

This crisis though is not about the stock market, it is about THE CREDIT MARKETS. There is NO access to capital. We are shut down for business. Way worse than after 9/11 when the markets were closed. At least than, we were out shopping at the request of our President. Now we are just deer in the headlights at the whim of the House of Reps and Congress and Senate who just seem out to punish the rich. Bullshit politics. Everybody has a chance to be famous. They are really punishing everybody else.

The FED is out of bullets and we have absolutely zero leadership or hopes of any leadership soon.

On that sobering note, as the New York exchange plunged (777 points), and then Asia, too (biggest drop since 1987), An analyst on Bloomberg dryly said, “Cash seems to be the safest place to put your money now.” Commodity prices had their biggest drop in 52 years (since the index began). The Australian Prime Minister issued a statement appealing to the US Congress to pass the emergency measure, a sentiment echoed by the Japanese Finance Minister.George W. Bush will address his countrymen shortly before the markets open on Tuesday.

This seems a colossal game of “chicken,” with political leaders answerable to voters pitted on a collision course with financiers normally dismissive of nations, sovereignty, etc., demanding a bailout from the political leaders, otherwise everything comes crashing down. It’s interesting that as today wore on, the analysist began to speak rather confidently of the bailout being passed by the end of the week.

The Republican nightmare is obviously straight out of the Hollywood version of populist Huey Long’s barely fictionalized movie biopic, All the King’s Men:


Here at home, people have been nervous ever since insurance giant AIG ended up being taken over by the US government to prevent its collapse. See Business – Are my Philam investments safe? in INQUIRER.net

There are also concerns, now, over the possibility of bank runs and to head off potential panic, the Central Bank has tried to make soothing noises. See Business – How safe is my money in the bank? also in INQUIRER.net

Salve Duplito, who authored the two articles above, then goes on to point out that instead of hand-wringing, some sober planning is in order for ordinary people: Money Smarts » How are you dealing with the crisis?

As for the economists, Nouriel Roubini takes a kind of grim satisfaction in not turning out to be a Cassandra (see The Worst Financial Crisis Since the Great Depression and the subsequent The Shadow Banking System is Unravelling:Such demise confirmed by Morgan and Goldman now being converted into banks) while Roubini then looks at the proposed 700 billion dollar bailout plan and compares it to other bailouts in the past: Is Purchasing $700 billion of Toxic Assets the Best Way to Recapitalize the Financial System? No! It is Rather a Disgrace and Rip-Off Benefitting only the Shareholders and Unsecured Creditors of Banks

Whenever there is a systemic banking crisis there is a need to recapitalize the banking/financial system to avoid an excessive and destructive credit contraction. But purchasing toxic/illiquid assets of the financial system is not the most effective and efficient way to recapitalize the banking system. Such recapitalization — via the use of public resources — can occur in a number of alternative ways: purchase of bad assets/loans; government injection of preferred shares; government injection of common shares; government purchase of subordinated debt; government issuance of government bonds to be placed on the banks’ balance sheet; government injection of cash; government credit lines extended to the banks; government assumption of government liabilities.

A recent IMF study of 42 systemic banking crises across the world provides evidence on how different crises were resolved. First of all only in 32 of the 42 cases there was government financial intervention of any sort; in 10 cases systemic banking crises were resolved without any government financial intervention. Of the 32 cases where the government recapitalized the banking system only seven included a program of purchase of bad assets/loans (like the one proposed by the US Treasury). In 25 other cases there was no government purchase of such toxic assets. In 6 cases the government purchased preferred shares; in 4 cases the government purchased common shares; in 11 cases the government purchased subordinated debt; in 12 cases the government injected cash in the banks; in 2 cases credit was extended to the banks; and in 3 cases the government assumed bank liabilities. Even in cases where bad assets were purchased — as in Chile — dividends were suspended and all profits and recoveries had to be used to repurchase the bad assets. Of course in most cases multiple forms of government recapitalization of banks were used.

But government purchase of bad assets was the exception rather than the rule. It was used only in Mexico, Japan, Bolivia, Czech Republic, Jamaica, Malaysia, and Paraguay. Even in six of these seven cases where the recapitalization of banks occurred via the government purchase of bad assets such recapitalization was a combination of purchase of bad assets together with other forms of recapitalization (such as government purchase of preferred shares or subordinated debt).

In the Scandinavian banking crises (Sweden, Norway, Finland) that are a model of how a banking crisis should be resolved there was not government purchase of bad assets; most of the recapitalization occurred through various injections of public capital in the banking system. Purchase of toxic assets instead — in most cases in which it was used — made the fiscal cost of the crisis much higher and expensive (as in Japan and Mexico).

Thus the claim by the Fed and Treasury that spending $700 billion of public money is the best way to recapitalize banks has absolutely no factual basis or justification. This way of recapitalizing financial institutions is a total rip-off that will mostly benefit — at a huge expense for the US taxpayer – the common and preferred shareholders and even unsecured creditors of the banks. Even the late addition of some warrants that the government will get in exchange of this massive injection of public money is only a cosmetic fig leaf of dubious value as the form and size of such warrants is totally vague and fuzzy.

Others have tried to translate the amount in human terms:CJR: What Can You Buy For $700 Billion?

It would reimburse banks, home owners, and local governments for nearly 9 million foreclosures – It could prevent over 200 million foreclosures – It could buy 8.6 billion monthly Metrocards – The government could rebuild Katrina-ravished New Orleans and Gulf Coast… three and a half times – Roughly 538 Yankee Stadiums could be built – 5.4 million students could be sent to a public university – It equals nearly 520 times the amount of Amtrak’s current operating budget – It is $14 billion more than the U.S. spent during the Vietnam War

Another economist, Carsten Hermann Pillath, offers up an approach based on evolutionary economics and cultural science, bringing up game theory and the prisoners’ dilemma (see The financial crisis: a humble evolutionary economist’s perspective).

Over at Left Flank, you can find links to scientists weighing in with their efforts to relate the financial news with Chaos Theory! See Black Swans and Charlatans.

Jeff Jarvis, in Stewardship v. ownership of our news, money, and society took a cue from the unfolding crisis and criticizes mainstream media and it’s efforts to control how their content is processed, used, and redistributed on the World Wide Web.

The political fallout, if any, is something else, altogether. I’ve been silent for some weeks because I’ve been trying to get beyond simply reacting to the news, and instead, trying to make sense of where we are and where we ought to go; I’ll attempt to start piecing my thoughts together when I’ve recovered from the flu.

Manuel L. Quezon III.

319 thoughts on “A colossal game of “Chicken”

  1. “i have a question to you too. Do you think there’s a conflict of interest exist between Obama’s campaign providing $800,000 to ACORN. An organization that advertise on its website as a non partisan organization and yet endorse Obama as their presidential candidate. Check this video for a fact:”


    I dont think there is a conflict of interest. Im not even sure if conflict of interest is the right term. Maybe you are trying to say, guilt by association. But I dont think this is possible too.

    It is indeed a fact that Acorn comitted a fraud.of voters registrant. And a criminal case was already filed. If Obama camaign is liable to that for that then a they should have been incuded in teh charge sheet. Clearly they are not. So there is no connection at all.

    If I am a supporter of Obama and I will cheat for Obama without the Obama konwing it. does that mean Obama is a cheat too?

    I dont think so. What ever alleged crime comitted by Acorn has really nothing to do with Obama at all until you come up with another video showing Obama campaign was indeed and in fact connected to the fraud.comitted by Acorn. Like it was really proven that he directed Acorn to do the fraud.

  2. Leytenean,

    Here is another questions for you.

    Are you comfortable with all of the Mc Cai proposed policies. what is your view of His healthcare now thta you know that it cannot cover peopel with preexsiting condition. Are you still Ok with $5,000 tax break despite the flaws pointed out by Obama?

    Are stil OK with the war in Iraq despite the economic crisis that America is facing? Dont you think the biliions of billion s of dollar being used to financed it has a much better use otherwise?

    You know rather that these ennuendos, speculations, I think it would be more productice if you just focus on issues.

    Alls these links that you hav ebeen flooding in this blog has really no direct proven conection that tied up to Obama campaigns. All these Mc Cains negative campaigns has not really produced enough tie up to Obama.

    And if Obama is really that negatiev as you are trying to suggest, then why peopel like Warren Buffet supports him. Dont tell me that he hasnt known that Acorn fraud or any of those links that you have published here…..

    Obviously Leytenan , all you have doing here is nothing but negative campaigns and does not really help Mc Cains with the independent and undecided voters. What will really help Mc Cain is to stick to the issues facing the country and very good presentation on what he really wanted to do if he is elected as president.

    He could have use Palin to do the presentation rather than used her as an attack dog….

  3. Fearless forecast: McCain will lose 😥 Florida. I’m basing leytenian efforts of the past many days. [ Michelle Obama’s college thesis 😯 being raised as an issue is total desperation . ]

    McCain will lose Michigan, too…. (oh, wait… McCain has already lost …. McCain already conceded 😕 Michigan. )

  4. The Dallas newspapers report that McCain’s advertising is more than 95 percent negative (Obama’s ads — 30% negative) but McCain’s ads are so ineffective they might as well be on YouTube and sent by e-mails like leytenian has been doing. [ The most effective McCain ad (the one that generated the most discussions for quite a few days) was also the nonsensical one that also “featured” Paris Hilton and Brittany Spears. One of the most effective Obama negative ads — that McCain “says that he’s going to give you a $5,000 tax credit. What he doesn’t tell you is that he’s going to tax your employer-based health-care benefits, for the first time ever.” ]

    Just look at these two mantras :
    McCain/Palin — DRILL, BABY, DRILL 😐
    Obama (with Bill and Hillary echoing the same message )

    No wonder many Republicans have gone public for McCain to fire 😕 his entire campaign staff.

  5. one commentator said that there is a very strong TEFLON shield that separates obama and the voters with regards to the truth on his associations with many shady personalities among them Wright (his pastor for 20 years), ayers, rezko, and ACORN, the NGO(?) which reincarnated the Aswang voters in the 50’s from Mindanao to Indiana in the present presidential election. the teflon of course is courtesy of the democrat/liberal press.

    obama definitely is associated with those personalities. one way or the other they influenced him or it maybe the other way, obama influenced them. one thing for sure, BIRDS OF A FEATHER FLOCK TOGETHER.

  6. to PilipinoParin: what state are you from? Kung taga California ka o taga New York, tapos na ang bola. The electoral votes for those states go to Obama.

  7. exactly, leyetenean, so better stop all these negative campaign now because it is not achieveing anything and you are just wasting your time. Now that is what is funny!

    The fact as shown by the polls is that Obama has the momentum. And with 4weeks to go, Mc Cain has a lot of work to do to evercome that momentum.

  8. that’s the problem, not only here in USA but most of the time in our homeland, the Philippines. we see problems, we talk a about it but we don’t seek for the truth and the solutions.

    in my view, these are not negative propaganda. the purpose is to look at the innards of the candidates, their true color. let us dissect their history, make a time line, look at the associates. only then we can say what kind of candidates these people are. i don’t believe in promises during election, pangakong napapako. i believe in the pattern of behavior, their previous accomplishments. we all know them, kinda like ” I voted for it before i voted against it”, the numerous flip-flops among them. typical politicians, local and abroad, they will promise even their souls just to be elected. dissect the history, personality…don’t rely on oratory bolahan sa election.

    we know that economy is the main problem today. but it does not mean we would set aside other criteria for electing the best candidate. let us check everything for we are at the verge of socialism with triumvirate, obama, pelosi and reid.

  9. btw, NY and Cali do not dictate the future of USA. “Conan the Barbarian” is now asking for $7billion (yes, with a big “B”) from the federal and Bloomberg is trying to change the state constitution just so he could lead the “needed changes” in NY. bottom line, NY and CA are just two states of USA, out of 50. others have they say in our future.hindi pa tapos ang sabong, baka talunin pa ‘nung texas ‘yung bulik.

  10. Obama’s answer on first question on debate is to end the jobs sent overseas. Second, Obama has no clue of the housing market. This is again an inexperience tactic where most pinoys are taking chances.

  11. Actually, All panelist in all talks shows that I watched last night after the debate agreed that the It Mc Cains best performance ever. He was winning the first 30 minutes the debates that Obama campaign started to worry. Unfortunately, It was when Mc Cain brought out the Ayers and and Acord issues that he started losing the debate. Obama suddenly came strong when he answered the Ayers mud being thrown to him. it was the monement that showed Obama great strength and Mc Cains negative side. So majority especially the undecided voters see Obama sa very presidentiable Obama got the nod of so many undecided voter based on CBS instant poll.

    See, I ve been telling this Leyetenean,…negative campaigning is just destroying the Mc Cain campaign and bossting Obma’s.
    BTW heres a nice article for you on the ACORN that you made such a big deal in this blog.


    And heres teh CNN poll on the debate. The daiing news headline here in NYC say ” AND THE WHINNER IS….. Mc Cain


    MC Cain may be strong in , foriegn policy , homeland security and may have a better economic plan. But the thing is Obama is simply just a politcal genius who caryy himself very well and very relatable to a majority of the people. It simply just his time . And just like Hilary, Mc Cain and other old timer in US politics can just eat their heat out. And political neophyte and a black at that just made them all eat dust….

  12. Pilipinopa rin,

    Bakit ba ang daming pinoy ang anti Obama? You know I strong suspect that this prejudice . Talgang hanggang ngayon karamihan sa mga pInoy ay backward pa rin ang mindset.

    I dont know if you watche dtalke shows, if you are try checking the Charie Rose in PBS. It 10:30 to 11:30 in NYC. Dito and panelist ay mga non partisan so they really said what needs to be said. And they last every just said nothing but great words for Obama.

  13. “Bakit ba ang daming pinoy ang anti Obama? You know I strong suspect that this prejudice . Talgang hanggang ngayon karamihan sa mga pInoy ay backward pa rin ang mindset.”….rego

    It is very unfortunate that the words”prejudice and backward” are being thrown into the discussion by one of our own, a Filipino himself.

    We know that 10% of our kababayans are spread out in the entire world at anyone time, from Antartica, to Timbuktu to the deepest parts of the oceans in submarines. They are considered one of the happiest groups of people, one of the easiest group to be assimilated into any type of local conditions. The Filipinos never had problems with any group , any race, and yet here comes one of them calling the whole Filipino race PREJUDICE AND BACKWARD? I am very disappointed, rego. I hope this is just a typo.

    Anyway, I don’t believe that checking every bit of information, history, personality etc. of someone who is aspiring to be one of the public servants especially the highest position, the president is out of line, be labeled as prejudice and with backward mindset. Voters in the Philippines, much more in USA are not satisfied with watching candidates do the “ocho-ocho”, the “hahil sa iyo nais kong mabuhay” thingy. Voters want to scrutinize the candidates. This maybe one of the offshoots of
    CIS, hehehehhe.This is the only way we can be sure that a right person is elected as public servant, including the president

  14. “Voters want to scrutinize the candidates. This maybe one of the offshoots of
    CIS, hehehehhe.This is the only way we can be sure that a right person is elected as public servant, including the president.” pilipinoparin

    right, for 8 years you’ve been sure that you’ve chosen the right president… and you need another 4 years.

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