Calhoun on the Bubble

Tuesday, September 30, 2008

Reader Dismuke alerted me via email to an excellent piece at RealClear Markets regarding the current economic crisis, by investor Joseph Calhoun. What I like about it is that it busts two myths at once: that the current crisis represents a failure of capitalism and that there is a shortage of capital in the economy. Each has been used when convenient lately to sow panic and to justify massive new government interventions in the economy.

Last week Goldman Sachs raised $10 billion in new capital in one day. They sold $5 billion in preferred stock and warrants to Berkshire Hathaway and also completed a secondary offering of common stock that raised another $5 billion. Friday, JP Morgan raised $10 billion in a secondary offering to help pay for the Washington Mutual takeunder. Both of these offerings were oversubscribed, meaning that the companies could have raised more capital if they wanted. There is not a shortage of capital for well run financial companies.

There is, however, a shortage of capital for companies that have acted irresponsibly with investor capital in the recent past. For some reason, our political leaders believe this is a failure of the market, but isn't this what should be expected from rational investors? Given a choice,why would a rational investor allocate limited capital to the losers rather than the winners? If capital is really as scarce as it seems, isn't it better for our economy if we make sure that it is allocated wisely? [This can be done only by making sure that people who know what they are doing are free to act on their rational effort. --ed]

The biggest bank failure in the history of the United States happened last Thursday night and by Friday morning, it was business as usual. The only difference was the name on the door and the losses suffered by those unfortunate enough to invest in Washington Mutual bonds or stock. The taxpayers didn't lose anything and depositors didn't lose anything, only investors. That is how capitalism works in case everyone has forgotten. [bold added]
Oh, and scratch what I said about "justifying" government intervention in the economy. The proper verb in my last sentence is really "excuse". Capitalism depends on (and, to the extent that a nation is free, it is the triumph of) countless individuals exercising their own, independent judgement. This is impossible without freedom, which must be protected by the government. In fact, that is the only proper function of the government.

Any time and for any reason (HT, C. August) the government interferes with individual rights, it curtails the ability of some individuals to act according to their best judgement, and threatens to do so for all. Think about what this means in the context of the current crisis.

Those who have made bad decisions in real estate (and related) investments have already suffered their losses, or can probably see them coming.

What good is it going to do for our economy or our freedom for the government to take money away from those who have not made similar mistakes and hand it over to those who have? And what good will "supervision" of the able (in the worst imaginable context, that of threats) by the very people who helped create this mess do? Most importantly, by what right?

In all the disgraceful spinning of campfire ghost stories, cries of "act now, think later", and groveling before Nancy Pelosi (of all people!), not once has any politician in favor of the bailout explained why robbing American citizens for the benefit of inept bankers is the right, American thing to do. That's because they can't, any more than Nancy Pelosi can wave a wand and relieve all of us from the necessity of thinking carefully in order to make a living. Or make socialism compatible with the actual requirements of human life.

Just for starters, a "bailout" will insulate those who deserve their losses from the consequences of their bad decisions, as well as (via the inevitable redistribution of wealth) visit those consequences upon those who don't deserve them and deprive the rewards of sound judgement from those who do deserve them. Isn't the last thing our economy needs right now to throw good money after bad, while removing incentives from those best able to make good economic decisions?

If we allow sympathy for the inept (or the foolish) or envy of the able to cloud our judgement enough to blind us to the fact that government intervention in the economy is ultimately achieved by violating someone's inalienable rights, we will rue that choice sooner or later. A mere bursting bubble will look like a walk in the park. (Calhoun hints at that, too, although he could have gone a lot farther.)

Read the whole article. (Among the things I haven't discussed here, Calhoun succinctly explains how some recent government interventions have already misfired.)

-- CAV


: Corrected typos.


mtnrunner2 said...

The rationales for intervention nearly always depersonalize the economy, turning it into a misbehaving and/or broken robot that must be fixed.

That is a fraud of monumental proportions, since what we are talking about is nothing less than the judgments of millions of actual people, including professional traders and investors; people who make their living by seeing price trends and value (or lack of value) where others do not. Yet the judgments of these individuals are arbitrarily declared useless in the single act of claiming that the markets are not "working". Pray tell, Mr. Czar of the Economy, exactly which judgment is wrong? Should trader A have not sold stock B for price C on day D? If not, which stock, price and day would have been correct?

It seems that interventionists want to claim that causality itself breaks down, and that markets operate indpendently of the actions of the individual participants.

Gus Van Horn said...

"It seems that interventionists want to claim that causality itself breaks down, and that markets operate independently of the actions of the individual participants.

That's an interesting way of looking at this, and a symptom, I think, of the fact that many people are heavily influenced by Pragmatism or simply unable to think about politics and economics in terms of principles -- which you'd need to do in order to really be able to see cause and effect properly.

Some politicians have this problem, too, and some sense that the problem gives them an opening to foist their snake oil on the public.

Anonymous said...

Here's another indication that the capital markets per se are not frozen: companies like Microsoft and General Electric are paying over a percentage point less interest than the financials, on short term debt.

"Sept. 29 (Bloomberg) -- The same credit crunch gripping banks, brokers and insurers is providing industrial companies with the lowest short-term borrowing costs in almost four years. "

However, in a letter that John Lewis received from his congressman regarding the bailout, he wrote that his main reason why he voted for it was that municipal governments with AAA ratings were having trouble issuing bonds.

What these two facts led me to conclude was that Paulson was not scared by the possible consequences for "MainStreet", but by the possible consequences for government: a financial sector freezeup that cuts the deficit financing spigot off. I'm speculating here, but I have to wonder whether local governments are the canary in the coal mine.

Gus Van Horn said...

Although that sounds reasonable to me, I'm not sure off-hand exactly HOW the local governments would be the canary in the coal mine -- unless municipal bond ratings factor in the likelihood of federal grants/matching funds failing to materialize, or something like that....

Very interesting! THAT would certainly explain why Bush and the Democratic leadership are so gung-ho on this one. We might actually have to CUT THE WELFARE STATE BACK FOR A CHANGE in order to keep taxes lower.

Thomas Rowland said...

If the mark of the criminal is the desire to live without productive effort at the range-of-the-moment perceptual level, then the US has become a nation largely composed of criminals for whom government is the agent or street thug. Your post demonstrates that business has been corrupted as much as anyone.

Gus Van Horn said...


Some businesses, I see, but not most.