Monday, September 15, 2008

More Sunday Night Excitement

A lot of news for a Sunday Night:

- Lehman Brothers is filing Chapter 11.
- Bank of America is buying Merrill Lynch.
- The Fed is expanding the types of collateral it will lend against to include equities.
- AIG is planning asset sales to raise capital as part of a massive restructuring.

I wonder if at some point it might make sense for the Federal government to create its own vulture fund with one or two hundred billion dollars and start buying up distressed mortgages and mortgage-backed securities at steep discounts. Maybe that would put a floor under the prices of some of the complex assets derived from mortgage-backed securities, and if the Feds buy these securities at steep enough discounts, they might turn a profit on them when the credit markets revive. Just a layman's thought. Perhaps professional pundits will offer better suggestions.


Daniel said...

I'm no professional pundit, but:

Bringing politics into the buying of mortgage-backed securities would probably result in the same disastrous consequences as it has had in the selling of them.

I'd personally say that the government has absolutely no right to any part of the mortgage market (never has and never will).

Though some good things have and no doubt could result from their involvement, someone must pay for them. And more times than not it is the prudent and the cautious who are sacrificed to the reckless.


On a different note, Dave: you should check out the Sitemeter widget. Lots of good information provided on traffic, the make-up of it, and so on. It's free.

DaveinHackensack said...

"I'd personally say that the government has absolutely no right to any part of the mortgage market (never has and never will)."

You are aware, of course, that the government created the secondary market for mortgages in the first place. I'm not sure why you think the government doesn't have a "right" to participate in the market it created. If this sort of vulture fund buying is done prudently and at steep enough discounts, no one would need to be sacrificed, since the operation would make a profit. It would be better if this could be done by the private sector -- and that is happening, to some extent, as I've noted previously. I just wonder how long it will take larger financial services firms to raise enough capital for these sorts of funds to have an impact. A lot of these firms burned investors so bad on mortgages on the way up that they may have trouble attracting investors at this point.

Thanks again for mentioning that Sitemeter widget. I'd been meaning to check it out.

OT, what are your thoughts on Mark Cuban's preference of dividends over stock buybacks? I noticed you've mentioned the buybacks at POT and HEM recently on your site.

Daniel said...

I have a bias towards buybacks over dividends given that they can be used more selectively, and have tax advantages to boot.

But it's definitely not a preference that I think can be applied out of context.

For instance, if buybacks are a part "of business" irregardless of the price of the stock--or simply to offset the dilution that can occur via huge options packages to top management.

In the case of PotashCorp I think their buyback program is great but the dividend they pay (miniscule as it is) is, well, not so great.


I was using "right" in a different sense of the word.

The government, or people, can claim the rights to many things--from health care and education to a house of their own and a vacation--but that does not make them proper rights in a political sense.

The easy way (in my view) to test whether a claimed right is proper, or not, is to ask whether or not it requires another person's rights to be violated.

In this sense, one person's right to a vacation or an education for their child requires that another person's earnings (or their right to property) be abrogated.

In another sense, one person's right to free speech does not violate the rights of any other person--just like their right to property does not. That's why I'd say these are proper rights.

The government can not take a single step in the mortgage market or in the economy in general without abrogating the rights of some other person.

With whose money would they hope to make a profit? Or help someone get into a home--then stay in it?

Leaving the impracticality of the government being able to solve just about every problem except for the defense of citizens, the immorality of sacrificing the rights of one person for the benefit (ahem: vote) of another is appalling.

DaveinHackensack said...

The concept of representative democracy presupposes an exchange of certain rights to the government in return for providing certain key functions -- including providing for national defense, which even the most libertarian folks acknowledge is a legitimate role of government.

The rise of the modern welfare state, and of a capitalist economy with significant government participation, presupposed that more rights would be exchanged, in return for an expanded role of government. The extent to which this expansion of government (e.g., Social Security) has been extremely popular demonstrates that most of the people that the government represents are happy with it (even if they differ on the details).

My preference would be for a welfare state more along the lines of those in Singapore, Chile, or Hong Kong, which rely more on enforced individual savings than on transfer payments. Even in those cases though, you have the governments constraining and requiring a trade off of certain individual rights. In principal, I don't have a problem with this, and as a practical matter, I think it makes sense. I don't think you can run a modern state otherwise. Would you not provide any medical care to indigents because they don't have the right to it, according to your definition? Would you provide no education to children of parents who can't afford schools? There is more than one school of ethics, and I think the way any modern state is run must be informed, to some extent, by a sense of utilitarianism. Poor kids may not have the right, according to your definition, to an education they can't pay for, but the rest of us are probably better off with them in school than wandering the streets.