That’s not my point. A lot of political rhetoric has been about how awful the plan is because it takes money from “the taxpayer” and gives it to “the banks.” My point is that depending on which taxpayers get hit and how the banks get recapitalized, this may not be a bad thing.

Personally, I think it is quite unfair to recapitalize the banks by increasing taxes on the middle class and the poor. However, to fix the economy, you need massive tax increases on people making more than $1M and moderate tax increases on people making more than $250K, I don’t object to this.

LifeIsTwoShort: well, is there not major risk that in the end the plan may not be enough in thus both the taxpayer and the financials end up in worse shape than we are in today?

Yes. But if you have any better ideas…..

LifeIsTwoShort: i do also want to point out that, it is, my understanding that AIG London issued not 1 but trillions in CDO contracts. whats interesting here is it was actually (from my understanding) a NY ibank (big player) that proposed this idea…

I think you mean CDS contracts. Also CDS contracts are typically states in terms of notional values, which overstate the actual exposures. Also a lot of AIG’s contracts went through Goldman-Sachs, which has let to a lot of conspiracy theories, which I personally don’t believe.

LifeIsTwoShort: Issued in CDS’s is so discouraging that by my accounts we are still facing a 8-9T hole.

You only have to pay a CDS if a company goes bankrupt, and 8-9 trillion is the amount that has to be paid if every company in the United States goes bankrupt.

This is why these assets are so damned hard to value. If the economy stabilizes, then none of the CDS’s get tripped, and so their are no payouts. If things get bad, then CDS’s start getting paid. If things get really, really bad then you start having a chain reaction as one CDS blowups up, it triggers another one, until everything just explodes.

The chain reaction is why AIG was bailed out, and the possibility of a chain reaction is one factor as to why the US government is not that enthusiatic about pushing GM and the banks into anything that would result in a bond default.

LifeIsTwoShort: Of course, i could be wrong, but the Geithner plan may work temporarily, but it really does not address the root of the crisis. bad banks will stay with bad assets….

The root of the crisis is unemployment. Get people jobs, and most of the problems disappear.

Part of the problem that people have is that people assume that there is this big label saying *THIS IS A BAD ASSET*, when this is not the case. Lets look at my mortgage. Right now, it’s a good asset. I pay my bills on time. Now if I lose my job for a year, and run through my savings, then this good asset becomes a bad asset since I’ll likely put food before my mortgage.

Rajesh: The data shows that most of the Chinese savings rate does not come from individuals, the savings occurs in businesses and state owned enterprises.

The current savings rate is 50% households and 50% SOE’s. The amount of household savings has remained constant for the last 30 years, but what happened after 2000 was that you had this burst of SOE savings.

Looking back it now appears that the Chinese banking reforms of the late 1990’s was one of the most successful examples of basic financial restructuring, and it’s something that the US should try to learn from. (And China modeled a lot of the reforms on the US savings loan fix in the 1980’s.)

Rajesh: Now for most small businesses, it is academic whether the savings are attributed to the business or its owner but for the larger enterprises it implies that those funds can not easily be diverted to consumption; they are more likely invested in new plant and equipment.

It’s not that hard. The government can take a dividend and invest in health and education. There are two problems 1) is political which is that the SOE’s don’t want the government to take their money and 2) you need to set things up so that the incentives are right. If the government takes SOE money any time they make a profit then there isn’t much point in making a profit.

Rajesh: Also most of the larger companies, because they have large profit margins, are self-financing and less dependent on banks for loans (which explains why the economy did not slow down as the central authorities raised interest rates and reserve requirements.)

I think that isn’t the big explanation. The government can just order the big companies not to spend money. They are state owned after all, and the government has control over their capital budgets.

The big explanation for why it was hard to cool the Chinese economy I think was that large sectors of the Chinese economy (like exports and construction) were big financed by Western banks. One of the ironies is that the economic downturn hasn’t hit Chinese banks which whose lending to construction was limited, but it has hit Western banks hard.

It’s ironic because for about a decade, Western banks and economists were lecturing Chinese banks on the need to improve risk management and avoid NPL’s, and Chinese banks took those lectures seriously. Western banks didn’t.

Rajesh: Peasants in China for the most part do not have bank accounts. Much of the rural economy is on a cash or barter basis.

This isn’t true, most peasants do have bank accounts. Rural China has a pretty extensive banking network in the form of rural credit cooperatives. A lot of this comes from China’s socialist past. Because the major banks are state-owned, having a bank in a small village is like having a police station or a post office. It’s a sign of state authority (and Japan has a huge postal savings bank).

Most of these rural banks are totally insolvent, but they are there. The fact that rural Chinese are tied into the financial system is what makes China very different from Latin America.

There is a huge problem with rural banks, but it is on the lending side and not on the deposit side. The problem is that because the rural banks are broke, they aren’t lending to rural areas, which is one reason why urban areas are developing so much faster than rural areas.

It’s also why Western banks never got very far in commercial banking. The idea that Western banks had was that they would be so much more efficient, that people would abandon Chinese banks for Western banks. It turns out that at the retail level, people don’t care how efficient your bank is. The care that they have an office around the corner.

The data shows that most of the Chinese savings rate does not come from individuals, the savings occurs in businesses and state owned enterprises. Now for most small businesses, it is academic whether the savings are attributed to the business or its owner but for the larger enterprises it implies that those funds can not easily be diverted to consumption; they are more likely invested in new plant and equipment. Also most of the larger companies, because they have large profit margins, are self-financing and less dependent on banks for loans (which explains why the economy did not slow down as the central authorities raised interest rates and reserve requirements.)

Peasants in China for the most part do not have bank accounts. Much of the rural economy is on a cash or barter basis.

you seem very confident in the strategy so subsidize the potential tax loss of those with income > 250K by purchasing financials.

am i correct?

well, is there not major risk that in the end the plan may not be enough in thus both the taxpayer and the financials end up in worse shape than we are in today?

my opinion is, and unfortunately speaking have not reached a selling climax or low in the S&P. I think we have 2 more years to go in the bear market.

i do also want to point out that, it is, my understanding that AIG London issued not 1 but trillions in CDO contracts. whats interesting here is it was actually (from my understanding) a NY ibank (big player) that proposed this idea… I’m wondering say even if the taxpayers and banks swap toxic assets the 1T is not enough. the amount of toxic assets issued in CDO’s is so discouraging that by my accounts we are still facing a 8-9T hole.

Of course, i could be wrong, but the Geithner plan may work temporarily, but it really does not address the root of the crisis. bad banks will stay with bad assets….

That’s one cause, but the fact that peasants don’t have to pay rent is another one as is the fact that the banks have been stable. Yet another reason for high savings rates is that people started off in 1978 with high savings because under central planning, there really wasn’t that much to buy.

Latin American peasants also have very little safety nets but don’t save because they have to pay land rent and because inflation has wiped out the banks several times in recent memory.

bsetser: china’s urban dwellers also do seem to be paying a fair amount of rent.

Yes but apartment ownership rates are extremely high. Most urban dwellers got an apartment as a “going away present” in the 1990’s when the SOE’s were closed. If you worked for an SOE, you got title to an apartment. It’s also common for factories to provide housing to migrant workers, and this makes the seemingly low wages that factory workers make, a lot less low.

bsetser: The rise in national savings in china hasn’t come from a rise in household savings.

True. It came from the successful reorganization of the state enterprises. Once they were reorganized, the SOE’s started making money left and right. Curiously a lot of the problems that Chinese SOE’s faced are strikingly similar to the ones that General Motors faces.

bsetser: and tis true that there are democrats on the street, tho in my experience the street is more republican than the rest of new york.

NYC or NY State. NYC is very heavily Democratic so that doesn’t mean very much. NY State is much more Republican upstate.

bsetser: have to say though that my experience wouldn’t support the argument that “Wall Street tends to favor higher taxes and stronger regulation.”

My experience has been otherwise, but I mean “Wall Street” in a very limited sense. The two cultures within finance are investment banks and hedge funds. And when I use the term Wall Street, I mean IB (which ironically have largely left Wall Street).

IB’s tend to favor higher taxes and more regulation in part because they make more stable incomes and have armies of lawyers and lobbyists. Whatever regulations get passed, the IB’s will go through it and figure out how to make money off of it.

Hedge funds tend to lean more Republican. Also hedge funds tend to end up in Connecticut and Long Island. Most hedge funds aren’t big enough to afford armies of lobbyists and lawyers, so they tend to be more “no regulation” than “lots of regulations which we can influence and use to make money.”

You can see this in campaign contributions. Democratic candidates consistently get more money both in individual contributions and from PAC’s from the big banks.

bsetser: i was hearing until august 08 that the greatest risk to the financial system was a regulatory over reaction to modest troubles (not many said the greatest risk was that the financial sector itself was overleveraged and undercapitalized).

As lots of things, people often keep their real political views to themselves, and what people really think can be quite different from the official propaganda the party (oopps) I meant corporation puts out.

You can have media relations put out nice glossy campaigns say X, Y, and Z. Meanwhile, you have a trader thinking quietly to themselves “god, what a mess.”

One thing that I find is how the people that seem to worship the market the most, have never had substantial experience in it.

bsetser: and i seem to recall the PE and HF barons put up quite a fight to keep the carried interest tax break!

And in my mind, private equity and hedge funds aren’t “Wall Street”. If you talk to PE and HF’s, they tend to be very proud about not being “Wall Street types.”

This is one reason I find a lot of these conspiracy theories someone off. What they almost invariably get wrong is who is friends with whom and who hates whom. Hedge funds and investment banks can often just barely stand each other because the cultures are so different.

Also there are sometimes very strong differences in culture and political beliefs between people in the executive suite and the vast majority of people who aren’t.

Chinese with their worthless reserve.

three points

a) china’s household savings rate isn’t any different from india’s, and the usual explanation for its (relatively) high level is the absence of much of a safety net. china’s urban dwellers also do seem to be paying a fair amount of rent. the rise in national savings in china hasn’t come from a rise in household savings.

b) fixed rates in eastern europe were a big source of all the fx denominated mortgages (see the baltics — pegged to the euro, and now with a ton of euro mortgages).

c) tis true that there are strains in the democratic coalition between those from the financial sector and others. and tis true that there are democrats on the street, tho in my experience the street is more republican than the rest of new york. have to say though that my experience wouldn’t support the argument that “Wall Street tends to favor higher taxes and stronger regulation.” i was hearing until august 08 that the greatest risk to the financial system was a regulatory over reaction to modest troubles (not many said the greatest risk was that the financial sector itself was overleveraged and undercapitalized), and i seem to recall the PE and HF barons put up quite a fight to keep the carried interest tax break!

I don’t think so. Once you had workers in China being part of the global supply chain, they were able to generate vast amounts of new capital, and the price of capital also fell.

kaan: Why people in Eastern Europe bought homes by mortgages in JPY? Because the price of homes were not affordable in local prices.

No. It was because the bank of Japan was offering zero percent interest rates. Using Yen versus local currency doesn’t change the price of the house. It changes the financing terms. It’s also dangerous as hell. Given the number of times that this sort of structure has blown up, I’m shocked that the national regulators didn’t stop it.

kaan: Who guaranted this price distortion?

Bank of Japan because it needed zero interest rates to keep it’s own banks solvent. If the BoJ had increased interest rates, then it would have been impossible to roll over bad loans at which point banks start blowing up.

I doubt that anyone in the BoJ every really thought about the impact on Eastern Europe mortgages, or even if it thought about it, that it cared much.

Blissex: Well, the goal of all the price intervention by IMF and its controlling government (the USA) is to get the nominal prices of asset going up again.

No. The goal is to get trading going again. If markets clear at low prices (which is what is happening with Chinese real estate) this is a good thing. The problem is that there isn’t trading going on at any price.

Actually it is that way.

The big reason that Chinese peasants can deposit large amounts of money is because China is socialist, and so most people don’t have to pay rent. That means that the fraction of income that Chinese that is disposible is much higher than Europeans and Americans.

The major expenses that peasants face are health, education, and retirement, those require a large amount of savings.

Blissex: That was actually a plan to reduce the wages of the US workforce. The idea was that manufacturing was unionized and paid better wages to the lower orders, and services were largely non unionized and paid the lower orders little and the higher orders a lot more.

That actually wasn’t and isn’t the plan. It doesn’t make sense for someone in banking to make people poor. If you are banker, you want people to be rich because the richer people are, the more money they have that needs to be managed. Just from a financial point of view, it doesn’t make any sense to make people poor. If you make people poor. they get angry at you, and end up taking everything you have.

Blissex: And for a while the Chinese and Indians went along. But they know that they don’t need to pay tribute and fabulous fees to Wall Street or City investment bankers and lawyers;

China doesn’t mind paying large amounts of money to Wall Street and City investment bankers and lawyers because a large fraction of people on Wall Street are Chinese (like me for example).

Blissex: they have hongkong/shanghai and mumbai, and can run their own high valued added financial systems without sending the cream on the top to NYC or London.

China is in a good position to have financial systems, but there is one problem here. Time zones. In order to do global trading you have to have three financial centers. One in East Asia, one in the Americas, and one in Europe. Unless you can change the way that the earth rotates, you just have to have a financial center somewhere in the Americas and in Europe. If China wants to be a global economic power, then it’s going to have to set up offices in NYC and in London.

Also I doubt that the US is going to lose it’s global advantage for the simple fact that most people in China are Chinese. Most people in the United States are not native Americans. The United States can go out, find the most talented people in the world, and offer green cards and citizenship. You can get American citizenship and still be Chinese.

China is going to have a much, much harder time doing this. If you are a Latvian, Nigerian or Japanese and you want to make it big in the US, then there is a pretty clear process for doing this. It will be very hard for China to offer Latvians, Nigerians, and Japanese the same sorts of advantages that the US does. This is important in finance, because if Citigroup wants to do business in Latvia, it can very easily find some employee in NYC that speaks Latvian and knows Latvia. It’s much harder for Bank of China to do that.

The US has some fundamental advantages over other countries and some of these are things that won’t change over the next decades. Some of these are sort of silly but important. Like the fact that the US has a coastline with two major oceans whereas China doesn’t.