Anand Rajaraman says that any startup that’s not growing is dying, and that if a startup isn’t going to succeed, it may as well die quickly. It’s outstanding tonic for the Sequoia RIP: Good Times presentation that seems to have been absorbed by everyone in the Internet business. I would guess that in five years, very few of the startups that decided to hunker down and wait for better times will be around.
I’ve been fascinated by the argument that eliminating or suspending “mark to market” accounting rules will end the financial crisis on the cheap.
Wikipedia has a good explanation of mark to market accounting.
Matthew Yglesias posts a simple explanation of mark to market.
Paul Kedrosky argues that changing the accounting rules won’t solve anything, which is my general impression as well.
Here’s the argument in favor of suspending the rules from Brian S. Wesbury and Bob Stein.
Update: Andrew Leonard (one of my favorite bloggers) weighs in on mark to market.
Update: Here’s Kevin Drum on mark to market.
It’s easy to blame the House Republicans for the failure of the $700 billion bailout bill today, but the Washington Post’s Chris Cillizza has the real story:
The data suggest that this bill was far from a political winner for members of Congress set to face voters in 36 days.
And, for vulnerable Republicans who believe that the free-spending attitude of Congress and the Bush Administration was either partially or primarily responsible for their ouster from majorities in the House and the Senate in 2006, the idea of floating the federal government another $700 billion was simply unpalatable.
It’s no coincidence then that of the 205 Members who voted in support of the bill today, there is only one — Rep. Chris Shays (R-Conn.) — who finds himself in a difficult reelection race this fall. The list of the 228 “nays” reads like a virtual target list for the two parties.
There’s only one person in Congress who was willing to justify their vote to approve in this political climate. The truth is that there’s nobody in Washington who wants to pass a bill like this, and the fact that only lame ducks and legislators in safe seats are willing to come out and support it tells me that it may very well be awful tasting medicine that we really do need.
Update: FiveThirtyEight has a more detailed breakdown. The “competitive district” effect is not as pronounced as Cillizza makes it sound.
Update 2: It should also be noted for the sake of completeness that Republicans voted two to one against the bill, over the beseeching of the Majority Leader, President, and their Presidential candidate. 60% of Democrats voted for the bill.
Political blogger Ezra Klein says that making limiting executive compensation a part of the bailout plan is scam.
I disagree.
Most critics argue that penalizing the companies involved serves no good outside of providing catharsis for the taxpayers required to fit the bill. Fed chairman Benjamin Bernanke and Secretary of the Treasury Henry Paulson argue that penalizing executives will make it more likely that companies will opt out of the plan.
The point of penalizing the companies by limiting executive compensation or through other measures is to keep them out of the plan if they don’t really need to be in it. The basic idea of the bailout plan is that the federal government will purchase debt from banks at some price above the market clearing price. These companies are failing because they hold assets (in the form of securities and derivatives) that nobody knows how to value right now. The government is expected to buy them at roughly the price that the failing banks paid.
If there are no penalties for participating in the bailout program, then every single bank will sell all of its questionable assets to the federal government. Why wouldn’t they? I imagine if the government announced that they were buying up all of the used cars in the country for the original sticker price, there would be no shortage of participants.
Even a very strong bank with a little bad debt should sell off that debt just to cheaply lower its risk. So for this thing to work at all, it has to suck (badly) for a bank to participate in the bailout program.
The bailout is corporate welfare. Welfare is supposed to be for people who have no other option. I don’t know whether limiting executive compensation is the right penalty for participating companies, but some penalties are essential or this is just a handout.
In a guest post at the Freakonomics blog, economists Doug Diamond and Anil Kashyap explain the current financial crisis in FAQ form. For example, here’s the nut of the problem with Fannie and Freddie:
Fannie and Freddie were weakly supervised and strayed from the core mission. They began using their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards.
Elsewhere at the New York Times, Paul Krugman explains why the bailout plan the Treasury Department is floating is a bad idea: see No deal and Thinking the bailout through.
In 1895, J.P. Morgan bailed out the federal government by supplying it with $62 million in gold in exchange for bonds. By the end of the month, independent investment banks may be extinct.
What role have speculators played in the rapid rise and then decline in crude oil prices? Andrew Leonard cites a book that argues that commodity index speculators were a driving force behind the price fluctuations.
And from elsewhere in finance, Tyler Cowen explains why the government must bail out Freddie Mac and Fannie Mae.
Tyler Cowen posts on the coming bailout of Fannie Mae and Freddie Mac. Bottom line: after all of the stupidity, greed, and outright fraud, we the taxpayers will all pay up to make sure that the housing market doesn’t fully collapse. If you see a house flipper, mortgage broker, or investment banker who didn’t overextend themselves and lose everything, I think you should be allowed to punch them once in the face with impunity.
Back in April, David Einhorn gave a speech called Private Profits and Socialized Risk. The title alone sums up the current situation.
The bottom line, though, is that the government must bail out these agencies. Here’s why. Freddie Mac and Fannie Mae buy up mortgages and package them as investments that are sold to institutional investors (like foreign governments, among others). They purchase these instruments even though they pay a relatively low interest rate because they assume that the US government will guarantee that the Freddie Mac and Fannie Mae won’t default on those investments. If that assumption does not hold, the securities sold by Freddie Mac and Fannie Mae will have to pay a much higher interest rate to make up for the higher than anticipated risk profile. That, in turn, will drive up the mortgage rates home buyers pay, slowing down the housing market and killing demand for more expensive homes.
Letting these two quasi-governmental companies fail would crater an already failing housing market, destroying an awful lot of wealth. That’s not something any politician is going to let happen if they can stop it (nor should they). The US is sort of like the family where the single income earner takes month’s wages and blows them at the casino. You may hate them for what they did, but you still have to take them back in because they’re the only one with a job in the first place.
Update: Add Fannie Mae and Freddie Mac to the list of things about which I know more than Sarah Palin.
Tim O’Reilly’s warning against a Web where sites link mostly to their own content is worth paying attention to. He makes two suggestions to sites that link to their own content, but his second rule says it all for me:
Ensure that the pages you create at those destinations are truly more valuable to your readers than any other external link you might provide.
To shorten that even more, your links should point to the best resource in that context, whether it’s on your site or somebody else’s. As long as you’re following that rule, I think you’re on solid ground.
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Credit card issuers preparing to reap
My oversimplified theory of the financial crisis is that the economy has gone in the tank because the lending practices of the credit card industry came to be accepted in the mortgage lending industry. As I’ve pointed out many times, the now-infamous negative amortization mortgage was, essentially, buying a house on a credit card. Stated income mortgages made it possible to qualify for mortgages the way you qualify for credit cards — there was no verification of actual income. And the list goes on. The housing bubble was fueled by lending people more money than they could afford to borrow so they could move into houses that they could only pay for as long as houses continued to rapidly appreciate. This basic mechanism is what made it possible to create all of the other financial instruments that led to easy profits for a time and that are crushing banks, insurance companies, and just about everyone else right now.
Joe Nocera prints an anonymous letter that indicates that these bad practices will soon come back around and ruin the credit card issuers themselves. Here’s an example he provides:
I’m not sure the focus on preventing credit card companies from sending out so many pre-approved offers is the right plan, but I think he’s correct in predicting that the banks are going to be coming back to the federal government for more bailouts when the unemployed fill up their credit cards and start filing for bankruptcy.