Whose "Liquidity Crisis" Is It?
---
More demands that the Fed, among others, "just do something" —
Which begs the question: why should fluctuations — even major ones — in "just another market" imply mandatory intervention by central bankers, or by any other part of government? People make money and lose money in markets all the time — the liquidity market is no exception. If the "youthful wizards" — and the not-so-youthful senior Wall Street executives who hire them — miscalculated, then so what? Too bad so sad.
But that cuts both ways. If a speculator thinks he can use the liquidity market (i.e., make easy money) by purchasing 20 undeveloped lots in Las Vegas but turns out to be wrong, then so what? Too bad so sad. (Again, and this is important: The spike in foreclosures is not Mr. & Mrs. Bluecollar being kicked out of their single-family home; it's Mrs. & Mr. Infomercial failing to flip their 20 "no money down" speculative properties. That's one investor, twenty foreclosures, zero homelessness.)
If there are anecdotal cases of institutions engaging in false advertising, deceptive accounting, manipulating the legally incompetent, then fine — pursue them with the full force of the law. But the mere fact that many otherwise competent people, including financial professionals, happened to make very bad decisions is no claim check on the Fed, Congress, or taxpayers' wallets.
More:
And, one more time: "American homeowners" aren't the ones suffering; speculators and their financiers are. In another context these are the same people dismissed by central planner wannabes as "greedy capitalist bastards." Now suddenly they're helpless victims in need of a dole check underwritten by the financier of last resort: the innocent taxpayer who had absolutely nothing to do with this mess. Go figure.
Similar thoughts at EconLog.
The past few weeks have exposed a giant crack in modern financial architecture, created by the youthful wizards and endorsed as a diversifying positive by central bankers present and past. While the newborn derivatives may hedge individual, institutional and sector risk, they cannot hedge liquidity risk. In fact, the inherent leverage that accompanies derivative creation may foster systemic risk when information is unavailable or delayed. Only the central banks can solve this, with their own liquidity infusions and perhaps a series of rate cuts."Liquidity risk" is a fancy name for a phenomenon that most people understand perfectly well. It simply means that in some circumstances you need to wait before paper worth becomes tangible worth. Examples include:
- "I can sell my house for $300,000 — just not tomorrow."
- "The value of a 401(k) account is essentially zero before you reach age 59 1/2."
- "How can you have any pudding if you don't eat yer meat?"
Which begs the question: why should fluctuations — even major ones — in "just another market" imply mandatory intervention by central bankers, or by any other part of government? People make money and lose money in markets all the time — the liquidity market is no exception. If the "youthful wizards" — and the not-so-youthful senior Wall Street executives who hire them — miscalculated, then so what? Too bad so sad.
But that cuts both ways. If a speculator thinks he can use the liquidity market (i.e., make easy money) by purchasing 20 undeveloped lots in Las Vegas but turns out to be wrong, then so what? Too bad so sad. (Again, and this is important: The spike in foreclosures is not Mr. & Mrs. Bluecollar being kicked out of their single-family home; it's Mrs. & Mr. Infomercial failing to flip their 20 "no money down" speculative properties. That's one investor, twenty foreclosures, zero homelessness.)
If there are anecdotal cases of institutions engaging in false advertising, deceptive accounting, manipulating the legally incompetent, then fine — pursue them with the full force of the law. But the mere fact that many otherwise competent people, including financial professionals, happened to make very bad decisions is no claim check on the Fed, Congress, or taxpayers' wallets.
More:
The ultimate solution must not emanate from the Fed but from the White House. Fiscal, not monetary, policy should be the preferred remedy. In the early 1990s the government absorbed the bad debts of the failing savings and loan industry. Why is it possible to rescue corrupt S&L buccaneers yet 2 million homeowners must be thrown to the wolves today? If we can bail out Chrysler, why can't we support American homeowners?The savings & loan industry was a mutant creation of the post-Glass-Steagall, pre-Gramm-Leach-Bliley financial omni-regulatory state. Those "corrupt S&L buccaneers" were spawned by government, much like the "corrupt lobbyist buccaneers" of today. The S&L crisis, meanwhile, was the direct result of incompetent central planners changing the rules for financial institutions post facto and making the S&L industry, which they themselves created, non-viable and doomed to collapse. It was completely avoidable before government changed the rules and completely unavoidable after government changed the rules. Chrysler, meanwhile, is the perfect case study of why government should never bail out failing corporations — did it end up doing any good?
And, one more time: "American homeowners" aren't the ones suffering; speculators and their financiers are. In another context these are the same people dismissed by central planner wannabes as "greedy capitalist bastards." Now suddenly they're helpless victims in need of a dole check underwritten by the financier of last resort: the innocent taxpayer who had absolutely nothing to do with this mess. Go figure.
Similar thoughts at EconLog.
Posted by Kip on
24 August 2007
To comment on this post, please visit the new blogsite.