February 19, 2009
Who Is the Sucker??
Now that the new Administration's economic proposals are trickling out we can add them all up and see who is taking it on the chin, who is getting played for the sucker. The old advice for players at the poker table holds: If you do not know who the sucker at the table is, it is you. Our economic system runs on voluntary compliance linked to cultural norms, not fear of getting caught and prosecuted. The cultural norms, in pre-PC days, used to be called the Protestant Work Ethic or the like. People who put themselves in position to find work and earn some income, did not over-spend their budget, bought and paid for a home they could afford, saved a bit for their children are the suckers. They will pay for others who did over-spend and saved nothing. They will pay in increased taxes, both in income and estate taxes (and their social security repayments will be means tested), and in inflation (their savings will be eaten up by inflation). Those who voluntarily complied with the rules and lived within their means are the suckers.
February 19, 2009 | Permalink
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Respectfully, I disagree with you. The American public to which you refer got exactly what it voted for, starting with Richard Nixon. Our country is reaping what it sowed in the form of conservative economic thought, its most virulent form being the Chicago School of Law/Economics and its political face, Scaliaism.
I will take only one example, your own writing on this blog. You timidly called Central Bank a mistake. It is a lot more than a mistake when you hold that lawyers and accountants and investment bankers may charge millions in fees to advise clients, who will lie,cheat, and steal, how to do such. Aiding or abetting is not complicated, contrary to what you say. Aiding and abetting is counseling people to commit crimes. No sane rational person would suggest that Congress intended such a result.
Those of us who operate in the real world knew exactly what would happen. Within a decade of Central Bank being decided every major investment bank in America has been looted by its senior management, following the sales of trillions in toxic securities, and the Country is destitute. You say, "Our economic system runs on voluntary compliance linked to cultural norms, not fear of getting caught and prosecuted." To the contrary, because in Munger's words incentives are such a super power, only the fear of getting caught and prosecuted will control corporate behavior.
If you think not, read the discovery orders in the Merck litigation where you will find that, in an attempt to avoid getting caught, every corporate communication, regardless of origin or destination, in the entire firm was sent through the legal department in an attempt to create an attorney client privilege and shield such from disclosure. Only a criminal enterprise would engage in such behavior. What major corporation in America doesn't do business in this fashion? What does this tell us about so-called voluntary compliance? Anyone this disingenuous and dishonest is not about voluntary compliance.
As Flip Wilson would say, If you are out sneaking around at 3 a.m. and you run into somebody, they're out sneaking, too!" ...
If if walks, quacks and acts like a duck, its a duck.
For the reader the citation is In re Vioxx Products Liability Litigation, 501 F. Supp. 2d 789 (ED. La. 2007).
In Vioxx, Merck & Co. asserted privilege over approximately 30,000 documents during the course of discovery, the majority of which were electronic communications. Merck claimed that extensive regulation of corporations created potential legal issues in virtually all its communications with legal and non-legal departments, requiring a collaborative effort protected under the attorney-client privilege. The court disagreed. It recognized that some tasks that do not appear to be legal can be legal in nature; however, a corporation must establish a primary legal purpose for each communication to obtain the benefits of the privilege.
Instead of focusing on what the Courts were doing---where was the public outrage over the Supreme Court hold that people could aid and abet crimes, with impunity---the American public was buying the incessant propaganda that America's problems were caused by "trial lawyers."
Charlie Munger writes of the need to understate the bias of the speaker on any subject. Where Americans were suckers is that they thought voices from our law schools could be trusted. They did not understand the financial and professional incentives that exist for professors to oppose securities laws, or transparency, or heaven forbide the root of all evil, the business judgment rule.
Posted by: John | Feb 19, 2009 10:51:22 PM
"Those who voluntarily complied with the rules and lived within their means are the suckers."
So far I'd say that the gov money to be spent on the $75 billion (which would be disbursed as approximately $15 billion per year, for five years) for the BHO plan that matches gov money to concessions from the banks up to 3.5% (though the banks may need to subsidize much more than 3.5% w/o the gov match) of a borrower's monthly income is the closest thing to money going directly to average (poor decision making) citizens.
This plan also pays the servicers (bankers) an incentive over the first three years, as long as the loans don't default. And, it reduces the borrowers' principle by, at the most, a bit less than $20/ week for five years, as long as the loans doesn't default. Of course, if the banks don't want to subsidize any of the gov matched 3.5% (and easily multiples more w/o the gov match) of a borrower's monthly income to get the borrowers' housing expense to the required 31% of income, they don't have to. This program is voluntary for the banks, so if the lenders don't want to chip in their part, they can go ahead and foreclose and there will be zero cost to the BHO plan (although, there will still be the direct and indirect costs associated with any foreclosed property in a community.) The banks need to decide if it's more or less costly to be stuck with underwater REO in a terrible housing market.
And, the gov and the banks need to hope that the poor decision making borrowers remain stupid enough (or, who knows, maybe they'll feel a moral (Protestant Work Ethic) obligation to pay their debts) to not mail in their keys, and instead they can sign up for the BHO program and spend the next decade w/ these huge underwater principle balances that they were stupid enough to rack up in the first place. The prudent careful borrowers are already suffering real losses because they actually put money into their purchases, sure the folks using the BHO plan are getting some subsidies, but at least they'll still be in the hole w/ the rest of us, and maybe the hole won't be as deep, or over-correct, if fewer folks are abandoning ship. We don't want a system that leaves the prudent folks holding the bag on the sinking ship (I think I'm running out of metaphors to mix.)
"Our economic system runs on voluntary compliance linked to cultural norms, not fear of getting caught and prosecuted. "
Sounds like something else I've heard:
"Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief" Greenspan
Seems like we need to set and enforce speed limits on the highway. We've decided against the honor system on our roadways. Maybe we should try to set up a financial system that doesn't rely on the Protestant Work Ethic, especially when folks are motivated by a) a fiduciary responsibility to keep up w/ competitors who are maximizing what is allowed rather than what is virtuous, and b) the enticement of extreme self enrichment. Seems like there are plenty of incentives for folks to push (and lobby to expand) the limits of what is legal in the pursuit of profits.
Maybe the incentives need some sort of adjustments.
Posted by: 1jpb | Feb 20, 2009 12:38:24 AM
Wow John that was a heck of a rant but your might have retained some credibility if you did not start the rant by linking Nixon and free market economic thought. Nixon was quite the opposite (hello regulation, price and wage controls, etc).
Posted by: Anonymiss | Feb 23, 2009 7:12:27 AM
I was referring to Nixon's judicial appointees and other matters. Nixon was a contradiction on many things, but he loved rich crooks. It was his driving ambition to be one.
Posted by: John | Feb 23, 2009 7:24:27 PM