Archive for January 2009

This Crisis is Solely About Lack of Government Regulation

You see, kids, government has to closely regulate evil capitalists, because these capitalists sometimes make investment mistakes, like making highly leveraged investments in risky bubble assets.  The government must be the one to watch over their shoulder, because well-meaning public servants would never make such a mistake themselves:

The California Public Employees' Retirement System (CalPERS)is now warning California's cities that they may have to cough up more money to cover the retirement and other benefits the fund provides for 1.6 million state workers, reports the Wall Street Journal. Some communities are already cutting municipal services and they are blaming CalPERS, not Proposition 13. Dan Cort, mayor of Pacific Grove, has been quoted as saying, "CalPERS could bankrupt us faster than anything else."

According to the Journal, CalPERS has lost almost a quarter of the $239 billion in assets it held in June of this year. Stock market losses are an obvious cause of the fund's distress, but less well known is that CalPERS makes extensive investments in real estate -- investments that have been largely financed by borrowing. Some deals involved as much as 80 percent of borrowed money. While this worked well in a rising market, now that real estate has tanked CalPERS expects to report paper losses of 103 percent on its housing investments for the fiscal year ending in June.

Note especially the text in bold.  It takes some effort to lose more than 100% of your investment in one year.  They would have been better off investing with Bernie Madoff, since a 100% loss would have been better than 103%.

The inherent flaw in every call for government action is not the "insight" that business people sometimes are wrong, even way wrong.  The flaw is assuming that anyone in government is more capable, or has superior incentives, to make better decisions.

This Crisis Is Soley About American-Style Capitalism

A Critical Turning Point


The steel industry, a bellwether for the state of the nation's economy, is looking to the government for a huge investment program: up to $1 trillion over two years.

Government can't create capital -- it can only force it to be reallocated and, to a small extent, move it forward from the future.   Given that there is some sort of fixed amount of investment capital in the economy, then, it strikes me that we are rapidly approaching the point where we are giving to Congress the job of allocating the vast majority of the country's available investment capital.  And if that prospect does not scare you, and it should, consider this:  Congress has made it fairly clear the three criteria it will use to select the recipients of capital:

  • They must have a business model that has been proven a failure (by poor performance, eroding market share, and/or near bankrupcy)
  • They must have strong, powerful unions with the historically proven ability to dictate terms to management
  • The company and its key stakeholders must be strong supporters of the party in power

They say the government does things that private parties can't or won't, and that is certainly true here since I cannot imagine any private investor allocating capital on these criteria.