Who will bailout the bailout-men?

We may soon find out:

“The numbers basically confirm that Treasury is going to have to take some TARP money and reimburse the Fed,” said Whalen, whose financial-services research company analyzes banks for investors. “It is essentially up to the Treasury to get the Fed out of this.”

Interesting

China is buying gold – big time

Mortgage modification

Meets a law suit and some unintended consequences:

The head of Greenwich Financial Services LLC warned bond investors in Washington last month that government efforts to reverse the housing slump are doing more harm than good by undermining debt contracts.

Sentence of the day

From The American:

If the evolution [continuing growth in the size of the special interest state] cannot be reversed, and the tendency toward expansion cannot be checked, and if at the same time the arrangements cannot expand forever, then we seem to have a paradox, because what cannot go on must stop.

Securitization and fractional reserve banking

I'm not a fan of fractional reserve banking, as it is inherently prone to epic failure.  But this topic is interesting for those more in the mainstream.  From the abstract:

It appears that the interaction of these instruments create an infinite loop within the monetary system, which removes the limit on loan creation that should be imposed by the bank’s reserve requirement. This has effectively disabled the ability of the central bank’s reserve requirements to limit the expansion of credit by commercial banks, leading directly to the current credit crisis. The evidence suggests that loan securitization and the sale of commercial bank loans outside the regulated banking industry are incompatible with the stable operation of a fractional reserve banking system.

Lehman or WaMu

Which failure was more important?  Mr Hempton has a strong opinion.

Sentence of the day

From Mr Gupta:

The tax slavery of the population fed a fat and ineffective State, which every passing day resembles the latter stage Soviet Union more simply by virtue of size and general character.

The next bubble

The last time our economy collapsed (the S&L crisis) the government's solution to the problem was to massively subsidize homeownership.  Everyone was supposed to own a home.  The next crisis was, of course, related to . . . housing.

This time, the government's solution is to essentially turn all debt into federal government debt – this chart from The Atlantic is as good as any at showing where all the money has been going.  And now, California is asking to have its debt turned into Federal debt.

My argument is that the next bubble will be in Federal debt.  I am not alone in arguing this, and my company is good.  Can I interest anyone else in some TBT?

Review of "Exit, Voice, and Loyalty" by Albert O. Hirschman

I decided to read this book after seeing it recommended by Patri Friedman in this essay.  Frankly, I'll read anything that is recommended along with Unqualified Reservations and Democracy: The God that Failed.

Mr Hirschman has written a very nice little essay.  However, after reading it, I'm not sure if Mr Hirschman really understands exactly what he has written with respect to our current political climate.

The book begins by stating that all organizations decline over time.  Further, there are two methods of policing this decline: exit and voice.  Exit is simply leaving – a customer leaves a firm and buys a substitute good or a person leaves a political party or a country for another.  Voice is protesting – concerns about declining product quality are expressed to management or members try to change the course of a political party.  Mr Hirschman argues that economists have traditionally focused on exit and not voice, while political scientists have traditionally focused on voice and not exit.  Both parties should, he argues, focus on the interaction of both mechanisms.

Mr Hirschman is most interesting when discussing the worst possible scenario of interaction between voice and exit:

The basic point is that competition may result merely in the mutual luring over of each others' customers on the part of a group of competing firms [or political parties]; and that to this extent competition and product diversification especially when, in its absence, customers would either be able to bring more effective pressures upon management toward product improvement or would stop using up their energies in a futile search for the "ideal" product [or political party]. . . . Nevertheless the radical critique is correct in pointing out that competitive political systems have a considerable capacity to divert what might otherwise be a revolutionary ground swell into tame discontent with the governing party.  Although this capacity may normally be an asset, one can surely conceive of circumstances under which it would turn into a liability.

What I believe we see here is something that Mr Moldbug has talked of frequently.  The political system of the US in the late 40s has become the dominant political system in the world.  Its effectiveness is, in no small part, related to striking the right balance between exit and voice.  Our governmental system is just as permanent and detrimental to liberty as any other system (try firing a bureaucrat, for example), yet through the right combination of voice and liberty this permanence has been achieved in such a way that citizens feel that they are able to effect changes in their government.  The political parties, which "disagree" with each other, don't offer meaningfully different directions for the country – and either way, the civil service gets its way in the long run.  Some interesting stuff to think about.

Revenue Anticipation Notes

You couldn't make this stuff up