Friday, July 10, 2009

2 Views, 1 Magazine -- on the Bailout

I was catching up on some magazines tonight and was really surprised to see 2 diametrically opposed views on the banks and the bailout. Fittingly, one story ran in the front of the book and the other at the end.

The first article is an opinion piece by Allen Sloan who -- I think rightly so -- points out that "...before you accept the Street's version of events, recall that you didn't hear complaints about "socialism" when the government bailed out creditors of Bear Stearns and AIG, and let Goldman Sachs and Morgan Stanley become bank companies so that they could borrow hugely -- and cheaply -- from the Fed." Sloan does add that perhaps there's more to the banks desire to pay back the TARP funds may not be just to get out of the political spotlight, but also to buy back the warrants that the Treasury got for lending the funds before they become worth too much. Basically they took the money when they needed it and want to give it back before the value of the warrants rise too high and the American people get their fair return. Nice work guys.

But there is another side of the story that starts 64 pages later that tells the Banks' side of the story. Basically it's the banks crying about how they were vilified by the press and the public as they were taken through the bailout process and the feeling that they were mistreated by the government -- both in terms of changing of the deal as the process continued and politicians demonizing the banks in public sessions to score political points.

Through all the complaining there was a really good paragraph towards the end:

So has TARP done its job? "It was one of the largest government appropriations in history," says Thomas Chen, CEO of the investment bank Piper Jaffray. "And a mere seven months later we're letting capital be returned on the basis that the problem is fixed. So you have to ask: (1) Has it all been fixed?, or (2) Was it necessary in the first place?" Chen believes the program had a short-term calming effect on the economy -- more than a financial effect. Says Thomas Nides, Morgan Stanley's chief administrative officer: "The original concept was to accomplish one thing: to stop us from going off the cliff, to send a clear message that the government was not going to let the system collapse. For that I give them an A+."

I think Chen and Nides have this about right. For all the flaws of TARP, I think it did what it needed to do -- it averted an all out crisis.

One final thought on the 2 articles. Which view is more right? Are the banks having a bout of selective memory? I think so. Mostly because of the adage "Follow the money". Paulson, Geithner and Obama aren't going to get rich off TARP. But the bankers have not only kept their jobs, but it seems as if they may prosper greatly as the government takes on all the responsibility for their mistakes in the form of toxic assets, and through access of cheap money, leaving the bankers to make boatloads of money. I think the bankers doth protest too much.

Thursday, July 9, 2009

Steve Forbes Would Like Us to Drive Tanks & Raise the Gas Tax

In Steve Forbes' Fact & Comment article, "Car-Wreck Regs" in the current issue of the eponymous magazine, Forbes unfortunately twists historical statistics regarding highway safety and fuel consumption to seemingly support the continued development and production of gas guzzling cars that people have stopped buying.

Let's walk through a little of his tortured logic:

  • CAFE Rules Will Kill People: Forbes reaches back to an old study that found that about 2,000 additional people per year are killed in car accidents because CAFE standards drove manufacturers to build smaller, lighter cars. Now I'm sure that there is data that supports this and Forbes does a nice job of invoking an old trick -- if you reference a study you boost the credibility of your argument, regardless of the quality and bias of the study. Many "industry studies" are designed specifically to support a pre-determined point of view. So you have to determine whether or not the assertions pass your own personal smell test. Let's consider a few things then . The study compares cars build in the mid-nineties to cars built in the early '70s. But this doesn't take into consideration that in the intervening 30+ years that we have developed lightweight, yet stronger composite materials that are not only used in cars but airplanes. And it presumes that there has been no advances in car frame design or other safety systems like air bags or ABS braking systesm to make cars even safer. Not to mention that cars today meet much higher safety standards than cars of the past did. All in all it feels like Forbes' article is bunk.

  • New SUV's are cleaner than old, poorly tuned compacts. This is another truly stupid argument. Yes, it is very likely that a new car will have better emissions than a 15 year old car. So yes, it's better to have newer cars on the road than older ones. But smaller, more fuel efficient cars will be cleaner than large SUVs. So why not make more of the newer cars, smaller cars? Again, Forbes loses.

  • Rising CAFE Standards Increase Oil Consumption. Forbes uses some impressive statistics -- improperly -- to make his case. He points out that Fuel consumption has grown dramatically over the past 30 years -- a whopping 60%. But what he doesn't point out is that the number of cars on the road grew by 74% and with suburban sprawl, the number people who drove to work and the number of miles that they drove grew dramatically as well. These are the real reasons why consumption increased, not Americans' wild desire to drive more because mileage is better.

So what is Forbes' great idea instead of improving CAFE standards? Raise taxes. Yes, Steve Forbes who typically thinks that any idea to reduce taxes is a good one is suggesting that we raise the gasoline tax. His model for this strategy -- Europe. Another amazing flip-flop for Mr. Forbes. It's hard to think of any other article that Forbes has written that holds up Europe as a model for America to follow. He holds that high taxes is why Europeans are buying smaller, fuel efficient cars. But what happened to the problem with smaller cars being less safe? Either he doesn't care if Europeans crash to their deaths or he forgot what he wrote a few short paragraphs before.