Friday, September 19, 2008

Socialist States of America

The United States has been teetering on the edge between capitalism and socialism for quite some time now, but today I believe we have jumped off the cliff and there's no going back (revolution aside). There's going to be a $1.2T (yes that's trillion dollar) bailout of the banking system. The US taxpayer is going to take over responsibility for all the bad decisions made by Wall Street. Of course, the US government created the monetary and regulatory environment that made this all possible. I am at a  loss of words to describe this. Most people won't even realize how bad they are being raped. It's going to be the biggest transfer of wealth from the poor and middle class  to the most connected and powerful people in the history of the country. It will also be terrible for wealthy people who accrued their money through hard work and innovation. But it will be great for those who work in the banking system -- they will get to rebuild these companies at tax payer expense and reap the profits from that endeavor. As I've said many times before in this blog, they privatize the profits and socialize the losses. 

I predict we'll look book at this year as a pivotal point in US history. We're going to see innovation and capital leave the United States. It's not possible to have capitalism and innovation unless failure is allowed. Instead, we're now planting the seeds for the next round of massive malinvestment. This always results in less prosperity for the vast majority of people in the country. People want better healthcare, high quality education for their children, and opportunities to work hard and be rewarded for it. I think we can kiss that all good-bye. It's going to get much, much worse. And even if we have a Democratic president and a Democratic congress that promise to give everybody healthcare and a great educaiton, they are going to acheive just the opposite. It will be just like how Fannie Mae and Freddie Mac were supposed to make housing affordable yet the bigger those companies became, the more housing prices rose. 

I was talking to a pediatrician last night. He was saying how the salary for a pediatrician in San Francisco is about $80K/year because the cost of practicing medicine here is so high ancd the fees are pretty much set on a nationwide basis. And that's $80K/year for working 60 hour weeks. Why would anybody want to become a pediatrician at this point? I don't understand why anybody would put themselves through such an expensive and intense education and training to then work so hard and make so little for it. The same person could go to Wall Street and make that much in a month. And they will now because of this bailout. 

This is what the government doesn't understand and can't fix as long as they stick to these policies. We're going to see healthcare costs rise and the more they try to insure more people and reduce the costs, the worse it's going to get. At some point though, the financial system is just going to collapse because the debt levels are going to be unsustainable. And then maybe we'll have to start over. That is going to be a painful dislocation for the middle class. Of course, politicians won't blame themselves for the bad policies that caused the problem. They will just find scapegoats like short sellers. 

The argument people always come up with to rebut this is that many countries have socialized healthcare and it works very well. Well, actually their healthcare is usually pretty bad (waiting time for routine surgey is longer for people in Canada than for pets). What these people don't get though is that those countries don't spend a huge percentage of their GDP on their military. We're going to see military spending go up in the future. Both Obama and McCain want to expand the size of the military. If we spent the same on the military as other countries, we'd have great healthcare too and it wouldn't be because the government provided it. There would just more people going into medicine than creating the next generation of smart bombs and fighter aircraft.

In somewhat related news, this week was quite interesting for my investment accounts. I am just slightly up for the week, but had the biggest swings I've ever seen. I was massively short the financials and then I made the classic mistake of going even shorter just before the bailout and ban on short selling was announced. It's funny because even as I excuted those trades, I had this voice in my head saying, "Don't short the hole," but greed is a pretty powerful emotion and I knew these financial companies were going to zero. Given what I know about how politics work, I should have realized that they would never let that happened. So the finacials rallied massively and I was forced to cover resulting in a barely-up week. On the bright side, it's much better to learn those type of lessons this way rather than by taking huge loses. At some point though I may just start buying banks again. It's a pyramid scheme and there's no better business if you're at the right part of the pyramid. And now with a government bailout, these banks are likely to be able to create huge businesses again in the future. I mean, if we're going to transfer wealth from the tax payer to the banking system, I might as well try to profit from it. I will take a wait-and-see approach to guage when will be the right time to enter. A lot of things could still go wrong. There might be considerable backlash when the public notices the $1.2T number.


eugenes said...


I was upset by this as much as you were, but after reading the plan it sounds like it's not that bad of an idea.

The goal is to bring clarity to bank BS, which is what the market wants. These banks have already written this stuff down a bunch, and will be probably selling these instruments at a decent loss to the govt in exchange for the clarity that it provides them on their balance sheets.

A large problem with these assets is there is no common central market for them, like a stock exchange. This creates a huge issue in deriving true market value, which is something the govt wants to setup with the auction process.

If banks fail because these new market prices cause new mark to market rates, then govt should let them fail or take preferred stock and fire management etc. like they did with lehman.

I am not sure what the alt should be?

I have a feeling at the end of the day fannnie/freddie bailout will cost a lot more than this proposed bailout, and buffet seems to think the govt will make a profit.

Am I being naive, and is it better that the govt just do nothing?

erl said...

Dude, I found your post randomly... Somehow I doubt that the US has been teetering being Socialism and Capitalism since the institution of the Federal Reserve.

Maybe it's good that some citizens have that perception... meaning perception is 90% of reality... but I'm concerned you are deceiving yourself...