Infinite Jeff

Nothing merit, privilege, randomness

Jim Manzi steps off The Corner and says something truly original about the “effectiveness” debate, an evolutionary argument way smarter than the kind of evidence-free, Saddam-has-WMDs ranting one usually hears in that blighted neighborhood:

Let’s assume arguendo that torture works in the tactical sense that I believe has been used so far in this debate; that is, that one can gain useful information reliably in at least some subset of situations through torture that could not otherwise be obtained. Further, assume that we don’t care about morality per se, only winning: defeating our enemies militarily, and achieving a materially advantaged life for the citizens of the United States. It seems to me that the real question is whether torture works strategically; that is, is the U.S. better able to achieve these objectives by conducting systematic torture as a matter of policy, or by refusing to do this? Given that human society is complex, it’s not clear that tactical efficacy implies strategic efficacy.

When you ask the question this way, one obvious point stands out: we keep beating the torturing nations. The regimes in the modern world that have used systematic torture and directly threatened the survival of the United States — Nazi Germany, WWII-era Japan, and the Soviet Union — have been annihilated, while we are the world’s leading nation. The list of other torturing nations governed by regimes that would like to do us serious harm, but lack the capacity for this kind of challenge because they are economically underdeveloped (an interesting observation in itself), are not places that most people reading this blog would ever want to live as a typical resident. They have won no competition worth winning. The classically liberal nations of Western Europe, North America, and the Pacific that led the move away from systematic government-sponsored torture are the world’s winners.

Now, correlation is not causality. Said differently, we might have done even better in WWII and the Cold War had we also engaged in systematic torture as a matter of policy. Further, one could argue that the world is different now: that because of the nature of our enemies, or because of technological developments or whatever, that torture is now strategically advantageous. But I think the burden of proof is on those who would make these arguments, given that they call for overturning what has been an important element of American identity for so many years and through so many conflicts.

Could it be that when Darwinian competition occurs at the level of national systems, “survival of the fittest” means “survival of the most civilized”?

Law, Politics darwin, evolution, torture, war crimes

Geithner re-announces his public-private plan for toxic assets.  Leaving aside the boring details, the plan amounts to what?

 •  corporate statism

•  crony capitalism

•  lemon socialism

•  Groucho Marxism

The answer, of course, is … all of the above.

Economics & Finance, Politics banks, geithner, ideology, public-private fund, TARP

Photography & Design atlas, rockefeller center, snow, winter

Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits — a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

— John Maynard Keynes, The General Theory
of Employment, Interest and Money (1936)

— Jacket art by Edward Koren from
Akerlof & Shiller, Animal Spirits (2009)

Economics & Finance akerlof, animal spirits, econolypse, keynes, recession, shiller

Nate Silver, live-blogging last night’s Republican response to Obama, as delivered by Bobby “Kenneth the Page” Jindal:

If it sounds like Jindal is targeting his speech to a room full of fourth graders, that’s because he is. They might be the next people to actually vote for Republicans again.

(h/t Matt, as ever)

Politics jindal, kenneth the page, obama

Good, though.  From Ely Kim, a Yale MFA student.

Nothing boombox, dance, ely kim

The dean of the bank M&A bar speaks to the Financial Times:

“If the phrase ‘height of stupidity’ has any meaning, it would be shown if they nationalise a US bank,” said Rodgin Cohen, chairman of law firm Sullivan and Cromwell, who has advised on many of the past year’s biggest bank rescue deals and recapitalisations.

Mr Cohen stressed that the nationalisation of a large global bank had never been tested and the unintended repercussions of such a move could be severe, particularly in relation to any of the bank’s foreign subsidiaries. He favours a plan that would infuse banks with more capital and extract bad assets from their balance sheets as quickly as possible, to boost confidence in the institutions.

“Given time, these institutions have enormous earnings capacity,” he said. “If you start to take out these bad assets, we’ll start to see confidence rebuilt.  It can turn around, and it will turn around.”

And when it does turn around, we want to make sure our guys are still in charge so they can privatize the gains and share them with us.

Looks like the rent-seekers have found their mouthpiece.

Economics & Finance, Politics banks, law firms, lawyers, lemon socialism, nationalization

Corporate governance icon Lucian Bebchuk gives his directions to Public-Private Neverland in “How to Make TARP II Work,” a proposed structure for private sector investors to participate in the government’s acquisition of troubled assets from banks.  Prof. Bebchuk believes that an effective plan is possible based on the Public-Private Investment Fund (dimly) previewed by Treasury’s Geithner last week.  One element of Bebchuk’s proposal — establishing a “significant number” of privately managed P-P funds, each financed in part by the government, to make competing bids for troubled assets — reprises a paper he published in September 2008, during the debate over TARP I.

The other, less familiar element calls first for private fund managers to compete for government financing, to make proposals that maximize private participation in the P-P funds and minimize the government’s exposure.  If, for example, the government financing is in the form of a non-recourse loan, competitive bidding might result in each P-P fund being financed 60% by the government and 40% with private capital contributions, leaving the government exposed only to losses in excess of 40% of the fund portfolio’s initial value (itself the result of a competitive bidding process).  To keep the interests of the government and the private sector investors aligned in a heavy-loss scenario, the 40% private participation could be split so that only ¾ is equity and the remaining ¼ is debt that ranks pari passu with the government financing.  To give the government some exposure on the upside, it could acquire an equity participation in lieu of a portion of (or in addition to) its non-recourse loan.  And so forth.

Bebchuk’s dual-auction structure — bid for the government financing first, and then bid for the troubled assets — promises a sophisticated mechanism for price discovery in difficult circumstances, and is appealing on both rational and emotional grounds.  Designing the process and tinkering with the various parameters would be fun for a few months, and would certainly make it easier to ignore the advancing hoofbeats of the econolypse.  But even if the structure ultimately results in bid prices that reflect the “fundamental” economic value of the troubled assets (i.e., the discounted present value of their expected cash flows if held to maturity), what reason is there to think that these bids will be any closer to the troubled assets’ book values — and the banks’ asking prices — than the prices available in today’s supposedly “illiquid” market? Bebchuk makes a critical assumption:

It should be stated at the outset that making this market well-functioning would not necessarily bring the banking sector to normalcy. A well-functioning market will convert some of the troubled assets held by banks into cash and, perhaps more importantly, provide more reliable valuations for the troubled assets that banks will retain. While this might confirm the claims made by some banks about the value of their assets, it might lead to realization that some other banks are insolvent or inadequately capitalized, which would require infusions of additional capital. Thus, restarting the market for troubled assets might well be insufficient by itself to solve banks’ problems, but, at the minimum, it would clarify matters a great deal, removing the clouds that currently hamper the activities of some banks while identifying those requiring an infusion of capital. In any event, for the remainder of this paper, I shall take as given the administration’s stated objective of restarting the market for troubled assets, and I shall focus on how this objective can be best achieved.

I’m afraid there isn’t time for this.  If a public-private, dual-auction troubled asset acquisition plan isn’t reasonably certain to result in market-clearing prices, then it will be cheaper and more effective to nationalize now and auction off the troubled assets to private sector investors later.

Economics & Finance banks, bebchuk, econolypse, public-private fund, TARP

Roubini says that if we don’t like the sound of nationalization, we should call it “receivership” instead.

Calculated Risk suggests “pre-privatization” for a slight shift in emphasis.

Yglesias goes all in:

I say we go further and call it “awesome capitalist cowboys” just to ensure that everything’s really in tune with American cultural norms. Everyone loves cowboys!

Oh, what the hell — call it a “tax cut” and let slip the stress-testers.  Raise up the Resolution Trust Corporation.  Party like it’s 1989.

(h/t Matt for the linguistic trend-spotting)

Economics & Finance, Politics banks, nationalization