When I was in school, I hated chemistry. But I was so deep into it that it wasn't worth it to quit. So to balance out one set of finals I hated taking (not like I ever went to class), I decided to take economics; an area I have an amateurish, non-professional interest in. There's a post in the NY Time blog which (indirectly) poses the question: "Why has the field of economics made so little progress in fifty years?" If you look at any other scientific field, noticeable progress has been made. But with economics, we seem to keep repeating the same mistakes over and over again (but whether econ is to blame, or bad players is debateable).

There was a comment in that post which reminded me of a post I was going to write.

Who cares what the multiplier is? The government has got to make clear what it is going to do or not going to do so that private investors can fix that variable in their forecasts. It’s more important for the government to make a public commitment to do something definite and then stick to that than it is what the government does in my opinion.

What follows is purely speculative, and lacks the deep thinking that you should expect. Take all of this as fiction; I'm sure somebody smarter can refute most of these claims. You're reading this on a blog, after all.

Here's a short list of companies that spring to mind which have been affected over the past year: IndyMac, Lehman Brothers, Citicorp, Fannie Mae/Freddie Mac, Washington Mutual, Wachovia, & AIG (there's a lot more, but these are the ones I want to focus on).

In the case of companies like IndyMac, the process was relatively straightforward: customers, fearing their deposits, made a run and the FDIC seized the bank. Company files bankruptcy, assets and liabilities get sold off, and the stakeholders get paid off.

In the case of companies like Washington Mutual, the FDIC seized the bank, but immediately turned around and sold the assets and liabilities to JP Morgan. However, even the debtholders got shafted in the process for WaMu.

When you are investing in a company, there's a couple of different ways to do it; each type of ownership has its benefits and disadvantages. But when it comes to bankruptcy and the order you get paid, the general order is: senior debt, junior debt, preferred shares, common shareholders. If you own stock, it's generally common. Senior debtholders, ala Wiipedia: "In the event the issuer goes bankrupt, senior debt theoretically must be repaid before other creditors receive any payment."

It must have come to a surprise that the FDIC decided to take all the good parts of the bank and essentially give it to JP Morgan, and leaving everybody else (including those who thought they got highest priority during liquidiation) holding the bag.

This by itself isn't so troubling, but then the FDIC followed that up by trying to force a marriage of Wachovia and Citigroup for $2.2 billion (the cynicist would note that this would help replenish Citi's capital reserves by being able to tap Wachovia's rich deposit base). So maybe it was another government-assisted firesale (remember Bear Stearns for $2?)... but then Wells Fargo swooped in and offered $15.1 billion in stock for Wachovia. Intentions of the FDIC aside, in this case, a potentially troubled bank (remember that trust is the only thing that prevents bank runs) managed to get all of its shareholders and debtholders paid. But if the FDIC had its way, they would have been paid a lot less.

I don't want to fixate on every individual story (I'm sure there will be a lot of books on that), but on the fact that the government is acting in a very erratic and unexplainable manner. Some companies they save (AIG), others they leave to burn (Lehman). Some they seize and give away assets (WaMu) while others they arrange a forced marriage (Citi and Wachovia).

Wells Fargo demonstrates that private money is going to pull us out of this mess - while I don't disagree with fiscal approaches to getting us out of this mess (the $900 billion stimulus package), ultimately, private money has to come out and play.

And unfortunately, nobody knows the rules of the game. When the Nordic countries were undergoing a crisis in the 90s, the government did not nationalize immediately. Norway, in particular: (emphasis mine)

The process used in Norway was to assess the shareholder capital of the bank.  Shareholders were given FIRST RIGHT to recapitalise it.  If private money could be raised they kept the bank.  If they were short capital the government loans (which had previously guaranteed liquidity) were converted to equity and the old equity was written down.

I'm not saying that nationalization is the right or wrong answer; all I'm saying is that there needs to be some due process to this whole mess, and until people know how the game is played, everybody's gonna sit on the sidelines.

What worries me the most about the stimulus package isn't the debt (Keynesian economics is in such vogue right now!) or the wasteful spending; it's the fact that it may not stimulate the economy. A bunch of money will be thrown into the system, and it won't provide the necessarily stimulus. What, then?

And while I'm happy that we're continuing to fund AIDs/STD research, why was $355 million alloted to it (page 147 of the bill). I'm not sure that AIDs scientists are the ones who are feeling the pinch right now. How about allocating that towards the Rust Belt and Detroit and finally providing transition money to those industries we still hold onto, but are no longer really competitive? (Steel, car manufacturing...)

When it comes to fiscal discipline, I stand pretty closely with the Republicans. I understand the need for a fiscal stimulus (our monetary toolbag is empty), the way we're spending it seems pretty unfocused. (And for the record: more "tax breaks" is exactly what we *don't* need - we just need to spend more in areas where blue collar employees will feel the benefit).