Here are my two shots from TechTicker yesterday:

Why Geithner’s Bank Fix Will Fail

Analyst: “Nationalization” of Citi and BofA Inevitable in ’09

I think there are two issues regarding the financial bailout: First, is what we are doing effective?  Two, are we adding to “perceived” systemic risk or reducing it with our actions?

And the question of the week: Is there Any Such Thing as Systemic Risk?

And if there is, where does she live?

As I noted in the second shot, there is no such thing as systemic risk, IMHO.  Just a way for politicians in Washington to push the statist agenda and turn us all into slaves, to wit:

“You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that, my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.”

The late Dr. Adrian Rogers

Thanks to Gerry for the quote.

Best,

Chris

Category: BP Cafe

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “Is there Any Such Thing as Systemic Risk?”

  1. Cooter says:

    Does this quote honestly imply that the wealthy work harder than the poor?
    Half the fucking world lives on $2 day or less. Try that for a week and tell me who works hard.

  2. Imelda Blahnik says:

    Amen, Cooter.

  3. bottyguy says:

    “The government cannot give to anybody anything that the government does not first take from somebody else.”

    The late Dr. Adrian Rogers was simple minded homophobe, and I suspect that if he had been influential in the 60s he would have opposed Civil Rights legislation. That is why he could not understand why the above statement is absolutely false.

    Assuring equal rights and opportunity for all citizen is a job that only government can do, it by doing so it gives rights to everybody without taking rights from anybody.

  4. VoiceFromTheWilderness says:

    The quote makes a lot of sense, and is the kind of thing this country has completely forgotten, but ‘statist agenda of politicians’? Please. The financial communities disingenuous whipping of washington is a great tool for public perception manipulation, but it is in fact, utter hogwash. The ‘statist’ agenda, as always, comes from the powerful economic actors who have taken control of the legislative, and political process and are actively using it for their own advantage. It is inherent to the notion of ‘free markets’, though rarely remarked on, that elimination of the most powerful actor (government) as market force, only creates a power vacuum into which other actors with concentrated power bases step actively, and surreptitiously, to manipulate for their own private gain. The proposals coming out of washington have all kinds of grandiose sounding justifications, but the reality, as evidenced by the results they produce, is the benefit of an increasingly small group of extremely wealthy individuals at the expense of the society. To pretend that ‘Washington’ is some kind of independent actor, while lobbyists write financial bailout bills is disingenuity of the highest order.

  5. Moss says:

    Just substitute Wall Street bankers for government and you have the reality of today. WTF is your point anyway?

  6. wally says:

    The systemic risk is that since credit = debt = money, we can pretend that there is more of it than is possible. That is because debt cannot exceed some fraction of the potential future amount of work. When it approaches that point, confidence collapses and the debt is destroyed. We have gone through this over and over and over in history. The hot fad now is to think government can alter this cycle by creating even more debt. The answer to that is : ha ha ha ha. Think it over: by preventing the destruction and extending the time frame of debt (by financing with future deficits) the government lengthens the process, as it did in the 1930s, rather than decreases it.
    We are in for a loooonnnnnnnng one this time.

  7. Chris Whalen says:

    Point is, Moss, we are gonna protect the depositors or C et al and toast the equity and most of the debt, IMHO.

  8. wally’s cathching the fullness of it..

    LSS: We’ve been hounded by that hoary tale, of “Systemic Risk”, since the Ink was dry on Jefferson’s glorious Handiwork.

    For Long, “We’ve been told of Phantoms”. To the same End, that story is spun–Ever greater consolidation of Power into fewer, and fewer Hands..

    It’s been fantastically effective, at that..

  9. Greg0658 says:

    from the primary quote “When half of the people get the idea that they do not have to work because the other half is going to take care of them”

    sounds like the dinner table here … I used to be the primary bread bringer .. times change .. I don’t have a money tree and a young body anymore .. but I’m thinkin and posturing of ways to legally get my mojo back

  10. KidDynamite says:

    wow Chris. i loved the quote. i’m surprised at the backlash.

    I quit my job on wall street almost 18 months ago, in no small part because i was sick of paying 50% of my income in taxes – in short, it wasn’t worth it to me. so i KNOW there is at least some portion of truth in that quote.

  11. druce says:

    First thing you learn in chemistry is that if you mix two solutions, three things can happen: A big explosion, a new stable solution, or (occasionally) an oscillation.

    The solution that has potential to explode has systemic risk.

    If 2 superpowers each have one hundred ICBMs that are relatively invulnerable, and launches are quick and easy to detect, it’s not too likely either one will strike first. If each has one hundred ICBMs with 10 warheads each which are highly vulnerable and launch detection is error prone, it starts to make a lot more sense to strike first. That situation is less stable and has more systemic risk.

    No accident Buffett called derivatives financial weapons of mass destruction. If you have institutions with no transparency, and toxic waste on their books that could explode, or just give them sudden need for lots of collateral, people are going to start fleeing them at first sign of trouble.

    Systemic risk is real… markets have natural sources of stability and instability, and you can design them so the sources of stability are self-reinforcing, or the sources of instability are self-reinforcing.

  12. karen says:

    i’m with you, Kid. loved the quote and Chris’s commentary. have been reviewing this in my mind for months, i.e., systemic risk is a smoke screen. deposits have been back-stopped. this is all about let’s pretend money isn’t printed/borrowed into existence to maintain the existing structures of power and tax collection…

  13. theorajones says:

    The government cannot give to anybody anything that the government does not first take from somebody else.

    Yeah, to hell with clean water! There’s no such thing as productive investments by the state in common goods. It’s all just redistribution. Screw water, sewers, roads, bridges, police force, educational system, fire department, electric grid, judicial system, patent law, pure food, safe medications, building codes, fire code, currency…it’s all just takin’ money from the hard working and giving it to the lazabouts.

    When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that, my dear friend, is about the end of any nation.

    We’re a million miles from that. Take a look at the exponential growth of CEO and financiers’ pay and then note the decline of median income, wages and wealth as worker productivity has soared. Tell me, what happens when a majority of the people realize it’s no good to work because somebody else is going to get what they work for, and no one will ever take care of them?

  14. Mannwich says:

    But how do you account for rampant criminal activity that we’ve seen on Wall Street and in financial services overall in recent years? And, no, I’m not just talking about the likes of Madoff and Sir Allen either. Rewarding incompetence/criminal behavior would seem to undermine Dr. Rogers’ theory, no?

  15. Darmah says:

    Typical world view from those who hold that humans are rational actors and that by-god I worked hard for my money why should I share it with dead-beats. The common good is best served by my rational self-interest. Sorry. Claptrap. If the past eight-years haven’t disproven it for you, I’m not sure what will.

  16. rob says:

    Darmah, you assume I (we) exist to serve the common good! I exist to serve myself and loved ones, even at the exclusion of the others if an amenable agreement can be found.

  17. Reinko says:

    Oh there is no such thing as ‘systematic risk’?

    Ask the folks from Iceland if there was no systematic risk in the way they rules their banks.

    And the USA? Financial sector only has about 17 trillion US$ debt on herself, that is over 100% of USA GDP and it grows much faster then the GDP.

    (Source: http://www.federalreserve.gov/releases/z1/current/accessible/d3.htm )

    Ha, 17 trillion of debt and even the interest obligations / coupon payments can only be done by ‘refi’ or issuing new bonds? And no quantum of systematic risk in the air?

    __________

    This article falls into the category of ‘worshipping the rich’, what is against extra taxes for the rich?
    The rich have proven to be able to get rich, so why don’t they repeat the trick a few times more?

    And when it comes to stuff like fighting crime, all these folks that worship the rich are looking at the government for a solution. US military costs? Same package; the govenment has to do it.
    But with a government comes it’s costs, you accept that or live in anarchy without taxes (very often you need to pay ‘protection money’ to the local mob in such a case).

  18. Groty says:

    We now have a society where people who have been responsbile and managed to save a nese egg are being “rewarded” with near 0% interest rates on their savings so the FED can try to bail out a bunch of banks who made stupid lending decisions.

    Now Obama wants to reward irresponsible borrowers who bought too much house relative to their income by allowing them to dishonor their obligations. Taxpayer money will be used to make their mortgage payments less burdensome.

    These policies make people who have behaved responsbily by saving and who honored mortgage terms look like suckers.

    Santelli may have been joking about a taxpayer revolt on CNBC today, but I think it may be pretty close to the truth.

  19. austrian atlas says:

    bottyguy said “Assuring equal rights and opportunity for all citizen is a job that only government can do, it by doing so it gives rights to everybody without taking rights from anybody.”

    Question — In your example, how does this “government” get paid for it’s equal rights consulting services to humanity? Probably by taking money from someone. And, it’s easy to see that Dr. Rogers was talking about taxation and wealth redistribution, not firemen and morality.

  20. druce says:

    you know, I was reading the original comment and thought… that seems like a strange out of character thing for Barry to say… I think the author byline font needs to bigger and placed on the left in the reading flow.

    Any economist should know… transactions are not zero sum. A transaction takes place in a free market when it makes both the buyer and seller better off. And it’s positive sum for the government to put up a traffic light even when it has to tax users to do it. As Orwell said, the first duty of intelligent men is the restatement of the obvious.

  21. Simon says:

    In this case Chris means freedom to “for the banks” to fail. With which I agree of course.

    Unfortunately the rest of the quote seems to apply to tax paying people vs people receiving benefits. In this case the logic breaks down rather quickly IMO. Society is like a family or should be. The old, the weak, the young and the unfortunate are looked after by the rest. Of course good social policy needs to have a strong emphasis on systemic risk mitigation. It needs to try to avoid dependency. There is systemic risk where ever you look. Some systemic risk is probably unavoidable. Even the designer of natural systems could not avoid it. The benefit of “a system” however outweighed the problems of “going it alone”.

    In any case with regards to tax it seems that, beyond wages, governments are not very good a gathering tax. Wages earners are usually not where the really big money is.

  22. Chris Whalen says:

    Thanks for the comments. Regarding the quote conjuring images of the family sitting around the dinner table, ditto. My father taught me that being an adult is about accepting responsibility for other people.

    I think the quote is really meant to be a high level comment on the inability to create wealth via forced redistribution. To that point, the issue we face right now is that, given the reduction in capital and market volumes we see around the world, we face a much slower growth future as the speculative sector deflates and the real economy eventually recovers. The whole story of modern financial economics is about spinning straw into gold in the speculative sector, which eventually grew to an order of magnitude larger than the real economy basis. As the bezel shrinks and the froth we mistook for growth evaporates, the living standard supported by the real economy is going to be quite a rude shock for people around the globe.

  23. Cooter says:

    We in the West are going to have to get our heads around the idea of wealth, and what that really means.

    Wealth is not simply numbers in a bank account or your passive cash flow or your equity.

    Wealth really means being able to access the resources, services, leisure, social relationships, spiritual connectedness that make us human.

    The question for all of us is how to go about creating wealth? I suggest it is created through a healthy mix of education, hard work, play, love, kinship, spirituality, compassion, investment. When the lack of financial resources undermines a large part of society’s ability to succeed in all those areas, then some forced redistribution from haves to have nots is in order.