The SEC Helps Out

They finally relaxed the mark-to-market rule. Unlike the ban on short selling this actually will alleviate artificial downward pressure on the markets. Today the major indexes made up over half their losses from yesterday’s sell-off; the rule change combined with news that the Senate will take up the rescue package tomorrow night should keep the markets moving in the right direction tomorrow. (Considering the bailout package at night will also have the advantage of not adding to market volatility since the domestic stock exchanges will be closed.) I’m inclined to think the rule change also makes the bailout a less iffy proposition by allowing the market a chance to self-identify the mortgage-backed securities that are so poisonous the government needs to take them on. That is the most opaque issue to me, and the fact that it won’t be entirely left to the government to figure out gives me significantly more confidence than I had 24 hours ago that we’re not necessarily heading VFR direct to a deep recession.

One thing this crisis has highlighted to me is the deep divide between conservative (or rather, liberal) economists and philosophical conservatives. The former are concerned with the significant economic costs of inaction; the latter seem to mainly want to keep government from getting involved. The former paint the issue in terms of the “catastrophic choice” versus the “bad choice,” while the latter argue that since government created the problem the last thing we should want is government trying to fix it. I first noticed the way conservatives divide over policy when I started studying constitutional law and noted the disparity between what the most prominent free market economist of our time had to say about welfare policy (Milton Friedman’s reverse income tax proposal) and what the legally conservative (i.e. Originalist) perspective would be. In this case I’m finding myself going with the economists — something has to be done. The rest of the economy should not be punished for government’s negative involvement in the housing market and the lousy decisions of a minority of borrowers, lenders and investors.

As usual, I’ve found a member of congress to be disappointed by. Congressman Randy Neugebauer (TX-19) was one of Fannie and Freddie’s enablers just over a year ago; yesterday he voted against the bailout package. In neither case would John McCain accuse him of putting country first. Neugebauer has received $20,000 in contributions from Fannie, Freddie and their employees over five short years in Congress, which only scratches the surface of his real bread and butter — the home builders lobby (amounting to $109,750 from real estate interests and $24,450 from home builders in the 2008 cycle alone, all for a solidly Republican seat). When he had the opportunity yesterday to try to prevent the bad decisions he enabled from hurting the rest of us, he did the politically easy thing and voted against the Paulson plan despite holding an essentially safe seat. When I was in college I worked hard to elect and then re-elect him; since then I’ve watched him pass on numerous opportunities to shape rather than reflect conventional wisdom. He is only one typical example of Congress’ bicameral, bipartisan Cowardly Caucus.

The Misguided Ban on Shorting

The SEC banned shorting in the financial sector last Friday as part of its response to the latest toppling dominoes in the subprime mortgage meltdown. I’m not convinced this is a great idea. Hoover tried this in 1929, as Amity Shlaes discusses in The Forgotten Man (2007):

Without short contracts, he reckoned, the stock market would not experience such violence ructions. The shorts, to his mind, put downward pressure on a market that might in some instances otherwise do fine. Now he wanted new rules to limit shorting. But the argument against shorting had a flaw. For every short seller — the man who was exerting downward pressure — there was always a long buyer — the man who bet he could get the stock for cheap under the arrangement, and then sell it himself, for more. [Emphasis mine.]

And the point of the SEC’s action, really, is not to remove downward pressure on otherwise good stocks — it’s to discourage people from jumping ship on their bad stocks, ostensibly temporarily, until Congress can get around to passing Paulson’s $700 billion bailout package. Larry Kudlow is as skeptical as I am:

In extreme, the absence of short sellers would inflate stock market upturns, probably into bubbles. Short sellers keep the market honest. I know many in the short-selling community and most of them really do their homework. They are skeptical about puff pieces on companies and they are properly cynical about corporate press releases.

The wisdom of the bailout package is an entirely other matter about which I am equally skeptical. It’s time once again to see what our congressional representatives are made of, but I would bet money on them selling us out again.

Hoping my heart doesn’t get broken again

I’m sitting at a coffee bar in Midwest City, Oklahoma appropriately enough reading a book called The Coffee Paradox (2005) by Benoit Daviron and Stefano Ponte. The thesis of the book is that the cause of the so-called ‘coffee paradox’ — the price of coffee in coffee-consuming countries like the U.S. continues to go up while the price coffee producers in the global South can demand for the beans continues to go down — is that the most valuable part of the consumer experience, the ambiance and “cafe culture”, is added in the consuming countries. They appear to be moving toward an argument for producers to try to get involved in more of the value chain, which appeals to me because it isn’t an attempt to help the poor by tearing down the rich. I am only on the first chapter so we’ll see how this goes.

At any rate, I’m making my first visit to a coffee bar called “The Underground.” I’ve been looking for a decent non-Starbucks coffee establishment since I left Lubbock in 2006. I never found one in San Antonio — at least not one convenient to where I lived. I discovered this place accidentally while driving further up a particular road than I had ever been in search of a sandwich shop. I came with great trepidation this morning, knowing the high failure rate of independent coffee shops. Costs are high, profits are low, and much depends on location and having an inviting (and large) enough interior space to get people to want to sit for several hours on your territory. Basically I didn’t want my heart to get broken again by the loss of a great coffee place (like the one in my hometown that lasted about 6 months in 2006). I’m a little buoyed by the fact that the signs say “Est. 2005.” Hopefully this place will last. It is definitely warm and inviting, and I really like this couch. I could be very non-productive here.