2002: Bailout & "too big to fail" theme predicted

Well, Bookworm may have found <something huge.

Researching for another post she came across this prophetic bit of writing by economist Utpal Bhattacharya, of the Kelley School of Business at Indiana U:

As no rational agent would be willing to take part in the last round in a finite economy, it is difficult to design Ponzi schemes that are certain to explode. This paper argues that if agents correctly believe in the possibility of a partial bailout when a gigantic Ponzi scheme collapses, and they recognize that a bailout is tantamount to a redistribution of wealth from non-participants to participants, it may be rational for agents to participate, even if they know that it is the last round. We model a political economy where an unscrupulous profit-maximizing promoter can design gigantic Ponzi schemes to cynically exploit this “too big to fail” doctrine. We point to the fact that some of the spectacular Ponzi schemes in history occurred at times where and when such political economies existed—France (1719), Britain (1720), Russia (1994), and Albania (1997

Bookie questions the…well, not the timing…she just wonders if we’re living through a coincidence or some applied theory.

Let me add to Bookworm’s find, this from the NY Times, in 1999. Yeah. 1999:

”Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

Why didn’t anyone try to stop this from happening?

Oh…wait…people did.

I don’t remember much about that in the press. But there’s lots of stuff I don’t ever remember seeing reported.

Well, then again, the press can’t be expected to report on everything. After all, someone has to gurgle about how the Obama’s have reinvented sex…or something

Reader C writes in:

many…actions of the new administration, have that “contrived” feeling. For example, the current dust-up about the AIG bonuses. If my memory recalls correctly, I read that when the initial bridge loans and the 40% equity share in AIG were made by the Bush administration, AIG was required to provide full disclosure on everything as a condition of the loans, including bonus payouts. I find the “outrage” quite manufactured. (How can the current administration not know the terms?)

[…that’s a very good question, indeed, considering Geithner wrote the guide lines for the AIG bailout money -admin]

Similarly, two weeks ago, Citi was said to be “in very bad shape.” This bad shape was the reason for another infusion of bailout money in February. Their stock price below $1.25 per share. And, now suddenly, Citi reports a $6.8B profit for January and February. Both Bank of America and Wells Fargo are hinting at similar good news on their balance sheets. (A pal at WF has said they’re still working lots of overtime like it was last October.) Something is not right. Also, the Bush DOJ had begun a criminal inquiry in December/January to determine who began the electronic run of $550B last September. Since the change in administration, the investigation seems to have fallen out of sight.

Plenty of “hmmm …” at play.

Yeah…too bad our press is so incurious.

Incurious. That’s a word you never hear anymore. Remember when everyone was saying “Bush is incurious…”

Funny…now the press, which was never very good at asking Democrats anything “uncomfortable” seems to have lost any pretense of curiosity.

Curiouser and curiouser.

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About Elizabeth Scalia