Thursday, December 04, 2008

I guess real estate didn't take

A little under nine months. That's how much time passed between the breaking of the Eliot Spitzer prostitute story and his first column for Slate. The title of this business column is "The Best Policy." That would of course be a reference to the old saw: "Committing adultery is the best policy." Anyway I have a few gripes with the debut column itself:

1. I don't think the fact that international buyers now trust the Chinese to manufacture aircraft (instead of, say, shoes or consumer electronics) is terrible news for America.

2. Using $7.8 trillion figure for the "cost" of the bailouts is pretty misleading. Yes, he specifies that it includes guarantees but he nonetheless talks about the money as if it's been "spent." The government hasn't spent anywhere near that much money. The difference between taking a loss and being exposed to a loss is very big.

3. Spitzer writes:

For years, we have accepted a theory of financial concentration—not only across all lines of previously differentiated sectors (insurance, commercial banking, investment banking, retail brokerage, etc.) but in terms of sheer size. The theory was that capital depth would permit the various entities, dubbed financial supermarkets, to compete and provide full service to customers while cross-marketing various products. That model has failed..."

This is nonsense. If anything the "financial supermarket" model has been vindicated. Look at the biggest of the survivors: JPMorgan Chase, Bank of America, and Citi... all of them are supermarkets, with retail branches and investment banking operations. Bear and Lehman were pure investment banks, as was Merrill (which didn't end quite as badly). And now the remaining pure investment banks are looking to get into the retail business, because deposits are the readiest source of funding these days.

The problem isn't that the banks were supermarkets, it's that their proprietary trading, and the amount of risk they took on in general, was wildly irresponsible. But that mismanagement didn't flow necessarily from the diversity of business lines, and there are better ways to address it than to try to arbitrarily cap banks at a certain size. Reserve requirements can be imposed, better underwriting standards can be enforced in the mortgage industry, the rating agencies can be blown up reformed, etc.

I don't have a problem with "true competition with winners and losers; companies that disappear; shareholders and CEOs who can lose as well as win..." But it's worth separating the practices which are intrinsically flawed and prone to causing financial catastrophe from those that aren't.

Anyway I'm not a huge fan of the piece. It's pretty interesting, though, I'll give him that. I'll continue to read him even though he's a scumbag.

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