12
Jan
10

Continued destruction of value

A while ago I argued that value isn’t zero-sum — the value of a given product can be more than the sum of its inputs.  Well, it cuts both ways.

Let’s have a thought experiment.  Suppose I approach you with a compelling offer: I’m going to make you the most unique and delectable sandwich ever.  It’ll take months of experimentation, of course, but I have a plan — and can show you a list of potential ingredients ranging from Kobe beef to French truffles to the finest applewood-smoked bacon — and a lot of confidence.  Accepting your stipulation that the final sandwich include bacon (as all good sandwiches ought), I guarantee a sophisticated epicurean experience unlike any you’ve ever tasted.  All you have to do is foot the bill.

Months go by.  I send you itemized receipts for filet mignon, Ahi tuna, fresh asparagus (out of season!), and other more exotic ingredients.  These are accompanied by tasting notes such as “too pungent”, “coppery when paired with beef”, and the occasional “brilliant; compliments dark chocolate exquisitely”.  These communications build in you a mounting frenzy of anticipation.  What form could this ultimate sandwich possibly take?  You sign off on each receipt eagerly as my costs run into the thousands of dollars.

Finally, the presentation: Beaming with pride, I place before you, ensconced between two hearty slabs of rye bread and swaddled in bacon and a tasteful arrangement of arugula, the world’s most expensive shit sandwich.  As you work your way from horror to rage, I explain that I’ve been gorging myself on the fine ingredients you bought me and carefully pairing and combining the resulting feces into what I claim is the masterpiece I’ve set before you.

Then you punch me in the mouth.

What’s the value of this shit sandwich?  Unless you’re an epicurean coprophage, probably negative — I suspect most people would pay to not be served a shit sandwich if they couldn’t otherwise avoid it.  The facts that its ingredients cost thousands of dollars, and that its construction has kept me employed for the better part of a year, are utterly beside the point.  I have, quite flagrantly and thoroughly, destroyed the value of those marvelous ingredients and the value of my time and effort.

Now we pass into the analogy segment of this blog post.  You are the American taxpayer; I am General Motors; and the shit sandwich is GM’s 2010 model-year lineup.  (Automobile enthusiasts might note that the strips of bacon correspond to the Corvette, and the slabs of rye to the Camaro and CTS-V respectively.)

Let’s back up for a bit.  The good news is that, to my surprised delight, the U.S. Treasury is actually making a profit on some of its investments as part of the TARP bailout.  The bad news, of course, is that AIG and GM (and, oh yeah, Chrysler — do we still give a shit about Chrysler?) are losing money far faster than those investments can recoup it:

The Treasury estimated net losses on its $700 billion bailout program at $68.5 billion for the fiscal year ended September 30, 2009.

The December report for the Troubled Asset Relief Program, or TARP, showed that the fiscal 2009 net loss included estimated losses of $30.4 billion for AIG and $30.4 billion for automakers, with $27.1 billion in losses from the Home Affordable Modification Program.

These were much larger than a $15 billion profit registered from the Capital Purchase Program for banks and $4.4 billion in profits from other bank investments, asset guarantee and lending programs.

AIG has to be pretty fucking awful to destroy value as quickly as GM and Chrysler combined.  Still, it’s encouraging to note that if we could somehow sever ourselves from those three corporations, we’d be able to claw back — slowly but surely — some of that $700,000,000,000 figure in the form of honest profit rather than seizing it by the usual force of state.

All of that, however, makes this next bit even more obnoxious:

The LA Times-sourced story begins thus:

WASHINGTON – Obama administration officials and lawmakers are scrambling to find a way to funnel some of the financial industry’s record earnings back to the taxpayers who helped rescue the industry from looming disaster.

MISSION ACCOMPLISHED!  Someone land on a carrier.  The US Treasury earned $19,400,000,000 on its TARP investments; all y’all have to do now is apply that to the deficit and we’re golden.

Something tells me that’s not what the administration has in mind.

The White House is considering a fee on banks and other financial companies as one approach, with revenues earmarked to help recoup any losses from the government’s $700 billion bailout fund, a senior administration official said.

…oh.  That’s special: we’re going to go after the one part of the TARP bailout that’s actually posting a positive return on investment for us.  Brilliant fucking incentive, there.

Er, wait… the proposed fee is only being levied against banks that participated in TARP, isn’t it?

Isn’t it?

Note that there is no attempt here to only charge banks who received bailout money, but all banks will be charged equally.  To each according to his need, from each according to his ability.  This is moral hazard in spades.

Dear Mr. President:

More commentary from Megan McArdle:

So we ought to tax bank profits because . . . GM is losing money just like everyone said it would.

I am all for regulation which prevents banks from taking on too much leverage–or encouraging others to do so by offering stupid loans. I would very much like to find a system of financial regulation which results in a financial structure that isn’t so utterly dominant (and bloated) as it has been for the last two decades.  But I’m failing to see why the banks in particular–or rather the customers of the banks who will enjoy higher fees and lower interest rates–ought to bear the financial cost of the Administration’s ill-advised bailout of the UAW.

So am I.

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