Bailouts Must Be Odious 11 comments
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There has been a significant shift in bailout psychology over the last week or two. The grand shift has been to make the cost of receiving money from the U.S .government smaller, which gets “banks” to line up for cheap money, and non-banks like CIT and American Express to become banks. Insurers with Thrift arms can be “banks” as well. The hurdle for help is low.
This is the wrong philosophy. Bailouts have to be the best of a bunch of bad solutions, rather than something financial companies like. Common and Preferred Equity need to get whacked hard, and subordinated debt needs to take a haircut.
The present situation has the Treasury coming back to Congress for the second $350 billion quite rapidly, with little accountability for what they have done already. How can we tell that what the Treasury has done is right? How can we tell that it is fair? Answer: we can’t.
In giving and forcing money into healthy institutions, the Treasury has wasted money, in my opinion. Far better to give it to marginal institutions that need a little to get by in exchange for a large stake in the institution. But what they have done so far resembles giving aid to the largest politically connected firms, whether they need it or not.
Going back to Walter Bagehot, Central Banks should lend without limit at a penalty rate during a crisis. That rate should hurt, but it is better than no access to credit. To do otherwise is to shortchange taxpayers, and place the value of the Dollar at risk. That is what we are doing now.
Consider these graphs (click to enlarge):
Or, the oversimplified version:
The Federal Reserve was once a simple institution. Bloated with too many people for the task at hand, but simple all the same. But now, the Fed no longer controls its destiny. What high-quality securities that Fed holds belong to the US Treasury. And, if you look at the top graph, you will see a gap in the Northeast corner. That represents the degree that the Fed is short high quality Treasury assets. Not pretty. In a real crisis, where the Fed would face a call on cash, the result would either be inflation or severe recession.
Our government is rhyming with what it did during the Great Depression; they aren’t finding ways to reduce overall debt levels. They are moving deck chairs around on the Titanic. Our economy will not be healthy until we reduce debt relative to GDP. That’s not on the agenda now, which means we might imitate Japan for the next few decades, assuming our entitlements crisis doesn’t do us in.
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This article has 11 comments:
Repulbicans and their apologists should be ashamed.
1. Firm receiving aid must issue a majority stake to the government in COMMON stock, intentionally diluting existing shareholders.
2. Trustees representing the government must fire the top management and the board.
3. No payment of dividends nor cash spent on stock buybacks.
You are wrong, go back to many years ago starting from
President Carter, the seeds of failure were planted then.
Now we are harvesting the fruits of Failures.
Don't blame people blindly please. Who control the Congress
for the last 2 years ? They were asleep for 2 years ?
Doesn't this imply that the FED has printed and issued approximately $1.4 Trillion dollars recently? Granted, some of the assets are "held for the Treasury", but doesn't that also require issue of currency?
$1.4 Trillion (and growing) of new money in a $14 Trillion GDP economy can't be a good thing for long term inflation rates. Just a hunch.
Older leadership that have sucked the life out of the economy this last decade are like giant, rotting trees in a forest. They block out the sunlight from reaching the seedlings. Eventually lightning comes and burns the whole thing down. Then, lots of sunlight reaches the seedlings and a new forest grows.
Best analogy I can provide so the group of us can stop torturing ourselves as to why the greedy and corrupt can stay in power a few more years to continue to be greedy and corrupt. Every four years is a voter revolution from the depressions. We did not just have one, those in power stayed in power and in truth, we really have a one party system at this point. No, a climax and true change back to fundamental, conservative thinking will not be painless but it is necessary. Pain is the catalyst that creates necessity. Necessity is the mother of all invention.
On Nov 14 10:33 AM EUARTE wrote:
> I think by now some people are catching on that Paulson is paying
> off his friends in the financial industry. Beyond that he has not
> a clue what to do next. This means that he laying the ground work
> for the one thing that will destroy the industry, Obama socialism.
> We then get the worst of Paulson's nightmares a depression. Be scared!
To believe that Obama will be worse than the current administration is a stretch that I am unwilling to make, and, under the remote possibility that he could be, then there is absolutely nothing that could save us from a Greater Depression. His cabinet and staff should make things better than they otherwise would have been compared to continuing the insanity of current policies and actions.
Americans of good will and common sense should support and assist in the recovery of our economy and institutions, but ony with fully accountable , well thought out and sensible solutions, something Paulson and the current admin. has NOT delivered.
We must all be hypersensitve to hypocrisy, political maneuvering , and sabotage from all sources, or we will be led down the primrose lane again by the neocon's and their powerful supporters, including the national TV media.
Bad leadership makes victims of us all! The last 8 years proves this to me beyond a shadow of a doubt. Dissenting opinions welcome.
@ SeekingTruth: I agree that we've been doing it wrong! I don't think Obama will be any worse - but I don't think he'll be any better - He will continue to take the government down the same road, which is bad - Bail Outs, Stimulus packages, interest rate changes, printing money like it's water, etc, etc. Go look at most of his advisers - they come from Goldman Sachs, the Federal Reserve, Freddie Mack, etc, etc. Last time I checked, he was in favour of the first bail-out despite all it's faults. The fact that he is a lawyer and can understand the legalities of the fine print and stil gave it a thumbs up, scares me.
Truth is, it isn't government's job to create jobs, and by picking winners and handing out money, they are just trying to cheat economics - economics will win in the end despite government actions. So, IMHO, the government (despite what party is in power) has been going the wrong direction for a while.
The government (both Democrat and Republican) has been trying to get the consumer to take on more debts for a long time to give the illusion the economy is fine and dandy. An economy financed on debt will ultimately fail; It is unsustainable. Every time there is a hicup in the economy - they lower interest rates to entice consumers to take on more debt - which serves only to MASK the underlying problem with the economy - competitiveness. When lowered interest rates fail, the bail-outs and stimulus packages start to pop into the political agenda. None of these deal with the underlying situation - COMPETITIVENESS.
It would have been more encouraging if Obama's team would have been new, rather than recycled failures.