Bail-Outs or Bung-Ups by the Government?

Excerpts from Dr. Enzio von Pfeil's December 11, 2008 appearance on CNBC Worldwide Exchange:

1. Governments are stepping up measures to ward off the worst financial crisis. How effective are these measures?
   • From a structural perspective, they can be only of limited use. As Robert Samuelson posited in the South China Morning Post, “Private behaviour is neutralizing public policy.” Indeed, The Economist’s illustrious editor, Walter Bagehot (1826-1877) arrived at the same conclusion in London’s City when he said that any money given to Central Banks was not finding its way into the private sector.
   • Thus, the current Economic Time™ is characterized by an excess demand of money. But the reason that Central Banks cannot create an excess supply of money is because commercial banks are the ones who refuse to lend - only, once they re-gain confidence can an excess supply of money be created.
   • So, current measures, are at best, bail-outs. Sadly, it seems as if politicians are privatizing the gains and socializing the losses in areas such as the US car and banking industries. Thus, I am not criticizing governments for acting; it’s just that their room for response is limited.
2. How deep are you expecting the recession to be, and what will be the impact on financial markets?
   • How long is a piece of string?
   • My guess is that the world is going to “L” and will remain there until at least the end of 2009.
   • Indeed, I have likened the current state of the market to that of a fish flopping around on a hot cement sidewalk (as opposed to a cat on a hot tin roof).
   • Leery lenders won’t budge for a long time.
3. When do you see the markets bottoming out, how much more downside is there?
   • Expect to see another 30 – 50% down, once earnings start hitting and analysts have to revise down their rocketing price earnings ratios.
4. What are you expecting from the FOMC meeting next week? A zero rate policy? Reality?
   • More quantitative easing from Bernanke-san.
   • As Robert Samuelson points out in said editorial today, “…the Fed’s new loans and credits easily exceed $1 trillion.”
5. What is your investment strategy, and some trends and themes for 2009?
   • Please see below.
   • The global Economic Clock™ will keep showing an excess demand for money and thus an excess supply of goods.
6. Are there any other topics you'd like to discuss?
   • The current bailout packages are creating scary consequences down the road.
     • On the fiscal side, the US federal budget deficit will balloon.
     • On the monetary side, as Samuelson points out in today’s editorial, the Fed has moved way beyond being a lender of last resort. Indeed, now it is a hedge fund with a) the most toxic assets and b) nobody who knows how to run this hedge fund!

Comments

[Jason Rines...:]

Too many contradicting statements or beliefs my this man to comment on. Disagree with him on 'L' looks to be more like a 'W' shape to me with the middle bear rally not being so hot this time. Nice historical reference though. Would love Mr. Von Pfeil to come debate me on his viewpoints.

2008 Dec 10 04:14 PM

[Tony Petroski:]

I'm breathless. Thank you Dr. Pfeil, if I were anything but an American, I would go out and commit suicide. The American economy will heal soon, and will lead the world out of this mess. Then the American people will have to figure out how to remain free.

2008 Dec 10 09:49 PM

[woodsey:]

"Scary consequences", "excess supply of goods". How about "crisis of overproduction", e.g. housing boom? Marx would have a field day with this.

2008 Dec 11 02:27 PM