Government Intervention in the Markets: At What Cost?

Total Loss of Fiscal Inhibitions
The current economic doldrums seem to have caused a loss of all fiscal inhibitions across the world. Facing a recession and widespread credit contraction, countries and central banks from all over the globe are in a state of panic. This panic has broken down the barriers to government intervention in markets and spending on scales never seen before. Consider the following news items:

Marketwatch

Japan plans to buy $227 billion in shares to boost market

By Michael Kitchen

NEW YORK (MarketWatch) -- Japan's government said Thursday it is submitting a bill to parliament allowing for the purchase of 20 trillion yen ($227 billion) in stock to help stabilize the Japanese stock market, Kyodo news reported. Under the bill, the Banks' Shareholding Acquisition Corporation, originally created in January 2002, would resume buying shares from banks and other entities, the Japanese news agency reported. The bill would be introduced early next month "with an eye to implementing the measure by the end of March," the report quoted lawmakers as saying. The Liberal Democratic Party had initially considered just 10 trillion in stock purchases, but the size was roughly doubled to 20 trillion yen at the request of its ruling coalition partner, the New Komeito party, the report said.

227 Billion in stock market buys from Japan. The original plan called for half that amount, but then was DOUBLED for good measure. Japan also made a monster interest rate cut from a rate of 0.3% down to 0.1%. That is not a misprint. A whole 0.2% cut should make all the difference!

Business News Network via Mish

Bank of Canada has prepared range of options

Heather Scoffield, The Globe and Mail

December 17, 2008

Bank of Canada governor Mark Carney says the central bank has prepared a range of options, beyond interest rate cuts, to stimulate the Canadian economy, but says it's "premature" to put any such plans into action right now.

As the financial crisis deepens, the Bank of Canada needs to become more aggressive, by taking on high-risk collateral from commercial banks, and even consider buying equities, added Nicholas Rowe, economics professor at Carleton University and a member of the C.D. Howe Institute's shadow monetary policy council.

The central bank's current measures to keep money markets moving have helped somewhat, he said, but the commercial banks are still shouldering all the risk, and that makes them reluctant to lend. The Bank of Canada could alleviate the risk by becoming "a pawnbroker of last resort" and accepting high-risk loans as collateral. "I think they could be a lot more aggressive .... Let's go crazy and go into markets and buy the index of stocks."

So the Canadian government sees that commercial banks that have to handle loan loss risks are reluctant to extend credit in an economic slowdown. While for all of history this had made sense, in the current environment it is not acceptable. The government and by extension the taxpayer should shoulder all that risk. Why stop with lending risk? Some in Canada think now is the time to "Go Crazy" in the stock market with taxpayer money.

AP

Paulson: Congress needs to release second $350B

Friday December 19, 12:25 pm ET

By Martin Crutsinger, AP Economics Writer

WASHINGTON (AP) -- Treasury Secretary Henry Paulson said Friday that Congress will need to release the last half of the $700 billion rescue fund because the first $350 billion has been committed.

Paulson said the use of the rescue fund to provide loans to the auto industry along with all the other rescue efforts for the financial system meant that the administration has now basically allocated the first half of the largest government bailout program in history.

House Financial Services Committee Chairman Barney Frank, D-Mass., has said the administration must allocate some of the new money for borrowers facing foreclosure, and impose more conditions to make sure banks use their rescue funds to increase lending.

"They're not going to get the (money) unless they get very serious about the foreclosure modifications and showing us how we're going to get some lending out of the banks," Frank said earlier this month.

So the second half of TARP was not needed, but now it is. Even though there were two lawsuits that tried to pry any information about how the TARP money was being used (FEDs say they cannot say due to "stability" issues) we can feel confident that Barney Frank will be on the case this time around.

These three stories highlight the reckless abandon with which central banks and governments are operating right now. Flying by the seat of their pants, major long term decisions are rushed into action. No explanations. No transparency. No detail on just how the governments will, if ever, be able to extricate themselves from the markets. It seems we will need the "jaws of life" to cut government out of the free markets in the future.

Taken in as a whole, what this all means to me is that the stock markets, currency markets, bond markets, just about any market cannot be trusted. There is so much blatant manipulation going on that one cannot use any standard metric to judge much of anything. The goal of all this intervention was supposed to be some kind of stability. The very stability the central banks are trying to engender is a false one based upon government backing of all things financial. By definition then, they simply cannot exit the markets anytime soon. I do not feel the markets have accepted this fact as of yet. I also do not think the markets understand the price the government will eventually extract as their "fair return" if things get going again.

Think about social security needs, public pension needs, etc. If the economy turns around and the markets go up, why would the government not step in and take a huge cut for themselves? After all, they saved the markets. I think this is not discounted in the current thinking.

Comments

[herbert hoover:]

if the markets go up, pualson owns everything anyway. he's the only one who has bought any equities in the last 6 weeks.

2008 Dec 21 01:44 PM

[User 364586:]

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Austin

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