This 'Band-Aid' Approach Is Getting Old

Equity markets continued their downward march breaking breaking through the downside support levels of last November and dropping to 1997 levels. Investor confidence continues to erode as the health and sheer existence of major financials once again were at the center of market attention. How can anyone have much confidence in the equity market when the center of economic power has shifted from Wall Street to Washington? Political decisions and testimony before Congress now drives market activity. Gone are the days when statements from Buffet, Boggle and Lynch moved the markets. We now focus on statements from Frank, Geithner and Bair to drive market direction.

The breakdown in confidence stems from the lack of sufficient measures to address the problems that are at the core of this financial crisis. The recently proposed housing plan does not have the legs to provide a long term solution for underwater mortgages. The bank plan proposed by Treasury does not do enough to remove toxic loans from the books of the financials. A bad bank solution has been discussed but not yet established. The Stimulus package did little to instill confidence in the economy. The injection of public funds in the form of capital into the financials has done little to spur consumer lending.

In fact, more capital is needed and we now seem to have an open ended commitment to continually fund losses and capital infusion needs for the financials ala Citi (C) and AIG (AIG) on the insurance side. Without confidence in the financials, much needed credit is not going to start to flow and the equity markets cannot find much needed support.

The band-aid approach to this crisis is getting long in the tooth. The longer the core issues remain unsolved, the longer we wait for real economic recovery. The foundation for equities is cracked. Worries persist on the job front, housing, credit and financials. The jump-start expected from the stimulus plan depends on renewed consumer confidence and spending. The minimal “tax reduction” will not help to get credit flowing or housing stabilized. At this point, none of the fundamental problems has been properly addressed. There cannot be expectations of a turn in the US and world economy without a clear and concise solution to the issues above.

The proposed budget for fiscal 2010 raises taxes (redistributes wealth), increases spending and puts more doubt on the ability to bring this economy out of the dumps. Washington needs to look no further than the equity market that is continually eroding in value and down over 50% from the previous high to see where the economy will be at the end of 2009. Tax increases, continued “injections” and floating trial balloons on policy fixes do not fix the underlying systemic problems. Yes, the trickle-down effect of recent actions may eventually help to move the economy forward. But, it is hard to believe we have the time to wait for trickle-down economics to work in this environment.

Washington needs to get their act together and starts working with Wall Street to solve the issues that still confront the markets. It is time to put the band-aids away, get out the scalpel, get the surgery out of the way and let the private sector work along with the government and get the economy on the right track to recovery.

Comments

[Steven Hansen:]

i suspect the time for action was earlier this decade. The first step in problem solving is to define the problem. well the problems are dynamic, and when we start to get ahead of it - it changes course.

we should be preemptive. my point is that it will always appear as if we are not.

Mar 08 04:16 AM

[random walking:]

If by Wall Street as crisis problem solver, you mean the insider politically connected instititions in lower Manhattan, that is anti-capitalistic. The internet makes lower Manhattan irrelevant except for concentrating political influence.

The only reason markets for securities would be centralized was if technology was insufficient to decentralize trading. Trading works best when all players of all sizes everywhere have equal access during all timeframes. Capitalism is supposed to be interested in "free markets", open markets, level playing fields. Wall Street and Washington are a form of central planning, which has its place to prevent market abuses, not to replace markets. For example, not a single packaged CDO has been unpackaged and auctioned off in a transparent market place that was open to the public. There are examples of internet "market places" that would serve as a great conduit for marketing mortgage securities to the widest possible audience. Financial institutions with troubled assets that need to be unloaded are looking to the wrong place to unload them (the Federal Government), and are unwilling to do what it takes to unload them in a free market. Have we become tone deaf to what capitalism is? Wall Street was not real capitalism.

Mar 08 04:34 AM

[Moon Kil Woong:]

No amount of money can absolve the derivatives debacle. Although the contracts theoretically wash (every one dollar owed is one dollar received from another), the fact is it has added trillions in theoretical profits which has now becometheoretical losses and over leveraged our system. The fact that many have no collateral and aren't payable for 10 or more years leaves us where? Waiting for 10 or more years with everyone hoarding cash to cover the unpredictability of these "assets". We need a legal remedy that can purge these from our books and prevent the same thing from happening again.

Even today, I am sure more of these derivatives are being written, mostly rolling them over and over ad infinum so both parties need not pay cash they don't have or receive pennies on the dollar making them assets they can't afford to depreciate.

Free cash financial band aids can't solve anything. They didn't under Bush Jr. and they won't under Obama.

Mar 08 04:40 AM

[Rob Viglione:]

What's getting tiring is the concept that some people ought to decide how everyone elses resources are used. When we talk of either fiscal or monetary policies, we're really discussing how power should be used to force wealth from individuals towards one social experiment or another.

Borrow a few trillion, print another bunch of trillions...all sounds great, proposed by confident-looking folk in nice suits, validated by obtuse academics, and taken on faith by the sheeple...but why is it OK for resources of all the citizens of this nation to be pooled and doled out by those at the top of the power pyramid?

Rolling the dice with our currency, and borrowing/spending away all the future earnings of our children does not seem ethical. Worse, it has never proven to be a recipe for success...

Mar 08 05:07 AM

[pelican:]

I agree with the adage, the cleanest cut heals the quickest. I think the article is saying that. But I would like to hear more concrete solutions. The poster above (constructe) wrote: "We need a legal remedy that can purge these from our books and prevent the same thing from happening again." I think this makes sense. Everyone knows something needs to be done and like the author said, the band-aid approach is wearing thin. It does nothing to increase consumer, business or investor confidence and as long as the huge amount of uncertainy remains, progress will only be incremental. I don't have all the answers but it is clear we need aggressive solutions because band-aids won't stop the hemorraging. Otherwise get used to the feeling of being "behind the curve" for a considerable period.

Mar 08 05:57 AM

[Glen L.:]

Hey, we already had the legal remedy: bankruptcy law. The cleanest cut was already available to be wielded by the invisible hand of the best surgeon of all, the free market, but our government prevented it from operating.

The government and the FED are trying desperately to reflate the bubble. The bubble was caused by massive malinvestment and "creative" leveraging which would have never occured minus the ridiculously low interest rates propagated by the FED. These market distortions MUST be allowed to self-correct, and self-correct they will regardless of what government does. The more government does, the longer it will take to play out, and therefore the worse it will be.

It is a complete mistake to look at the massive interference in our economy as applying a "band-aid". It's more like treating heroin addiction with increasingly large doses of methadone. Sooner or later, the patient kicks cold turkey or dies.

Do you want to see the markets recover in the shortest possible time? Then stop repeating the mistakes that caused the problems. It's as simple as that.

Mar 08 11:29 AM

[henarl:]

The patient is on the death bed and a series of expensive band aids are not working. We can choose to do a radical operation and chance the patient dying on the operating table, or we can apply more high priced band aids and wait for the coroner to take over. The prognosis is not good either way.

Mar 08 12:59 PM

[jrhc:]

Bla, bla, bla and bla...
Let's the «free market» do its job... let's the «invisible hand» do its surgery... and let's see one third of the american population dying in hunger as a result. Then the healthy survivors will start over again remaking this big and glorious country...

Mar 08 06:43 PM

[@TexasER:]

The reason for the band aid approach is to allow time for folks to adjust. I believe a revaluation of the dollar will be necessary. Inflation is the only answer.

But if it happens too suddenly, it would also cause panic and tremendous disruption.

It takes time to evaluate the effect of any "stimulus." So the only prudent way to proceed is to write hundred billion dollar checks at a time, then wait and see the effect.

Don't worry. We'll get there.

Mar 09 12:23 AM

[milkchaser:]

Where is there hunger in this country on the level you suggest? Nowhere.

On Mar 08 06:43 PM jrhc wrote:

> Bla, bla, bla and bla...
> Let's the «free market» do its job... let's the «invisible hand»
> do its surgery... and let's see one third of the american population
> dying in hunger as a result. Then the healthy survivors will start
> over again remaking this big and glorious country...

Mar 09 03:01 PM