Why I Think Paul Krugman Is Wrong 63 comments
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I find that a scary sentence to write. If the past decade has taught me anything, it has taught me that mistakes are avoided if you follow two rules:
- Remember that Paul Krugman is right.
- If your analysis leads you to conclude that Paul Krugman is wrong, refer to rule #1.
So why do I have a positive and Paul a negative view of the Geithner Plan? I see three reasons:
The half empty-half full factor: I see the Geithner Plan as a positive step from where we are. Paul sees it as an embarrassingly inadequate Band-Aid.
Politics: I think Obama has to demonstrate that he has exhausted all other options before he has a prayer of getting Voinovich to vote to close debate on a bank nationalization bill. Paul thinks that the longer Obama delays proposing bank nationalization, the lower its chances become.
I think the private-sector players in financial markets right now are highly risk averse--hence assets are undervalued from the perspective of a society or a government that is less risk averse. Paul judges that assets have low values because they are unlikely to pay out much cash.
One way to think about it is that the privates are placing a low market price on distressed securities because they place a high weight on future scenarios in which the prices of distressed securities fall still further: in such scenarios they will need cash really badly, and the additional losses that would be generated if they further extended their positions and if such scenarios came to pass would be extremely painful--institution-destroying, and hence to be avoided at all costs.
The government, however, is the agent of society at large. As such, it is close to risk neutral: only the losses associated with truly great depressions get substantial extra weight. It doesn't care much about bad news that leads to further declines in the values of toxic assets it holds: if worse comes to worse, it can always offset them by printing more money and so generating an inflation that is annoying and painful but not something to be avoided at all costs.
It is this difference between the (extremely low) risk tolerance of private financial intermediaries and the (relatively high) risk tolerance of the government and of society at large that creates the rationale for a program like the Geithner Plan.
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This article has 63 comments:
says it all perhaps
Overall this just seems like trying to buy time and does not solve the problem. And I also think it is doubtful that trying to buy time helps the issue.
From my viewpoint there is far too much cronyism between the Fed, the Treasury, and Wall St. for any good to come of this. Geithner and Summers I think are too beholden to what got us in trouble in the first to be able to have the vision to get us out. They are clearly playing politics first and trying to be effective second. There is ZERO transparency here. As I said in another post- are Geithner and Summers merely unwitting pawns in the entrenched Wall St. feudal system where Goldman Sachs gets a cut of everything and the financial sector is the god that must be eternally bailed out?
Wall St. continues to run the country be default , literally. The AIG bailout (the bonuses were a distraction) stinks to high heaven. If anything Geithner has only added fuel to the idea that Goldman Sachs is continuing to run the Treasury for 3 administrations in a row. Where is the transparency promised?
Paul Krugman is wrong on all three counts, which makes you right from one perspective. Trevor, however, has addressed the real issue. Is Geithner's solution the right one for the US and the world? The answer is clearly NO.
From Keatings's statement, "by frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn...contributed to the global financial crisis which has since devastated the world economy."
Geithner single-handedly destroyed Indonesia's economy back in the '90's through his incompetence. Quoting Keating, "Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis."
In Peter Harcher's words, "Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription. The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind." Harcher, political editor from Sydney, Australia, wrote the article.
Asian governments are painfully aware of Geithner's mistakes, and refuse to cooperate with US policy in the current crisis. They see it as a colossal mistake in judgment. Geithner, and Krugman, are both dead wrong in their diagnosis and prescription. They are quacks. We should get a second opinion from real doctors.
As you live, so you judge. Get some help.
The list of knowledgeable, reputable economists and financial advisors who think the TARP 3.0 plan is a bad idea is staggering. Indeed, it is hard to find anyone who supports the plan outside the Administration and the financial sector.
Like Krugman, most of these world-class minds are moving toward despair--and I think they are justified. We are about to spend trillions of dollars to benefit a few who knowingly ignored risk expecting bailouts. And the monies dumped into these financial institutions will do little, if anything, to stave off economic or financial decline. Moreover, we all will be paying for this for decades to come in inflation and higher taxes.
Paul's whole premise is in that banks are insolvent. Nobody knows if they are. they themselves do not. I worked as an analyst at banks and various funds for 15 years, modeling structured credit. Imposibble to say if C or BAC are solvent or not. Impossible. I tend to think that they are, and thus that Paul, and Nouriel are wrong. that makes you and Geithner right. But, like i said, nobody knows. I hope the program works.
He bashed President Bush for spending too much, and bashed President 0bama for spending too little.
Krugman writes political articles...calling him an economist and giving him economic prizes is Orwellian.
If Krugman says that the sky is blue...you better go outside to check...because with his track record, it's probably not.
My concern with these plans is that Geithner seems to be trying to make whole the people and institutions that took huge risks and were highly compensated based on those risks. Yet now when the risks are not panning out they're not be forced to take the losses. That's the whole point of risk and the reason that those who take them are highly compensated (e.g. millions of dollars of compsenation). You can make millions or you can lose millions. It's being on the right side of enough bets and pulling them off successfully that makes you the money. It's quite convenient that when it doesn't that you can be made whole again (or nearly so) at the largesse of the government. It smells bad and screams of unfairness.
The autoworkers for one example and many home mortgage holders for another, are being asked to suck it up for their poor performance in negotiating a deal or for poor foresight into where the market was going. Yet, here are people and institutions that set up, facilitated, and fostered this Ponzi scheme and they are being made whole to the tune of trillions of dollars.
Instead of continuing to try to prop up the value of their worthless assets, maybe we really need to temporarily "nationalize" the banks, liquidate the assets, and find new owners for these assets in the private sector. Presumably, these would be financial institutions with better sense and stronger balance sheets who would pay a rational amount for those assets. Yes, there would be huge writedowns on these transactions as the value of these assets has come down… a lot. That's where the equity (stock) holders and bond holders lose. But, that comes with the risk in investing.
I am just a tech guy and not economically savvy and sophisticated like the folks who have commented.
But let me say this - the administration is insane, and getting more and more reckless day after day. This plan of Geitner's makes the government look like running a Gambling House in Las Vagas - with the government dealing a hand in the deck of cards in a game of Black Jack.
Help! We are doomed!
teutonic
But what to do when these two disagree? It is a puzzlement.
And so it is with the banks. Krugman believes that the government should run the banks. Well, haven't they been doing just that all along? Nationalization would be just more of the same only worse and without recourse. Like it or not, this must play out the same way it came in with Wall St. in bed with the banking committees of Congress. Will the offspring be healthy or stillborn, a bastard no one wants or a "Golden Child" with many doting parents? Remains to be seen.
As for Paul Krugman in particular. His sort of "journalism(?)" is what is responsible for the demise of broadsheet newspapers such as the New York Times and the Los Angeles Times. Political and personal agenda before financial fact and professional standards. A propagandist at best.
If anyone takes a haircut it will be the taxpayer.
On Mar 23 07:56 AM CautiousInvestor wrote:
> An essential point overlooked is that the pricing of these troubled
> assets has an impact on bank balance sheets. If they take a big hit,
> they will need to secure equity from a new source.
Seeking Advice hit the nail on the head. Behind all the obfuscation, one truth emerges: all the government's plans carry one common thread: those who were compensated for their gambles when they worked are trying to get Government to let them off the hook when they didn't work. Not a single executive has been fired. They can't protect their own money, yet we are giving our hard-earned money to them. Now try and tell me there's no insanity in there at all.
Ten years ago, we had a good solution to a similar problem. It was called the Resolution Trust Company. It worked. It bought toxic assets and sold them when the market recovered. Taxpayers fronted the money, but got it all back.. Banks that made bad bets were allowed to fail.
Why are we studiously avoiding something that worked before? Let the bad loans default, especially those for non-primary residences. Let the borrowers lose their credit. Sell the foreclosed properties to the RTC. They'll recycle those properties back into the economy when it recovers. It will sell homes in bulk at a discount to investors who pony up a lot of money. That's government and private enterprise working together. We did it before, only ten years ago! Are our memories so short?
I'm beginning to get the impression this bailout is geared more toward channeling taxpayer money into banks' pockets than anything else. Too many credible people are saying it won't work. (That is, people not in with the Obama Administration or banks.)
I also don't think that private investors will look at this as a free-ride. Remember, they have a fiduciary obligation to their fund investors (i.e. pension funds, etc.) and will face tremendous scrutiny from their investors on each and every deal they pursue. Capital is scarce for private equity and hedge fund players these days, and trust me, everyone wants to do a good deal. No one wants a repeat of the past 2 years.
On Mar 23 08:55 AM Lilguy wrote:
> Sorry, but I'll stick with Krugman--and Simon Johnson, Yves Smith,
> Barry Ritholz, Jamie Galbraith, Dave Merkel, Nouriel Roubini, Mish
> Shedlock, etc, almost ad infinitum......
>
> The list of knowledgeable, reputable economists and financial advisors
> who think the TARP 3.0 plan is a bad idea is staggering. Indeed,
> it is hard to find anyone who supports the plan outside the Administration
> and the financial sector.
>
> Like Krugman, most of these world-class minds are moving toward despair--and
> I think they are justified. We are about to spend trillions of dollars
> to benefit a few who knowingly ignored risk expecting bailouts.
> And the monies dumped into these financial institutions will do little,
> if anything, to stave off economic or financial decline. Moreover,
> we all will be paying for this for decades to come in inflation and
> higher taxes.
The better solution to the current financial crisis is Regulatory Forebearance including the Mark to Market Rules. Allowing forebearance in the implementation of restrictive clauses on M2M that forces reluctant banks to downgrade their assets based on the desperate actions of other banks or asset holders will allow banks to hold their assets closer to maturity price levels. Let time decide whether such assets are going to appreciate or depreciate rather than the prevailing market sentiment. If and when they do sell those assets must be the time when they mark them up or down their current mark to maturity prices. That is the only time that they either gain profits or incur losses. Base the asset price based on actual sale price of the said asset rather than the price others all willing to buy or sell. Those who buy or sell at any given time have their own reasons that may or may not be the same as the one who are holding their assets to maturity. During bull market extremes and bear market extremes, everybody know that there is a vast disparity between price and reality due to extreme greed or extreme fear. If assets are to be forced to be marked to market for the purpose of responsible accounting - it must be during normal economic conditions and not during extremely stressful economic situations. It is totally irresposible to mark prices when prices are completely out of synch with reality but rather dictated by irrational behaviors.
M2M is forcing every investor to become a short-term trader. Long-term economic viability will only be eroded as more investors abandon their true and tested ways of making money by taking lots more risks of becoming short-term traders. Invest in time rather than trade in speculative manias. Let the traders kill each other to determine who is the King of the Jungle.
The better solution, I believe, in order to solve the spiralling joblessness that is going to undermine both economic and political viability of the country is by attracting fresh capital infusion into the economy. Business entrepreneurship has been know to be a very effective method of creating new jobs. But since investors are not going to invest their hoarded cash while the economy is plummeting to unknow depths; the government must GUARANTEE the capital investors are willing to risk in an extremely uncertain environment. This will at least provide the investors the means to recover their initial capital even if they lose profit opportunity if the economy don't recover forever.
5 to 10 years investor capital guarantee against bankcrupcy will be more than enough time in order for the economy to recover above and beyond current levels.
Giving guarantee to investor capital will immediately stop the stock market potential meltdown. Stop companies from firing more employees with as more of additional funding that they despreately need becomes available. This in turn is going to stop gut wrenching consumer belt-tightening as less people lose their jobs and will in fact consumers will start spending to sustainable levels once new hiring starts as more capital got invested in new businesses.
Giving guarantee to fresh capital investments makes effective use of government size and credibility to the benefit of the economy and the whole population in general. It must be implemented covering all sectors of the economy rather than targeted to the "chosen" few that only results in dis-enfranchisement of the many.
In the end, the government may not even have to lose a single cent while providing the opportunity to gain bigger tax receipts in the future as the economy recovers to sustainable levels within the guaranteed timeframe.
Force the banks to sell their mortgage-backed securities to the government at 0.30-0.50 on the dollar. The banks will take massive losses but then be free and clear with cash to lend. The government then holds these securities until either maturity or a recovery in price and collects 0.75-0.80 on the dollar. This profit would more than pay off the debt used to purchase the assets, and could be applied to reducing that national debt. Taxpayers win.
Well, the banks obviously don't or they would sell them. Of course that would mean admitting that they actually insolvent, which we have recently been assured that they are not.
Refer to Rule #1
On Mar 23 11:11 AM mr freddo wrote:
> Paul Krugman is a professor at Princeton University, not Harvard.
>
>
The internet boom, proved to be just another false bubble. Thanks Krugman I shorted.
I recall him warning very early about housing bubble. Thanks Krugman I got out of bank stocks and shorted
He has mentioned the effect of the housing bubble on our society and how it would spread. I got out of entire market weekend before memorial day. shorted everything.
Thanks a Paul, I owe you a few beers
On Mar 23 10:17 AM TWOfold wrote:
> When has Krugman *ever* been correct? He wrote an entire book in
> the 1990's about how the U.S. economy would decline during the internet
> boom.
>
> He bashed President Bush for spending too much, and bashed President
> 0bama for spending too little.
>
> Krugman writes political articles...calling him an economist and
> giving him economic prizes is Orwellian.
>
> If Krugman says that the sky is blue...you better go outside to check...because
> with his track record, it's probably not.
On Mar 23 03:03 PM Chris B wrote:
> Ok, so we want the bank shareholders and bondholders to take the
> hit and not the taxpayer, right? We want to unfreeze the banking
> system and not have zombie banks like Japan, right? We want to avoid
> a depression caused by bank failures, right? Here's the solution:
>
>
> Force the banks to sell their mortgage-backed securities to the government
> at 0.30-0.50 on the dollar. The banks will take massive losses but
> then be free and clear with cash to lend. The government then holds
> these securities until either maturity or a recovery in price and
> collects 0.75-0.80 on the dollar. This profit would more than pay
> off the debt used to purchase the assets, and could be applied to
> reducing that national debt. Taxpayers win.
When has Paul Krugman ever had a positive view of anything?
If the economy continues to decline, he will continue to be correct. But if there is ever a recovery, he will certainly not forecast it. For a better view of economic cycles review Hyman Minsky's Financal Instability Hypothesis. Paul McCulley of PIMCO has an excellent recap here:
www.investorsinsight.c...
McCulley's full article is a part of the CFA curriculum and is shown here:
rolfe.winkler.googlepa...
On Mar 23 11:36 AM bricki wrote:
> Nice rant, but you must realize that ad hominem attacks are logical
> fallacies. It is much more useful to the gentle reader to actually
> discuss the actual reasons that a particular opinion may be right
> or wrong. After all even a blind squirrel may occasionally find an
> acorn.
>
> Not that I think it has happened in this case.... while the central
> question is whether we should behave as if banks are insolvent, but
> who can tell? Maybe the best thing is to take your lumps and assume
> they are.
>
> On Mar 23 08:34 AM Reardon Steel wrote:
I must object to any analysis of this proposed plan that does not discuss whether it has any real hope of accomplishing it's avowed goal of getting credit flowing again, and whether that's any kind of realistic or useful goal in the first place. Whether they do or don't have balance sheets full of "assets" that have no value because they have no market, these banks are simply not going to start lending again anytime soon and, even if they did, increased lending is not going to cure the current situation which was caused by orgies of debt in the first place. We need deleveraging not releveraging, in my humble opinion.
Second, I object most strenuously to the justification of these kinds of bailout plans on the political grounds I believe to be suggested in this article. If I understand the announced political rationale, it is that even though this won't make things any better, it's worth doing because it gets us closer to the day we can eventually propose the a really useful solution with any hope of getting it through Congress. To propose temporizing at the cost of $100'sB printing press dollars for supposed and (likely) false political purposes is to suggest exacerbating the problem, not advancing a solution. I hope I do misunderstand Mr. DeLong on this point, because that kind of "realpolitik" is truly disgusting.
I want a solution, I want a long term solution, I want the potential upside for the pain of having my money bail these fuc...ers out. I want those who profited from selling what they knew was bad to have their profits taken away and get thrown in jail. I want those who profited from on the way up before, to get cut out of any profits generated from my tax dollar. I don't care what it's called getting there. I care that it is gotten done.
Look folks if for those who call Krugman a socialist, then you have to advocate a capitalist solution. Let the banks fail, no governnemt money at all. The should have failed a long time ago. If you had wanted a real capitalist solution Greenspan would have cut interest rates to the bone and we wouldn't have gotten into this mess. Or long term capital would have been allowed top fail and much of this excessive risk taking would have been averted in the first place.
You mean you want a "capitalist " solution that makes you money!!!
Please don't argue this capitalist BS when you benefit you like the "socialist protections provided by governemt", bet when government works against you it is "marxist" or "socialist"
i will tell you all that your intellectual credentials are inferior, and your bias is evident.
Respectfully, I'll have to disagree with you on the M2M issue. I believe every investor ought to be able to know the true value of his/her market investment at any given time. And this requires a fair valuation of all assets the company holds--except in the case of assets it intends to hold to maturity (of which there are few). This is pretty much what FASB calls for, and it gives "wiggle room" on those assets with thin markets. Hence, we have some "mark to myth" Tier III assets on the books.
This doesn't undercut strategic investing as oppose to short-term trading as you suggest. It just enables me and other potential investors to more fully and accurately understand the value of the firm at a given time. It is up to us to judge whether marked down assets will rise in value in the future (a good investment)--or be written off all together (not so good).
In my view, anything that reduces transparency not only makes it more difficult to assess a firm's value, but it greatly erodes confidence and trust. And why should I invest in such an entity??
Arthur Laffer, Jude Wanniski, Dick Cheney, Don Rumsfeld?
They did a fine job of running this country into the ground.
On Mar 23 12:59 PM Steve in Greensboro wrote:
> Generally, you can't go too far wrong assuming whatever Paul Krugman
> says is complete garbage. The same is true of Brad DeLong.
>
> But what to do when these two disagree? It is a puzzlement.
The banks will sell very few toxic assets if any at all because their bid reserves will not be met.
www.portfolio.com/view...
So, what this author is saying in point #3 is that he is okay with the government just printing money and buying the assets directly, and that is the reason this plan is fine. However, this plan is not being sold as a print and give-away of money to the people that made the mistakes, even if this author seems fine with that. And of course, Krugman is seeing right past the sham and calling a giveaway/subsidy/fleecing a problem.
If the response to any plan is to say "we can always print our way out if we fail", then that is very likely pretty bad plan to start with.
I think I'd rather partner up with Tony Soprano.
On Mar 23 08:11 PM 367851 wrote:
> Why was Lehman allowed to fail and Goldman Sachs wasn't?
If you can't attack the message, deal with the messenger, huh? Pretty lame stuff..
this is a link from bloomberg from a BOA analyst. I doubt he is in the Krugman cabal
Was getting in the # 5 position important enough to you that you needed to use multiple accounts to do it? You posted only 1 comment the morning of the 23rd, and a previous comment 2 days prior on the 21st. Both of those netted you only a 5 points. Other than that, you posted nothing since the 19th (6 days ago), yet tonight you jumped 70+ points in less than 30 minutes to get past Chris B. Do you really think that will help you sell more paintings?
On Mar 23 11:11 AM mr freddo wrote:
> Paul Krugman is a professor at Princeton University, not Harvard.
>
On Mar 23 08:31 PM User 357469 wrote:
> I guess Goldman Sachs put more money in the pockets of the right
> politicians.
>
> On Mar 23 08:11 PM 367851 wrote:
On Mar 24 10:43 AM john redmond wrote:
> Guys! why worry so much about details. There are smarter men then
> you in Washington who will fix all of our problems at no cost to
> any of us. You wanted "Change we can believe in" and you got it.
> Sleep tight.
On Mar 23 10:17 AM TWOfold wrote:
> When has Krugman *ever* been correct? He wrote an entire book in
> the 1990's about how the U.S. economy would decline during the internet
> boom.
>
> He bashed President Bush for spending too much, and bashed President
> 0bama for spending too little.
>
> Krugman writes political articles...calling him an economist and
> giving him economic prizes is Orwellian.
>
> If Krugman says that the sky is blue...you better go outside to check...because
> with his track record, it's probably not.
On Mar 23 06:11 PM mediapro wrote:
> So, to whom do you intrust our country?
>
> Arthur Laffer, Jude Wanniski, Dick Cheney, Don Rumsfeld?
>
> They did a fine job of running this country into the ground.
On Mar 23 07:02 PM j_remington wrote:
> OPINIONS DON'T MATTER
>
> The banks will sell very few toxic assets if any at all because their
> bid reserves will not be met.
>
> www.portfolio.com/view...
The Government has different risks from an investor. The investor does not guarantee bank depositors, pay unemployment or pay the costs of keeping "our best and brightest" in gaol.
The risk to the Government of a Geithner failure is that things don't improve. If it suceeds a little bit - (that's my guess) it will probably have been worth doing.
The lowest risk solution is to solve the problem with a new and comprehensive regulation regime for banking and finance. Any plan that ignore the foundations will eventually be proved irrelevant.
On Mar 24 02:23 PM User 357469 wrote:
> Why do I not find that comforting? I guess its because it isn't.
> We cannot spend our way out of the problems we are in. Increased
> spending will only make them worse. It is my position that before
> this ends as much as 90% of all personal wealth in America will be
> destroyed and we will be left with nothing but a debt that none of
> us can even conceive of repaying. Change? Yes, there will be change.
> Believe in it? Sure, it will come to pass. Will it save us from our
> enevitable fall? Absolutely not.
>
> On Mar 24 10:43 AM john redmond wrote:
The problem most private investors see is that banks have an overinflated sense of certainty as to how well the underlying mortgages will perform. They just can't believe that they are going to get 5 - 6X the number of losses they originally projected, but that is where the numbers are coming in. Some of them, as late as last fall, even believed that housing prices would rise in California this year.
They are in serious denial, this program won't help them unless private investors are willing to overpay due to the huge taxpayer subsidies.
The above is a purely *economic* point, as 0bama and Krugman share the same politics, yet disagree on this particular bank rescue plan.
I disagree with Krugman, taking 0bama's side that the Markets actually can price assets accurately, especially when done in volume and even moreso when decent information is available (another part of the bank rescue plan).
Yet you are intimating that my disagreement with Krugman is political. How is that possible?!
One can either agree with 0bama or agree with Krugman on this economic bank rescue plan, but either way both men share the self-same politics.
Have you really thought about your "political" claim, or was it simply the most convenient, knee-jerk reaction that popped into your head?
Can you defend your claim that my disagreement with Krugman's economic analysis is somehow political?
I doubt it.
I have taken your measure, and found you wanting, Robert Ash.
On Mar 24 03:47 PM Robert Ash wrote:
> I'm guessing you disagree with his politics. On economics his reputation
> seems deserved, as I haven't been able to find serious fault.
>
dailybail.com/home/the...
In summary taxpayers get little upside but all the downside. Bank bondholders absorb none of the risk or losses. Why do GM bondholders have to take 70% hits on their bonds but bank bondholders get to take the A-train and float with the hotties in first class ?
Political connections. And that is truly disgusting.
All bonholders of failed institusions should suffer. And for me it's a non-starter until bank bondholders are asked to bring their own Draino and join the unclog. We'll pay for the rubber gloves, the wetsuits and the kneepads but they have to get covered in shit like the rest of us.
stuckinstowe.com
The toxic securities plan is more cryptic, and equally bad. IF the purpose is to restart lending, the obvious route is via Loan Participations by the Govt. in NEW loans. But then, the Fat Cats do not get another big slug of Govt money to bail them out. Prof. Krugman is right for more reasons than he has stated so far.
I do not know how well Geithner's plan will work, but Krugman's (and Roubini's) alternatives to nationalize banks is just pure lunacy. US is not Sweden, our banks are 100s times larger and multinational unlike theirs.
The important fact we all must acknowledge that taxpayers are on the hook no matter what as do need financial system, so the best the government can do is to limit taxpayers exposure while paying-off hedge funds to take off toxic crap from banks' balance sheets.
And stop kissing Krugman's ass just because he got a Nobel price. Yasser Arafat got a Nobel prize too.
On Mar 23 02:13 PM private equity wrote:
> I think one point that people may have overlooked is that, with regards
> to the "Legacy Securities," what investors would be purchasing are
> AAA rated securities. Obviously, the counterargument is that with
> legacy securities, AAA may not really be AAA with the lax underwriting
> standards of the past few years. That being said, AAA CMBS paper
> is trading cents on the dollar and implies an extremely high default
> rate on the loans that back this paper. Commercial real estate fundamentals
> are weakening, but the disconnect b/w the implied default rates of
> discounted AAA paper and what investors perceive to be the actual
> default rate will be can make for a fantastic investment. This is
> not "toxic paper" that is being sold. This is the top tranche in
> securitized loans, where a lack of market liquidity has resulted
> in fundamental mispricing.
>
> I also don't think that private investors will look at this as a
> free-ride. Remember, they have a fiduciary obligation to their fund
> investors (i.e. pension funds, etc.) and will face tremendous scrutiny
> from their investors on each and every deal they pursue. Capital
> is scarce for private equity and hedge fund players these days, and
> trust me, everyone wants to do a good deal. No one wants a repeat
> of the past 2 years.
Do you really believe that the Federal govt was smaller when George Bush than when he came in? If so, with all due respect, you're completely missing reality.
Or maybe this qualifies as one of those "politcal" statements as opposed to "economic"?
On Mar 24 03:59 PM dcb wrote:
> I think the problem is you can't trust either. In no way shape or
> form would I like my ranting to be viewed as support for Mr. Bush.
> Ideally the Republican's serve certain special interests that oppose
> democratic interests. When the dems spend too mcuh the Rrp come in
> and cut the size of Gov't. Then when this goes too far the dems come
> in and spend. Unfortunately, the Rep's didn't cut on the spending
> side and left us really behind the eight ball for the dems spending.
> One thing I have learned from the crisis is that both parties serve
> the interests of big finance and that throws the moderating balance
> between the two parties off.
We don't know enough to judge whether the Geithner plan will work. So far, the market seem to believe it will. The market might change its mind if toxic asset sales don't take place fast enough, large enough, and at the right prices.
A trader who guesses right can make a lot of money.