The Microwave Society's Answer to the Economy Is Half Baked

Perhaps the entire problem with the economy is in the attention span of people. We expect everything to be accomplished in a short period of time. Whether it is turning things around or re-regulating the financial industry as a whole, it should be accomplished in a time frame of divine proportions.

The unveiling of the Obama Administration proposal to overhaul the financial system to prevent future mishaps such as occurred last fall comes after a carefully orchestrated media assault on the very idea of a depression leading up to the G20 Summit. Once more, a grandiose plan to solve all the problems just needs quick congressional approval.

We have been here before, several times, and always it seems another plan is needed, the plan presented is not fully thought out and is rushed into action to show that something is being done about a problem that is not fully understood.

Treasury Secretary Timothy Geithner gets high marks for acknowledging the problem in his testimony before the House Financial Services Committee. “To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game.” The problem is the administration’s proposal will represent a major expansion of federal authority over the financial system. Pushing for quick action, the administration hopes to have the House vote on the measure by next week.

Slow down. Like every other program that has been crammed down our throats since the original bailout (or else there would be chaos in the street) in 08, it has to be done now, just the way the administration wants it, in order to be effective. Well, I can’t argue with the effectiveness, just with the fact that it’s never the effect that we seem to be looking for. For such a sweeping change, shouldn’t our lawmakers take a few months to make sure they understand just what they are doing?

Part of the regulations would cover all trading in those financial derivatives that are blamed for most of the problems we currently are experiencing. Even the people who wrote the contracts for these things don’t understand them and suddenly the Obama Administration should be trusted in knowing not only what they are, but how to control them? Even Securities and Exchange Commission Chair Mary Schapiro points out that “the devil is in the details” when she expressed concern that “we don’t create a monolithic entity” that would diminish investor protection.

Creating a single, systemic, risk regulator to monitor the biggest institutions and suggesting it be under the auspices of the Federal Reserve is nothing short of stupidity. The Federal Reserve is supposed to handle the money supply, instead it is currently leading policy in trying to tackle the depression? When did the Federal Reserve become the fourth branch of government? We have now entangled Wall Street, major global financial institutions and the US government into a monster that is generating trillion dollar per year deficits while presenting an Alfred E. Newman face to the problem. In the background, the song “Don’t Worry, Be Happy” is playing at full volume.

It’s not that the administration and congress is ignoring the problem of the economy, it is the fact that no one has the magic bullet to cure all the ills, but we are going to use whatever bullets we can to see if something might work. Sure it’s a waste of good ammunition, but at least we are doing something!

This proposal needs some serious, deep thought. CDOs became a problem because the underlying securities developed problems. It expanded because of financier’s repackaging of securities into new groups to sell to others who did the same thing. Now they are trying to unwind these instruments so that they can reduce the risk and exposure. This is all easier said than done as all parties must agree to the restructuring or it becomes a bottleneck. Geithner is trying to use a sledgehammer to solve a problem that like a diamond, requires extensive research into finding the right point to strike to break the problem, not turn it all into a sparkly dust.

Comments

[Bemused.alpha:]

Thank you for an excellent perspective Mr. Zimmer. As the saying goes, we've seen the enemy and it is us. When we as a society confuse motion with progress and machine guns with sniper rifles, this is what we get and deserve. The problem, unfortunately, is if we wait long enough to analyze it, special interests and lobbyists (er, Congress), will inject whatever the administration comes up with so much junk that the cure ends up killing the patient. I'm not sure which is better. Good luck to us all.

Mar 27 05:27 AM

[mrresponsible:]

In the psychological world, our culture can be defined as compulsive. It can be seen everywhere! One thing I have noticed in leadership positions, is people have to really be secure with themselves to brainstorm and be creative. And it takes time!

Mar 27 10:37 AM

[wakeup call:]

The problem with CDOs is not the underlying paper. The problem with CDOs is that the discount reflected a potential perception of possible market problems. If you look at the CDO valuations in relation to the actual portfolio performance you will see discounts that are no relection of actual performance. To remove this anomaly from the analysis take away mark to market accounting then deal with actual loans that do go bad. A bad loan is fixable since there is something tangible behind it. A CDO is a synthetic and difficult or impossible o fix.

Mar 27 11:01 AM

[Carlos Lam:]

The underlying assets that are currently impairing the CDOs' values are simply worth less than what the banks thought they were. The banks assumed that real estate prices would continue to trend upward, but they didn't. Any real speculator would accept that his assumption was incorrect, sell the underlying assets at their fair value, take the losses, and go on.

The banks, though, don't want to face the consequences of their actions, and they are sure that they won't have to do so because of the "Greenspan put." They remember that 10 years ago the government didn't let Long Term Capital Management go under and instead bailed it out. They bet that -- in the end -- they will continue to get bailed out. So far, they are right!

The banks don't want to sell their "legacy assets" (if that's not Orwellian, I don't know what is) at their fair market value because they simply don't want to take the losses. Until either (a) the banks man up & take losses (highly unlikely) or (b) the taxpayer foots the bill (very likely), these assets will continue on the banks' books.

Mar 27 11:43 AM

[CJJ:]

Maybe someone needs to explain that people don't need money as an enticement to do work or to do great things.
The people who created this mess and the pundits and bloggers who talk about it are overwhelming all part of the same ilk. They are slaves to money/assets and that drives every idea they have.
Once they realize their human capital is what really matters maybe then they'll get to some solutions.
This what is the crisis, solution, scandal of the moment, what can I complain about, whine about right now crap is the true crisis.

Mar 27 02:25 PM