If Stupidity Got Us into This Mess, Why Can't It Get Us Out?

To say that these are unusual times would clearly be classified as a “marvelous grasp of the obvious,” but just as you find the best shells searching the beach after a storm, there has been at least one benefit to the tumult the world is struggling through: the number of high profile people contributing their thoughts in the media on various ways to solve the multiple challenges we face.

Advisors, cabinet members, professors, market practitioners, both past and present, have supplied a constant stream of ideas on how to overcome various aspects of the obstacles that must be surmounted for a meaningful recovery to begin. It has been a case study as none ever offered by Harvard B-school with a quorum of adjunct faculty no one could afford to pull together (especially not in these times). All there and costing nothing more than the price of the paper and the time it takes to read it.

There are so many submissions in fact, that on occasion, a point-counterpoint situation occurs. That is pretty much what happened recently between a piece published by Martin Feldstein, Chairman of the Council of Economic Advisors under President Reagan and Harvard professor and James Keller, former head of structured products at UBS. Understand that these were not published in the same paper and it was only after reading them both that the idea came to do a little comparative analysis.

Writing in the WSJ this past weekend Mr. Feldstein’s overall impression of Tim Geithner’s Public Private Investment Plan (PIPP) is a positive one. He champions the Treasury’s idea of getting private investment capital to determine the price of the assets and having the taxpayer go along for the ride with the FDIC providing the financing. Making the specific point that one of the key reasons this might work is that no one has to ask congress for the money.

From here, Marty seeks to put his own twist on things and adds a few tweaks. The first of which is that the Treasury must be willing to inject capital into the banks that sell assets as the prices the assets fetch could be a tad different than the price they are currently assigned on the bank’s books. (Imagine that!) The capital, Marty thinks, should be in the form of preferred shares or perpetual debt.

Second, MF raises the point that the banks now own $3TN of residential mortgages, $1.5TN of corporate real-estate loans and $1TN of consumer debt ($5.5TN in total) and he believes getting all of this off the books is going to take a wee bit more than the $0.5TN (9% of total assets) currently planned for the program so he suggests increasing the amount allocated.

Thirdly, Marty reiterates his earlier solution of having the Government issue “mortgage replacement loans”. This is where Uncle Sam offers homeowners with negative equity; low interest recourse financing for 80% of the existing mortgage, wiping out the existing one. The benefits here are lower payments for the home owner and a 20% cushion to keep home equity positive even if prices fall a bit further reducing the likelihood of defaults; emphasizing that participants would be personally liable for the money, a big difference from current mortgages.

Mr. Keller has a few problems with the PPIPlan but since the Keller piece was published in a different paper (Barron’s) and not specifically written to refute the professor Feldstein’s piece it stands on its own as another view point.

I must first say that James is a bit more opinionated and not quite as approving of Mr. Geithner’s plan as Marty’s was but then who knows with Larry Summers already in Washington, Marty might be waiting for the nod and Harvard might become the new Goldman as a source of financial intellect.

In any case one of the key issues James Keller has with the PIPP is the pricing of the assets. I will quote JK here because nothing I could write would sum it up so succinctly.

“One of the principal aims of Geithner's plan is to provide a market where none exists, so that these securities can be valued and traded. But it is not true that nothing is trading because nobody knows what things are worth. Nothing is trading because too many people know what things are really worth.”

As such Mr. Keller believes:

“Banks don't want to sell to astute investors, who are bidding conservatively for something that may continue to fall in value. Banks want to sell to investors who will overpay for noneconomic reasons.” and he thinks “Geithner proposes to give them that chance.”

The other issue James has is the structure of the deal itself as from his perspective, it looks a lot like a CDO which, he says is “the very structure that supposedly caused all the trouble.” He adds that cheap financing and leverage also added much fuel to the fire and wonders why if, given the combo above, investors would act any differently this time around than they did last time and the specific act he is talking about is the overpaying for financial assets by investors.

Keller closes with a quote from none other than Will Rodgers asking "If stupidity got us into this mess, why can't it get us out?"

I will leave you with that one to ponder for yourself.

Comments

[fireball:]

because the stupidity is entrenched in government and the guilty will never admit the truth.
distraction is the strategy of the day. while the middle class continues to be drained.
this is more about power than piling up fiat currency. consider the assets purchased by the fed with worthless paper.

Apr 07 08:44 AM

[TeresaE:]

Because the stupidity is entrenched in our country.

For a country that spends the most per kid on education, we are an undereducated lot that no longer have the ability to use logic or reason.

For a country that spends the most per citizen on health care, from pill sales alone we are the sickest country on earth.

There are correlations, in both instances we the people have capitulated to the "experts" who don't live in the real world and are only "expert" at stealing our middle class and gifting our former greatness to themselves and the third world.

Apr 07 08:55 AM

[Allan Frain:]

Not stupidity, but conniving.

Better question--"How much deeper will the connivers be allowed to drag us into this mess ?"

Apr 07 09:02 AM

[MisterPhi:]

I'm more likely to stand behind Keller's opinions, since he was an investment banker and knows exactly how the system shafted the less aggressive / informed / astute investors ("sheeples").
How do we get out of here? Someone suggested a "stupid" answer to me just the other night, namely "...Claw back their ill-gotten profits, all the criminal bonuses of the past 10 years, and have all these "stupid geniuses" serve 10 years' community work..."
It doesn't sound less stupid than allowing banks to missstate what their stupid investments are worth (not)

Apr 07 09:09 AM

[huskerbob:]

MisterPhi - that idea may not work much better but it would be many billions cheaper and infinitely more satisfying.

Apr 07 11:12 AM

[retiredengi...:]

godd article. having a balanced government so they can't do anything is the best cure as this time. the banks will hold on to their worthless house loans as long as they think the government will bail them out. if there is no bail out the free market buys up the junk and the banks take the hit they need to because of their bad lending practices.

Apr 07 11:40 AM

[pacman1947:]

MisterPhi and huskerbob, you guys have it right. Most of us would prefer to see the people who caused this debacle to pay the price. I'm more than willing to have my taxes raised to pay for white collar cops to seek out these criminals, for DAs to try them and prosecute them for their crimes, for courtrooms and juries to reclaim the stolen assets and claw back the outrageous bonuses, and the prisons to hold them for life.

I am not happy with having my taxes raised to balance the books at the financial institutions who caused this mess.

Apr 07 11:50 AM

[bluetick:]

TeresaE, You could not have said it any better.
I cannot conceive how the masses who populate the greatest nation on earth, with the most opportunity for those masses to prosper, degenerated to the level of stupidity present today. You see it in personal finance, the lack of effort in raising their children to be responsible citizens, the lack of honesty and work ethic, you name it.
We have even let our country come to be run by professional politicians who largely have no clue how to do anything constructive outside getting reelected, and we accept that fact while we do nothing about it but moan.
This country has literally thousands of 80 yr old millionaires who made every penny by hard work, common sense living, and the gift of a little logic.These same men were barely educated, many in two room schoolhouses, likely for 8 or fewer years. Yet they succeeded far beyond their wildest dreams, while many of our people don't have enough sense to even avoid buying lottery tickets or taking on debts they could never begin to repay. How did this proliferation of sheer stupidity get this entrenched in our country?

Apr 07 11:59 AM

[Mutual Fund...:]

Yes, stupidity is probably the reason we are in this financial mess. But who's the most to blame? Gov.- Corporate ceo's - Consumer?

Well, I guess we all know the answer to that one...Everyone !!!

I came across a news item today that should save us all...
A powerful U.S. lawmaker is going to introduce a bill that will stop banks from loaning money to people that can't pay it back. WOW are we ever on the road to recovery now..

See story on my webpage www.mutualfundwealth.com/

Doug T.....The mutual fund guy

Apr 07 12:48 PM

[henarl:]

Punishing the guilty with jail time and large fines would be extremely satisfying but it will never happen because the people that would be in charge of the prosecution are part of the same insider clique as the ones they would be punishing. This ruling elite are not stupid but rather simply self serving and avaricious.

Apr 07 12:51 PM

[Don Mack:]

Expert?! "Marty" was also on the board of AIG for about 20 years, overseeing that company's successful fleecing of the US taxpayer.

Apr 07 01:42 PM

[Mike10613:]

They need more powerful computers, so the stupids can do more stupid things in the same amount of time; or the same number of stupid things in a fraction of the time. Things will be back to normal by about 2020 and the traders will be trading again on rumour heard in Starbucks instead of reading annual reports. They will drive BMW's because cars made in their own country isn't in vogue. They will pose with Iphones or their 2020 equivalent and be just as stupid.

Apr 07 02:29 PM

[Boldhawk:]

Jim Delaney, Readers,
Will Rogers’ sarcasm aptly disarms logic to make the poignant statement that we must not rationalize our leaders’ behavior by generously labeling it stupidity, which is the immediate reactions of people who honest themselves, can’t imagine that there would be those who do exactly as they intend to get the result they wanted.
Things have taken place according to plan, and have come out nearly as well as expected: The financial community dictates to and owns the government, and they will NOT under general circumstances accede to the demands of people, except to the extent necessary to retain their power.
TARP was urged onto the people by a member the financial community club, Paulson. The entire Obama administration is filled with club members, friends of Reagan’s trickle down economics. Both TARP and ARRA are typical examples of trickling down the recovery, all trickling down by being funneled through the financial community, who simply doesn’t do what the Fed and the government says they expect it to do. They mount and run impenetrable walls of legal interference just to obviate the application of the public’s intention. AIG bonuses are on their way to be paid, and after a few months of legal legerdemain when people will have forgotten, they will have the right set of public relation statements that people will doubt, but will have no choice but to accept. Actions are the manifestation of intention.
So, let me end with another one of Will Rogers brilliant statements from his book, The Illiterate Digest: Be thankful we're not getting all the government we're paying for.

Apr 08 11:21 AM