Why This Bailout Can't Work - And What Will

The Treasury plans to borrow to fund entities that will buy up to $700B of mortgage-backed assets, which if marked to market, would bankrupt much more of the banking system.

Fed Chairman Bernanke breathed life into the faltering plan by explaining to Congress his perception of “fire sale vs. hold to maturity pricing”; intimating that the ultimate cost to taxpayers will be a fraction of this amount as the assets are held long term and sold as real estate and mortgage-backed securities prices recover. Banks currently holding these overvalued assets get the bailout cash and resume receiving loans from other banks, due to their reduced credit risk, and making new business and consumer loans. Mortgage assets originated on or after March 14, 2008 are eligible; and participating sellers will give to be determined equity stakes to the bailout operation. Since no government entity has anywhere near the cash to do this, the national debt limit has been correspondingly raised.

This approach cannot work because:

• It retains the bad assets on the economy’s balance sheet at inflated prices using fresh capital (while shifting them from the imprudent lenders’ balance sheets (who created them) and rewarding them with this capital). This compromises future growth and leads to further misallocation of capital at the hands of lenders with a losing track record.
• It does not address the prices/valuation of real estate, stocks and risky bonds; all of which will continue plummeting; further compromising the asset side of the US balance sheet while the liability side remains – and drives hundreds of billions more in net loan losses. The asset side will be further undermined by the collapse of commodity prices in the face of plunging global demand.
• It does nothing to induce marginal real economic activity/growth that is critical as the US and world economies face a deflationary depression.
• It stratospherically increases government liability at a time of plunging tax revenue from all sources, destruction of loanable capital, and growing liability to fund unemployment claims and the like. This liability can only be met by borrowing, taxing or fiat money creation – each of which has major negative consequences.

Clearly, the price paid to current lenders cannot be one that bankrupts them or forces them to look for so much dilutive and skittish capital that it cannot be quickly raised. Even with the Treasury’s cost of capital advantage over any other buyer; this requires over-paying far above current market prices or the plan cannot achieve its goal.

Not addressed is the potential fallout from rising delinquency and default rates of trillions in other consumer and corporate debt; nor the assumptions about the direction and extent of change in future home prices which back these and remaining unimpaired mortgage assets. The problem has been framed as a temporary asset under-pricing phenomenon to be corrected by maintaining private solvency and liquidity with government as the only market maker. In the case of mortgages, the debt is backed by physical structures which are both priced far below book value in the market and which require cash out flows to maintain, insure and pay taxes. To the degree that loans are paying neither interest nor principal, the holder must cover the cash outflows.

The fundamental assumption behind this plan is most curious. Some maintain that the ultimate loss may not exceed $250B – it is therefore to be believed that this amount is causing the havoc in the financial markets and the risk to economic growth. This should be viewed in context of the identifiable net tangible and financial assets of the US economy which include $32.4T of non-financial debt ($51T total debt), $19.4T of public equities value, $11.1T of net real estate value, $7T of foreign-owned assets producing domestic GDP, plus trillions more in public infrastructure, private company equity and net tangible assets; etc. which together with human capital generate our $14.4T annual GDP. 

Is it plausible that less than .36% truly bad assets in relation to identifiable total financial and net tangible assets is causing the jeopardy we face? Or, is the impaired and rapidly becoming impaired human and capital asset base far larger than this; and so, poses a lethal danger to real growth?

1. The Government’s Incremental Liability and Negative Growth Effect

The liability of the Fed and Treasury incurred this year is not limited to the amounts so far lent or sought for problem loan buyouts; but extends to the full balance sheets of the entities it has taken control of including Fannie Mae, Freddie Mac, AIG…and the FDIC… up to the full $4.4T of insured bank deposits.

• Fannie Mae (FNM) + Freddie Mac (FRE): $5.4 trillion in on the books assets and insured loans sold to and held by others and in addition any derivatives exposure
• AIG (AIG): $1 trillion in assets plus off-balance sheet derivatives exposure
• Bear Stearns (BSC): $30 billion
• Asset Buyout Funding Sought: $700 billion
• Fed term lending and swap facilities (PCD, TAF, TSLF, Securities Lending, SFP and currency swaps): $535 billion
• FDIC additional funding exposure est. $150B on top of the $45.2B the FDIC has (of which as much as $24B could go to WaMu (WM) depositors alone) with little remaining to cover losses on the other $4.4T of insured deposits; leaving $2.6T of uninsured deposits. This leaves an FDIC capital to loss coverage ratio on insured deposits of .5%.

Approximate total asset exposure: $7.8 trillion (excluding insured deposits; and except to the degree to which the new $700 billion buyout facility would purchase some assets now pledged as collateral under the above Fed programs). The liabilities of these entities remain unchanged.

The net worth of the Fed, FNM, FRE and AIG combined is about $179B. The Treasury has negative net worth and depends solely on taxing, borrowing or creating money to fund its operations. The asset to equity leverage ratio of this rescue operation appears to be at least 43.5-fold (compare to AIG’s 13.5). This implies that an asset loss ratio of more than 2.3% wipes out all equity. For purposes of reference, the US banking system has assets of $11.03T, net worth of about $1.22T and cash and near cash on hand of $266B. The rescue operation must also meet cash outflows based on debt service and other costs while the inflows from assets held may be substantially less while they are held long term in hopes of sale at higher prices.

What is a fair value of the $7.8T in assets at risk? How much of those assets are performing (amortizing principal and paying interest)? … and for how long in a plunging global economy? – are all fair questions from the sponsoring taxpayers.

As a consequence of purchasing bad mortgages, the Treasury must fund on-going maintenance, insurance and taxes stemming from a bailout portfolio; which, at say 4% of book value (check the costs related to your own home as a percentage of value) could amount to $28B/year which would exceed the cost of the borrowing at 3% or about $21B. This cash outflow of about $49B would be somewhat mitigated by interest and principal amortization from the bad asset portfolio – which is minimal; or it would not be for sale. Meanwhile, the $700B bailout funds could have been invested in real economic value producing activity earning at least 5% or $35B; resulting in a real annual loss to the economy of up to $84B/year – assuming no net capital loss on the bad assets and not counting management fees.

Compare this to ideal real GDP growth of 3% or $432B per year on a $14.3T nominal economy. The cost of this part of the bailout interventions alone is at least a 20% reduction in real potential GDP growth.

The government has taken on this incremental liability at the precise time of plummeting tax revenue from all sectors, destruction of loanable capital, and rapidly rising unemployment claims liability. The likelihood is that prime and Alt-A mortgages will continue to sour; as will the $2.6T of consumer, $2.2T of state and local, and $10.9T of corporate debt. Loans made by American banks to foreign entities have no better prospects considering the well-publicized home appreciation rates in Europe and its faltering growth prospects.

2. Leadership

The Fed Chairman and Treasury Secretary as well as government economists have failed to see the largest financial crisis since the great depression coming: first denying a crisis was imminent as recently as the turn of the year; then repeatedly claiming it was contained and solved after a string of government interventions. Also, encouraging FNM and FRE to continue lax lending and mortgage insuring operations just months before taking them over. This is not to single out our leadership, because very few private forecasters saw this one coming either. 

There is no evidence that the crisis was foreseen, or that even now its scope, nature, and solution are understood and known. Has leadership credibly changed? Have new and proven tools emerged to enable the leadership to deal with this crisis?

3. The RTC, GDP and Financial Markets

In August of 1989 government created the Resolution Trust Co. to liquidate some $394B of bad S&L assets at a loss of between $85B and $125B; implying a 27% loss on book value. These assets were not purchased, however, but assumed for liquidation. Nominal GDP was $5.5T at the time; compared with $14.4T today.

By Q3 of 1990, the economy entered five quarters of the severest recession since 1980. In early August of 1990, Iraq invaded Kuwait and the price of oil briefly spiked. The stock market held nearly flat from Q3 of ’89 to Q4 of ’90 before rising sharply. However, the marginal income tax was cut from 38.5% to 28%; thus boosting asset valuation, and the corporate tax rate was cut from 46% in 1986 to 40% in 1987 and 34% in 1988 – thus driving after-tax profit higher and reducing new investment hurdle rates. Tax policy was already providing strong tailwinds to the economy. According to OFHEO, real estate prices were rising coming into the RTC formation and essentially held stable for the several years following. Case-Shiller shows same house prices rose 8% in the year before the RTC formation; held steady for some months, then fell 8% in the three following years. There was nothing like the price appreciation preceding the current state of housing prices.

It is very likely that the US is in recession now and that the relationship of total bad assets to GDP is far higher. No action that affects either asset prices or real economic activity has even been discussed.

4. Prognosis

The author expects the near contemporaneous global further collapse of all major asset classes: stocks (earnings), risky bonds (higher risk spreads), real estate (return to constant real valuation and effects of recession, loanable funds dearth), oil (demand fall), gold (deflation) – and most other commodities (demand). Especially hard hit will be export-dependent nations (China, Lat Am, Russia (the latter two due also to collapse in the price of oil)), and India. If the US government continues to panic and pursue ineffective policies this is unavoidable. The money supply inflation option, if pursued, would destroy the dollar (if not equally matched abroad), further crush equities, increase bond yields and the nominal cost of debt and boost gold.

This assessment rests in part on an estimate of the amount and degree of impaired financial, tangible and human capital in the economy, its trend, and the lost return on these assets compared to potential real GDP growth.

Those interested in asset valuation are invited to research Required Yield Theory.

Historically, global financial crises spawn large wars.

5. The Only Solution

The only solution to this worsening global crisis is to immediately and simultaneously boost asset valuation and growth while writing down bad assets to market. Assets are valued based on a required, expected, real, after-tax return. Cut taxes on investment gains to immediately boost or mitigate the decline of asset prices. Cut taxes and regulatory costs on real economic activity to spur its formation.

Asset Valuation:

• Eliminate all gains taxes on real estate and cut state, local and school property taxes. Offset lost revenue, which anyway is plummeting, by firing non-essential state and local workers (who are supported by tax dollars and generate dubious real economic value) so that they may be redeployed in the private sector. 
• Eliminate capital gains, dividend and interest taxes on stocks and bonds; cut the marginal tax rate on gains in tax-deferred plans (currently the income tax rate). The cost of debt and equity falls/prices rise or declines are mitigated.
• Do not attempt to inflate the money supply since financial asset prices will collapse more because investors price assets so as to obtain a real, after-tax return.

Growth:

Contractionary forces must be met with expansionary measures:

• cut the corporate income tax; thus lowering new investment pre-tax return rate hurdles and spurring investment
• eliminate the minimum wage; thus increasing return on investment and spurring hiring
• reduce regulation impairing internal and cross-border trade
• Fed Funds Rate: this rate is economically meaningless as there is compelling evidence that the Fed has to follow the market, which sets the short-term rate. Based on the current 3-month Bill rate; the Fed must soon cut massively - which will be a mere formality.

Allow banks with poor assets to fail. Let the insured deposits shift to well-run banks that allocate capital prudently. If this is made clear, uninsured deposits will quickly flee the bad banks; exposing them as surely as WaMu was. The market will bid on the assets of these failed banks; not taxpayers.

Long term, pass legislation qualifying only citizen taxpayers to vote – those who have an economic interest in the success of this country and in the prudent allocation of their taxed earnings by their elected representatives.

Disclosure: none

Comments

[David White:]

You have made a few valid points. However, what you are advocating would cause more than just political unrest. There would be rioting in the streets, etc. There would be good reason for this. Social programs could not exist under your scenario. School budgets would have to be drastically cut. It seems likely police and fire budgets would have to be cut also. However, you would be needing them more with the increased violence. Think again!!!

The U.S. solution to its economic problems today would seem to stem more from energy and imports. The largest contributor to the trade deficit seems to be oil imports. Cars are probably a close second. Congress's recent support of the U.S. automotive industry should help (i.e. the $25 Billion in low cost loans for development). The approval of offshore drilling should help. Still every American must work to conserve gas/oil.

2008 Sep 29 11:02 AM

[LCACM:]

Excellent article by the author!!! He proposes cutting all taxes that might effect rich CEO types and fire as many workers as possible. One point he missed is that he should also propose cutting unemployment benefits to zero. And while we are doing this, what about firing all those school teachers? Many of these teachers and workers have been unaffected by the financial meltdown and it is time they shared in the pain. The government has put restriction on Executive pay, and it is entirely likely that some of these CEOs could see their pay be slashed from 60Million to a mere 600K. This will make life extremelly hard for these CEOs and might force some of them to dip into their meager savings which are probably less than a few hundred millions or at the mos ta billion. The CEO suffering could be reduced if funds could be transferred from the Teachers/Workers Pension plans to help the bankers. This will have the additional benefit to ensure that these retirees will be penniless and ready to work at hourly rates that will enable American Enterpreneurs to hire workers at rates comparable to China. This will bring pressure on all wages, so that in 2 or 3 years time American Enterpreneurs will be able to compete with their Chinese counterparts. Only the above measures will ensure that we are being true to the Free Market ideology. Else we are flirting with Socialism.

2008 Sep 29 11:36 AM

[sponger:]

I do not understand what you mean in Item 6 when you recommend boosting asset valuation while writing down bad assets to market. Since much of the current problem derives from poor real estate valuations and performance of related mortgages, I believe the following comment conveyed to the House Finance Committee may be pertinent:

"It is no more realistic to valuate real property at zero [or nearly zero] worth because of a frozen market than it is to assign it value at its historicaly highest price, [whether] estimated or actual. A more realistic and practical measure of worth could be obtained by figuring an average over ten years or assigning a mean figure for that term. Value of almost any asset cannot be measured solely by one moment in time.

The FASB directive to mark to market at the latest and (in this case) the lowest price should be modified. Putting accountants in charge of the economy is just as dangerous as putting attorneys in charge of medical practice.

A program to help resolve the financial crisis by allowing federal acquisition of distressed assets at premium prices in order to inject liquidity into the banking credit system is a tacit admission of the inadequacy of the traditional FASB ruling. As excess inventory in the housing market is worked off in the next few years valuations will eventually return to normal and will climb higher than the premium prices paid by the federal program for those assets. That occurence will then validate the recommended change in FASB directives for real estate.

2008 Sep 29 11:36 AM

[TheMarketTimer:]

Well researched, and your solutions to help solve these problems are worthy of TheCorrectAnswer.com website.

Our present system of government will not produce your desired reforms, and I expect more and more taxpayer funded bailouts before we'll ever see necessary spending and tax cuts.

IMO, the only political party that has truly crafted the correct solutions to these government caused problems is the Libertarian Party, and their candidates have been ignored by a compliant and corrupted media.

As for energy policy, the correct answer dot com is to access significant pollution user fees on oil/gas/nuclear to be used to finance renewable, non-polluting energy sources (wind/solar/hydroelect...

2008 Sep 29 11:36 AM

[Midas Mulligan:]

An excellent column, with a likely correct solution --- a solution which, unfortunately, will never be implemented either whole or in part. An Obama Regime, aided by an increased Democrat majority in Congress under Pelosi, Frank, Dodd, and Reid, will not only see to that, but will in all likelihood take the traditional liberal tack, and essentially go the other way entirely ( i.e., increase Government spending, raise taxes on income, capital gains, etc. ).

2008 Sep 29 11:39 AM

[Spieler Eins:]

This is nothing more than a right-wing rant, i.e. cutting taxes and spending are the only solutions. Using taxpayer funds to short-circuit a foreclosure driven death spiral in real estate and credit markets makes a lot of sense to me. Two other points: the concept of net-worth does not apply to the Fed. Their balance sheet can be expanded ad infinutum, literally, and it makes sense to do so as the value of assets goes up in smoke. Also, gold goes down while the dollar gets smoked? Once again, makes no sense. Don't quit your day job, Julian.

2008 Sep 29 11:45 AM

[Philip Gvinter:]

I disagree with your assessment of the rationale behind the bailout plan. The plan is not meant to prop up the many insolvent financial institutions with overweight exposure to questionable debt. Instead it is meant to provide a reasonable floor for the price of these questionable assets. Currently there is not a single buyer for these assets at anything but distressed prices which discount their fundamental value (in my opinion about 50% of par) even further and create transactions at 20% of par value. This forces other financial institutions to write down the value of similar assets below the reasonable 50% level all the way down to their current market price of 20% of par. This forces dilutive capital raises and ripples down through the financial system. The purpose of the bailout is to stop the collateral damage caused by such a situation by creating a fund for the purchase of these deeply distressed securities upon the failure or regulatory closure of these institutions. The many poison pills chief amongst them the equity position which must be given to the fund and the limits on executive compensation will make voluntary participation the equivalent of bankruptcy to participating institutions. In my estimation most of the ALT-A mortgage debt originated in Q2 2005 and later is garbage. This is approximately 2.5T of debt (please feel free to correct me if my estimate is off) the $700B would not cover enough of this to truly "bail out" any institutions. The point is to set a reasonable floor and take away the distress discount applied to these securities. I have no problem with that and feel that if priced appropriately we the tax payers may be able to make a small return on the purchase of these assets if we hold them to maturity or at least until the housing market has found a true bottom and the securities become easier to price fairly given an availability of reasonable predictions for recovery rates (currently unavailable because we do not know how far the value of the collateral in this cases houses and commercial properties will fall) thereby allowing investors to buy with a typical level of confidence in their risk adjusted rate of return.

2008 Sep 29 12:05 PM

[JasonC:]

The "do not increase the money supply because people care about real returns" line is utter delusional nonsense.

We face deflation of epic proportions and idiots are trying to hold the line on narrow money supply.

People, if everyone is forced to realize all future income streams by next week, then everything is being valued at an interest rate of infinity and only current liquid assets have value --- and the narrow set of assets that count as liquid in that case are a tenth at best of actual current asset values. As a result, capital values will fall 90% and the price level will soon follow - with money supply utterly unchanged.

The only solution to the mad panic to get out of other assets and into cash is to let people get all the cash they want at current asset prices. Only if people believe the route to cash is open and available at any time, will they again risk holding assets whose value lies in *future* cash flows.

Otherwise put, effective interest rates of infinity must be arbed away by the monetary authorities who can create the assets everyone want even at 0%, and can use the proceeds to buy the assets no one wants even at 100% and upward. Directly until others have confidence that the real rate of interest will *equilibriate* across risk and liquidity profiles, indirectly once others are willing to act that way.

When A rated financial companies have to pay 40% to borrow for 3-6 months, but the government pays less than 1%, it is flat insane not to act on that spread. No for profit institution in history would refrain from acting on that spread. It is left to monetary ideologues to advocate courses of action that stupid and ruinous.

Flood the market with money and buy future values, giving away present ones.

Also, the populist hang em high crap has to stop yesterday. Everyone will go down with this ship, if you continue bickering senselessly.

2008 Sep 29 12:24 PM

[Xorthfred:]

ONE REFORM WOULD REVERSE THE DEATH SPIRAL: go back to the pre-Sarbanes Oxley accounting rules. If a mortgage is performing, you shouldn't have to write it off. Period. No one should invest in any bank or insurance company until the quarterly mark to market death spiral ends with mortgages selling based on a 75%+ annual return to the buyers or mark to market accounting of performing mortgages comes to an end. It is just a matter of how heavy the hand of govt. intrusion into the markets will push this economy down!!!!!!!!1

2008 Sep 29 12:34 PM

[SO42:]

This guy is blinkin' crazy!

2008 Sep 29 09:42 PM

[David in D:]

Julian - All I can say is WOW! I'm glad you are not calling the shots in the upcoming economic turmoil. I think you would manage to exacerbate the problem by many factors. I'd think again about most of this post... although I do think you are right about the fundamental problem of overvalued assets.

2008 Sep 29 11:29 PM

[msteele999:]

Thank you - I referenced your blog and specifically '5. The Only Solution' in my correspondence to my Senators and Congressman.

2008 Sep 30 08:21 AM

[russ:]

You have soiled a reasonably good analysis with goofy right-wing ideological solutions. Some of the above comments by readers need not be repeated but they need to be heeded. At a time of crisis, we need not only good analysis but calm thoughtful solutions. You did not deliver on the second. Please join the rabid right talk radio circuit and leave economic solutions to the level-headed.

2008 Sep 30 08:30 AM

[User 54395:]

I think we can sum up your "Only Solution" in one phrase - FEED THE RICH, STARVE THE POOR.

2008 Sep 30 09:58 AM

[doubleguns:]

I agree with your assesment of the problem and the additional problems coming. No one has discussed them befor and you covered them very well. I believe this problem is going to get a lot bigger real soon. Your solutions however were all over the board. Some facist. Just drag out non tax payers and shoot them should have be last on your list. Of course that would be everyone layed off including our teachers and state workers. Maybe there are a few that need that but I think we need a better solution to the coming problems you identified. I really appreciate you identifing the added problems in a way that all can understand.

I guess I am not sure which is more frightening. The problem or YOUR solution.

2008 Sep 30 10:24 AM

[sponger:]

Marking to market in itself is not the problem, but assigning the current value of an asset to the balance sheet without considering historical value and future projections is the problem. It is as useless to assign the lowest historical value to a property as it is to assign the highest value.

Real estate value is not a moment in time but decades of time. To drive our mortgage institutions to insolvency by this valuation method is self perpetuating and self defeating. Real property needs to be valuated based on something like a ten year average. Doing so will not only prevent premature insolvency but it will stop banks from giving out unsafe equity loans based on the highest value as well.

The criteria used for assigning real property valuation needs to be
reconsidered. The current method is fundamentally flawed, but
it is carried forward in an effort to provide transparency and honesty.
However, it is a fundamentally flawed concept to apply it as the primary
criterion for institutional health. American society allows its regulators to move from one extreme to the other -- from making decisions based
on non disclosure to making them based on full disclosure as though
financial markets can survive the transition following the same set of valuation rules. At the very least, we can say a home is not really valued until it is sold.

2008 Sep 30 10:25 AM

[momomiester:]

hahaha. Oh my. Yeah ok. You must live in a fantasy world to think that would work. Cut all taxes, all services minimum wage that would just inflate the economy to the stars and take care of all of this. And only taxpaying citizens are allowed to vote?
I hope you carry a gun and you are good at using it cause your going to need it when the masses start rioting and looting. If you keep preaching that type of insanity your head will be the first they put on a spike.
It really amazes me the mentality of so called experts that get published. It is like they lost the ablility to think out cause and effect.
Or is it an elitist attiude that ignores history....Hey just say.."let em eat cake"...

2008 Sep 30 01:11 PM

[Inventer:]

TOO MUCH TALK; and, in the Wrong Direction!!! AMERICANS Need Paychecks, recieved from a tax paying employer; or, the US Government!! Bring Back the CCC Camps; anyone applying for Unemployment is given a "voucher" good for food and transportation to a Camp; that worker can recieve Only 50% of their pay [$10-15 per hour] getting all when returning to the private sector. Everytime a dollar changes hands 3 times, the Gov. has it back. Our Bridges/old sewage lines=Are Falling Apart! Soooooo, Repair/Replace them-----LACK OF MONEY[ for ALL of the "Bad" loans....] is the real reason for this "bad" Economy.

2008 Sep 30 01:11 PM

[momomiester:]

Ahahahahha ....yeah ok.. You know the article was going well till you went off the deep end about getting rid of taxes, firing people, lowing minimum wage and cutting corporate taxes then getting rid of the voting rights of people that don't pay taxes......I hope you own a gun and your good at using it cause you are going to need it with the anarchy that breaks out of a result of your convoluted plan.
It really amazes me some of the ideas of so called experts. It is like they lost their mental capacity of cause and effect...
Hey why not just tell everyone "let em eat cake" oh and no complaining if you get a very severe sore throat as a result of the torch welding villagers wrath.

2008 Sep 30 01:15 PM

[doubleguns:]

It would seem that the solutions so many people come up with are either facist or socialist (ccc camps?). I dont care for either of these type of solutions. How about a capitalist solution. Let it all get liquidated in the great big fire sale. This sale would be on the grandest of scales and would be a global event. If you had money you could go to France for thier sale and head on to Germany for thier sale. A quick nights sleep in Moscow for their sale the next morning and then on to the far east for a shopping trip to China, Japan, Korea........ Get the picture.

This is going to change life as we know it no matter what solution is selected. I just cant see a facist or communist (socialist) solution as being in anyones best interests. After we get through this we can evaluate which country had the best solution and we will be ready for the next time fiat money gets us in this mess. Make sure that you purchase canned goods and appliances that dont require electricity.

700 bil is just the very teeny tiny tip of the iceburg we are about to hit.
Got gold????

2008 Sep 30 01:33 PM

[WAKEUP:]

LCACM wrote, today: "Else we are flirting with Socialism." If Capitalism continues to "succeed" at its recent level, Socialism is going to look like Prosperity. (Attention, Dense People: Sarcasm, get it? Sarcasm.)

2008 Sep 30 01:59 PM

[milkchaser:]

Excellent analysis. Excellent free-market solutions. I don't trust the big gov't solutions anymore.

2008 Sep 30 04:01 PM

[LUAPW:]

I don't understand why, for example, can't certain classes of debt be written off. by this I mean the debts of the companies who are actually at risk of foreclosure and of adding more unemployed to the list of the potentially enraged citizens. All the cash injections have only created a bigger flow of liquidity to the financial system and most of it has stopped there - i.e. hasn't gone to the "real" economy. If you do not positively alter the behaviour of the masses you are bound to see more runs on banks, out of money market funds, runs on ATMs and to whatever source of cash. Markets are run - irrationally - by fear and greed, and unless you address precisely these elements the net effect of any bailout will be minimal. Guess what? As I'm writing TARP vote part II has been successful, and the markets are creeping down once again. Despite TARP and despite the short-selling ban. Start to think from a behavioral perspective or else we might indeed see the perspective from the wrong side of a gun barrel.

2008 Oct 03 03:09 PM