No Bailouts, Even if Congress Approves Them

Excerpts from Dr. Enzio von Pfeil's September 30, 2008, appearance on CNBC Asia:

1. What do you think of the U.S. bailout package and its effectiveness in solving the problems in the U.S. financial sector and unclogging the markets?
   • What is wonderful about America (having lived there so long myself), is that if it does see a problem, it attacks it massively. And I think that Hank Paulson should be praised for being such a leader – and one who understands the language of investment bankers all too well.
   • However, I don’t rate this package as effectual at all:
     1. It is like giving aspirin to someone with a constant migraine. Crucially, banks will be going to the “Salvation Army” merely to get free funding for past decisions based on greed. These free gifts, however, cannot cure America’s overall financial problem – the complete and utter lack of self-regulation (see point 5 below). Until such self-regulation occurs, even more regulations will just be there to be circumvented;
     2. The second weakness is that instead of increasing banks’ capital, the Treasury and Congress are just throwing good money after bad money: they are plugging holes; and
     3. Finally, “why me?” is going to rear its ugly, aggressive head. Why did Washington keep Morgan Stanley (MS) and Goldman (GS) afloat, but let Lehman and Washington Mutual, along with others, fail? There is going to be a great deal of political bickering ahead of us….let’s see what the FBI is allowed to release to the public!
2. The credit crisis seems to be spreading to Europe and the U.K., as regulators there struggle to save the troubled lenders. Do you think regulators are doing the right thing? Just how far will the contagion spread? Is Asia also at risk?
   • I really think that the regulators AND THE RATING AGENCIES are very much to blame for these crises (yes: there are many: at banks, credit card companies and finally at firms extending each other credit).
   • So when you refer to “regulators struggling to save troubled lenders” my retort is: why did regulators and rating agencies allow this blatant avarice in the first place? Now the rating agencies are downgrading as fast as they can, which is about as stupid as the World Bank, IMF or ADB releasing “Economic Outlooks” that even a child would recognize as being a good year behind the curve.
   • The third group massively at fault – and so far untouched – are those chief economists and chief strategists at some of the major investment banks. They must have been lying deliberately to their clients and thus to the world when they talked things up. My suspicion is that they were told to talk things up so that their in-house props books could get rid of long positions.
   • So when you ask if the regulators are “doing the right thing”, the answer is “no, no, and no”. They are NOT addressing:
     
     1. Greater self-regulation, which would limit male avarice,
     2. More streamlined regulations, instead of bulking up on further stupid rules that will cost businesses only more money in the form of ever-more bloated compliance departments, and
     3. Unconflicted research. By this I mean the blatant lies promulgated by very public
        1. rating agencies, who had a vested interest in “keeping the client happy” by keeping the ratings way up there, and
        2. chief economists, strategists as well as corporate analysts.
   • Is Asia at risk? Yes, on three counts:
     
     1. First, just because banks out here are not talking about their problems cannot mean that they don’t have them. Indeed, witness the recent public run on one well-known Hong Kong bank.
     2. Secondly, as elsewhere, banks out here have correspondent banking relationships with American and other global banks. The problem is that these “nets” are so interwoven that you just need one bit to wobble, and the whole ground shakes. Look at how high the interbank lending rates are.
     3. With the Economic Time ™ worsening in America, her shrinking demand for imports is going to hit us out here. After all, we are still strongly reliant on exports, and once they get whacked, down go our property markets…
3. What is your view on the U.S dollar and the state of the global economy?
   
   • The global Economic Clock™ is ticking worse and worse. We are running straight into an
     • Excess demand for money, and thus an
     • Excess supply of goods.
     • This time things are “different” – but for the worse: global contagion is insidious, its tentacles are subtly snaking their way through Europe and Asia…
   • I still don’t understand why the dollar is an asset class unto itself. It seems as if when people buy dollars, they sell commodities. But that is just the way it is.
   • I guess that people are buying dollars because everyone else is – and because one gnome seems to think that US interest rates are going to be more attractive than Euro rates at the short end. I don’t, given the worsening global Economic Time™…
   • Besides, superpower currencies always head south: the Empire runs out of money and prints more, so up goes its supply. Meanwhile, its price falls. In the early seventies, you had to pay four times as many yen and Deutschmarks per dollar as you do today….
4. What investment strategy would you recommend now and why?
   • Cash has to be king, as do commodities.
   • Reason: with the global Economic Time™ worsening slowly but surely, corporate profits have to wilt.
   • So you will find that asset class plays come in to play. My bet is on commodities as an idiot-proof asset class.
5. Are there other issues and concerns that you would like to highlight?
   
   • The key problem of the U.S. financial sector is NOT “too little regulation”. That view assumes that “more regulation” would “solve” all problems. The problem with the U.S. financial sector is NO “self-regulation”.
     • We just had a delightful dinner with a long-time friend in Munich. He is one of three partners in a bank – and he is personally liable for any financial losses of his firm up to five years after he has left them! That surely would be the answer to the U.S. financial institutions’ woes – NOT more regulation, but heavy self-regulation.
   • Europe. Having just spent a month in Eastern Europe and in Germany, two observations:
     • The Euro is killing Europe: prices are just too high, particularly in the Euro satellites like Turkey, Hungary and in the Czech Republic, and
     • Europe is, by virtue of its welfare state, much more shielded from a U.S. downturn than Asia is, where particularly in China, no welfare state exists.

Comments

[H.J. Huneycutt:]

Thank you for this article. Very insightful.

2008 Oct 01 10:46 PM

[Jack Walker:]

One of the fundamental principals espoused by Deng Xiaopong in 1978 was to build a rising middle class. He said China has been poor for a thousand years and “It is time to prosper.”

It has recently been reported that retail sales growth in China for August was a faster than expected 23.2% compared to last year.

Do you think expanding domestic demand in China has a chance of turning the tide of declining industrial production and slowing the decline of the World economy?

2008 Oct 02 01:34 PM

[Owen:]

Contrary to your claim, Washington didn't keep Goldman Sachs afloat. Goldman Sachs kept itself afloat. It never asked for any Federal assistance, nor does it need any.

2008 Oct 02 06:46 PM

[Channon:]

It was my understanding that GS had $20BB+ of exposure to AIG. GS says that was hedged, but by whom -- LEH? If GS did have $20BB of AIG exposure, Paulson may have saved GS.


On Oct 02 06:46 PM Owen wrote:

> Contrary to your claim, Washington didn't keep Goldman Sachs afloat.
> Goldman Sachs kept itself afloat. It never asked for any Federal
> assistance, nor does it need any.

2008 Oct 08 06:24 PM