First Thoughts on the Fed Plan 10 comments
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Details are sketchy, but my initial "blink" is positive. This plan is not a panacea by any stretch, but is helping to underpin a measure of confidence in the global financial system that didn't exist only a few days ago. That said, we've got a long, long way to go, and after the initial euphoria wears off investors will still be staring at a future laden with fiscal deficits, declining consumer activity and a shell-shocked public that will take a long time to recover.
That said, a few of my thoughts are:
- Direct investment by the Treasury is smart. Was clearly a necessary step. Focusing initially on the largest and riskiest institutions attacks both systemic issues and market sentiment, the latter of which is critical for the stock market and the real economy to turn around.
- Raising the FDIC-deposit insurance ceiling is a no-brainer. Directly attacks consumer sentiment.
- Providing backing for senior unsecured bank debt issuance for a period of three years is also a well-considered move. The LIBOR/Treasury disparity needs to close, and confidence in inter-bank lending needs to be re-built. This is a way to specifically address this issue.
However, let me be clear - we still need a Good Bank/Bad Bank solution. It is not at all clear to me that private capital will rush in simply because the US Treasury has injected capital into these banks. Both the Treasury and the Fed hope this will happen, but I just don't see it. Write-downs on mortgage assets, LBO loans and committed bank lines can easily eat through these injections, putting us back to square one.
I am hoping that the US Government sees this as a first step in a broader restructuring plan, one which encourages on- and off-balance sheet housecleaning, with an emphasis on transparency. This means that bad assets should still be sold to a separate vehicle for warehousing, financing and monetization over an extended period of time. The last thing we need is for bad assets to be inexorably hitting the market, much the way they did in Japan which served to extend their decade-long economic malaise.
We've got to get this right, and the US Government's actions give us a better shot to make this push towards transparency and balance sheet stability a reality.
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Well it has happened again. It should be obvious that the Federal government (the Congress, President and Federal Reserve) will do anything the banking industry wants. (and note at how much better a deal Buffett is getting).
As to your conclusions a better approach would have been for some of these banks to go out of business (making sure first that all depositors and interbank lenders were protected--that is what was causing the broader panic)
So I think your comments about this being a first step... is wistful thinking (actually I think it is a first step in that the banks will be back for more money)
dont forget that...
Sure. Let's not forget that these are the very same banks that managed to 'financially engineer' themselves trilliions of dollars in the hole. How does giving them more money to play with and a guarantee that nothing will go wrong in the future help 'restore confidence'?
It's like breaking up a fistfight between two 5 year olds by giving them a loaded revolver to play with.
The 'cure' isn't likely to be much better than the 'disease'.
I pulled completely out of the market in December of last year. I congratulate myself, since I have avoided huge losses by this move.
Having said that, I think this appears to be a sucker's rally. But I would want to take advantage of it, neverthless. I am back in the market with 20% of the cash (very short term).
The only way to restore confidence in market participants is to force complete transparency. This would require such a comprehensive transformation of banking culture AND of government culture that it is all but guaranteed not to happen. Therefore, the pain will be long and deep, and in all likelihood we will reach a point where the very future of the nation is in grave doubt.
The crisis could be swiftly resolved with courage and honesty. Unfortunately, these traits are drilled out of students at the nation's top business and law schools as the first order of business.
Terrible moves by our government -- the direct buys into banks, and the bailout in general!! We're sitting here printing money now, to help banks deleverage and ramp up for more lending...when too much lending was the core problem to begin with!
What we really need is a much smaller finance industry -- we never should have been living on credit to begin with. Why have we gotten used to it? Why do we assume that we *need* a mortgage in order to purchase a home at all? Because the Feds take 30-40% of your gross if you're a middle-class American. Let's do something about THAT. And let the American worker deleverage, so that we can buy on money we have, not on borrowed money. That's the *only* solution that will set the foundation for long-term prosperity!! In contrast, all I'm hearing has to do with greasing the wheels for more credit, more socialism, increased welfare and food stamps. Cut the damn taxes -- drastically -- end the entitlement era (yeah, I know, that means end of government control of our lives, too)...and give us OUR money back!! Then we can spend without credit bubbles, and there will be economic growth.
Say bye to market to market and real valuations for decades. Look at what it did to Japan. Hidden bad assets will drag the economy for decades and with the government unwilling to see the losses they will just end up hiding more and more... possibly forever.
So only a little bit of cleaning on the 'on balance' items can be done; for the off balance things there is nothing or little left.
This is no problem: the assets in the off balance shadow bank system do not count for the reserve rules anyway...
So what's the problem?
In my opinion, the Feds need to let this problem work itself out, instead of over-reacting (nothing new to the Bush admin). It will be like shock therapy.
Let the reckless banks and investors pay for their mistakes. And while you are at it, enforce transperancy. Yes we will end with a much smaller financial sector. But on the long run, the system will heal itself. People will be forced to become less addicted to credit, which is a good thing!.