Dirk McCoy

What the Treasury Plan Needs: Price Discovery, Writedowns and More

Watching the bank CEOs today, it seems unanimous amongst them that:

A. They're going to repay the TARP funds, with 5% interest;
B. They're going to come out healthy with profitable operations;
C. They expect the world to continue to revolve.

The problem I have with some plans is they stop the world. OK, the world will keep spinning, but nationalizing THE BANKS says to everyone who would ever invest in a bank again that YOU'RE AN IDIOT. Because the Fed can jack up interest rates whenever they want, create an economic downdraft, throw you into insolvency, and you lose- everything. OK, investors maybe keep investing, but interest rates will be about what you get from the payday loan outfits or Guido and Johnny. And if you think we're going to put gigawatts of solar or millions of electric cars or expand much of anything with 20% interest rates, you're dreaming.

Instead of bankrupting the banks and cramming down principle for the sole purpose of proving Roubini and Brown and Schiff and Marx were all smarter than the vast majority of humankind who thought there was no problem with expanding credit, the internet, and new houses, why not do the obvious? Inflate. Home prices go up, China goods and oil go up, and confidence is resumed while Americans are forced to go to work again. It's clear that retirements will be postponed. Is it any worse for that retirement to be postponed a bit because a steak costs $10 instead of $5 than for it to be postponed for decades because people have lost 50-100% of their wealth (except for those parked in gold and cash who may not have done a single productive thing in twenty years except whine about risk)?

I won't claim to have a Black-Scholes-like model that tells me how much of which assets the Fed needs to buy to create inflation, but inflation they must create.