Promod Radhakrishnan

PPIP Killed the 2008 Bear

The PPIP does involve some risk for tax payer money, but its probably one of the only few options to revive the MBS/ABS/CMO markets and have liquidity flowing again. The question is not whether big banks will gain from this...but whether there are enough controls to safe guard public moeny. Considering the situation, Tim Geithner and team have done a decent job. If there's nothing on the table from the government, tha market's going to stay off such assets for a long period. Fresh Fed lending alone doesn't help - banks just park it back as deposits with the Fed itself! So, i would say the PPIP is one of teh few good options to get the credit markets functionaing near normalcy again!

Economic Fault Lines Emerge

Nice article..i agree we need to make a long-term move towards a balanced fiscal strategy and work our way up the savings ladder. However, the current crisis is unforeseen and of enormous proportion - and hence the need for seemingly counter-logical interim steps to pull us out of the rut before we can work on a longer term strategy. As long as the current administration does have a medium-to-long term strategy of balancing the budget, we can very well live with an interim fiscal deficit brunt.

Making Sense of the PPIP

I agree with your key point - the legacy securities program is indeed the lynch pin of the PPIP. But, 3 months is not too long considering the logistics involved (selection of Asset Managers, Raising capital, execution of investment strategy etc)...even if we assume home prices continued to fall (but at a lower rate), we shouldn't see much of a change in written-down value of these assets from current levels. As an indicator, CDS spreads haven't widened much beyond January levels in the last 8 weeks.

On your other point, the only reason sellers would hesitate to embrace the plan is if they feel assets are already written down below fair value/assets are worth more than what the market's valuing it at. In that case, the basic premise is that there's not much down side. Even in that case, wouldn't a competitive bidding scenario surely help determine true market value?


On Mar 29 07:49 AM CautiousInvestor wrote:

> It is not clear to me this is a well thought out plan.
>
> The most fundamental issue is whether bids for troubled assets will
> be accepted by the seller. If the bids are low and the seller does
> not accept the bid, the toxic assets remain on the books and we delay
> resolution.
>
> Realted to this is the delicate matter of timing. It would appear,
> now, that the most important of the two programs and the one dealing
> with legacy securities will not become operational until late June
> or July. During this span home prices are likley to continue falling
> at a 18% annual rate.........further depreciating the assets that
> the banks wish to sell and making it more likely bids will fail to
> clear.

Making Sense of the PPIP

There are only 2 options for the government - sit tight and let the market play itself out OR be an active participant to market revival. The first option might mean a continued economic freeze/down turn for another 12-18 months or more, with associated increase in umemployment rates. Does any of us want this to play through - at the current rate, unemployment would already hit 9.5-10% by Q2 end! I agree we can debate on the model used - can we put tax payer money at risk? But given the fact that the one who suffers the most from the fallout of a continued recession and liquidity freeze is the tax payer, I don't think this argument holds much water.

The tax payer didn't bring this market down - hence participants who caused this will/should be forced to play by stricter rules - through increased supervisory oversight, tighter regulations and disclosures etc. The outline of Geithner's plan already has heavy provisions for disclosures and reporting on many fronts - inluding those related to hedge funds, venture capital funds and private equity funds. As long as the government follows up with efficient execution on this front, we will gradually move towards sanity.


On Mar 29 11:55 AM ed233 wrote:

> HERE IS THE SCARY PART. The government is trying to flog depressed
> valued instruments to prop up a few once big international banks;
> that if they fail could possibly topple the whole financial global
> markets which would spell double trouble for the emerging economies
> who have invested heavily in these toxic investments. The US government
> to protect their standing as the choice of currency for international
> transactions have placed the US taxpayer as the ultimate fall-guy
> by guaranteeing unnecessarily the future generations of their children's
> children. To make those investments more palpable it would have made
> more sense to protect the investments behind these toxic instruments
> rather than watch those(eg. housing investments) plummet month after
> month. But as they say you can always find a buyer if the price is
> right. The question is how sweet is the deal going to be for anyone
> to stick their toes in at the expense of joe public. It's the US
> currency as a currency of choice world wide that is at risk because
> when the US prints more money they'll be able to export most of their
> toxic instruments via the debasement of the dollar. The countries
> holding large amounts of the US dollar and bonds will pay the ultimate
> price at the expense of the wall street types and the federal government
> who move more US dollars globally

Bleak Statistics for 2008 - Will 2009 Be Better?

Is it too optimistic to think that USD 500+bn spent in a non-pork, targeted fashion on productive sectors like alternative energy and healthcare cannot create 2 million jobs? If we can do that, it would at least counter job losses that would have occured otherwise. And, with the entire global economy waiting for a stimulus to start sending initial signals of a trend reversal, we have enough international support to feed government debt. We still might have 6 months of gloom, but the same way we couldn't see a never-ending boom cycle, i don't see us in recession for another 2 years...economic cycles have become shorter - and sharper!


On Jan 12 02:39 PM PROXIMO wrote:

> To put a positive spin on the road ahead is a stretch, given the
> tons of economic stats already out and continuing to come out. Strongly
> disagree with "If Obama does succeed, even moderately, of targeting
> fresh money to areas like construction, healthcare, green energy
> and education, the very impact of this in downstream sectors and
> resulting gains in employment would be more than enough to crank
> the engine back." IT WON'T MAKE A DENT.

Bleak Statistics for 2008 - Will 2009 Be Better?

I agree with your fundamental worry - that a shallow debt-driven fiscal-deficit heavy strategy can pose long term risks. But, do we have an option now - but to replace private demand with government spending and ensure an emergency resuscitation?

Assume we have a stimulus package which does a mix of these:
1) Large scale spending in new (non-pork!) projects in alternate energy, healthcare, infrastructure (targeted)
2) Tax hikes on higher income segments while maintaining corporate tax levels
3) Tax cuts on lower income segments
i.e. target investments in productive sectors which drive future growth while not going over board with tax cuts and fiscal imprudence. This can both help save/create millions of jobs while keeping the dent on long term deficits to a minimum (with the assumption that productive investments yield tax revenues and downstream jobs, which in turn create more revenues etc).

Even if we touch a 10% fiscal deficit (USD 2 trillion) by Q2 2010, as long as we have a way up to take us back to a 4-6% level in the next 2-3 years, we would have prevented a deeper recession without creating too much of long-term fiscal imbalance!


On Jan 12 11:45 AM OldLimey wrote:

> "The big question in every one's mind is - is this the start of a
> deeper recession or is the worst behind us?"
>
> No, not every one's. The question on my mind is whether the economic
> model that has powered global growth over the last two decades (cheap
> and increasingly easily available credit fuelling sequential asset
> price bubbles fuelling overconsumption and misdirected investment)
> is permanently broken. If it isn't, then the author's optimism may
> well be correct - although what price we will ultimately have to
> pay for yet another debt-fuelled surge in end-consumption is anybody's
> guess. If the model is in fact broken, a much longer period of (global)
> economic rebalancing will be required whilst the role of household
> consumption in total economic activity is ratcheted back down to
> historically more normal levels in the Anglo-American economies.

Can the Fed Really Afford to Cut Another 50-75 Points?

I agree with your assessment of the current situation - we definitely need a lot of focus on saving the insurers and money center banks. However, once another rate cut takes us to 2.50 or 2.25, the fed will no longer have any leeway in rate reduction as a monetary tool. And given the current situation, i feel just one more rate cut instalment would not do much good. If the Fed instead focuses all attention on what lilguy has mentioned ("find a more direct way to...") and provides rate cuts in spaced out instalments, that might give it more time from a monetary policy stand point. And leave enough room for the market down the year to expect positive monetary policy updates.