The innocence and knowledge of a child is sometimes much more clearer than our insights. My young daughter asked me what comes after a Trillion dollars. My son answered a Zillion. I had to interject and add that does not exist ( yet). Maybe U.S. Treasury Secretary Timothy Geithner will invent a new number the way he is going.
I do not find it hard to be in the minority. The stock market loved the announcement. So many ( maybe so) think the bottom is in and they are rushing in buy all the bargains. It still resonates with me all the money that was lost year trying to buy cheap. The fact was cheap got cheaper. Only time will tell if this is a Bear Market Rally or a true bottom.
There are two levels to this… obviously a trading one and the other an economic debate. Yesterday noble laureate Paul Krugman came out and harshly criticized Tim Geithner’s plan. What is concerning was Krugman’s exact words, “”In fact it fills me with a sense of despair.” This is not just me or a man in the street. This is a Nobel Laureate, an economist from Princeton. He phrased it very simply:
“The Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt,”. What a great investment for an investor. Heads I win, Tails I lose and I don’t have to pay anything.
Seems very clearly there could be an inefficiency due to the fact that the bad loans may be undervalued because there is too much fear in the current climate. We see this all the times in trading. And who will bear the brunt of the inefficiency? One guess: Joe the plumber and fellow taxpayers.
What happens if the plan fails, ( which I think it will)? Besides the fact that more money goes down the proverbial AIG toilet drain, How would Obama persuade Congress to come up with more funds?
Possible answer to my children: What comes after a Trillion? A zillion… inflation…hyperinflation… Defaults???