Oppose the Current Bailout Plan, Redux
Perhaps the tide is turning. Congress is now receiving more calls in favor of the bailout? Ugh. People are so attuned to short term market moves defining what is right or wrong. They would surrender their liberties just to make the markets rise. Well, the Senate votes on Wednesday evening, and the House probably on Thursday, so I urge my readers, and the rest of the blogosphere to call Congress to oppose the Bailout.
Now, the current plan is better than the original one, having more oversight, and requiring equity stakes. I still don’t like the proposal, because it won’t work on the areas of our economy that need help now, mainly the short term lending markets between banks.
As it is, the pressure in those markets is high, and the Fed is stretching its balance sheet to cope. Other nations and central banks are acting to stem the panic, and are moving to support the short-term lending markets.
This is a global crisis, with rates rising in Asia, with failing banks in Europe, and the rescue of AIG protecting the interests of European banks, as well as domestic institutions. The other nations of the world should step up to their responsibilities; we are all in this together. If not, we will probably experience a global recession lasting two or more years.
Not that anything is certain in economics; the global economy has been straining over the last few years to goose growth in ways that seem foolish to me. We know the lessons of mercantilism. Why force exports when the returns may prove to be far less than advertised? China may laugh over a growing economy where they sell an increasing amount to the US, but what are they receiving in return but devaluing US T-notes?
Look, there is a better bailout available. Aim at the short term lending markets; use the $700 billion to recapitalize the Fed, and let them provide liquidity until the short-term lending markets calm down.
Or, use the money to take super-senior convertible stakes in financial institutions that are in trouble. If the government is bailing institutions out, let them do it in a way that minimizes loss, that they would have a senior creditor position if there is loss, and significant ownership if there is a recovery.
With that, I close by saying don’t listen to foolish people who say that we can make money off of the bailout. The objective of a bailout is to lose less money than you expected. There are rare cases where money is made, but as we would expect with government intervention in tough times, the incentives are perverse.
October 1st, 20088:37 am at
David – I appreciate your work immensely, so I am happy to see that you are interested in Hussman’s idea of Superbonds. My two cents is on TCSDaily. http://www.tcsdaily.com/article.aspx?id=093008C
The point that bothers me is Kenneth Rogoff’s comment on how bloated the financial sector has become – 4% of GDP and 30% of corporate profits. To what degree are the bailout proposals necessary for the nation, and to what extent are they an effort to sustain an unsustainable business model?
October 1st, 20088:51 am at
“Don’t listen to foolish people who say we can make money off of the bailout.” FYI, Cramer has been pushing the bailout for precisely that reason. ergo…Cramer = Foolish
October 1st, 200812:48 pm at
David:
Don’t you think that if the government start taking super senior equity stake (which started already) will scare off private investors?
October 1st, 200811:43 pm at
Instead of citing “foolish people” in the abstract, why not directly analyze the public comments of Bill Gross and Warren Buffett?
Just a suggestion….
October 2nd, 200812:01 am at
Jeff, If you’ve read my prior posts on the topic, I have cited the studies on bailouts, and how few of them make money. Statistically, the odds are poor. I have also pointed out the difficulties of reverse auctions on diverse and thin assets classes. I don’t like to name names, that is usually not my style. There are enough making the argument as a class that I can refer to them generically.
Vincent — good point. Yes, it would scare off private investors, but marginally capitalized companies will already have scared them off.
October 2nd, 20088:57 am at
David.
Could you say some words about your views regarding stocks in view of a world wide recession?
I’m reading various and opposing views and all of which take into account the $700B bailout: great time to start buying. Say 40 to 60% investment. Market is putting in a bottom. Market discounts 6 months ahead, so buy now. Instead of going into sectors I’ll just show some stocks: WAG, WAT, DEO, MSFT, IWP, Japanese companies.
Other view point is that the stock market has not priced in a recession yet, so wait, till Nov.
And then the worst views recession will be deeper and longer than we’ve seen in a long time. Don’t look to buy till Dow breaks 10k, maybe even 9k.
October 2nd, 20089:08 am at
Unfortunately Congress isn’t listening to you. Would it not be beter to swallow this pill then risk a depression like collapse. This is a socialistic pill to be sure, but if we have a collapse the new president and Congress may be incentivized to pass a much bigger brand of “New Deal” socialism. It goes from worse to worser.
October 2nd, 200810:06 am at
David — As you know, I read all of your work. I am surprised that you think we have enough experience with bailouts to use the word “statistically.” The only way to analyze this particular policy is to look at the specifics.
There is no way to analyze a proposition without reference to someone’s specific argument. If one does not do that, one winds up creating straw men. Bill Gross has a very specific argument about the difference between expected return and borrowing costs. Buffett’s is similar. Both are published and neither would be offended if we took issue with their conclusions (assuming they even noticed!)
This is assuming that making a transactional profit is even the right question…..
October 2nd, 20083:27 pm at
I agree with you in general, but I really don’t like the idea of the government owning all kinds of warrants, preferreds, etc in public companies. I think it’s a lot better to just own them in receivership or conservatorship until they can be sold off. The politicians will make a tremendous mess of things that way.
IMHO, you are spot on. Let the Fed step into the CP market for AA firms through anonymous brokers. A small bit of buying at the margin (and at Buttonwood worthy rates) will stem any panic.
October 2nd, 20086:00 pm at
This government is getting more and more out of control. I read today that they might freeze all banking activities for a week. How would we get money to eat?? The article was here http://www.gotoguy.com/?p=367