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Archive for October 28th, 2009

Some Praise and Questions for the US Treasury

Wednesday, October 28th, 2009

1) Perhaps the US Treasury is getting a few things right.  Let’s start with lengthening the average maturity of Treasury debt.  I have backed this idea in the past.  It is worthy to note that zero coupon yields peak out around 20 years out, and then start declining.  It is quite possible that debt longer than 30 years might price at a discount to 30-year debt, if for no other reason than there is a demand for longer debt as an asset to fund longer liabilities with seeming certainty.

The US Treasury is finally getting some sense in this matter, and is looking to lengthen their maturity profile.  Good for them; let’s see if foreign investors are willing to take down longer-dated dollar-denominated debt.

2) I have also encouraged the concept of liquidating institutions that are “Too Big to Fail;”  I believe they deserve a special chapter in the bankruptcy code.  Well what do you know?  Congress is proposing much the same idea. (Ugh, Barney Frank agrees with me?  But, so does Sheila Bair.  Better company.)  Here are some of the details.  Far better to liquidate such institutions rather than bailing out the holding companies (what idiocy!).  That said, why would we give more money to GMAC?  It is not critical in a systemic sense.  Let it go under.

3) Most stimulus programs waste money.  Better to rebate taxes to everyone equally.  It is fairer than choosing favorite firms or markets.  With that I would argue that it is time for the first time buyer credit to end in residential real estate.  Most of those that bought would have bought anyway, and the credit benefited sellers more than buyers as it pushed prices up for now.

4) The efficient markets hypothesis did not mean that market prices are always right, as if we hit that evanescent neoclassical equilibrium.  No, prices are always wrong to some degree, but that does not mean it is easy to recognize the mistakes.  So I limitedly back Jeremy Siegel, who says that the efficient markets hypothesis was not to blame for this crisis.  That said, common misunderstandings of the EMH did affect the crisis, because markets do self-correct, but over years and decades, not months or days.

5) If you had the ability to ask one question to Tim Geithner, Secretary of the Treasury, what would it be?  I have my list, but maybe I am off base.  As I close for the morning, here are my questions:

  • Haven’t low interest rates boosted speculation and not the real economy?
  • We are looking at big deficits for the next seven years, but what happens when the flows from Social Security begin to reverse seven years out?  What is your long-term plan for the solvency of the United States?
  • We talk about a strong dollar policy, but we flood the rest of the world with dollar claims.  How can we have a strong dollar?
  • None of your policies has moved to reduce the culture of leverage.  How will you reduce total leverage in the US?
  • Why did you sacrifice public trust that the Treasury would be equitable, in order to bail out private entities at the holding company well?  People now believe that in a crisis, the government takes from the prudent to reward the foolish.  Why should the prudent back such a government?
  • If we had to do bailouts, why did we bail out financial holding companies, which are not systemically important, instead of their systemically critical subsidiaries?
  • We are discussing giving tools to regulators for the tighter management of the solvency of financials.  There were tools for managing solvency in the past that went unused.  Why should we believe the new “stronger” tools will be used when the older tools weren’t used to their full capacity?  (The banks push back hard.)

I doubt that I will get a chance to have those questions answered, but who knows?  From Quantcast, I know that some at the US Treasury and the Federal Reserve (I have my own set of questions there) read my blog regularly, so I leave it up to them ponder my questions, whether I ever get answers or not.


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.

Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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