Hank Paulson Has Finally Done It. We Are Officially Bailing Out His Wall Street Cronies.
Secretary Paulson is on television today again telling us the root cause is housing and as I have said he is completely wrong. These programs will do nothing but burden the taxpayer for a massive bailout and put a larger drag on the economy. I could have said that three years ago and no one would have listened. But, then every major global outcome we see unfolding today was discussed in advance on this blog. And Hank Paulson was telling us just months ago this was the strongest global economy he has ever seen in his lifetime. He either didn't know what he was talking about or he was being less than forthright. Either way, he lacks the fundamental understanding of what is wrong with the economy and that has the potential for more damaging effects due to poor policy decisions. By now most people have a clear sense something is wrong well beyond the fact that housing prices are falling as Paulson would have us believe. To date, I have actually been a moderate voice on here supporting the government's actions to stabilize markets and save the banking system but we have now entered the next phase of the Orwellian world.
As an aside, if there is some form of economic terrorism that the government is worried about as has been rumored for weeks, they created it. How often have we harped that hedge funds, unregulated pools and offshore capital of unknown sources playing in the casino needed to be transparent or regulated? In fact I wrote over a year ago that we had no idea where much of this capital was coming from. There have been rumors for years that the Russian mafia is a major trader in global markets. Who else? We don't know because we have no regulation of capital. We didn't hear Wall Street complaining about this when the market was going up and Goldman, Morgan, Lehman and others were minting money from hedge fund and offshore capital services. Were the SEC working on behalf of the sovereign instead of at the behest of lobbyists, none of this ever would have unfolded. In fact, even as I write this the SEC should be proposing regulation to fix this environment yet they do nothing. Ban unregulated capital. Now. Ban potentially criminal trading in the CDS market. Now. Ban unregulated overseas capital flowing into our markets. Now. Bring back the uptick rule and restore the liquidity and economic benefit of short selling with it. (Why is short selling banned for two months? Does November 4th, election day have anything to do with it?)
I still have doubts the exact form of this plan will gain traction with Congress. I realize there was a meeting last night and Congress is supposedly behind this plan. But, what price is the government going to pay for worthless or distressed debt? Par? Burdening the American people and benefiting those who created this mess? 50c on the dollar? 10c on the dollar? Let's see how Congress feels after they have had a few days to field phone calls from their constutuency.
What would be much preferable is some type of program similar to what I wrote of a week or so ago in the post Pro-active Policy For Bailouts, Loans and Investments In Failing Companies. Senator Schumer chimed in on just such a structure yesterday. He must have read my blog post last week. haha. This is a much preferable structure. It can be accomplished with "temporary" money, it keeps potentially worthless and toxic debt off of the government (taxpayer) balance sheet and in the markets where it should be, and it provides an opportunity for the government and society to potentially profit via an equity stake and to mitigate risk. But this approach doesn't bail out Wall Street as Paulson's plan does. Instead the plan is to now buy debt that not a single entity in the world wants. Not one. At seemingly any price. Who is going to buy it under Paulson's plan? Why, of course, you are.
I'm still highly dubious of a sustainable rally. Given this is witching week, there is too much money to be lost by letting markets fall. As we have said, counter trend moves are very common during this week and strong technical reasons often support it. And, if we see substantial short covering, it will drive the market for some period of days. We wrote of this in banks quite a few months ago before they imploded again. Short covering has the potential to create a deleterious vacuum in pricing as we saw before. Let's watch in coming weeks.
None of this does anything to address a single root cause. And this will likely do nothing to stop the decline of assets. I could actually see outcomes that worsen it but we shall see. The government believes this will free up capital in the banking system to be loaned into the economy as both Paulson and the President have said today. In closing, I'll leave you with a common sense perspective lost in these times. And definitely lost on Paulson and the President. Corporations and people borrow money when they can make money. The interest rate is often irrelevant. But, the fact that rates are so low today and the money multiplier in the economy has ground to a halt, as we have talked of before, should tell you something. So, what is going to induce society to borrow money now? Borrowing now is often to stay out of bankruptcy and hope an environment returns where borrowing leads to making money. And, how does this help the banking system? Banking's problems are far from over. That means this crisis could recreate itself again. And again.
Contact your Congressional representation and let them know how you feel about this. Regardless of which side you are on. Their email addresses and telephone numbers are on their web sites.
As an aside, if there is some form of economic terrorism that the government is worried about as has been rumored for weeks, they created it. How often have we harped that hedge funds, unregulated pools and offshore capital of unknown sources playing in the casino needed to be transparent or regulated? In fact I wrote over a year ago that we had no idea where much of this capital was coming from. There have been rumors for years that the Russian mafia is a major trader in global markets. Who else? We don't know because we have no regulation of capital. We didn't hear Wall Street complaining about this when the market was going up and Goldman, Morgan, Lehman and others were minting money from hedge fund and offshore capital services. Were the SEC working on behalf of the sovereign instead of at the behest of lobbyists, none of this ever would have unfolded. In fact, even as I write this the SEC should be proposing regulation to fix this environment yet they do nothing. Ban unregulated capital. Now. Ban potentially criminal trading in the CDS market. Now. Ban unregulated overseas capital flowing into our markets. Now. Bring back the uptick rule and restore the liquidity and economic benefit of short selling with it. (Why is short selling banned for two months? Does November 4th, election day have anything to do with it?)
I still have doubts the exact form of this plan will gain traction with Congress. I realize there was a meeting last night and Congress is supposedly behind this plan. But, what price is the government going to pay for worthless or distressed debt? Par? Burdening the American people and benefiting those who created this mess? 50c on the dollar? 10c on the dollar? Let's see how Congress feels after they have had a few days to field phone calls from their constutuency.
What would be much preferable is some type of program similar to what I wrote of a week or so ago in the post Pro-active Policy For Bailouts, Loans and Investments In Failing Companies. Senator Schumer chimed in on just such a structure yesterday. He must have read my blog post last week. haha. This is a much preferable structure. It can be accomplished with "temporary" money, it keeps potentially worthless and toxic debt off of the government (taxpayer) balance sheet and in the markets where it should be, and it provides an opportunity for the government and society to potentially profit via an equity stake and to mitigate risk. But this approach doesn't bail out Wall Street as Paulson's plan does. Instead the plan is to now buy debt that not a single entity in the world wants. Not one. At seemingly any price. Who is going to buy it under Paulson's plan? Why, of course, you are.
I'm still highly dubious of a sustainable rally. Given this is witching week, there is too much money to be lost by letting markets fall. As we have said, counter trend moves are very common during this week and strong technical reasons often support it. And, if we see substantial short covering, it will drive the market for some period of days. We wrote of this in banks quite a few months ago before they imploded again. Short covering has the potential to create a deleterious vacuum in pricing as we saw before. Let's watch in coming weeks.
None of this does anything to address a single root cause. And this will likely do nothing to stop the decline of assets. I could actually see outcomes that worsen it but we shall see. The government believes this will free up capital in the banking system to be loaned into the economy as both Paulson and the President have said today. In closing, I'll leave you with a common sense perspective lost in these times. And definitely lost on Paulson and the President. Corporations and people borrow money when they can make money. The interest rate is often irrelevant. But, the fact that rates are so low today and the money multiplier in the economy has ground to a halt, as we have talked of before, should tell you something. So, what is going to induce society to borrow money now? Borrowing now is often to stay out of bankruptcy and hope an environment returns where borrowing leads to making money. And, how does this help the banking system? Banking's problems are far from over. That means this crisis could recreate itself again. And again.
Contact your Congressional representation and let them know how you feel about this. Regardless of which side you are on. Their email addresses and telephone numbers are on their web sites.
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