You mean, this won’t work either?
OK, I guess Paulson and Bernanke need to start thinking about Plan C.
Plan A was the $700 billion bailout bill, without which we were threatened with Armageddon, if not martial law. We know how well that turned out. We got Armageddon anyway, the Dow and S&P each getting slaughtered 18+ percent the week after Congress finally snapped to Big Hank's marching orders (but only in exchange for $100 billion in tax breaks and subsidies for favored constituents, natch).
The problem, we were told, was that while the bailout served to take toxic "assets" off the hands of the banks, it did nothing to put "liquidity" back in the system. In other words, the banks would take those shiny new Treasuries they traded in for the toxic stuff and use them to clean up their balance sheets, instead of using them to make loans to credit-starved businesses and consumers.
So, it was time for Plan B. Paulson cooked it up late last week and presented it as a fait accompli to the big banking CEOs Monday afternoon. Pretty simple: Uncle Sam would give $250 billion to the banks to buy up preferred shares. This approach, we were assured, was what was needed to put liquidity back into the system. Why, no less than the new Nobel prize winner in economics, Paul Krugman, said it would.
But wait, what's this? "There is a risk that banks will take the new government capital and use it to bolster their balance sheets but still not resume lending," reported the Washington Post yesterday morning, "and the Treasury is not getting any specific contractual guarantee to prevent that from happening."
Same problem as before, in other words. Seems as if this reality dawned on traders throughout Tuesday. So much for Monday's "relief rally." Paulson ought to change his name to Britney Spears: "Oops, I did it again."
The problem, as non-Nobel prize-winning economist Jeffrey Miron of Harvard explains, is that no amount of "liquidity" means a tinker's damn without something else — "transparency."
If banks were fundamentally sound but temporarily in need of cash, they could sell stock on their own to private investors. Few investors now want bank stock, however, because they cannot tell which banks are merely illiquid — short of cash for new loans because their assets are temporarily sellable only at fire-sale prices — and which are fundamentally insolvent — short of cash and holding assets whose fundamental values are less than the bank's liabilities.
This lack of transparency is a crucial impediment to new investment, and therefore to new lending.
Government injection of cash, however, does little to improve transparency. A bank with complicated, depreciated assets is in much the same position after the government gives it cash as it was before, since outside investors will still have limited information about the solvency of any individual bank.
Miron advises government stand aside and let events take their natural course. But as I observed yesterday, bailout opponents are, by establishment media standards, wackos. Even someone with a Harvard pedigree like Miron. He might rate a column at CNN's website as a zoo-like curiosity, but he's not worthy of an interview on CNN itself, or any similar outlet, where only the Very Serious People* in alignment with the Tom Friedmans and David Gergens of the world get a hearing.
And when Hank Paulson says "jump," those folks say, "how high?"
*As Glenn Greenwald might call them, although he limits the term to matters of foreign policy
Sphere: Related Content
As usual the DC-NY clown squad fiddles around the burning, while meanwhile the real market goes about its of adjusting fast and efficient.
In this case the implosion of fiat-money credit markets is driving folk into real money, a.k.a. gold:
First Cash Financial Services recently announced it was shutting down its auto lending division so it could focus on its pawn shops. Their profits rose by 26 percent in Q1 and 39 percent in Q2.
http://www.msnbc.msn.com/id/27121805/
Funny how the uneducated working poor understand the fundamentals of this better than our Very Serious Elder Statesmen.
And last I checked, Outstanding Investments’ precious metals portfolio is still going gangbusters…
Comment on October 15, 2008 @ 10:17 am
Gold does not do good in recessions because it takes money to drive up prices, and in recessions nobody has any discretionary funds. Gold prices will work their way down from here until the end of the recession. And besides those with real cash to spend are licking their lips over the low stock prices and don’t want to tie up cash in gold.
Comment on October 15, 2008 @ 4:10 pm
First-time poster, long-time reader.
I want to say that in a history of brilliant columns, this one stands out.
“non-Nobel Prize winner” — best attribution of 2008.
Bravo Mr. Gonigam.
Comment on October 15, 2008 @ 4:32 pm
you need to read Peter Schiff article in the San Diego Union Tribune “just stop paying your mortgage” to get a sense of how bad this is going to be. It’s much worse than you think in terms of moral hazard and financial armageddon. It’s hard to profit from moral hazard although it seems easy to just look for the subsidy and try to receive it rather than pay it. There is a bigger problem out there than bank solvency. That is yesterday’s story and already discounted in the market-
Comment on October 15, 2008 @ 5:27 pm
It’s distressing even to a socialist to realize that our inevitable path to socialism through Barack Obama will have to go through Karl Marx’s play book amd debauch the monetary system. I feel a little guilty in benefiting from the coming bull market in moral hazard, because for a while we are still going to be playing the winners and losers game and keeping score that way
Comment on October 15, 2008 @ 5:29 pm
Even an elimentary grade education enables one to discern that the south sea tulip derivative bubble is burst,possibly to the tune of $500t.Though barely able to work out a bar tab,even I can see that the world cannot move on until most of this paper is declared ‘null and void’.
Comment on October 15, 2008 @ 5:45 pm
Zimtran - I don’t know how old you are, but the last time we had a really serious recession in this country was in the 1970’s, and that’s when gold went through the roof. Soon, everyone will have “money” as Bernanke has promised to drop it from helicopters. The only way central banks know how to fight a serious recession is to print, print, print. Hold on to your gold, folks.
Comment on October 15, 2008 @ 6:23 pm
There is no Plan A, B, C, E or E!!
Paulson, on his last year at Goldman Sachs, knew bigtime trouble will be coming. He ran the derivative, swaps and other highly leveraged stuffs. He knew them like the back of his hands. The his hands said the housing bubble is out of control and subprime will blow. That will hit all banks bad but investment banks like a neutron bomb. That why he ‘offered’ to take the Treasury job - it is time to move to the government side and make sure Goldman Sacks will be protected in the upcoming upheaval. This should be a straightforward task given the Absolute Idiot Bush is ‘in charge.
That why Paulson, on the day he arrived at Treasury, has a Plan G. G for Goldman Sachs. Here’s the outline:
- When the bubble burst, manage the firestorm from the Treasury, and direct the war as chief of the Plunge Protection Team.
- One by one, destroy Goldman’s key competitors, except JP Morgan. (Achieved)
- Bail out only those whose counter-positions severe affect Goldman (Achieved, such as AIG)
- Enlarge the crisis and scare Congress to cough up unlimited amount of money to refinance the banks, but the biggest slice goes to Goldman. (Achieved)
- Ensure when the dusts settle, Goldman Sachs will be ever stronger domestically and globally. Use US bailout strategy to trick Europe and Asian banks into putting their own banks in vulnerable positions. (In progress)
- Finally, Goldman Sachs to start a finance war in the ferocity of WW3, and take over key international banks. Goldman now controls world finance and trade. This is the final objective of Plan G.
See, Paulson still works for Goldman Sachs.
Comment on October 15, 2008 @ 7:08 pm
It is time that the Nobel committee seal their reputation by giving the peace prize to Bush and co.
Comment on October 15, 2008 @ 7:46 pm
Tom,
Last time I checked those ‘money bombs’ Bernanke threatened to drop are satelite guided and will only hit banks and other financial institutions, not Joe Public. When I see four digit+ tax rebate checks rolling in every quarter then I will believe that hokum about dropping money from rotory wing aircraft. Bernanke can’t drop money willy nilly because it will drive America, and the world, into Zimbabwe style hyperinflation, nothing kills a currency confidence like _blatantly_ running the presses. He wants to _appear_ to be surgically attacking the problem, spreading the money to the general public really takes of the mask.
Also, the “paper gold” and “physical gold” market will be nowhere near each other. In order to advantage of Gold at this price you need about $84,000 in CASH right now, buy a contract, make a trip to NY to take possession of the physical contract. I don’t know anybody with that much cash and that much free time. You could pay 5% over spot and buy from NTM, but once again you gotta have the cash.
As long as all the worlds central banks are going to do the same thing, flood their markets with paper, then we’ll have a strong buck and _relatively_ low Gold.
Comment on October 16, 2008 @ 1:55 am
How far can we go on just one engine?
Wll the way to the crash site.
How much lower can the markets go?
All the way to zero.
But they won’t. They very well could end up at about 4500-5000 on the Dow. And it is not extreme to anticipate a true bottom (don’t I wish I had one) of 1450, or 90%.
I won’t get back into this game, or any other game until my confidence returns.I managed to scrape together some PM’s and took possession before the availability disappeared. Whoa! Now it’s cash accumulation only.
Probably for the next two years.
Comment on October 16, 2008 @ 6:13 am
I’m a non-economist, but I can add up my bar tab.
All that money/debt that is being dumped into the frozen credit markets is supposed to thaw it out. Yeah it’s stuck there now but when it thaws we all better pray that it makes a quick exit to money heaven.
I know inflation is about the money supply but right now the only deflationary force that is showing up in my wallet is from the lower cost of oil. The oil producers are already rumbling about reducing output to prop the price up, so enjoy it while you can.
Lastly, governmental deficit spending is exploding. There is a HUGE argument that that in and of itself is inflationary.
So far my “assets” (house and modest savings) are decreasing in value. Thankfully I live in the boondocks so no one was flipping condos for a million $ profit and so far my property value is holding up ok. (deflation)
The cost of everything I CONSUME has gone up. Yeah the price of gasoline is down, but I still haven’t seen any “rollback” on prices at the supermarket and the volume of everthing is being cut even if the “price” hasn’t gone up. (inflation)
And the winner is “stagflation.” An unhappy compromise at best.
The really really BAD worst case scenario is HYPER INFLATION. Not OMG look at my stocks tank or my home equity evaporate, but I just spent my life savings on a loaf of bread.
To every one waiting to get rich in gold (and I do believe it will hold it’s “value”) the best quote I’ve read is that “$4,000 and ounce gold is possible but you wouldn’t want to live in a world where that happens.”
The best I can figure out is to be sure I have a garden, goats, chickens and enough food and neccesities that I don’t have to go to the grocery store for at least a year. “Food Security” may take on a whole new meaning if this trainwreck continues.
Comment on October 16, 2008 @ 9:03 am
Oh yeah, there’s a lot of counter intuitive stuff going on in the currency and the gold markets right now, but we are in like “Act One or Two.” Unsustainable or unrepayable levels of debt haven’t historicaly translated into a strong currency.
The traditional engines of wealth and a healthy economy are capital (we ain’t got none) and productivity (Uh Oh).
Comment on October 16, 2008 @ 9:20 am
PPS
What we are witnessing isn’t “socialism” it is Fascism. Kind of socialisms really mean cousin.
Comment on October 16, 2008 @ 9:23 am
PPS
What we are witnessing isn’t “socialism” it is Fascism. Kind of socialisms really mean cousin.
Comment on October 16, 2008 @ 9:23 am
I discovered Austrian Economics in 2005. I read history, I saw war ramping up, and no taxes to pay for it, thus, money printing galore to come…
I did what I was told I would regret…I sold all my paper, 401k, IRA, etc. Paid the taxes and penalties, and stuck the majority in gold.
I feel fine, what’s the problem with the rest of the so called ’smart’ world? They were ‘transparent’ as hell to me.
Comment on October 16, 2008 @ 9:55 am
right on PK…that’s where the rest of my resources are…4 acres and a tractor, working on getting her running on something I call H.O.E.M. gas….(pronounced ‘home’) betcha want to know what THAT is…;-)
Comment on October 16, 2008 @ 10:01 am
how it is fascism?
Comment on October 20, 2008 @ 6:38 am
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