Tuesday, September 23, 2008

Maintenance of Illusion is Not a Sound Economic Policy

Hello all! Still amazed at what happens every day? I know I am. This blog was given special treat last post as Michael Panzer himself, the writer of the blog http://www.financialarmageddon.com/ stopped by and left a comment. I always stop by Mr. Panzer's site and his listing of this blog on his blogroll gives me a bunch of traffic! Thanks again for stopping by! That is exciting stuff.

Participation is Voluntary for Wall Street
There was a ton of coverage done on Hank Paulson and Ben Bernanke's testimony today in front of the Senate. There is so much to hash over, I can in no way cover all the details. I want to focus on a couple of particularly annoying points that stuck with me.

The first point is the desire by some in the Senate to attach CEO and other top executive pay restrictions during this time of Federal giveaways. It seems only correct to me to insist that the same boardroom members that brewed up this debacle should only get a minimum pay package on the taxpayer's bill. I mean, if indeed we are on the verge of total systemic collapse, multi-million dollar bonuses should be low on the CEO priority list as opposed to keeping a firm open.

Of course, this is not the case! When pressed about the pay cap inclusion, Mr. Paulson shows us that the inmates are running the asylum and that the same fellows that caused this mess still expect to make a killing. His quote (loosely; I cannot pour over all the transcripts right now):

"It may be difficult to get firms to participate if pay restrictions are enacted."

Did you get that? Insolvent banks looking to pocket big money from the taxpayers will not participate if their pay structures are messed with. No problem, none at all. These guys can opt out and please sign a form so I know who to short to ZERO if the ban is ever lifted! The sheer nerve of such a statement shpws you all you need to know about this mess.

Maintenance of Illusion is Not a Sound Economic Policy
The whopper of the day belonged to Benny Bernanke. Confused senators questioned how in the world the treasury purchase of toxic paper would make any difference, as there are plenty of buyers for that paper right now. Bernanke lowered the boom on us wall as he explained that the purchase price of the bad paper will be close to FULL WRITTEN VALUE! Of course! I myself had serious doubts about how this plan would help banks with capital, and here is the answer:

The FED and Treasury Plan on Paying Mythical Prices for the Trash paper

Reread that sentence again. There is no potential benefit here. This is a cash grab plain and simple. Even some senators that were pretty sure to rubber stamp this bill visually winced at this detail.

I can really appreciate the effort here. The main problem is that too much debt was created and extended with no reasonable expectation that is would ever be made good on. The reality has now sunk in. These instruments (Mortgage paper, school loans, Second mortgages, car loans) have a value, but that value effectively renders most firms insolvent. The solution presented by the FED and Treasury is to pretend. Seriously, the plan is to play make believe that these securities have close to their written value.

I am sorry to inform the powers that be of this simple fact:

Maintenance of Illusion is Not a Sound Economic Policy

I know, it's rough. I know this stinks. Is it really the best plan put forward by our "best and brightest" economic minds to play make believe? I guess it seems like a good idea right now, but can this kind of kicking the can really provide for a real recovery?

The root cause of all this is that our economy is now prefaced on runaway consumer spending. The years of 2002-2007 were 5 years of credit binge gone wild. Even if banks were helped out, even if we dodge a big bullet, lending cannot go on at a rate anywhere near where it was those 5 years. Everyone that wanted money got it. The only good borrowers left do not need any money. There is no way to make lending the driver of our economy unless we pursue the same wild lending practices that got us here.

I think Hank and Ben should take this weekend and do something more useful with their time. Your homework assignment boys is to flesh out a system where the velocity of credit and debt runs at about 1/3 of what it did during 2002-2007. Extra credit will be given for charts or funny cartoons. Have at it.

Have a good night.


Kosty said...

A google search on "American OR us debt-revolt" brought me to your blog and this:

"Think about it. If after 2008 every "homeowner" that was 20% or more underwater on their mortgage defaulted, just what in the world do you think the banks can do? At that point the banks would be fighting for life and looking to the government for help, not chasing joe smoe for his mortgage payment. Likewise for credit cards. Imagine car repossessions in the millions! It is just not feasible.

I do not think we are anywhere near this kind of event. I have just been thinking about it over the last week."

You were a bit off on the timetable in your last paragraph but pretty much nailed it in the first. Kudos.

watchtower said...

"If this was being prepared for "some time" then the "emergency" status was manufactured."


This is from KD's post over at the Market Ticker today talking on the fabulous "bankster bail out bill"(link to the side).

I am really starting to wonder if TPTB have my best interests at heart :)