So, anything in the financial news today?

The British economist much smarter than I pens one of his best ever.  He thinks we are headed for the Second Great Depression unless — and possibly even if — Congress reconsiders and passes this bill or something like it.  I quite possibly fall into his “mad, but honest and principled” category.  Anyway, do not miss this.

LOLFed has a typically snarky take.

Or you can flee to the safety of Personal Bank (Dealbreaker cull).

So, what do I think?  Glad you asked.

It seems to me that we are facing two problems.

One is illiquid assets.  As Buffett suggested in his interview, a lot of the “garbage” does have a bid from private equity or elsewhere, but not in quantity because all of the huge institutions are selling.  So although you might be able to sell $1 million worth of MBS for $0.40 on the dollar, if you try to sell $1 billion worth, you will get nothing.  Buffett’s vision is for the Treasury to step up and buy at market prices but in Government quantities.  And he is right that the taxpayer would almost certainly profit from such a scheme, since market prices are almost certainly depressed.  The idea would be to unclog the system and help the market find a new equilibrium.

But it would not address the second problem, which is that the banking system as a whole is quite possibly insolvent.  Or at least, it is impossible to know which banks are solvent, which amounts to the same thing.  We may need to recapitalize the banking system, which will almost certainly not result in any profits for the taxpayer.  This argues for something like the Swedish model.  (By the way, if you search Google for “Swedish model”, you will need to scroll down a bit.  In this context.)  This is where government injects equity into the failing banks, nationalizes them, kicks out their directors and officers, and eventually re-privatizes them.

The trouble with today’s bill is that it tries to give Treasury the authority to do both of these things without mandating either.  Do you really want to give the ex-CEO of Goldman Sachs $700 billion to buy anything from anyone he wants?  But then again, the alternative could be very bad indeed…

What would I like?  I would like our leaders to clearly state both problems — or whatever the problems actually are, since nobody has stated them yet.  Then I would like a separate bill to solve each problem, with clear rules about when and how the money would be deployed.

Part of the problem here is that government’s mere presence is probably making things worse.  The markets were working on finding a new equilibrium.  True, it was not going very well…  But now, with the government about to spray $1 trillion in an unknown direction, how could the markets possibly price anything efficiently?  When someone is about to deploy that kind of capital, it is irrational to buy or sell anything until you have some idea what they intend to do.  Had this bill passed, the guessing game would have shifted from “what is Congress going to do” to “what is Paulson going to do”.  This is not helpful, in my opinion.

A good bill would make it more clear which assets will be purchased and how their prices will be determined.  Then the market could incorporate that information.  Right now, the uncertainty is the last thing we need.

OK, so is this bill better than doing nothing at all?  I do not know.  I do not know whether it will fail to solve the problem and leave us wishing we still had that $700 billion in a year or two.  On the other side, I do not know that the crisis in the real world will be as bad as some (OK, many) economists claim.

I am using the present tense to describe the bill because I think they are going to try again later this week.  As before, I remain of two minds whether I want to see it pass.

1 comment to So, anything in the financial news today?

  • nemo_has_been_found

    I think it’s weird that you’re in two minds. I probably don’t have as much information as you do (I don’t read or follow stuff other than just a few blogs), but I can’t see how giving a $700B taxpayer funded account to Mr Paulson with zero accountability achieves anything. If we do this, he will come back for more. And more.

    What we need is what you point out…we need a clear statement of the problem and a solution that holds also the responsible people fully accountable.

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