UT Professor Critiques Bank Asset Bailout Plan

[haha]

Part II Geithner Obama Kowtowing to "Massively Corrupted" Banks Galbraith Says: Tech Ticker, Yahoo! Finance

[Gone4Good]

Funny how the proponents of "receivership", "nationalization", or "bankruptcy" never mention how letting multiple companies, each with liabilities the size of Italy's GDP, go under will impact the economy. Apparently "the market will sort it out" . . . kind of like it did when Lehman went under, only 100x as much I guess.

[samclem]

Funny how proponents of neverending government bailouts and cash infusions never explain how these will somehow indefinitely prevent the market from correctly pricing the underlying assets. There's a true value to all the leveraged paper and other promises, and it depends on the value of what is underneath. The market will set that value. Those arguing that the government should prop up that value (through easy credit, underwriting private investor risk, directly buying the stuff up at inflated values, etc) apparently favor a continuation of the same policies that got us to this point. "Hey, we're not ready to end the party! Bring out another keg of cheap money and let the good times roll! Send the bill to our kids."

As the saying goes-if you find yourself in a hole, the first thing you should do is stop digging.

[haha]

Quote:

Originally Posted by samclem Funny how proponents of neverending government bailouts and cash infusions never explain how these will somehow indefinitely prevent the market from correctly pricing the underlying assets. There's a true value to all the leveraged paper and other promises, and it depends on the value of what is underneath. The market will set that value. Those arguing that the government should prop up that value (through easy credit, underwriting private investor risk, directly buying the stuff up at inflated values, etc) apparently favor a continuation of the same policies that got us to this point. "Hey, we're not ready to end the party! Bring out another keg of cheap money and let the good times roll! Send the bill to our kids." As the saying goes-if you find yourself in a hole, the first thing you should do is stop digging.

Here is a thoughtful John Hussman article (aren't they all!) with a similar viewpoint.

Hussman Funds - Weekly Market Comment: Fed and Treasury - Putting off Hard Choices with Easy Money (and Probable Chaos) - March 23, 2009

Ha

[Spanky]

Quote:

As the saying goes-if you find yourself in a hole, the first thing you should do is stop digging.

.. and start flying, climbing, crying, asking for help, praying ...

[tryan]

I don't understand this statement:

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Even Bear Stearns' bondholders can expect to get 100% of their money back, thanks to the generosity of Bernanke

The bonds have already been devalued. Losses have already occurred.

100% of current market value - OK. How is that bad?

[Gone4Good]

Quote:

Originally Posted by samclem Funny how proponents of neverending government bailouts and cash infusions never explain how these will somehow indefinitely prevent the market from correctly pricing the underlying assets.

That isn't the intent. The intent is to prevent uncontrollable cascading failures (narrowly averted last year).

Further elaborated here . . . http://www.early-retirement.org/foru...35&postcount=8

[ziggy29]

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Originally Posted by haha Part II Geithner Obama Kowtowing to "Massively Corrupted" Banks Galbraith Says: Tech Ticker, Yahoo! Finance

For what it's worth, Dr. Doom seems to like it:

http://www.nydailynews.com/opinions/...s_new_tox.html

[samclem]

Quote:

Originally Posted by . . . Yrs to Go That isn't the intent. The intent is to prevent uncontrollable cascading failures (narrowly averted last year).

Phew! Boy, were we lucky. I hope we keep piling on the tax money trillions at a time, as no price is too high to keep narrowly avoiding these postulated cascading failures.
We have to ask ourselves: Is it really prudent to mortgage the future and guarantee a lower standard of living for future generations rather than take our medicine now? Some think it is, and politicians definitely are prone to push this unpleasantness beyond the next election.

[Gone4Good]

Quote:

Originally Posted by samclem Phew! Boy, were we lucky. I hope we keep piling on the tax money trillions at a time, as no price is too high to keep narrowly avoiding these postulated cascading failures. We have to ask ourselves: Is it really prudent to mortgage the future and guarantee a lower standard of living for future generations rather than take our medicine now? Some think it is, and politicians definitely are prone to push this unpleasantness beyond the next election.

The only thing we're all postulating is the impact of current policies on "future generations"

As far as the impact of letting a large financial institution fail, we already know the answer to that. We tried it with Lehman and it was a disaster. Everything I posted in the prior link happened. This isn't guess work, but historical fact. The CP market shut down, MMFs started to fail, the securities of nearly all financial institutions were in a death spiral, bank revolvers got cut, the debt of companies with large CP balances was getting heavily sold, etc. etc. The only thing that arrested the decline was unprecedented governmental action (ranging from MMF guarantees and government purchases of CP to the FDIC guarantee of newly issued bank bonds), all necessitated by the Lehman failure.

We tried it your way. It didn't work.

[samclem]

Quote:

Originally Posted by . . . Yrs to Go As far as the impact of letting a large financial institution fail, we already know the answer to that. We tried it with Lehman and it was a disaster.

I disagree. The sun rose the next day, people went to work as usual, and it didn't cost me a cent except for money I had voluntarily invested with Lehman and in the other affected firms. That's the way it should be. The "disaster" is what has happened since.

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Originally Posted by . . . Yrs to Go We tried it your way. It didn't work.

"Mom, I tried to ride the bike and it didn't work. It's impossible!"

Is there any point at which holders of the "let's keep the party going!" view will admit it is a failure? Will this "AHHH! Financial meltdown, we can't afford to have these banks fail" bogeyman be trotted out as justification for spending more even when the US Government has a majority stake in most large industries and we've "invested" $15 trillion that our kids have to pay back? Is this position "falsifiable" or will it remain the preferred course of action regardless of what it costs in tax dollars and destruction of free markets?

[Gone4Good]

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Originally Posted by samclem I disagree. The sun rose the next day . . .and it didn't cost me a cent except for money I had voluntarily invested with Lehman

Well gee, why do you think that is?

1) Temporary Money Market Fund Guarantee Program - stopped the run on MMFs
2) Commercial Paper Funding Facility - provides a liquidity backstop to A-1/P-1 commercial paper and allowed non-financial companies to roll maturity CP
3) Money Market Investor Funding Facility - facilitates the sale of money market instruments in the secondary market
4) Temporary Liquidity Guarantee Program - prevented a liquidity crisis across the banking sector by allowing them to issue FDIC insured bonds
5) Capital Purchase Program - Injected capital into financial institutions

Every one of these programs was put in place as a direct result of Lehman's failure. And every one was designed to stem a run on the financial system that was in train. These programs are the reason the system didn't melt down completely in October. In fact, one could credibly argue that the government is much more deeply involved in the financial markets today as a direct result of Lehman's bankruptcy . . . nice work.

Your argument is akin to someone who's had the fire department put out a kitchen fire and is now claiming that 1) the fire didn't exist because the bedroom is undamaged and 2) even if the fire did exist, it would have gone out on its own.

Besides, if I adopt your strategy of ignoring historic fact, I can then argue that the sun actually did not rise the next day.

[Running_Man]

Quote:

Every one of these programs was put in place as a direct result of Lehman's failure. And every one was designed to stem a run on the financial system that was in train. These programs are the reason the system didn't melt down completely in October. In fact, one could credibly argue that the government is much more deeply involved in the financial markets today as a direct result of Lehman's bankruptcy . . . nice work.

No the government is much more involved in the financial markets because they allowed the situation to get to where it presently is by the design they allowed to be created for the safety of financial systems. It was assumed that the government would not allow any major financial player to fail after LTCM, Bear Stearns, et al.. and that risk was not priced into the system. The sudden realization that perhaps that might not be true caused a sudden market revaluation, after all markets are totally efficient correct?

For the most part the same folks that said what happened in October which required the massive government intervention were the same people arguing when this potential problem was being argued, that such an outcome was totally impossible due to the risk being spread throughout the financial system.

I am not really sure what is the best course of action for the future of the average citizens but I always am of the mind that the people that cause the problem should be wiped out not rescued. And you have to get to a bottom to begin moving up. That seemed to work in the 1930's even with all the banks closing and people losing all their money. People who saved their money and allocated to stocks could survive the crisis, right FIRECALC?

An attempt to get people back in homes they should not own by offering 8k credits and mortgages sponsored by the US government far below what would be offered without government intervention for the actual risk, and trying to push the average investor to increase the speculative nature of his holdings by artificially lowering investing rates is not a recipe to rise off a bottom but a recipe for postponing the bottom, economically speaking. This results in a need for nimble speculations as the markets tries to adjust to political favors, rule changes and expected future economic activity.

For now the markets are pleased that the US government appears willing to fund the housing speculation market. I just don't see an easy reversal from the trillions being spent without the severe impact on the economy in the future.

As a result of the 1930's economic crisis the US went off the gold standard. As a result of the mid 1970's crisis the US government ceased using Silver. I assume by the end of this crisis the world will get off the dollar standard.

[mb]

Quote:

Originally Posted by . . . Yrs to Go Funny how the proponents of "receivership", "nationalization", or "bankruptcy" never mention how letting multiple companies, each with liabilities the size of Italy's GDP, go under will impact the economy. Apparently "the market will sort it out" . . . kind of like it did when Lehman went under, only 100x as much I guess.

James Galbraith is not a Friedman-type let-them-fail, the invisible-hand will work it out free-market economist.

He is a neo-Keynesian and the son of John Kenneth Galbraith.

I suspect that his solution is that the gov should take control of these institutions so that the gov can "properly regulate" them for the "greater good."

[Gone4Good]

Quote:

Originally Posted by Running_Man It was assumed that the government would not allow any major financial player to fail after LTCM, Bear Stearns,

Nobody ever assumed Bear was too big to fail. Nor Lehman. And in ordinary times, neither would have been. These aren't ordinary times.

Quote:

Originally Posted by Running_Man That seemed to work in the 1930's even with all the banks closing and people losing all their money. People who saved their money and allocated to stocks could survive the crisis

Hard to argue with that.

Although most folks think (or at least hope) we can achieve an outcome better than a second Great Depression.