Tuesday, September 30, 2008

The Bother with the Bailout Bill

The text of the Bailout Bill in PDF format by Fox News.

World is shocked, shocked ... House Reps throw out corporate social security act!

Video archive material on hearings: Democrats blocking Republican calls for regulation of Fannie Mae and Freddie Mac.

The video shows what no one wants to learn: the way to hell is paved with good intentions; but the effect of selfish capitalism means prosperity for all! Point being, a system that works, in tandem with the right philosophy based on the real reality (as opposed to a perceived, or wished one) takes courage - isn't for the meek or the feeble of spirit ...


Until we get that (Barack), engineering and regulating will lead to more failures, crisis and mayhem!

(For your own good and) for morality read fifty times "The Fable of the Bees:"

The Grumbling Hive: or, Knaves Turn'd Honest

A spacious Hive well stock'd with Bees,
That lived in Luxury and Ease;
And yet as fam'd for Laws and Arms,
As yielding large and early Swarms;
Was counted the great Nursery
Of Sciences and Industry.
No Bees had better Government,
More Fickleness, or less Content.
They were not Slaves to Tyranny,
Nor ruled by wild Democracy;
But Kings, that could not wrong, because
Their Power was circumscrib'd by Laws. >>>

Here's the best explanation yet.

But here's the thing:

Real Clear Politics: "In Times of Crisis, Trust Capitalism", by Joseph Calhoun

The US government (...) claim this intervention is urgently needed and if we don’t act, the consequences are dire. Dire, as in New Depression dire. Have these supposed experts on capitalism forgotten how it really works?(...) There is not a shortage of capital for well run financial companies. There is, however, a shortage of capital for companies that have acted irresponsibly with investor capital in the recent past. For some reason, our political leaders believe this is a failure of the market, but isn’t this what should be expected from rational investors? (...) The biggest bank failure in the history of the United States happened last Thursday night and by Friday morning, it was business as usual. (...) The taxpayers didn’t lose anything and depositors didn’t lose anything, only investors. That is how capitalism works in case everyone has forgotten. The “crisis” we face today is not a creation of the market. (...)

There has been much commentary recently about the role of Fannie Mae and Freddie Mac in the creation and expansion of the sub-prime mortgage market which many believe to be the cause of this mess. That criticism is certainly warranted, but little attention has been paid to the real culprit – the Federal Reserve.

There has always been a stigma attached to borrowing directly from the Fed and for good reason. If a bank can’t get other banks to lend it money, that tells the market something about the condition of the bank in question. Last August, Bernanke convinced three large banks to borrow at the discount window in an effort to remove that stigma. When that didn’t work, he concocted a scheme to allow banks to borrow from the Fed in anonymity via a mechanism he called the Term Auction Facility. (...) Banks will not lend to each other because they don’t know which ones are really in trouble. The rise in inter-bank lending rates is a rational market response to a lack of information.

Furthermore, why pay those inter-bank rates when the Fed or ECB is offering easier terms? These opaque lending facilities are just part of the problem created by the Fed and Treasury. (...) Now markets are waiting on pins and needles as the politicians haggle over the details of the latest bailout attempt by the Fed and Treasury. This has introduced another roadblock to the re-capitalization and reorganization of the financial industry. Companies that are in need of capital are waiting to see if the plan will bail them out of their difficulties. If Hank Paulson is willing to pay an above market price for their bad loans, why should they dilute their equity now? (...) Why take Tony Soprano terms when Uncle Sam is willing to let the taxpayer take the hit for you?

(...) This plan short circuits the capitalist model which would allow the stronger, well-run institutions to gain market share and/or expand profit margins. The long-term effect will be to lower the overall return on capital in the financial services industry. The government apparently believes that the key to economic recovery is to allocate limited resources in an inefficient manner. Does that make sense? (...) The Fed is the one keeping the market from functioning. The Treasury does not need to enter the market for it to start functioning; the Fed needs to leave the market.

Paulson has said that the cause of the current problems is the housing deflation, but that ignores the elephant in the living room. The housing bubble, which was concentrated in a relatively small number of states, was caused by the reckless actions of the Greenspan Fed. The consequences of that bubble have been exacerbated by the Bernanke Fed. (...) We got into this mess because we tried to avoid the consequences of the Internet bubble. We will only make things worse by trying to avoid the consequences of the housing bubble. We are not on the verge of a new depression. (...)

Investors who made mistakes in these markets should be held responsible and those who navigated the Fed-distorted market should be rewarded for their wisdom and prudence. Enacting the Paulson plan will not allow that to happen and our economy will suffer for it in the long run.

The Japanese tried to prop up failed banks in the aftermath of the bursting of their twin bubbles and the result was 15 years of stagnation. Why are we emulating a strategy that is a demonstrable failure? A better alternative would be to allow capitalism to work as it should and stop the interventions of the Fed in the money market. Trust capitalism. It works. >>>

There have been interviews today with a few very experienced traders who went through all the financial crises in current history. They said the following: "Banks do not lend each other- have no trust, what they need are intermediaries, so-called clearing houses." This is apparently normal practice, but investment banks do not like it because they'll make less money in that way. He ended by saying that the turning point has probably been reached.

Another in The Netherlands pointed out that propping up Fortis Bank with a relatively vast amount has failed. Stocks plummeted 23,5% today in spite of it. He said that "this must run its course".

The above may be an indication that the rebellious House Republicans may be right, specifically considering the astronomic amount of money involved. Perhaps this shake out (or correction) must be allowed to run its course. Bailouts stand symbol for distrust in markets. Per above article here too, "Trust capitalism. It works."

- Filed on Articles in "The Economics and Monetary Dossier" -


James Higham said...

He ended by saying that the turning point has probably been reached.

Yes, but in what direction?

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