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Monday, March 23, 2009

We’re going to need a bigger boat

For whatever reason, when I look at what the government is doing to fix the financial crisis, I keep coming back to this scene.

It’s still pretty unclear what’s being proposed.  If it is a proposal to manipulate the price of bad assets higher using tax dollars, expect it to fail.  By tying the dollar to overvalued assets, the government is likely to dilute the value of the currency… and once again, this hurts everyone, not just the companies and individuals that probably deserve to go out of business for their lack of risk control and over-leveraged lifestyle.

The market jumps at any sign of hope, no matter how sparse the details.  This is a sign that we remain in a bear market.  At the bottom, hope is lost.  Geithner has proven to be a significant disappointment and represents the interests of the banks and not the taxpayers, despite his office representing the people.  He has too many NY Fed grown ties and has been too close to the crisis to approach it objectively or in a fresh way.  As Paul Krugman, noted economist and predictor of the credit crisis, puts it in a NY Times op-ed this weekend:  “By my count, this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan, each time adding a new set of bells and whistles and claiming that they’re doing something completely different.”

The plan seems to involve banks bundling bad assets into securities which would be sold to investors and then backstopped by the FDIC.  The CDO problem was that banks bundled bad assets into securities which were sold to investors, and rating agencies based their ratings on the strength of their underwriters without sufficient due dilligence or judgment of the underlying securities.  In this case, we have the same assets, repackaged, rated toxic and FDIC guaranteed.  This may be a good plan for investors but it’s a potentially catastrophic investment on the part of the government, especially as the underlying notion seems to be to have the FDIC set the pricing and overpay for these assets.

The bottom in the market cannot be reached until the ramifications of the full faith and credit of the US government is brought into question.  As long as people believe that everything will hold together without a major decline in the dollar due to this potentially massive dilution of the currency then we have not factored in all the negatives.  This is not a standard recession.  Bubbles pop and leave craters in their place.  Efforts to rush recovery will prolong it as we spend up our future fighting off the past.

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