Sunday, February 8, 2009

Densha to hōmu to no aida ga hiroku aite orimasu no de, ashimoto ni go-chūi kudasai.

Tim Duy has two pieces that repeat the same basic ideas:
  1. It looks like the current stimulus is way too small, way too slow, and not exactly what one would call stimulative, given how much of it goes to tax cuts. It's lovely that the NIH and NEA and everybody else get some more money, but this really isn't a solution to our economic problems because these areas have already been so gutted that even tripling their budgets is a tiny drop in the bucket. Wouldn't it be better to tout these changes to Bush era policy directly -- "look, we think education is important, let's spend more money on it" -- rather than try to wrap these changes in a larger stimulus bill and pass it under cover of nightfall?
  2. The bank bailout is almost certain to be a fiasco. We're heading for Japan here. Monday the plan is announced, so we should really wait and see, but I'm completely out of confidence now; we've gone back to the concept of "ring-fencing". This means drawing a line in the sand every few meters, waiting for the water to go wash over it, which everybody knows it will, and then stepping back and doing the same damn thing again, that is nationalizing the banks piecemeal as things gradually get worse. This won't work with the tides either. So I don't quite know what these guys are thinking. I can't tell whether they are just completely bumbling academics, or whether their hands are tied by politics, or whether they think that they can pull one over on investors, convincing people to climb back into the financial sector in the hopes that this is the bottom, the bottom, no, really, the bottom, I swear. We are a year and half into this now. We need to stop fucking around. America is full of animal spirits and traders who will buy the palpable sense of relief that hangs in the air as each new line is drawn, and sell each panicked wave of mounting losses as they break on the shore. But the real investors, the guys who actually put up the money for factories and office buildings will just sit on the sidelines and watch.
Anyhow, a few choice quotes from Duy:

3. Triage? From Bloomberg:

The Treasury may increase its stake in lenders that are judged short of capital, the people said on condition of anonymity. Should extra taxpayer funds result in a majority ownership by the government, officials would then decide whether to liquidate the institutions, place them into receivership or retire the companies' assets over time, they said.

This sounds like Treasury would try to identify those institutions worth saving, and either nationalize or liquidate those with that require federal help on the order of a de facto nationalization. The Wall Street Journal suggests something different:

The rescue is shaping up to include a second round of capital injections with tougher terms. The government is looking to get money into banks by buying preferred shares that convert into common equity within seven years; that avoids diluting current shareholders' stakes while helping banks better withstand losses. The Treasury may also allow banks that already received capital injections to convert the Treasury's preferred shares to common stock over time.

The Journal version sounds like an effort will be made to protect existing shareholders and avoid nationalization.

My suspicion is that Treasury will talk tough, but continue a band-aid approach that dribbles out funds at a rate that both avoids the messy issue of nationalization while providing insufficient funds for adequate capitalization, all while trying to keep toxic assets in the banking system. Clearly, I am not optimistic.

By the way, I would appreciate it if someone would explain to me how all this preferred converting to common in seven years "avoids diluting current shareholders". Or is this just because some sucker other than the current one (aka the baby boomers just as they retire) will be left holding the bag?

We also have a description of the repeated parlor tricks that will be used to make it look like this is doing something. After all, we can't have the market cratering the very day they announce that the financial rapture has come.

I have got to say, at least from someone on the outside looking in, the US government appears to be headed down a path already proven to be a failure. Is more of a failing policy smart policy? But it gets worse:

The latest round of discussions also appear to have addressed the most controversial aspect of the big bank concept: Pricing.

Under the emerging plan, the government will buy toxic assets below the banks "carrying value," which is basically market value, but not at fire sale levels, the source said.

That approach will likely placate both taxpayer and Congressional concerns about the government over-paying for the assets. But, the source noted, it could "trigger an accounting problem for the banks," presumably because the institutions will have to report a loss on the transactions.

The Obama administration is now working on ideas to address that, which might entail a temporary suspension of certain accounting rules.

Classic. Absolutely classic. Is this really addressing the problem of pricing? Are we not in the same boat of "if we pay too little, the bank is undercapitalized, but if we pay too much, the taxpayer holds the bag and therefore we need to nationalize"? Obviously we are in the same boat, because the new plan may cause an "accounting problem." Like insolvency. That is, in fact, a problem, no argument from me. Apparently, though, the Administration's solution is a suspension of accounting rules. Translation – we are going to try to hide the problem.


The financial crisis has been so mismanaged that the public will not support package with a high price tag, a price tag that could climb into the trillions. And there is no way to even bring the issue to the public unless taxpayers effectively buy troubled banks, which can only be justified after first wiping out shareholders and bondholders. Then the bad assets could be rooted out once and for all. But this Administration appears no more willing than the last to consider temporary nationalization. They either do not want to own banks (I don't blame them), or they are in too deep with Wall Street interests to upend the status quo.

We used to wonder aloud at the intransigence of Japanese policymakers. How could they allow their banking system to deteriorate? Why not take decisive action? Now we know: Fettered to an adherence to the status quo and an aversion to the concept of nationalization, the political will to attack the problem head-on is overwhelmed by the enormity of the financial crisis.

I feel like it gets clearer and clearer by the day; Zakaria was right, we don't have an (insurmountable) economic problem -- we have a political problem.

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