Monday, September 29, 2008

Thoughts On Bailouts and Market Economies...

Well, it looks like the government "quick fix" $700 Billion bailout plan has lost in the House of Representatives...and the DOW is down 777 today (a perfect number?) So, what does all this mean?

Based on my experiences in the stock market, both as an investor and a broker, my first opinion is there is no set rhyme or reason for these market gyrations. There are times when market indicators are dire, well positioned leaders predict economic doom...and the market goes up inexplicably. There are other times when market indicators are robust and positive...and the market tanks. It's really hard to predict with much rationality...which is why I got out of the brokering business in the late 80s. Today’s drop is bigger than Black Monday of 87 in points...but not as big percentage wise.

Obviously the market is diving today because the congress, hopefully representing the voice of "the people", has turned back the huge bailout of wall street on the backs of the American taxpayer proposed by those most responsible for this turn of events. One could argue that in the long run, this could be a positive sign...that the "people" want to enforce responsible market factors to kick in and not just another Band-Aid on the wounds of unsound financial practices of our financial institutions. Perhaps the market should go UP today based on this news. Why doesn’t it? Well, primarily because there has still been no solid proposition of how we are going to rebuild our economy and financial institutions based on reason and sound planning. These government gyrations and pendulum swings of legislated solutions based on emotion have few good track records. It is interesting to note that this denial of the bailout plan is bi-lateral...both parties rejecting almost equally this bailout. This may be the most agreed upon decision in the life of this current House of Representatives.

SO...some may say, "what would YOU do instead of the current proposed plan"? Of course, we have little leadership in the current administration as a lame duck Presidency that has been arguable asleep at the wheel...focused on wars and foreign affairs, and not even handling THAT well. But, if I were President, and HAD ANY RESPECT FROM THE ELECTORATE...which is required to get anything done...I would make the following recommendations...

1. TEMPORARILY oversee all the failing major financial institutions...oversee all foreclosures and attempt rewriting all these failing mortgages at lower, more affordable interest rates and payments. Contracts would need to be adjusted for current market conditions and values. This would provide medium term relief for consumers caught in this crossfire.

2. I would reassign all IRS agents to work on behalf of re visiting these contracts and working out new payment plans with the mortgage holders/home owners. While reviewing these mortgage contracts, they should prosecute any fraudulent owners who have falsified the applications to gain these generous, sub prime mortgages. I would also prosecute any mortgage agent who participated in that fraud.

3. On all these renegotiated contracts, half of the interest/profits would go towards repayment of the federal bailout loans/funds. Only until a financial institution attained a stable balance sheet and approved, knowledgeable management, and repayment of all public funds would they be allowed to continue as a private institution.

4. I would outlaw all lobbyists and lobbying companies. They would not be allowed to enter federal properties (US Capitol, White House, Pentagon, etc) to sell their wares or pass out their "gifts" to elected politicians or US Military staff. Any travel by US Government elected officials would have to be paid for and approved by the government...their "boss"...with obvious reportability to the American people..."the Stockholders".

5. KEY...put all these assets on the Market to domestic investors who would benefit from investing in and turning around this failed companies. Let free enterprise and OPM (Other People’s Money) fill the gap of this needed 700 BILLION (or couple TRILLION?) instead of tax dollars and federal funds...which just aren’t there anyways.

6. And yes, a constitutional amendment REQUIRING a federal balanced budget. Why should the government get better treatment and terms on running business than the average citizen? Our leaders should not be able to spend money they don’t have, and HAVE to get permission to go into debt by we...the STOCKHOLDERS.

7. Pull back funds from some of these "golden parachute" CEOs and CFOs who have robbed their companies of 150-200 MILLION per person as they went under or out of balance. These "entitlements" should be held as illegal...a form of direct robbery from the shareholders of those companies.

8. And even more fundamentally, put more accountants and business administrators in public office...while replacing the mostly "Lawyer" crowd we have in government now.

I will think of more things to recommend, but basically I am saying...we cannot put this bailout money in the hands of the same "leaders" who caused this mess to begin with. It's time to clean house, just like a regular enterprise would do under these circumstances. It is time to pull back spending of the government...not give them more carte blanche cash for spending. It is time to get a true accounting and a LONG term plan before we bail out anything or anybody. We need to go back to market based economics and rewarding the WINNERS instead of the LOSERS. We need to batten down the hatches financially together...everyone do their part...and never forget this example of how greed and unrealistic financing can potentially take away our freedoms. We need to return to the plan " form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity..." Our USA Constitution.

We can do it...even if it will be painful for a while...


Bibiana said...

Bueno, Ed, auque el dia de hoy fue terrible, lo que yo percibo de tu blog es que, este proyecto no paso por alguna razon.

Mas adelante se veran los cambios en la economia de EEUU, segun entiendo puede ser mejor asi.

Ojala que asi sea, pues este lunes negro, fue devastador.
"No hay mal que por bien no venga" Dice un dicho popular en mi Pais.

Hank Robinson said...
This comment has been removed by the author.
Hank Robinson said...

Been wondering what's the "hold up"?

Seems there may be a part of this bill worth looking at.

What first seemed to stretch from our local banker to Wall Street may now be a serious concern on the global debt we have accumulated over the many years.

All the trillions we have borrowed may now be coming due. Or the world may foreclose on America.

Consider this section of the "bailout bill".


The Secretary shall coordinate, as appropriate, with foreign financial authorities and central banks to work toward the establishment of similar programs by such authorities and central banks. To the extent that such foreign financial authorities or banks hold troubled assets as a result of extending financing to financial institutions that have failed or defaulted on such financing, such troubled assets qualify for purchase under section 101.

Looks like we can't just print money anymore.

I don't think the banks in China, England or Australia will take that.

You have to wonder why they have to push this thing so fast. Aren't the other great leaders of the world in NY right now?

There are many American taxpayers that are not happy to bail out the fat cat bankers. I wonder what they would think if they found out this money may be going to foreign soils.

edward said...

Thanks for the comments Bibi and Hank. I think Hanks observation about a lot of this bailout money going to cover our foreign obligations is a point well taken. points out the fact that "As of April 2008, Japan, Mainland China and the United Kingdom were the three largest holders of US Treasury Securities. Japan and China own a combined one trillion dollars plus of US debt, with Japan holding $592 billion and China holding $502 billion.

The ten trillion dollar figure works out to $32,895 for every man, woman and child in the United States."

I'm quite convinced that a significant portion of this emergency bailout will go to these foreign holders of our treasury notes. After all, SEc of Treasury Paulsen will have almost carte blanc on using most of these funds with very little oversight. Scary scary...

Hank Robinson said...

I saw a long interview with Warren Buffet last night about this very thing.

A couple things he said were this:
1. The Treasury Secretary job is more important than the V.P..
2. The current situation is like oxygen. When you have it you are fine. Without it for 5 min. You are desperate. This is in reference to credit.
3. The bailout of AIG was a good deal for the govt. They were close on private money but couldn't make it work. He would hire the person that made that deal for the govt. The reason is our govt. can wait things out. Buy cheap and hold.
4. He feels the same way about this deal with loan crisis. He refers to it as an investment. If done right it could be positive in the long run.
5. He does believe in the capitalist market. He would make some tweaks to it but it works. These ups and downs are a part of greed reflected in other periods such as the dot com. It's like Cinderella at the ball. We all know there is a pumpkin time and we keep on wanting to stay. The other problem is there is no clock on the wall.
6. How long till were out of this. He said 6 months to 2 years. 6 months he agreed is not realistic. Could actually be a long time as in 5 years.
7. He said the next step will be inflation.

I believe the further big picture of this deal is the value of the dollar. "The current account is the broadest measure of America's dealings with the rest of the world because it includes not only trade in merchandise and services but also investment flows. The deficit represents the amount of money the country is borrowing from abroad.

For all of last year, the current account deficit totaled $731.2 billion. That imbalance meant the country needed to borrow $2 billion every day from foreigners to finance its activities.

So far, foreigners have been happy to sell their products to the United States and take U.S. dollars in payment, investing that money in everything from U.S. Treasury securities to American stocks and real estate.

However, there are concerns that this massive transfer of wealth into foreign hands could at some point disrupt the U.S. economy if foreigners decide they do not want to hold as much in dollar-denominated assets. If they began dumping their dollar holdings, big declines in U.S. stock and bond prices could follow, sending the dollar sharply lower in value and pushing domestic interest rates up."

Hopefully Paulsen will do some good negotiations on this. People like the Chinese take our dollar and then invest it in other countries where they are running a surplus.

As many read this blog are interested in foreign travel and Latin/South America. I did see a recent interview with the President of Colombia.

Overall he comes across as a great man, and he is. Still you get the feeling you would not want to get on his bad side.

He is definitely concerned about losing his support from the Republicans with fighting terrorist and the Free Trade Agreement which he is still working on.

Colombia has some oil which is being invested in by the Chinese. But if the US market falls and a Democrat gets in office the Colombian peso may be affected.

The Colombian economy has been doing much better. According to their President much of this is the result of working against terrorist.

The question may be providing debt relief to Americans as part of this crisis. There is a point not to when looking at how Colombia managed to bail out their banks in crisis