From
Minsky Moment to Minsky Meltdown to…?
Learning
to Stop Underestimating the Likelihood of
“High
Impact, Low Probability” Events
Liquidity
Trap and Depression is a Serious Risk
It isn’t called the dismal science for nothing!
The evolution of capital markets prices will be determined largely
by (a) the evolution of what will come for the economy and (b) how much of that
has already been reflected in asset prices. Such a statement of the seemingly
obvious would normally be implicit and left unsaid, but its explicit statement
seems warranted by the combination of the extraordinary nature of the times, the
degree of uncertainty on the outlook, and the volatility of the markets (perhaps
suggestive of the tenuousness of market participants’ convictions, in
particular due to the unpredictability to date of government policy
interventions).
Clearly, asset prices (credit spreads, equity values and commodity prices,
in particular) went from, in September and earlier, pricing in expectations of
a moderately bad economic environment to, in October and November, pricing in
expectations of a rather worse -- and more intransigent -- economic outcome.
But how bad an economic outcome exactly is likely, and did the
markets, at their worst, finally go too far? (And, hence, the bounce from those
levels is warranted.) Or is the process that we’ve witnessed this year of the
markets continuously playing catch-up to the economic reality (as it evolves,
incorporating the various feedback loop effects) ongoing? (And, as such, the
worst has not yet been priced in and there are further lows to come.)
Equity and commodity markets, in particular, were relatively slow
to discard their optimistic assumptions, including, for instance, that subprime
is contained, that housing was bottoming, that there would be global
decoupling, that the U.S. consumer is resilient, that the corporate sector has
strong balance sheets, that (each successive round of) extraordinary government
policy intervention would cure our ills, that emerging markets were exempt from
the developed world’s problems, etc.
But does a breach of 800 on the S&P and of $50 on oil suggest
that we’ve finally reached capitulation? Or has the severity of the situation
still not been fully assessed, implying that as far as markets have retreated,
many prices have still not reverted far enough to reach fair values based on a
realistic assessment of our ultimate outcome? Or, alternatively, is it perhaps
then possible that the process of discarding optimism may be done, and market
prices did in fact reach reasonable approximations of fair value, but there
remains plenty of room to become even more pessimistic? (Markets, after all,
are notorious for overshooting.)
The answers to these questions rely largely on the answer to the
following one:
How bad a recession?
As Harry Truman said, a recession is when your neighbour loses his
job, a depression is when you lose yours.
The NBER has (finally) acknowledged
that the
In 2007, it was considered questionable whether the
Before the Great Depression of the 1930s any downturn in economic
activity was referred to as a depression. The term recession was then developed
to differentiate periods like the 1930s from smaller economic declines, such as
those that occurred in 1910 and 1913. There is, however, no standard definition
of what constitutes a depression; the NBER does not declare or define economic
depressions. However, it does say that “the term depression is often used to
refer to a particularly severe period of economic weakness. Some economists use
it to refer only to the portion of these periods when economic activity is
declining. The more common use, however, also encompasses the time until
economic activity has returned to close to normal levels.”
Though the odds of revisiting the depths of the Great Depression
are low, thanks in large part to the lessons learned from that episode (and the
macroeconomic policies and countercyclical programs that were the result of
those lessons), that is not to say that the probability of A depression is equally low. If a depression is, as most would
agree, a prolonged period of recession, or a significant and prolonged downturn
in the economy, characterized by declining business activities, falling prices,
rising unemployment, increasing inventories (and a degree of public fear),
there is certainly some degree of likelihood that such an outcome could result.
In fact, it is the purpose of this paper to document that such a risk is indeed
quite significant.
The Great One
Marriner S. Eccles served as Franklin D. Roosevelt's Chairman of the Federal Reserve from
November 1934 to February 1948. He detailed in his memoirs what he believed
caused the Great Depression:
As
mass production has to be accompanied by mass consumption, mass consumption, in
turn, implies a distribution of wealth -- not of existing wealth, but of wealth
as it is currently produced -- to provide men with buying power equal to the
amount of goods and services offered by the nation's economic machinery.
Instead
of achieving that kind of distribution, a giant suction pump had by 1929-30
drawn into a few hands an increasing portion of currently produced wealth. This
served them as capital accumulations. But by taking purchasing power out of the
hands of mass consumers, the savers denied to themselves the kind of effective
demand for their products that would justify a reinvestment of their capital
accumulations in new plants. In consequence, as in a poker game where the chips
were concentrated in fewer and fewer hands, the other fellows could stay in the
game only by borrowing. When their credit ran out, the game stopped.
That
is what happened to us in the twenties. We
sustained high levels of employment in that period with the aid of an
exceptional expansion of debt outside of the banking system. This debt was
provided by the large growth of business savings as well as savings by
individuals, particularly in the upper-income groups where taxes were
relatively low. Private debt outside of the banking system increased about
fifty per cent. This debt, which was at high interest rates, largely took the
form of mortgage debt on housing, office, and hotel structures, consumer
installment debt, brokers' loans, and foreign debt. The stimulation to spend by debt-creation of this sort was short-lived
and could not be counted on to sustain high levels of employment for long
periods of time. Had there been a better distribution of the current income
from the national product -- in other words, had there been less savings by
business and the higher-income groups and more income in the lower groups -- we
should have had far greater stability in our economy. Had the six billion
dollars, for instance, that were loaned by corporations and wealthy individuals
for stock-market speculation been distributed to the public as lower prices or
higher wages and with less profits to the corporations and the well-to-do, it
would have prevented or greatly moderated the economic collapse that began at
the end of 1929.
The
time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail
their consumption in an effort to create a margin that could be applied to the
reduction of outstanding debts. This naturally reduced the demand for goods of
all kinds and brought on what seemed to be overproduction, but was in reality
underconsumption when judged in terms of the real world instead of the
money world. This, in turn, brought
about a fall in prices and employment.
Unemployment
further decreased the consumption of goods, which further increased
unemployment, thus closing the circle in a continuing decline of prices.
Earnings began to disappear, requiring economies of all kinds in the wages,
salaries, and time of those employed. And thus again the vicious circle of
deflation was closed until one third of the entire working population was
unemployed, with our national income reduced by fifty per cent, and with the
aggregate debt burden greater than ever before, not in dollars, but measured by
current values and income that represented the ability to pay. Fixed charges,
such as taxes, railroad and other utility rates, insurance and interest
charges, clung close to the 1929 level and required such a portion of the
national income to meet them that the amount left for consumption of goods was
not sufficient to support the population.
This
then, was my reading of what brought on the depression.
Based on this account, it seems clear that there are a number of parallels between the situation that prevailed in the lead-up to the Great Depression and that which has pertained recently: inequitable income distribution, excessive credit growth and leverage, misallocation of resources and malinvestment, excess consumption.
Lesson
learned: “You're right, we did it. We're very sorry. But thanks to you, we
won't do it again.”
On the occasion of Milton Friedman’s 90th birthday, at a conference
at the
Bernanke was saluting Friedman and Schwartz because they, in
Bernanke’s words, “provided what has become the leading and most persuasive
explanation of the worst economic disaster in American history”, in their 1963
tome, A Monetary History of the United States. Their view was that the
economic collapse was the product of monetary forces, and that the Fed was to
blame for allowing the money supply to contract by one-third, turning a
garden-variety recession into the disaster it became. This was quite
controversial at the time, but the monetarist perspective gained much more
credibility during the inflationary episode of the 1970s, and, by 1976,
Friedman had won the Nobel Prize.
Bernanke, who has spent a good portion of his professional life
studying the Great Depression, and is widely-acknowledged as one of the
foremost experts on it, obviously seems intent on ensuring he honours the oath
he made to Milton and Anna. The variety of liquidity facilities the Fed has put
on offer, to an ever-expanding range of companies (not just depository
institutions), and against increasingly suspect collateral, along with the
dramatic expansion of the Fed’s balance sheet in recent weeks, is testament to
his determination. In fact, the Fed’s maneuverings run contrary to a principle
once held dear by many central bankers, Walter Bagehot’s famous 1873 dictum that
a lender of last resort in a crisis should lend freely, but at a penalty rate, to
solvent but illiquid banks that have adequate collateral.
The problem is, as so succinctly described by Mark Twain, that “to
a man with a hammer, everything looks like a nail”. Bernanke’s “hammer” is his
understanding of the causes and consequences of the Great Depression, and the
alternative policy prescriptions he has determined should have been implemented
at the time. His “nail” is this unfortunate current circumstance, which
provides the (fortuitous?) opportunity to put his years of research into
practice (it must have been fate that one of the world’s foremost experts on the
Great Depression was in place to address Round Two!).
None other than Ms. Schwartz, who Bernanke
effusively praised for her analysis with Friedman of the Great Depression,
believes Bernanke and the Fed are fighting the last war. "The Fed has gone
about as if the problem is a shortage of liquidity. That is not the basic
problem”, she argues. “The basic problem for the markets is that [uncertainty]
that the balance sheets of financial firms are credible." In the 1930s,
the country and the Federal Reserve were
faced with a liquidity crisis in the banking sector. As weak banks failed,
depositors worried that their bank would be next, which prompted bank runs on
otherwise healthy institutions. At the time, that Fed also did not heed
Bagehot’s advice, but in that case it was by sitting idly by, so bank after
bank failed, causing a self-reinforcing spiral, bringing down principally banks
that should not have been in distress. But "that's not what's going on in
the market now," Ms. Schwartz says. “Today, the banks have a problem on
the asset side of their ledgers -- all these exotic securities that the market
does not know how to value…Why are they 'toxic'?" Ms. Schwartz asks.
"They're toxic because you cannot sell them, you don't know what they're
worth, your balance sheet is not credible and the whole market freezes up. We
don't know whom to lend to because we don't know who is sound. So if you could
get rid of them, that would be an improvement."
As such, Ms. Schwartz actually believed that
the first incarnation of the TARP was a step in the right direction, though
with a potentially intractable problem: the question of how to price the assets
the TARP would acquire. If priced at current market values, the assets’ sale
would instantly make many institutions insolvent, which would of course
instantly realize the fears that were and are currently locking up the credit
markets, as a number of banks failed. This realization is surely why TARP v.1
became TARP v.2, with Paulson changing gears to recapitalize firms directly.
Ms. Schwartz believes this change in plan was tantamount to changing the
objective from trying to save the banking system to instead trying to save the
banks. But by keeping otherwise insolvent banks alive, the government is
prolonging the crisis. Rather, "firms that made wrong decisions should
fail," she says bluntly. "You shouldn't rescue them. And once that's
established as a principle, I think the market recognizes that it makes sense.
Everything works much better when wrong decisions are punished and good
decisions make you rich."
Predicting
the Improbable
Roger
M. Kubarych is Chief US Economist of UniCredit Global Research, and is also the
Henry Kaufman Adjunct Senior Fellow for International Economics and Finance at
the Council on Foreign
Relations. It is his view that “nobody likes to pay attention to low
probability, high-cost events. We've see this over and over again. And so you
bring up to somebody in authority that if this happens and this happens, then
this will be the result. It isn't that you are dismissed as being adolescent or
puerile, you're just too early. There's a great story that Chuck Brunie has
written about Milton Friedman, for whom he managed money. And Brunie talks of
once asking
It
is to be hoped that the advances in economic policies, research, and, more
simply, understanding should leave policymakers today better suited to
accurately assessing the likely course for the economy. Recent events, however,
cast doubt on that view.
At the Cato Institute’s 26th Annual Monetary Conference
in November, 2008, Don Kohn provided the keynote address, in which he explained
why, despite the lessons learned from recent experience, he, like many other
members of the FOMC, still believes that monetary policy should not be used to
influence asset prices. One of his key arguments was that identification of an
asset bubble in real-time is very tricky. He now recognizes that the Fed
underestimated the scope for housing prices to fall and therefore also
underestimated the severe economic fallout and thus the difficulty of mopping
up afterwards. After his speech, in the Q&A session, when asked to address
the risks of a Japanese-style deflation in the
Thus, on the one hand, Mr. Kohn insisted the Fed could not identify
asset bubbles (even extraordinarily obvious ones like housing, by virtue of fairly
basic metrics like price-to-rent and price-to-income ratios). He also effectively
admitted the Fed was lacking the insight or imagination to foresee, despite the
fact that housing was a clear leading indicator in 8 of the last 10
This is hardly reassuring talk from a policymaking institution that
has so obviously failed to appreciate the gravity of the situation it found
itself conducting policy in. For instance, Ben Bernanke famously declared
repeatedly throughout the spring of 2007 that the problems in subprime were
likely to remain contained, a mistake he just recently acknowledged. As a
second example, the Fed effectively ignored the recommendations of one of its own
Governors, Fredric Mishkin, who, at the Jackson Hole Conference in August 2007,
urged central bankers to respond quickly and aggressively to large falls in
housing prices with immediate large scale interest rate cuts. Mishkin argued,
to no avail, that a delay in a policy approach would just guarantee that when
easier policy was finally implemented it would be much less effective and
therefore need to be of even greater magnitude. This was hardly the only
occasion of an FOMC member’s good advice being ignored, as Alan Greenspan continuously
rebuffed warnings about the risk due to increasingly unscrupulous behaviour in
subprime mortgages, including from former Governor Ed Gramlich. Greenspan has
belatedly offered his own unique version of a mea culpa, admitting in testimony
in October before the House Committee of Government Oversight that he was wrong
about regulation: "I made a
mistake in presuming that the self-interests of organizations, specifically
banks and others, were such as that they were best capable of protecting their
own shareholders and their equity in the firms," and said his
free-market ideology was flawed-- "I don’t know how significant or
permanent it is. But I have been very distressed by that fact... I was shocked,
because I have been going for 40 years or more with very considerable evidence
that it was working exceptionally well.”
As Dean Baker, one of the economists who predicted the current
predicament, put it in October 2007, “It is disconcerting to hear that the
weakness in the housing market is greater "than had previously been
expected" will be "more prolonged than had seemed likely" or
would persist longer "than previously anticipated." The members of
the Federal Reserve Board are supposed to be knowledgeable about the economy
and therefore should not be continually surprised by events. The fact that they
have been repeatedly surprised by the weakness in the housing market raises
serious questions about their competence.” Based on the above, it does not seem
credible to believe that government policymakers necessarily have the requisite
knowledge, insight and tools to sufficiently address the problems it faces.
Are We
It is always easier to give advice to others than to put it into action yourself. Many American economists were quite critical of Japanese policymakers in the 1990s.
…
Hypocritical? U.S. has been faster and more aggressive on some fronts (int rt cuts; albeit not as fast as Mishkin and others would have like; missed opportunities in 2007 due to failure of vision) but failing to follow the advice it gave Japan on other fronts (take your pain up front; let/force the weak to die while supporting the strong; use FDIC and bankruptcy for what they were designed for (WAMU example may have been worse than LEH in terms of f’g up prospects of financials raising more capital in the private markets)
…
As Yves Smith, who authors the blog naked capitalism, is fond of saying, “persisting in a failed course of action is not a sign of intelligence.” None of the liquidity facilities enacted by the Fed to date has proven effective at stemming the credit crunch, yet the Fed insists on repeatedly returning to that same old dry well. This goes back to Anna Schwartz’s observation – the fact of the matter is that the Fed’s programs are designed to address a liquidity crisis, but this is not a liquidity crisis, it is a credit crisis (or debt crisis, or solvency crisis).
….
Fed transparency a thing of the past --- disingenuous about quant easing; refusing to disclose the banks it has lent to or the assets it has bought (Willem Buiter calls this a symptom of the Fed’s cognitive regulatory capture; this is a type of concession (in order to avoid stigma?) the banks have not earned, and has not been granted to anyone else, including automakers, who have had to hang their dirty laundry in public, as they should if they’re begging for public funds
….
Great Depression Round Two – What’s the Right Parallel?
Earlier in this paper, I have alluded to the similarities between
the
It is
1930s Smoot-Hawley --- today, beggar-thy-neighbour exchange rate
depreciation, export subsidies; plus collapse of shipping; BDI down 94%, Cass
Freight similar; letter of credit for trade n/a; ports (Long Beach, L.A.) =>
activity slowing, plus what is being offloaded is sitting warehoused not going
anywhere
…..
Exports
and investment primary sources of growth; personal spending was growing at a
fast rate, but (a) still a very low proportion of economy, (b) very cyclical,
and very reliant on income growth (personal savings huge in China b/c no social
safety net (nor even a large stable of kids to support you); (c) food a larger
component of spending, and growth in spending was in large part a food price
effect; (d) factories shutting down like crazy, workers losing their jobs
(riots already); investment was for exports, so as X slows, so too does
investment;
…
Fiscal
stimulus may have had less to it than meets the eye
Contemporary forecasts of doom and
gloom
You
no longer have to resort to reading the bearish analysis of prescient economist
Nouriel Roubini to receive a significant dose of doom and gloom. In fact, you
don’t have to read economists at all, not when chief executives provide
assessments such as these:
JP Morgan
Chase & Co. CEO Jamie Dimon, November 11, 2008
“We think
the economy could be worse than the capital-markets crisis. You really need to
separate them because they have completely different effects on our businesses
and on most businesses.''
Merrill
Lynch Chairman and CEO John Thain, November 11, 2008
“Right now,
the
Former
Goldman Sachs Chairman John Whitehead, November 11, 2008
“I think it
would be worse than the depression. We’re talking about reducing the credit of
the
Oppenheimer
& Co. Managing Director Meredith Whitney, Nov. 30, 2008
“My outlook
has been negative for over a year and, technically, I have been “right” on my
calls. Seeing massive capital destruction has brought me no pleasure, but
unfortunately I see little on the horizon that would change my outlook. In
fact, after observing the
analysis
of the global outlook from JPMorgan Chase, once among the most bullish of
analysts, in 2007-08 leading voice arguing about risks of global inflation.
Now, under the rubric “A bad week in hell”, JPMorgan states that: “Increasingly
signs point to a deep and synchronized global recession” ; “Once again, we have
taken an axe to near-term growth forecasts for the developed world and will
likely follow up with additional downward revisions for emerging economies in
the coming weeks. Already, our forecasts suggest that global gross domestic
product will contract at a near 1 per cent annual rate” in the fourth quarter
of 2008 and the first quarter of 2009” ; “it is likely that the coming six
months will see headline inflation dip below zero” ;
JPMorgan
expects shrinkage this quarter at an annualised rate of 4 per cent in the
Minsky,
Money and Liquidity Traps
Financial instability hypothesis; Ponzi finance, etc.
…..
Keynes
“Speculators may do no harm as bubbles on a steady stream of
enterprise. But the position is serious when enterprise becomes the bubble on a
whirlpool of speculation. When the capital development of a country becomes a
by-product of the activities of a casino, the job is likely to be ill-done.”
….
Quantitative easing – how it works and its limitations
….
MV = PQ
Velocity falling
Fed pumping up monetary base, but being hoarded, so broader
measures of M no change
Debt, Debt
and More Debt
No end to this until debt has become supportable ---- a prospect
which continues to be pushed into the future by virtue of declining employment
and incomes, declining wealth via housing and equity market sell-offs, while
aggregate debt continues to increase
Global
Imbalances
(A) Deflation and lqdty trap à
bond rally has room to run
Supply (govt supply) is coming, but its merely offsetting dropoff
in bond issuance in private sector (securitized and otherwise), plus bond
demand should be expected to rise (private sector balance sheets have bonds at
historically low level as proportion of assets; pension funds also have room to
add (more LDI when alternative long-duration assets (stocks) not working out
too well)
….
But (B) what if global imbalances start to unwind (and quickly)?
That which is unsustainable by definition won’t be sustained
….
Cyclical vs secular --- (A) has been trumping (B) recently and
seems likely to continue to do so in short term but not in long term; ? is,
when can we expect the tipping point?
Frankly, nobody freaking knows --- no facts to make a good
estimation of this on ---- speculation abounds
REFERENCES
Bernanke, Ben. “On Milton Friedman's Ninetieth Birthday; Remarks by
Governor Ben S. Bernanke at the Conference to Honor Milton Friedman, University
of Chicago, Chicago, Illinois; November 8, 2002
Backstrom, Urban. “What Lessons Can Be Learned From Recent
Financial Crises? The Swedish Experience”
King, Stephen. “How to Cope With Depression.” HSBC Economics.
September 23, 2008.
Krugman, Paul. “
Krugman, Paul. “Thinking About the Liquidity Trap”. December 1999
Kuttner, Robert. “The Alarming Parallels Between 1929 and 2007:
Testimony of Robert Kuttner Before the Committee on Financial Services”. The
American Prospect. October 2, 2007.
Leamer, Edward. “Housing IS the Business Cycle.” NBER. September
2007.
Reinhart, Carmen and Kenneth Rogoff. “Is the 2007
Reinhart, Carmen and Kenneth Rogoff. “This Time is Different: A
Panoramic View of Eight Centuries of Financial Crises”. April, 2008.
Schwartz, Anna. “Bernanke Is Fighting the Last War”. Wall Street
Journal. October 18, 2008.
Tymoigne, Eric. “Minsky and Economic Policy: “Keynesianism” All
Over Again?”. October 2008.
Whalen, Charles. “The
Wray, L. Randall. “Financial Markets Meltdown: What Can We Learn
From Minsky?”. 2008.
Other Analysts, Economists and Investors Worth Listening To:
|
Economists
(from
more alarmist to more conventional) |
Analysts
and Investors |
|
Nouriel Roubini |
Satyajit Das |
|
Robert Shiller |
Meredith Whitney |
|
Paul Krugman |
Albert Edwards and James Montier |
|
Kenneth Rogoff and Carment Reinhart |
Nassim Nicholas Taleb |
|
Joseph Stiglitz |
James Grant |
|
Stephen Roach |
Jeremy Grantham |
|
David Rosenberg and David Wolf |
|
|
Jan Hatzius |
|
APPENDIX
2008Q3 Forecast Notes (need to include charts to address these points)
None of us has the time here today to fully address all the facts and assumptions that motivate our forecasts and to do those topics any justice, so I’m going to be selective today about what I discuss and focus on.
First, I’ll just briefly review some key forces at play, before digging a bit deeper into one particular topic.
-
In 2006, I focused a lot on how the housing bubble was morphing into the most serious housing recession
in the post-WWII period, and how housing has historically been a leading
indicator of turning points in the economic cycle, which did not portend well
for an economic soft landing.
o
All I can add on this topic is
that bottom-callers these days are just as likely to be wrong now as they were
in late 2006 and all through 2007
o
Obviously we are now closer to the
bottom than we were then, but that does not mean it’s imminent
o
Housing prices remain well above
historical norms with respect to either incomes or rents, the overbuilding of
the last decade has in no way been worked off, so inventories remain high,
foreclosures and delinquency rates continue to climb, and though mortgage rates
have come down, affordability has not because of the tightening of credit
conditions
-
Many times in 2007, I detailed the deterioration in the
o
Obviously, the news on this front
has gotten no better since then, with 8 straight months of job losses, the main
unemployment rate 1.7% higher than its cycle low, at 6.1%, and the most comprehensive
measure of unemployment up 2.8% from its cycle low, to 10.7%, the highest since
1994
-
Around this time last year, I
highlighted a number of leading
indicators, in addition the to housing and labour market data, that had
also served as useful leading recessionary indicators, including Paul Kasriel’s
combination of a yield curve inversion along with a YoY drop in the
CPI-adjusted monetary base, the coincident-lagging index, etc.
o
A quick update on this front is
that the Chicago Fed NAI was just released for August and its value marked the
ninth consecutive month that it indicated a strong likelihood that a recession
had begun
-
In spring 2007, I focused on the
economy’s unsustainable debt growth,
and that I believed a Minsky moment
would ultimately occur, whereby the credit markets reached a tipping point,
unleashing a vicious circle of necessary deleveraging.
o
Clearly, this is ongoing, and the
only comments I’d like to add is that the probabilities of either a
Japanese-like deflationary lost decade or the most serious recession since the
Great Depression are materially higher now than they were when I first forecast
their risk
o
What’s more, at the aggregate
level, there really hasn’t been much, if any, real deleveraging yet
§ Financial
institutions have not raised sufficient new capital to offset the writedowns
they’ve taken, so their leverage hasn’t in aggregate been reduced
§ Despite
tighter lending conditions, household debt has continued to grow, so income is
down and wealth has been down for three quarters in a row, but debt has
actually built further
§ So
debt burdens all around have become nothing if not more onerous
-
I’ve also discussed in the past
that the theory about global decoupling
would eventually be proven a fallacy
o
On this front, it has become clear
that the OECD, particularly Europe and
o
Though the outcome for emerging
markets is not yet apparent, I’ll stick to my view that they will suffer the
same fate, though to a lesser degree, though just to a more lagged extent
-
The main topic I’d like to address
today, though, is the latest incarnation of government intervention, the Toxic Asset Relief Program, or TARP, which
is doomed to failure
o
It will be no more effective than
any of the previous cases of government meddling, from the Hank’s MLEC Super
SIV and HOPENow to Ben’s liquidity measures and rate cuts to the Bear
takeunder, to the inconsistent approaches taken to the GSEs vs AIG vs. LEH vs.
Wachovia and WAMU, etc.
§ The
TARP simply reshuffles the deck chairs on the Titanic; it doesn’t do anything
to solve the problem of bad assets (leveraged-up exposure to
less-than-creditworthy borrowers), its just a proposal for the taxpayer to take
on the burden of the private sectors greed-fueled mistakes
§ Either
the TARP buys assets at true market value, which locks in losses for the
company selling the assets and meanwhile also establishes a real market price
to which other institutions must mark their similar exposures down to, forcing
their insolvency; or it pays substantially inflated values, which exposes
taxpayers to the credit risk, and inculcates a policy of privatized profits /
socialized losses, while not solving the problem as foreclosures and defaults
continue rising
§ The
only approach that has a chance of working is a taxpayer-to-taxpayer relief
program that addresses income inequality to stem tide of defaults
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