Thoughts on Markets and Government
Friday, November 14th, 2008I can’t say I’m surprised that giving the U.S. Treasury $700 billion to spend any way they want has turned out badly. They don’t seem to have any idea how to fix the problem. The reason? I think they have misidentified the problem itself. It’s *not* liquidity, but solvency. If the treasury “invests” in banks, what are banks going to do with the money?
I suspect that Henry Paulson expected investment banks to keep doing what they were doing before they got the Fed money (lending money indiscriminately against inadequate reserves), and they decided instead to shore up their books and make sure they had the reserves for their current book, figuring that some day, possibly soon, there’d be an accounting. As a result, the bailout did not have the desired effect.
They now claim that their efforts are directed thusly: “Mr. Paulson said Washington will also try to directly increase the amount of loans available to students, car buyers and credit-card users, and possibly homeowners threatened by foreclosures as well.”
OK, but when more money is made available for students to spend on college tuition, tuition simply goes up (look down the page a little for the appropriate bit). As for car buyers, people either can’t take on more debt or simply do not *want* a new car right now. Stopping foreclosures *might* keep home prices up, but is that what we really want? Won’t that prevent first-time homebuyers from jumping in to the market just when fresh money is needed? Furthermore, I heard a piece on TV (no link, sorry) that 40% of people offered mortgage work-outs in lieu of foreclosure don’t want them. Either they can’t afford *any* mortgage, don’t want to live in their now failing neighborhood any longer, can’t maintain such a big house or have simply decided that the whole thing was a huge mistake. 40%! You can’t *make* people stay committed to their mortgage if don’t want it, and you certainly can’t make them start on a new one.
I heard more today on CNBC regarding credit card use. The retail numbers came in ugly (worst since 1992, blah blah blah), and some of these retailers have pointed out that credit card use has actually dropped more than sales. This seems to indicate that people don’t want more debt. After the media hammering at economic doom for most of this year, they have apparently gotten the message and are saving for a rainy day, or at least saving that bit of remaining credit limit for Christmas gifts. So, Paulson can lead a horse to water, but he can’t make it drink. Big shock there.
The way to fix the markets is to let them fix themselves. Excesses must be worked out. Banks and companies that can’t make money need to be allowed to fail, yes, even GM. GM wouldn’t just disappear — the assets would be sold off to people who might see their way clear to using a factory to make a car that consumers actually want to buy. Handing GM a vast pile of taxpayer money is just going to perpetuate more of their stupid, unworkable ideas. Furthermore, I don’t know if anyone at GM has noticed, but gas costs about 1/2 what it did a couple of months ago. This doesn’t encourage people to take a bath on something that guzzles gas to lay out money on a new something smaller that uses less.
Regarding a Detroit bail-out, Megan McArdle sums it up well here:
What bothers me is twofold. First, after the unions have put companies into an untenable position, they come to the rest of us looking for a handout to continue the unsustainable levels of pay and benefits. Almost everyone I know makes less than an autoworker, and has a whole lot less job security. Why should they pay autoworkers for the privilege of making cars no one wants?
(my emphasis) The whole article is worth a read.
I got off on a bit of a tangent there, but I just can’t figure out why it’s the government’s place to eliminate the business cycle. The trillions of dollars of taxpayer money (and new national debt) are only serving to confuse the markets. Traders find it all uncertain and unknowable as the government could pop up anywhere and mess up their bet. This means they don’t really want to get back in and chase a moving target. Regular investors are going to continue to sit on cash instead of “picking up bargains”, as the TV bubble-blowers like to say because they don’t believe they’ve seen a bottom. Certainly, the volatility index seems to indicate that the wild gyrations will continue a bit longer.
I find it hard to believe the bear market is over. First, we’ve only got the leading edge of the bad set of economic numbers coming our way. Second, the market contrarians have always said that a bear market is not over until no one is talking about buying any stocks. They must be completely repudiated as an investment to come back from the bottom. I think they’ve got that right, and I’m just not seeing it yet.
Ultimately, what the government and the Fed are trying to do is prevent deflation. This is the famedhelicopter money. of story and song. Oil’s price has crashed to nearly half what it was just a couple of months ago. Agricultural commodities have followed. Gold is doing really poorly — something that makes no sense considering the continual debasement of the dollar. Sure looks like deflation to me, but only time will tell. If they do manage to kick off inflation or worse, hyperinflation, what comes after that? A deflationary collapse.
To my way of thinking, treating markets like something that can be controlled is utter folly. They are a force of nature. Mucking with them in a half-assed way will only make the inevitable disaster that much worse. And yes, anything government is doing is half-assed. A couple of trillion dollars is a lot of money, but it’s nothing compared to the global derivatives market.
I wonder if Bush and Paulson cooked this thing up thinking that either a) it would work or b) it would fail, but so spectacularly that no one would ever try this bit of nonsense again.
