Plan B: Last chance to avoid financial system failure

www.itulip.com ^ | October 13, 2008 | Luigi Zingales

[Freedom_Is_Not_Free]

After pointing a gun to the head of Congress, threatening a financial meltdown in case his plan was not approved, Treasury Secretary Hank Paulson has finally arrived at the only logical conclusion: his plan will not work.

Desperate for a Plan B, Paulson is slowly warming to the suggestion of many economists: inject some equity into the banking system. Unfortunately, it is too little and too late. The confidence crisis currently affecting the financial system is so severe that only a massive infusion of equity capital can reassure the market that the major banks will not fail, recreating the confidence for banks to lend to each other. The piecemeal approach of 100 billion today, 100 billion tomorrow used with AIG will not work. It will only eat up the money, without achieving the desired effect—without reassuring the market that the worst is over. Simply stated, nothing short of a 5% increase in the equity capital of the banking system will do the trick. We are talking about 600 billion. Unfortunately, even if the government is willing to spend this kind of money, there are three problems.

[Freedom_Is_Not_Free]

For all who said Paulson's plan to buy the toxic paper wouldn't work -- the one reportedly as THE PLAN that Bernanke had set his little heart on from the very beginning -- you were RIGHT.

[Freedom_Is_Not_Free]

You are being pinged. Too much pinging going on here! But then, these are historic economic times.

[Freedom_Is_Not_Free]

I think the government is making a massive mistake if they are too aggressive trying to forgive mortgage debt by owners on the edge of foreclosure.

If they are too aggressive renegotiating loans for troubled home owners, more people who can afford their mortgages but are upside down on those loans will just stop paying, in hopes the government will come and lower their loan and interest rates.

Rather than reduce the losses by preventing foreclosure, this will increase the losses by reducing cash flow to the banks.

You get more of what you subsidize. If the banks subsidize bad behavior through mortgage defaults, they will get more of them.

[vigilence]

McCain needs to demand a Special Prosecutor be appointed to investigate who profited from this bailout and how it all began. By doing so he gains the support of a large portion of the electorate, Republican and Democrat, and BO is bound to be against it for fear of the outcome and that he may have to enforce it if elected. Downside is it would expose Republican acquiesence over the years.

[AndyJackson]

Last chance to avoid financial system failure

The financial system has failed. That is not a debatable point. The question is how to clean up the mess to ensure that the broad economy will start to function in the manner resembling a productive first world economy and not a debtor nation sucking on the world's credit and prodcution excesses. The other question is how to allocate costs and how to restore some sort of moral justice to the world by exacting penalties on those who executed the old system in a manner mostly to their own benefit.

[Travis McGee]

"The logic of the conspiracy theorists in this regard is, of course, impeccable: Goldman alumnus Josh Bolten runs the White House, while his former boss, Hank Paulson, runs the Treasury. They both speak regularly to former Treasury Secretary Bob Rubin, now over at Citigroup, who ran Goldman before Paulson and who keeps Paulson and Bolton dangling like puppets on a string. They all supposedly touch base with the heads of the Italian and Canadian central banks—both Goldman alumni—and with Robert Zoellick, head of the World Bank, ex Goldman. What's more Paulson is now getting his advice on how to handle the crisis from Ken Wilson, the recently retired Goldman partner and financial-institutions M&A banker, who Paulson just recruited to Washington to help him out. Already at Treasury were Goldman alumni Dan Jester, Anthony Ryan, David Nason and Bob Hoyt, the department's general counsel. And—the conspiracy crowd can't help but point out—Neel Kashkari, 35, a former vice-president at Goldman who Paulson recruited as assistant secretary of international affairs in 2006, has just been appointed—by Paulson—to run, on an interim basis, the new $700 billion bailout fund."

~~William Cohan, "Does Goldman Sachs Really Rule the World?" October 2008

“Gentlemen, I have had men watching you for a long time, and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.”

~~President Andrew Jackson, on the 2nd National Bank

[palmer]

Plan B won’t work either, but it does have the advantage of the bumping up the stock market directly. Unfortunately it also creates a fatal connection between the govt-created credit bubble and the beneficiaries of the credit bubble (and it’s not us). Another reason that plan B is stupid is that China would invest directly in our banks if they thought it was a good idea. Instead our govt is borrowing the money from China to invest in our banks with the collateral being the sweat of future American taxpayers (if there are any left in the future).

[Attention Surplus Disorder]

Ping away! How to play a bond collapse? Did you ask?

The only ways I know of are:

RRPIX Rydex
RYJUX Rydex

DXKSX Direxion

The Rydex funds have decent yields circa 4% and I like their charts. The Direxion fund I consider a litle off-brand. Also has a much lower yield, circa 1.3%.

[L,TOWM]

The contrarian investor in me thinks that if you are owning rental property or apartments on either coast, you are probably set for a while.

Of course their are a few investment vehicles out there that probably have a lot of this stuff undrlying their REIT or LP units, but I have not researched that deeply. A lot of this stuff is probably only eligible for 501(d) types, though. And I am not there yet...

[bioqubit]

There are banks that are solvent and there are banks that are not. They all know who is who. The ones that are solvent are the ones to “restart” the credit engine. More precisely, there is already a credit market working just fine between banks that are solvent and trust each other. The problem is with bringing the lousy bastards back into the system which are the bigger banks.

In the fullness of time, the solvent banks will help the market get back to normal a lot faster and with less pain than government intervention, and it is entirely possible government intervention could ruin the good the solvent banks are doing. All the more reason for Paulson to stay home and eat his Peking Duck.

[JasonC]

Please remove me from this and all future ping lists. Unsolicited pings are spam. Thank you.

[Freedom_Is_Not_Free]

I apologize for assuming you might be interested and I’ll immediately remove you from my ping list.

Thank you for promptly letting me know and please accept my apology for the bad assumption.

I pinged you because I value your opinions. I’m sorry you don’t necessarily want to participate in the discussions. It’s my loss

[Freedom_Is_Not_Free]

Until you started posting it, I had absolutely NO CLUE that Goldman Sachs had their tentacles so thoroughly into the US government. I knew that business and government became one and the same the way people float back and forth between the two. But that revelation of the cozy relationship between Goldman Sachs and the Bush Administration, and reaching out into worldwide institutions strikes like a solid punch in the face.

WE THE little people have no chance and never did.

[Freedom_Is_Not_Free]

There is a reason I post these articles here for discussion. I want them deconstructed. If they stand scrutiny, I learn from that. If they don’t, I learn from that too.

And I am in deep debt to all of you, my teachers.

I hate the process of investing and stayed ignorant intentionally. I want the outcome of having much more money and of investing shrewdly, but I am disinterested and even repulsed by the process of it. I hate money and what people are willing to do for it and what it can turn otherwise good people into.

As a result, I never was into wealth creation. I only wanted just enough to pay my bills and maintain a small premium of both fun and security. Nothing more.

The housing bubble collapse and subsequent liquidity crisis has caused me to want to study as much as I can about economics, but my foundation I had was very weak. Everything I am learning about economics has come in just the last 2 years. I appreciate the contributions from people here, even while it is maddening learning who is reliable through all the noise. And the noise here is deafening.

Thanks to all of you my teachers. The lessons are timely and not only helping me to protect my savings during this crisis, but I can help others as I pass the information along.

Before the internet, before FreeRepublic, I would have just remained ignorant.

Thank you all.

[Freedom_Is_Not_Free]

Yes. Thank you!

[Freedom_Is_Not_Free]

I beg to differ that all the banks “know who is who”.

If everybody knew who was clearly solvent with low future writedowns, then banks would be fighting to lend to them and to get their business. And they would be lending to any and all good risks.

That the works are completely jammed up tells me that they do not “know who is who”. What makes you believe anybody reliably knows who is solvent. Today, we know that the Fed has put their money on keeping 9 big banks solvent, so there is high likelihood that those 9 banks are in decent shape.

Other that, who is solvent and who is insolvent?

[Travis McGee]

Yep, it’s a total sham. The last insult, the last twist of the dagger in the back, was GS ex-CEO Paulson naming GS ex-VP Kashkari to dole out the 700+ billion.

[Travis McGee]

JasonC is on the other side in this disaster. Check this out:

"I'd like to see mainstreet try to live for 6 months without financiers directing their activities. They be reduced to shooting each other over the last can of campbells."

5 posted on Saturday, October 04, 2008 3:38:33 PM by JasonC

Amazing as it might seem, there are folks who support the banksters even today, and not only that, think we'd starve without them helping to guide our lives.

[Freedom_Is_Not_Free]

Yes, its a big club. A big Trilateral Commission One World Order club.

[Terry Mross]

I can’t believe McCain is that stupid. Two neighbors bought the same size house for the same price with the same ARM. They both adjust. Neighbor “A” pays his higher payments. Neighbor “B” gets his principle and rate lowered. Does McCain think “A” would continue to pay?