Shoebox already took the non-Pulp Fiction version of this question, and I do recommend you read it. I may as well throw in my 2-cents’ worth.
I firmly believe that the Democrats do want the market to crater itself for their political benefit. Unlike Shoebox, I think they’ll be successful in conning the public into believing that they are not at fault, and that one-party Socialism (formerly known as Communism) is the “answer”. After all, where else but this end of the blogosphere and talk radio (and portions of Fox News) are you going to hear about the massive role the hyper-enforcement of the Community Reinvestment Act, ordered by Bill Clinton and the Democrats, had in creating the supersized-and-crashed subprime market? Where else are you going to hear that a sufficient number of Democrats on Barney Frank’s committee voted against it to kill it?
That is not to say that the financial sector didn’t have their own hand in this. They took that mandate and ran very hard with it, with ridiculously-easy-to-get very-low-to-no-interest loans on items such as cars and credit cards. They also joined the “don’t blame me” generation, demanding that others cover their losses or else VERY BAD THINGS WILL HAPPEN! Unfortunately for us, they are virtually unique in the private sector in their ability to cause those bad things to happen, and yesterday’s historic market crash and the complete lockup of institutional credit outlined by Shoebox are but a taste of what they can cause to happen if they don’t get their way.
Still, I am glad the “grand compromise” was killed yesterday. It combined both Socialist approaches of buying up the “distressed” paper and seizing effective control of the financial sector (i.e. the Fannie/Freddie/AIG approach that failed spectacularily with those 3 entities) with almost no actual upside for those few of us that still believe in the free market. Indeed, almost everything that was sold as an “upside” merely stripped out the further overreach from the Dems’ counterproposal.
There was no addressing the government’s role in creating the subprime bubble. There was no assurance that the assets bought/seized by the government would ever be turned back over to the private sector. Indeed, if the government refused to turn a sufficient number of assets back to the private sector to pay back the $700 billion (or whatever they ultimately would have spent), they would act to make it a non-paid seizure.
So, what now? If I thought this had a snowball’s chance in Hell of flying, I’d go back to the Paulson proposal, get the decision on which securities to buy up out of the Treasury (Shoebox mentioned Mitt Romney, Asian Badger mentioned Michael Bloomberg, T. Boone Pickens mentioned the FDIC this morning on CNBC), and make it very clear that “RTC 2.0” was a temporary, one-time solution that is focused on reintegrating those securities into the private sector ASAP. Further, I would repeal the Community Reinvestment Act. Beyond the modified Paulson plan and the elimination of the CRA, nothing, and I mean NOTHING, would be a part of this. No death to golden parachutes, no tax cuts, no giveaways to ACORN, no earmarks, NOTHING!
Of course, the Democrats won’t like that; they want Communis…er, one-party Socialis,…er, screw it, Communism. Unless there is something even worse, from a free market point of view, that comes up, I don’t see any action until the next Congress. I honestly don’t know if the markets can or will hold on for another quarter, and if that crash happens in the next month, 2008 will make 2006 look like a major win.
In short, we’re fucked.
AIG approach that failed spectacularily
It failed, already?
The Fed will sell off the major components of AIG and recover the $85Bn in the next 12 months.
You expected what? A 1-day turnaround to find $80++Bn?
Is the institutional credit market any more liquid than it was (wasn’t, really) just before the Feds took over Freddie, Fannie and AIG? If anything, it’s locked up even tighter. I see nothing, other than greasy assurances by the seekers of the government teat, that says that spending another $350 billion for the distressed paper (which is all that would have been released this year) would have any more effect than the
economic stimulusreturn-to-welfare package earlier this year.Dad,
I’m a cynic, Steve gets closer to conspiracy theorist on this one (and I say that with all due respect!) I think we both agree that the RTC model is one that could work here. In fact, I think you are right in pointing out AIG in that it looks to be proof of that model i.e. buy assets that are technically bankrupt but have higher value than they are booked at and get them back into the hands of folks who can do something with them. The problem we both have is the extra crap tossed into the bill. I’m at the point where I would like to argue the ideology purist position but recognize the political reality. Steve is still hoping a pure RTC bill can get passed.
Do I expect that to happen? Yes. However, the longer AIG goes without a set of buyers, the less confident I get, especially if we get a D sweep (there’s my conspiratorial side again).
I’ll point out that the FDIC did manage to find buyers for both WaMu and Wachovia without dipping into the insurance fund. However, as I alluded to earlier, there’s potentially far more to be purchased than can be purchased in the current economic environment, and every bank that fails brings that point closer.
Also, while it isn’t a direct comparison, I believe that WaMu and Wachovia went for less than what AIG went for. The fact that we don’t have a private entity or set of entities able to take AIG tells me that we are very near the point of not finding private takers for failed banks.
The one caveat I’ll give you on AIG is that it is a MUCH different animal that WaMu or Wachovia. The latter two are much more traditional banks and therefore easier to assimilate into exisiting banking institutions…AIG? Who’s their peer? Certainly a smaller group of buyers.
That’s why I said it’s not a direct comparison. I don’t believe there is a single entity that has the mix of businesses that AIG has, and the FDIC model depends on finding a peer.
Switching topics to the markets – money is flooding back into the markets (with the notable exception of the precious metals), erasing roughly a third of the loss from yesterday.
“money back into the market” = suckers bet!
Even if the deal gets done, there is so much negative sentiment right now that each piece of bad news gets significant reaction down and good news is mostly discounted. I’m guessing this thing will turn based on the consumer concluding that machinations on Wallstreet are not impacting them. Until then, markets will gyrate. No “investing” is currently happening, only “betting!”
So noted. The question then becomes, when does the typical consumer begin to spend again?
Well, let’s look at what caused them to quit:
High gas prices
Increasing mortgage costs
inability to refinance equity in homes
and now, concern about income (jobs).
Gas has come down, soon to be $1 lower than the high, that will help as it will likely allow easing on issue #2. However, getting equity to spend on new TVs isn’t going to happend for a long time. I think the jobs picture will stabalize/improve as soon as the media thinks it should i.e. recession is when your neighbor loses his job, Depression is when you lose yours. Most folks it is their neighbor and should stay that way.
Short answer, I think some of this could settle early next year (after Obama waives his arms across the country to calm the economy!) However, things will not dramatically improve because the main driver of the past 5 or 6 years, equity, is not going to be there.