Wednesday, February 11, 2009

Dow evaporates almost 5% of total value

Geithner gives new bank bailout details; Multi Generational Economic Rape Act passes Senate; Dow plunges 381 points, losing almost 5% of it's total value. Coincidence, I'm sure.

The biggest problem may actually be Geithner's bail out program. Powerlineblog:
In the Financial Times, Martin Wolf critiques the Obama administration's approach:

The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive. ...

All along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency.

Under the first view, the prices of a defined set of "toxic assets" have been driven below their long-run value and in some cases have become impossible to sell. The solution, many suggest, is for governments to make a market, buy assets or insure banks against losses. This was the rationale for the original Tarp and the "super-SIV (special investment vehicle)" proposed by Henry (Hank) Paulson, the previous Treasury secretary, in 2007.

Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities. The International Monetary Fund argues that potential losses on US-originated credit assets alone are now $2,200bn (€1,700bn, £1,500bn), up from $1,400bn just last October. This is almost identical to the latest estimates from Goldman Sachs. In recent comments to the Financial Times, Nouriel Roubini of RGE Monitor and the Stern School of New York University estimates peak losses on US-generated assets at $3,600bn. ...

Personally, I have little doubt that the second view is correct and, as the world economy deteriorates, will become ever more so. ... The new plan seems to make sense if and only if the principal problem is illiquidity.

I had lunch today with a prominent economist who made similar observations: a considerable number of banks, including some of the biggest, are insolvent and need to go into bankruptcy. Trying to preserve equity in these institutions is madness.


Wolf says something similar:

I would merely add that it is extraordinary that a popular new president, confronting a once-in-80-years' economic crisis, has let Congress shape the outcome.

[W]hy does a new administration, confronting a huge crisis, not try to change the terms of debate? This timidity is depressing. Trying to make up for this mistake by imposing pettifogging conditions on assisted institutions is more likely to compound the error than to reduce it. ...

The one thing we know for sure is that the thirteen-digit cost of TARP II will be borrowed and passed on to our children as part of the most extraordinary deficit spending binge in our history, with consequences that no one can foresee.

I heard Rush Limbaugh reading an economist - cannot remember the name - comparing what we are doing financially to Doctors who, years ago, would bleed a sick patient:
If the patient didn't get better, the Doctor would bleed him more, and more - mistakenly believing the disease was in the patient's blood, and if he could only bleed him enough ...
This economist also said(my paraphrase):
Politicians always take actions which position them to later take credit. Politicians WILL NOT allow an unimpeded market to correct the problem as quickly as is possible, b/c then there is no political credit to be claimed for fixing things.

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