A friend and colleague of yours truly, economist David H. Wang, frequently speaks with family and friends from his native China. One of the observations he's been hearing recently goes like this: "Strange, new form of pure capitalism you have in the United States that bails-out every company."Well, as Wang pointed out, it's not every company, and in point of actual fact, the United States is a mixed capitalist system -- private sector-based, but with a social welfare safety net.
Still, the reality is that had the U.S. Federal Reserve not offered an $85 billion loan to American International Group (NYSE: AIG), given AIG's counterparty, pension, investment fund and related relationships, "the global financial system would have frozen-up," or "experienced a level of stress we haven't seen since the stock market crash of 1929," Wang said.
The Fed's action was the 'Greenspan Doctrine squared:' AIG was not only 'too big to fail,' it was 'too interconnected to fail.' So one can see why Fed Chair Ben Bernanke and U.S. Treasury Secretary Henry Paulson put in motion another 'loan of epic size' for a private company.
Now what?
AIG will not be the last rescue. And Wednesday's 449-point drop in the Dow to 10,609.66 does not nearly represent the bottom for the world's most widely-followed stock market index, but it can represent 'the end of the beginning,' to use a Winston Churchill phrase.
The end of the beginning, that is, if the United States deploys a solution that will begin to wind down the bad bonds / stock run / collateral call / company bankruptcy problem that is spreading the problem by resurrecting the Resolution Trust Corporation, or a variant.
U.S. Rep. Barney Frank, D-Massachusetts, who will hold hearings on the subject this week, The Washington Post reported Tuesday, was laughed at sixth months ago when he talked-up redeploying the RTC, or a new, modified agency to buy the bad assets and/or the mortgages / bonds associated with them. Few lawmakers are laughing now. The RTC can buy distressed debt at fair market value and help keep hundreds of thousands of citizens in their homes, and in the process preserve businesses, and perhaps, whole local economies.
Would it be better to let the free market run its course? Can the private sector handle it? According to U.S. Rep. Frank's research and analysis, there's not a great deal of private sector interest in the distressed bonds/notes. "The private sector won't even go to a fire sale," to U.S. Rep. Frank told Bloomberg News Tuesday.
Housing Sector / Economic Analysis: The view from here is that a revived, modified Resolution Trust Corporation looks like a logical next step in ending the financial crisis. More than likely, this financial swoon will not end until the troubled bonds are removed from the system -- and that means buying, warehousing and managing the troubled bonds. These measures will increase liquidity and help stabilize home prices -- two big steps on the road to financial market normalcy and economic recovery.
Closing Bell: Economic Catapult for Thanksgiving & Black Friday (WMT, TGT, GRMN, GOOG, MSFT)
Deere up on Q4 earnings performance
Reid Hoffman: LinkedIn will go public (at some point)
Reader Comments (Page 1 of 1)
9-17-2008 @ 8:55PM
Rickie Dennis said...
Why don't they do away with the mark to market rule? Then the companies could handle the screwed up assets and get the gain in the future and would not have to be raising capital.The situation would fix itself in a year.
9-18-2008 @ 6:23AM
al coholic said...
Rickie,
So how would these questionable assets be valued? Isn't that just too subjective?
9-24-2008 @ 2:07AM
Bruce Calabrese said...
Real Simple Solutiuon: Example: Columbus, Ohio - 16th largest real
estate market in US. There are 25,000 current real estate listings
in Columbus, Ohio totalling 4.275 billion dollars. The Government
needs to buy them up as of a fixed date. Of those listings 12% of
them are rentals and 25+% of them will be bought by a person that
just sold an existing listing to the government. That comes to 2.6
billion dollars to completely fix the Columbus, Ohio real estate
market. The government then needs to sell those listings over time
at new market prices. Do you realize what that would do to any and
all real estate markets? Do you realize how much will come back to
the banks in paid off loans, back interest and fees? Do you realize
what that does to the written down real estate of the banks? How
about all the industry related businesses of real estate? It
immediately puts a bottom in each and every market the government
chooses to fix. Take the top 150 real estate markets in the US and
it should cost about 500 billion dollars. It would be an instant
success and completely fix all related industries that are currently
in financial trouble. It will be less of a burden on the tax payer
and the government would now be holding newly appreciating assets as
collateral (houses) instead of the toxic garbage securities it
intends to hold. The crooks on wall street that caused this mess
will not get all of the relief. The relief will be spead equitably
across a true cross section of the economy that deserves it. The
Equitable solution is the only fair way of taking our money and
fixing the problem and that way an ex Wall Street Chief (Hank
Paulson) is not handling our tax money, we are. It goes right to
main street and eventually much of it will trickle up to Wall Street.
This time we will enforce instead of over regulate wall street.
Equitable Plan - bruce@eqfin.com