Wednesday, February 18, 2009

Bonus this


Greenspan Backs Bank Nationalisation

"In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.'

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”


Since no other bank, hedge fund, private equity fund, sovereign wealth fund or central bank will buy these "toxic" assets at the value our banks say they are worth, the guys who made this whole mess happen now say the US government should take the debt.

Mr. Greenspan may not be treated too kindly by history. The dot com bubble was under his watch. I have friends that saw 50% and more of their portfolios evaporate when that bubble burst.

Instead of advising the country to swallow its medicine, and take the necessary adjustment to GDP, which would have forced big business to rein in outsourcing, Greenspan went the other way. To stop the small recession that would have occurred, Greenspan decided to lower interest rates to spur economic activity.

In January, 2001, the incoming Bush Administration was eager for Greenspan's plan. They didn't want some nasty little recession to get in the way of the massive tax cuts they had planned. The Republicans wanted to look like White Knights riding in to save the day. Little did those nimble minds realize the laws they recently had worked so hard to pass, and that removed depression era banking safeguards, would be a fatal platform for the banks to launch a new bubble surrounding real estate activity.

Greenspan, of all people, should know the last, and best, asset any country has is the land it occupies. To create a bubble with property means all other avenues for economic productivity are exhausted. Wouldn't that be a red flag to an economist? How did these "great" minds not adamantly argue we should not fool around with the last asset we all must have, shelter.

At the height of the bubble, housing values in some markets were 10 times average wages. History shows us that no economy can function properly unless housing values are between 2.5 - 3.5 times average wages. Housing must be affordable, lest you concentrate wealth into the hands of a few, like in medieval Europe.

Where were the economists? They were praising Greenspan for a job well done.

Well, that job was far from well done, as is now evident.

Will Mr. Greenspan now tell congress that bank managers need billions in bonuses every year, also? I guess the bonus gets bigger as the losses get bigger?

I have read several good proposals to arrest this financial tsunami, and none of them include giving banks that are bankrupt any taxpayer money.

Links to some of the ideas are here:
Willem Buiter
Paul Romer
Karl Denninger, The Genesis Plan
RGE Monitor

If I understand it correctly, the best proposal establishes ten new regional banks. With a total of $300 Billion for initial capital, that's $30 Billion each, they can generate $3.6 Trillion in funds to be lent when following current 12:1 leverage ratios. If they go public and issue an IPO, the amount that could be lent dramatically goes up. An onerous coupon is placed on the new banks, meaning they must pay off the $30 Billion from the first dollar of profits. The taxpayer realizes no losses.

That sounds far better than to give $9.7 Trillion to banks that will only use that money to pay off the tens of trillions in losses they are realizing. Greenspan, the Wall Street elite, Congress, and many other financial leaders will argue against the "Good Bank" idea. Why? Because they know 200 years from now they will be held as examples of what not to do. They know what they have done, and they are currently acting as though they do not care what damage is done, as long as they can keep their money and blame someone else.

For more on the subject of why we must not allow the current bankrupt banks to get any more money, please see:
Mish - The Nationalization Train has left the station
Gerald Epstein - Bad Bank - Bad Idea
Charles Wallace - Bad Bank? Bad Idea
OC Register Opinion - A Profoundly Bad Idea

Oh, BTW - nationalization of the banks is socialism, but only for the well heeled. The serfs get the privilege of paying the bonuses.

4 comments:

Anonymous said...

you share good stuff.

the S&P is likely to experience, FOR THE FIRST TIME, negative earnings for the last Q of 08 and into 09. the S

if that's the case, there is an argument for the dow dropping below a pe of 7-8 for a bottom. that puts the dow below 3500 and at a current real value of 5000.

the problem with the dow dropping is it feeds the home price drop. there is no stopping this thing.

there will be more then one 'capitulation' as it will be tough to shake out all the sellers. could take years. short the world!

recruiterrick said...

Thanks for the prop.

I agree with you. The most interesting events are still in front of us.

I have looked at some charts that give a good case for the DOW at 4000 in 12-18 months, and as low as 2200 3-4 years out. The S&P at 400, then 210.

It can be arrested if level3 assets are immediately cleared, and the entities that own them, and their investors, take the full hit.

Problem is, the guys who run the companies that own the most bad assets have basically ruled the world for quite some time.

It is more likely the US will keep issuing Treasuries in an attempt to keep the dead alive. In doing so, among other unintended consequences, we run a great risk of getting downgraded.

That will make the charts relevant.

Anonymous said...

go to www.decisionpoint.com

log in user: jadams

password: silver

check out the article 'earnings crashing'. also check out at bottom of home page the chart makred 'big'. nice review of historical moves of dow and pe

recruiterrick said...

Nice site. He uses empirical data without the "unicorn" sentiment which accompanies people like Bove.

Same evidence of the S&P at the levels I believe they are going to.

Since the economy for the last 7 - 10 years was 90+% using your house as an ATM, "Earnings are Crashing" is putting it mildly.

The "Big" chart page almost makes me nauseated. How to convince the idiots that think BAC and C are still great companies is the trick. Until CONgress is duly pressured, nothing will change.

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