Monday, September 29, 2008

In Times of Crisis, Trust Capitalism

What is Going On?

Like many others who have ‘normal’ everyday lives, I’ve spent a lot
of time the past year attempting to understand the more arcane
machinations of the financial marketplace.

What I have come to believe, is that the current problem in liquidity,
stems primarily from the Democrats, who from Bill Clinton’s
administration on, pressured financial institutions to provide loans to
individuals who were not credit worthy; allowed Fanny and Freddy to
grow unfettered, by elbowing out more conservative financial institutions
from the market, by using their “government guaranteed” position to gain
competitive advantage; permitted Rep. Barney Frank and Sen.
Chuck Schumer and other Democrats, like the Congressional Black Caucus,
to block any effective regulation on Fanny and Freddy; initiated the policy
of “mark to market” which has been the current catalyst in causing the
complete devaluation of many financial institutions ‘suspect’ assets, which in
turn has caused the run on capital and the subsequent liquidity crisis.

To then have the architects of the current mess, Messrs. Frank, Schumer
and the Democrat Party, be the architects of the a Bill to correct the
situation, is complete lunacy. 

Joseph Calhoun, has provided additional real world perspective into
understanding the sticky gear works of the financial market machine.
I’ve attempted to edit his comments here to his essential arguments,
but suggest that you read the full article .

In Times of Crisis, Trust Capitalism
By Joseph Calhoun
If a bank can’t get other banks to lend it money, that tells the market something about the condition of the bank in question. Last August, Bernanke convinced three large banks to borrow at the discount window in an effort to remove that stigma. When that didn’t work, he concocted a scheme to allow banks to borrow from the Fed in anonymity via a mechanism he called the Term Auction Facility. When Bear Stearns blew up, he added the Term Securities Lending Facility for investment banks. By removing the stigma of borrowing from the Fed and hiding the identity of the borrowers, Bernanke removed important information from the market.”
This has introduced another roadblock to the re-capitalization and reorganization of the financial industry. Companies that are in need of capital are waiting to see if the plan will bail them out of their difficulties….Why not wait until they can offload the bad paper on the taxpayer and raise capital at a better price? Why take Tony Soprano terms when Uncle Sam is willing to let the taxpayer take the hit for you?
If this bailout goes ahead in its current form and the Treasury pays a high enough price to recapitalize the troubled banks, what has been accomplished? The plan may be enough to induce the banking sector to start lending again, although frankly, I don’t know why we would want institutions who have shown such poor judgment in the past to stay in that business. This plan short circuits the capitalist model which would allow the stronger, well-run institutions to gain market share and/or expand profit margins. The long-term effect will be to lower the overall return on capital in the financial services industry. The government apparently believes that the key to economic recovery is to allocate limited resources in an inefficient manner. Does that make sense?...
The market is functioning as it should. It is the Fed that is not functioning correctly. There is no reason we had to go through either the bubble or the aftermath. We got into this mess because we tried to avoid the consequences of the Internet bubble. We will only make things worse by trying to avoid the consequences of the housing bubble….
We are not on the verge of a new depression. The housing bubble collapse in California, Florida and a few other states is not enough to bring down the entire banking system. Investors who made mistakes in these markets should be held responsible and those who navigated the Fed-distorted market should be rewarded for their wisdom and prudence….
The Japanese tried to prop up failed banks in the aftermath of the bursting of their twin bubbles and the result was 15 years of stagnation. Why are we emulating a strategy that is a demonstrable failure? A better alternative would be to allow capitalism to work as it should and stop the interventions of the Fed in the money market. Trust capitalism. It works.

Full Story.... 


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