“Capital Insights” with Jack Kern
- Oct 02, 2008
A $700 Billion Mistake?
Some of the smartest guys I know, economists, CEOs and even housing advocates from sectors usually ignored in the mainstream media are all starting to come to a conclusion that I think may be prescient. The federally managed $700 billion, tax payer financed proposal should fail in Congress. While there is a likelihood it will pass, the more conventional, non-hysterical wisdom is this:
The president is not understanding our present economic situation and is getting bad advice from the Council of Economic Advisors and even worse advice from Benny Bernanke. The ability of the new funding to absorb rogue investments, against a backdrop of warrants and promises from the companies getting the lifeline will do nothing to stimulate housing markets, add jobs or in any way resolve the current credit crisis. The media has overblown the current situation to such a degree that people are taking time during the workday to whipsaw their representatives and senators between a yes vote and no vote, turning the ritual into daily tracking polls for every legislative district. There are a wide variety of reasons why the bail out is a bad idea, but rather than taking space here, let’s look at a good idea instead.
Recapitalize the banks. If the capital were used to finance the bank’s holding of debt instruments, then there would be ample opportunity for them to conduct business as usual, put the additional liquidity and access to the Fed funds windows to work and gradually improve the economy. In so doing, these things would ring true.
The CMBS that have been reviled are turning to be, well, not so worthless after all.
The CLOs and CDOs have been, to some degree, vindicated by the slowdown in their default rates.
Foreign investors, particularly our trading partners would have renewed confidence in our banking system.
The real loss of opportunity for the American people is that our banks have lost their credibility. Letting the Congress waste tax dollars buying uncontrolled assets won’t restore what the world view is for our financial institutions. Only giving the banks and the system the ability to recover can do that.
So far, there is vastly more wishful thinking on the part of the Congress, members being more concerned about being re-elected to the world’s dumbest governing body, than doing the right thing and moving forward on trusting the free market system to resolve the problems. In the past week, we’ve lost more wealth and confidence, than the $700 billion is worth. It’s time to do the right thing, not trust the government, and instead give the banks the capital necessary to move forward.
I don’t think anyone would argue that Congress is fundamentally corrupt, with special interest groups and lobbies running the show. Ever tried to call your Congressman? If you didn’t contribute a million bucks, you’re not getting a call back. Try it sometime. Now, unfortunately you’ll have 700 billion reasons to do so.
See you on the bread line.