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Prognostication

Things People Need You to Believe

So I finally wrapped up the wedding tour (link to absurd dancing photos), and came down with the flu this weekend. After sleeping most of the day Sunday I was back in the game for The Beancast and back to work to close out the quarter.

It’s interesting that the Bailout was shot down, talk about Marketing in Action. For my opinion on the bailout, please refer to this article in Time Magazine.

Remember to follow the money to identify the things that people need you to believe:

  • The Government can move the economy. That $700 billion (less than a 1 day loss in the market) is enough to move the entire economy. Controlling the economy is much like controlling the weather, if anyone says they can do it, they are lying.
  •  What derivatives die, the 4 Horsemen appear, signalling Armaggeddon. The Time article does a good job at explaining this – the bailout is for some Frankenstein financial instruments – think of it as insurance policies betting on on-time payments from a bunch of people who bought houses that they can not afford, have no savings and have about 10k in credit card debt. If these explode, only the people who thought this was a good idea to get burned (along with the 3 people below them in pyramid scam of reselling  this trash). Clarification – we do have another problem though – this balloon filled with crap is so huge and has been treated like cold hard cash, if it pops there’s enough to get some on everyone. Investing in duct tape and payouts to keep the balloon together is no long-term plan.
  • Financial Institutions are Too Important to be allowed to fail. Detroit can be decimated, tech bubbles can come and go, manufacturing can be wiped out, big box retailers come and go but there’s the big 3: Banks, Agriculture and Airlines – if these aren’t socialized there will be rioting in the streets and we’ll be selling apples.
  • Being an elected official is a full time career – When’s the last time you heard someone running for office talk about a duty to serve? Did I actually hear the word “Rule” during the debate last week? I’ll stack Politician on the shelf right next to Journalist in the “Professions of Make-Believe”.

And then there’s a few ideas behind the curtain that people don’t want you to ask:

  • Where did a bailout package that has Main Street bailing out Wall St. come from? Can someone show my why this isn’t elected officials sucking up to the rich?
  • Why are their no financial conservatives left?  Both Presidential Candidates see Legislative spending of citizen’s tax dollars as the solution. As a cranky old man I credit this to budget=power and since we’re dealing with career politicians there’s no incentive not to spend tax dollars.

My friend Steve has been living in LA for more than 10 years and we’ve talked about how difficult it is to buy a home there. The thought of him having to pay tax dollars to bail out some jackasses speculating on crummy mortgages makes me sick. And oh yeah,  the homeowners out of their financial league still lose their homes, they are not part of the bailout.

Before I return to our regularly scheduled marketing programming I’d like to mention Rep. Ed Markey and staff who were unable to tell me his position on Monday’s vote and even took my email address and said they’d get back to me, no need to bother now, your Aye vote speaks for itself. VoteSmart says this is an election year for you.

I’ll also note Sen. John Kerry’s office that wasn’t answering the phone, and my fax was refused, but I can give him some credit, perhaps things were just too busy today and at least he’s sharp enough to put his opinion up on his blog for everyone to read. In contrast, Rep. Markey’s website’s “Recent Events” section has him being named “Irish Man of the Year” back on March 12th.

The last of my representatives is Sen. Kennedy, regardless of political battles and opinions, I wish him the best with his health.

I can’t wait for election season to pass. Here’s the Beancast if you need some marketing to counteract the politics:

direct link to file

3 replies on “Things People Need You to Believe”

I am sympathetic to your point of view. As a longtime economic conservative, my stomach turns at the thought of the government so directly intervening in private markets and enterprise.

Yet it does appear that there is a genuine credit freeze here. Steps do need to be taken to alleviate that problem, otherwise the current crisis will spread far beyond Wall Street and directly down Main Street.

To me, the current rescue plan efforts are tolerable if they serve as a firewall between disastrous bets made by the big-money guys and the lives/businesses of the rest of us. As I understand the deal on the table, it does not bail out companies per se, but rather acquires debt that at the moment has a low value. It is likely that much of this debt will have a higher value in the future, as lack of investor confidence has driven the markets artificially low.

Will the current plan make a big difference? Yes, if it is coupled with other actions (like the imminent SEC action to modify mark-to-market regulations that are at the heart of the current predicament). A big gesture is needed to restore confidence and free up credit to allow companies large and small to borrow money to do the things they do every day — buy equipment, invest in R&D, and make payroll.

If I thought the $750 billion would merely be flushed down the drain or handed over to failed executives, I’d oppose it in an instant. But I do believe much, if not all, of that money will be recouped by the government as assets are sold. Furthermore, I have yet to hear a viable alternative, and I do not believe no action is a reasonable approach.

Chip, thanks this opens up some interesting discussion – I have some trouble getting proof of a credit crunch. My economics years are far behind me, but as far as I know, most measurement of a credit crunch is interpretation of tea leaves – comparing Government Securities to commercial bonds, or surveying Bank Lending officers. I would argue that comparing classes of securities is no longer effective in a Global Market – there are International Securities as alternatives, and International Buyers playing in the market.

Although Bank Lending officers would like to think they call the shots on what they can lend, that’s only the Supply – there’s still the quality of the Demand – how creditworthy are the applicants? If the same 10 applicants can get approved one month and refused 3 months later is this the essence of a Credit Crunch? (I’m asking, I’m not clear on that).

You are right on about serving as a firewall, let those who accepted the risk knowingly get burned to a crisp, but this raises another question of equity – where do the lines get drawn? Who gets bailed out of their mortgage? Houses worth less than X? Income below X? What about the guy or gal that’s $10k above the line that not only loses their home but pays taxes so the person below them can keep theirs?

The idea of the Federal Government having fund managers to keep track of a portfolio of bad debt doesn’t strike me as a good idea. Why would a fund manager work there when they could make huge bucks on the Wild West of Wall Street?

Ultimately I don’t know if anyone can prove that a bailout of any kind would succeed or fail. Either we get socialized financial markets, or risk a possible depression. Hobson’s Choice?

I don’t believe any individual mortgages should be bailed out any more than I believe we should bail out companies. Purchasing potentially bad debt is different from altering individual mortgage terms and conditions after the fact. Therefore, no line needs to be drawn.

The firewall is not about mortgages, but rather about jobs and economic growth. The way you keep people in their homes is by ensuring they still have jobs.

As to whether the credit crunch exists, I agree it is hard to quantitatively assess it with complete accuracy. That said, it seems that enough experts agree to its existence, that I feel comfortable in accepting it.

Ultimately, any path Congress takes carries considerable risk for the American people. For my part, I believe the risk of inaction outweighs the risk of action.

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