New Bailout Plan Still Falls Short: Remain Skeptical
Posted on October 14, 2008
After recognizing that TARP, as originally proposed, had no possibility of working due to the impossibility of properly purchasing worthless toxic assets, Paulson and Bernanke did an about face and are now going to inject capital directly into major financial institutions to help solve the financial crisis.
While “The Market” reacted positively, and correctly I might add, to the proposal of our government acquiring stakes in banks (see this prior post where we discuss this option), a deeper look into the new TARP bank-ownership scheme, should convince you that there is nothing really extraordinary about this latest “printing press” solution to the financial crisis.
Ultimately, nothing is really being done to rectify the financial system or the housing market or the real economy. Therefore, the financial system remains a house of cards, with the possibility of another panic at any time. Sadly, despite an opportunity to fix things, absolutely nothing has been done to set up the financial system on a firmer footing.
In the new TARP, while the banks get money quickly (after forcing the world economies to its knees), there is absolutely no real additional oversight over banks. There are no firings of negligent management, no guarantee of any lending, no attempt to recover stolen money from criminal activities at financial institutions, no mortgage reform, and most importantly no reigning in of fraudulent, speculative and dangerous derivatives, such as credit default swaps.
In the end, Paulson and Bernanke, have proposed no lasting solution to this crisis. Instead, they remain determined to try anything to keep the status quo, reinflate asset prices, and restart a credit ponzi scheme. But, ponzi schemes are difficult to get started again, once people are aware of the underlying scheme. A smarter solution perhaps would be to attempt to restructure financial institutions with an eye to developing an economic system that is not a ponzi scheme. Spending cash on real economic activity instead of supporting financial speculation in paper assets, would appear to be a good idea. But of course this solution is an impossibility, since it would entail a major contraction of employment in the financial industry, upsetting the status quo that Paulson and Bernanke are intent on supporting.
Bottom line: Remain Skeptical and Do No Invest Heavily in Equities as Valuation Measures Will Continue to Remain Under Pressure for Some Time.
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