Thursday, March 26, 2009

Obummer's Moment of Reality...or is it?

Perception vs. Reality
Paul Krugman, a Times Op-Ed columnist, is a professor of economics at Princeton University and winner of the 2008 Nobel economics prize.

Well, the stock market loved the Geithner plan, which proves … nothing. Stock investors have no special knowledge here; they’re groping like everyone else. For what it’s worth, credit markets didn’t react much at all. But let’s back up and focus on the fundamentals.

In essence, the Geithner plan is the same as the Paulson plan from six months ago: buy up the toxic assets, and hope that this unfreezes the markets. Don’t be fooled by the apparent role of private enterprise: more than 90 percent of the funds will come from taxpayers. And the way the funds are structured provides a strong incentive for investors to overpay for assets (see my explanation on my blog).
Subsidizing investor purchases of toxic assets has no real chance of turning things around.

So can this work?
Since the beginning of the crisis, there have been two views of what’s going on.

View #1 is that we’re looking at an unnecessary panic. The housing bust, so the story goes, has spooked the public, and made people nervous about banks. In response, banks have pulled back, which has led to ridiculously low prices for assets, which makes banks look even weaker, forcing them to pull back even more. On this view what the market really needs is a slap in the face to calm it down. And if we can get the market in troubled assets going, people will see that things aren’t really that bad, and — as Larry Summers said on yesterday’s Newshour – the vicious circles will turn into virtuous circles.

View #2 is that the banks really, truly messed up: they bet heavily on unrealistic beliefs about housing and consumer debt, and lost those bets. Confidence is low because people have become realistic.
The Geithner plan can only work if view #1 is right. If view #2 is right – if the banks are really in deep trouble that goes beyond lack of confidence — subsidizing investor purchases of toxic assets, many of which aren’t even held by the most troubled banks, has no real chance of turning things around.

As you can guess, I believe in view #2. We had vast excesses during the bubble years, and I don’t think we can fix the damage with the power of positive thinking plus a bit of financial engineering.

But that’s where the issue lies.
Revert: Until and unless the illusion, premised on arbitrary and astronomically inflated values divorced from ground realities being assigned to scraps of paper called equities, debentures, derivatives and what have you plus hocus pocus predictions of supply and demand being made on future contracts, is punctured and the casino lights at Wall Street are forever dimmed and the US of A return to the humdrum reality of manufacturing and selling real things, of assessing and assigning value based on market realities, actual growth, performance and underlying strength, of not leveraging on OPiuM (Other People's Money) to make asinine bets and speculative flutters, of not puffing up bubbles with loose monetary policies and even looser regulatory provisions (Greenspan, Rubin where are you??) that will be invariably punctured by the prick of reality, of not bingeing on their neighbours hard earned dollars to finance a lavish yet ultimately hollow lifestyle, of valuing hard work, thrift and industry as virtues and living within means a boon, of making an earnest effort to weed out the fraudsters, the charlatans and the thieves, of not rewarding failures (like the AIGies), of having surplus or balanced budgets: of letting failures to cop the blame: of not using public money to effect mindless bailouts and in the process, blowing the deficit sky high, of scaling back on military spending and support for gangsters like the Balathashars of this world, of embracing the principles of an Islamic economic system, of not creating financial instruments like some Copperfieldian maestro, of not playing a sleight of hand trick like what the house nigger and his acolyte (Geithner) are doing here i.e., providing a subsidy to the private investor and virtually guaranteeing eliminating/minimising risks in order to prop the house of cards (talk about bailouts and moral hazards) ..............I dont ever see senile old Uncle Sam ever coming out of this mess with his top-hat on much less his tuxedo and trousers............but then again that will be good news for Jihadis the world over......
.Maybe these two comments on Krugman et al views are worth pondering over:
1. The cause of the mess is a fundamental flaw in the premise of the economic system. The concept that things must continually grow is out of touch with the basic laws of physics (or nature), let alone that it’s just plain stupid. Of course there was a bubble and still is. In a way it’s always one bubble or another, based on this non-sustainable premise of endless growth. For this reason, this fix will work, if only because it will extend the illusion and it’s a long way down. We have lived our lives well in America by absorbing wealth from the rest of the world. This is obvious. We have expanded beyond our means by exploiting everyone wherever possible around the world. We have mor eof that to do before the em[pire collapses completely. That all we are trying to buy here. More time at the top.So in that way it will work…
2. So if all the private investors and hedge fund managers who participate are honest enough and smart enough this plan might remove one quarter of the toxic assets from the banking system?
Even if Geithner’s right and the underlying problem is panic and lack of confidence in a basically sound banking system how is this plan supposed to solve anything? One quarter is simply not enough to do help, it’s either going to cost a heck of a lot more further down the track or it’s not going to work at all (and may well collapse in a mess of further law-breaking and public outrage).
Given the fact that Rome is ablaze, the people are looking for pitchforks and Obama’s political capital will never be this high again, now seems like the one and only chance to try temporarily nationalizing banks and cleaning them up. That has a proven track record, that will work and costs nothing up front (and has a nice back-end profit for the government when they refloat them). The alternative is a high risk of another failed plan, depression level unemployment, and perhaps a decade or two of unnecessary suffering and social problems (in a country that already has more of these than it needs).
But then again, a real fall is good for infideldom, isnt it? and how about this as an appetiser of things to come:

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