…a note from Jon Hatzius, the Goldman analyst who was an early housing/financial firm bear and has forecast that credit-related losses to the economy will reach $2 trillion. His outline of what the rescue program must do:
Basically, I see three main conditions for resolving the crisis (a slicker marketer would call them “The Three R’s”):
a) Recognition. We need to find out what the assets on the balance sheets of banks and other financial institutions are really worth, and what the balance sheets of the most troubled institutions look like under a regime of realistic marks.
b) Recapitalization. The US banking system needs a lot more capital. Credit losses are depleting equity capital, and deleveraging increases the required equity capital per unit of balance sheet capacity. So capital infusions are needed to avert a sharp contraction in lending.
c) Relief. In many cases, we need to restructure the loan terms of homeowners who lack the ability (or economic incentive) to service their mortgage. This isn’t just in the interest of the homebuyers, but it’s often also in the interest of the lender (given the cost of foreclosure) and certainly in the interest of the macroeconomy (given the feedback effects between foreclosures, home prices, and economic performance)….
In any case, recognition is only a start. In fact, recognition actually increases the need for recapitalization because it brings capital shortfalls out into the open. So it will be important to see how the Treasury proposal addresses this. Do they force banks to seek equity infusions from private investors in a specified time period? Do they simply “pay over the odds” for the assets (this would promote recapitalization but jeopardize recognition)? Is part of the program earmarked for the purchase of preferred stock in banks? Or is there a public/private partnership scheme such as an issuance of publicly financed puts in e xchange for warrants for would-be private investors?
So, does this Uncle Sugar bail out only go to the reckless and irresponsible, or do those of us who did the “smart” thing get some of the largess? Can I restructure my 30 year fixed 5.75% mortgage on the house we bought under market to say…4.75%? 3.75%? After all, folks like me, and our children, and our children’s children, and our children’s children’s children will be paying for this bail out far in to the next century. The cricket and the ant story has come to pass, and as an ant, I am feeling ill used in the extreme. Now, I hear that we U.S. taxpayers will be bailing out FOREIGN banks, too.
I put up with a lot of ridicule from some folks on this blog a few months back, when I had the temerity to suggest that we need to get away from this fiat currency of Federal Reserve Notes and return to a real U.S. Dollar backed by silver. How now?
[i]Recognition. We need to find out what the assets on the balance sheets of banks and other financial institutions are really worth, and what the balance sheets of the most troubled institutions look like under a regime of realistic marks.[/i]
There is only one way to do that: end all bailouts and liquidity injections (the polite term for printing money) and let the market sort it out. When asset valuations return to realistic levels, the recovery can begin.
“Congressional Democrats began to set their own terms on Sunday for a plan to rescue the nation’s financial institutions, including greater legislative oversight of the Treasury Department, more direct assistance for homeowners and limits on the pay of top executives whose firms seek help.”
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Democrats are complicit in the current financial mess just as are Republicans, yet this cry [above quote from news article] seems to emphasize emergency measures that will best serve the Democrat Party as opposed to serving the interests of our country.
The Democrat’s left leaning leadership seems to always emphasize what will give their party an advantage in the political struggles of Washington, DC rather than what is good for our country.
For instance,
“…including greater legislative oversight of the Treasury Department…” is part of the very long term Democrat effort for Congress to assume more and more of the ‘executive powers’ of the Presidency.
“…more direct assistance for homeowners..” is an effort to make the government the ‘sugar daddy’ of all of the potential Democrat voters who can’t qualify for home ownership on the basis of their income and may be in a low income situation because of their long-term lethargy and lack of personal accountability/responsibility. Would you lend very large amounts of money to people who are at high high risk of defaulting on their loan contracts? Both parties sat by while this occurred. Three senior federal money managers, Freddie Macv/Frannie Mae, who were running the federal para-governmental loan apparatus leading up to this crisis were very well known Democrats.
“…limits on the pay of top executives whose firms seek help.” This I agree with except for one condition. If you want top level technical leadership then you must be competitive in the salaries that you pay for that leadership. Low pay often equates to sub-standard leadership. Again referring back to Freddie Mac/Frannie Mae, one of the culpable Democrat leaders earned $90,000,000 in six years as the country drifted into this financial disaster.
[i]is part of the very long term Democrat effort for Congress to assume more and more of the ‘executive powers’ of the Presidency.[/i]
The best thing that could happen would be for 535 bickering idiots to be unable to agree on what to do.
I am going to email all my congressmen and representatives to stop this madness before we end up with Weimar style hyperinflation. I suggest others consider doing likewise.
Your congressman’s fax/phone and email can be found here:
http://www.conservativeusa.org/mega-cong.htm
I recommend folks read the following:
http://globaleconomicanalysis.blogspot.com/2008/09/open-letter-to-congress-on-700-billion.html
September 23, 12:45 pm | [comment link]