Finally, leadership! Every commentator has whined for it. Every investor has pined for it. Every politician has inclined towards it. And now they’re going to get it, as we say here at Markets and Money – good and hard!
The world’s power elite have gotten behind the plan. We’re saved! They are striding boldly into the market – like J.P. Morgan in 1907 – with cash in hand.
Only…it’s not their cash.
(Whose cash is it? Is it the ‘taxpayers money?’ Not exactly. Is it from savers and investors? Uh…some of it. More on where this money comes from…later…)
Britain has nationalized its banks. America is up to its familiar Rooseveltian tricks (Barack Obama quotes him in every speech: “The only thing we have to fear is fear itself,” – as if it were all just in our heads). Yesterday, Paulson said he wanted to take over the banks “as soon as possible.” Today, Bloomberg says the U.S. government has already bought into 9 major U.S. banks.
Hundreds of billions in loans, giveaways, bribes and trash collection has been dispersed. And now Europe has come out with its own bailout plan.
The front page of today’s Le Monde says it will cost 1.3 trillion euros to save Europe’s banks. Over at Liberation , the price is 1.7 trillion. And the Financial Times announces it as “Europe’s 1.873 trillion bail-out boost.”
How come it costs so much more to save Europe’s banks than our own? The numbers don’t jibe, but the math is a little funny anyway. France is putting up 360 billion euros. Germany tossed a half- trillion in the bailout pot. But who’s counting, anyway? This is war…
In war…as in love…you never count the cost until the shooting is over. Then, of course, you regret the whole thing…
But yesterday, at least, the world celebrated what it considered a major victory. German stocks went up 11%. Up 11% in Paris too. Hong Kong rose 10%. London 8%. And the Dow? Up 936 points.
So, let us have some fun. Let’s drive by and moon the partiers.
We begin by pointing out the obvious. A bounce in a bear market does not give cause for celebration. It gives cause for selling. Sell the rallies, buy the dips. Buy low, sell high, in other words. We’re selling stocks, generally. And this bounce is a good occasion to do so…because we think this market could go a lot lower. Dow 5,000 is our target. When the Dow gets below 5,000 we might be tempted to buy. Until then, it’s sell…sell…sell.
Mr. Market is a decent chap, after all. He always gives you opportunities to get out…or get yourself in deeper. After the market crashed in ’29 for example, prices gained 18.8% over the next two days. Investors should have hit Mr. Market’s bid. Instead, many were convinced that the bottom was in. They took advantage of an opportunity to buy shares at ‘bargain’ prices – only to see them cut in half…and cut in half again. And then, they had to live with their mistake for a long, long time. Prices did not return to the ’29 high until the 1950s.
There was a rally after the crash of Black Monday in ’87 too. Stocks rose 16.6% over the next two days. This time, buying turned out to be only a short-term mistake; stocks rose for the next 12 years.
The bunkum behind this bounce is that the pyromaniacs who caused this conflagration…and then fanned the flames…are now going to put it out. We recall, for provocation, that Goldman Sachs was a leader in developing mortgage backed securities and swaps – the dry tinder that set off this blaze. We recall too that Henry Paulson was not only at the head of Goldman while this was going on, but actually pushing the company in that direction. We recall also that that the U.S. central bank – the Fed – has kept its key lending rate at below the rate of consumer price inflation for most of the last six years. As for the rest of the world’s leaders – they are little more than careless gawkers…people who drove out to see the woods on fire…and then got caught by the backburn… Now, they’re lost in the smoke and feeling the heat.
Yet, we are supposed to believe that they are creating a new world financial order…and that it will be stable and prosper. As to the former, we have no doubt. Governments are using this financial meltdown in the same way they used the meltdown of the twin towers in 2001 – to grab a little more power. The dumb fist of politics now pushes aside the greedy little ‘invisible’ hand of Mr. Market. Subtle swindles give way to heavy-handed larceny.
Whatever happens, now the financial industry will have to stand in line for pat-downs and strip searches. More people of low intelligence and low self-esteem will find employment protecting the homeland’s financial security. And those who didst ride so high on Wall Street will lie in the dust of Congressional hearings…or lie low in some offshore hideaway. We take all that – as nasty as it is — for granted.
But the second part of the bunkum is probably dead wrong. Government control of an economy has never led to stability or prosperity. In fact, the record is fairly clear – the more the state meddles, the worse the economic results. In extreme cases, such as the Soviet’s 70-year experiment with a command economy, the results were so spectacularly bad that – at the end of it – Soviet industry had become ‘value subtracting.’ That is, it mobilized an entire economy to extract valuable resources…to ship them… to refine and process them…and to turn them into finished goods. And at the end of the day, the finished products were so badly made and so out-of- touch with what the market wanted that they were worth less than the resources that went into them!
No one is planning to recreate the Soviet system. Instead, they’re thinking that maybe a little political supervision would be a good thing. And who knows; maybe they’re right. We just don’t know of any theory or experience that leads us to think so.
But the fix is in and who are we to argue with it? Paulson is busily giving $700 billion of the taxpayers’ money away to his friends on Wall Street. The English are trying to save the City. And the French? What they don’t know about crony capitalism – at the public’s expense – is not worth knowing.
To return to a key question: where will the money come from? There are only three sources. Taxes can be raised; you can forget about that right away. No one is going to raise taxes – except symbolically, to punish the rich – in the face of a depression. Or, the money can be borrowed.
“But where is the 360 billion euros coming from?” Liberation repeats our question.
“The government is going to borrow on the capital markets to finance the banks,” comes the answer.
But from whom? And at what rate? Borrowing money adds nothing to the world’s total financial resources; it only takes money from one pocket and moves it to another. That is, it deprives (we presume) worthy borrowers of capital so it can stuff the pockets of cronies and insiders. Overall, there is no increase in purchasing power or available credit. What’s more, as the feds borrow more and more money, it should – logically – drive up interest rates. This should further depress economic activity, making the situation worse.
That leaves the third possibility: print more money.
Hit the bid, dear reader. Hit the bid. the bid.
*** Well, the hypothesis, as you know, is that capitalism has failed. And now the politicians have to bail it out. Rather than let Mr. Market express himself fully, Mr. Politician will have his say. And he will say: ‘Hold on…we will put in a bid.”
There is a hot debate in the financial press over the terms of the bid. Should the government buy up Wall Street’s mistakes – as Paulson is doing in America? Or should it ‘recapitalize’ – or nationalize – the banks? How can it force the banks to lend? How can it make sure the money doesn’t end up in the bankers’ own pockets?
“The last successful government program was World War II,” as Jimmy Breslin put it. And we’re not even sure about WWII. So, the likelihood that these bailout bids will do the trick – however they are constructed – is slim.
None of the measures taken by the Hoover and Roosevelt administrations to counteract the Depression of the ’30s worked. Most were irrelevant. Some made the situation worse.
Nor did the measures taken by Japan after its crash in ’89 do any good. It wasn’t as if the Japanese didn’t know Keynes’ theory. And it wasn’t as if they didn’t try to apply it; they gave their economy all the stimulus they could. As to monetary policy, they took their key lending rate down to zero. It couldn’t go any lower.
As to fiscal policy, they took their deficit to 6% of GDP – the highest in the developed world.
Yet, the Japanese slump persisted…and continues to persist, 18 years later.
All the policymakers are doing differently now – as near as we can tell – is increasing the bid. The Europeans are throwing out their Maastricht limits on deficits. And if Morgan Stanley’s chief economist is right, the U.S. will soon run a deficit that will take the world’s breath away – at $2 trillion, or more than 12% of GDP. Over at the Fed, meanwhile, they still have 150 basis points to get down to zero. They’ll get there; we don’t doubt it. Look for another 50 basis point cut, coming soon.
But what will these interventions produce? How can you protect yourself? We have some ideas…which we’ll give you this week…and in a Special Emergency Report we’re working on. Stay tuned. And hit the bid.
*** Finally, a word of hope and optimism. We walk on the sunny side of the street, here at Markets and Money.
“Why the recession is a blessing in disguise,” says a headline in the TIMES of London.
According to American researchers, economic downturns can be good for people. When times turn tough, people smoke less, eat less, exercise more, spend more time with their families (especially those who are out of work), drink less and take fewer risks.
Yet, despite all that – they are happier! Yes, levels of contentment were higher in the slumpy ’70s than they were in the go-go ’90s or ’00s.
In a downturn, people slow down. They have the time to reflect. To do different things. To enjoy thrift and appreciate poverty.
Here, a former finance professional describes his new life:
“We’ve decided to go downscale and go to Venice for a bit. We’re in a flat on the Grand Canal, the children are learning Italian, the weather is wonderful and it feels like we can finally relax after ten years of madness.”
Ah yes…downsize, dear reader. Enjoy the simple pleasures…the fresh air of Venice. The sunlight on your cappuccino. The language of Dante as the evening settles over the Grand Canal. And a quiet dinner…just the family…at the Cipriani.
*** Newspapers are losing sales, making losses and missing loan payments. Several are in default. But what are lenders to do? Who wants to buy a money-losing newspaper?
How come the government steps in to save the banks…but not the newspapers? Newspapers are as important to our society as banks. They provide indoctrination…ooops…we mean, information. Without newspapers and other mass media, people would have to think for themselves. No one wants that.
While the government is buying bank shares…and maybe newspaper shares…and then, possibly, auto shares…we hope it saves a farthing for shares in small, struggling financial publishers. Go ahead…make us an offer!
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