A few questions, Mr. Secretary
So, post-Lehman fears that droves of money market mutual funds would be 'breaking the buck' led to a run (of c.$140 billion if some press reports are correct) until the Fed indirectly offered them $230 billion in extra liquidity and Hank ante'd up the Exchange Stabilisation Funds' $50 billion by way of a new insurance pool......
So now, bank depositors are only covered up to $100 k per by the FDIC, but shareholders in the MMMFs seemingly may end up with an uncapped guarantee. Hmmm - given these latter also generally yield more - what's to stop a BANK run breaking out next as regulatory arbitrage kicks in and everyone switches back?
This would be neat trick as MMMFs would finally have to be counted unequivocally as 'money' (strictly defined) since shares would be redeemable at par on demand in all circumstances - which would be an inflationary $3.5 trillion boost to the aggregates - while any bank failures so caused (beyond the non-recoverable portion of those $100k+plus deposits) would provide a potentially deflationary offset!
Next, since the investment banks' big worry was a 'run' by their prime brokerage customers (JPM and other commercial banks were said to be 'swamped' with business being transferred away from the two Last Men Standing) won't banning short selling - a necessary part of a traditional hedge funds' business [and even, thanks to the innovation of so-called 130-30 funds, a good part of that conducted by traditional money managers, as well] - make all this worse, or will we also now have to backstop all THESE accounts, too?
Next up, Hank's bailout will somehow or other see (a) FNM/FRE doing more of what just bust them in the first place - ahem! - despite the fact they are supposed soon to be shrinking toward insignificance and (b) will offer 'reverse auctions' to those seeking to get impaired loans off their books - -
But isn't this last exactly what happens on a free market if sellers are more insistent than buyers, anyway? And isn't the lack of enthusiasm for doing it (instead of 'marking-to-model' in their semi-fictional Level 3 accounting let-out) exactly what got the banks in such a jam in the first place? Also, how does he avoid a v-e-r-y serious problem of a negative selection of the very worst of the toxic waste being offered exclusively to him?
Worse still, once the first better capitalised institution says, 'OK, Hank, I got this junk on my books for 70 cents on the dollar, but it's yours for 20c', - err - won't all the OTHER banks now have to revalue downwards accordingly since we have finally had a little, long-overdue 'price discovery' take place?
If so, doesn't this mean that the savvy, well-run bank (if that's not TOO much of an oxymoron) can use the UST to send his peers to the wall? That is, can't he - SHOCK! HORROR! - engage in uncompetitive price 'dumping' in order to secure a long-run competitive advantage - something usually persecuted by the crooks on Capitol Hill, not organized by them?
Did Paulson - who, after all, does boast a little experience working at the biggest and most voracious of all Wall St's schools of piranhas - not realise this; or is it part of a very cunning plan to force a much-needed clean out on the same suckers who have been most wildly cheering its announcement?
If not, does this mean he now has to buy bank stock to make good the capital write-downs this will necessitate and, if he does THAT, would he like to let us in on how he thinks he will ever attract any private capital into ANY bank henceforward?
Incidentally, if he buys assets from a US bank but not a foreign one or - worse still - not those held by a foreign sovereign underwriter of US serial prodigality - even though these could presumably pay a small trun to have an eligible American institution ditch it for them, is this not going to be both shamefully invidious and intensely antagonistic, if not outright illegal (not that observing latter niceties is likely to be much of a priority)?
Finally, even though this might - m-i-g-h-t - erect a firewall around the asset-collateral death spiral afflicting the global casino, jut how exactly is it going to restore REAL business to profitability and hence arrest the rise in unemployment and the fall in incomes (both corporate and personal) necessary to avert a further decline in asset prices and/or multiples?
However you slice it and even before the Klepto-RepubliCrats get the barrels ready for what is likely to be the juiciest and most prolific suckling pig slaughter in recorded history, it does seem as if one or two questions have to be answered before we all start patting ourselves on the back....
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Comments (14)
Comments (14)
Yancey Ward
Answer to the last question- $50,000 dollar checks to everyone.
Published: September 21, 2008 1:12 PM
markm
Any chance that english translations of Sean's writings could be posted simultaneously with the originals? The man is exceptionally clever and I sense that there is more economics in one of his posts than the entire outpourings of the British Treasury. But - and I say this repectfully - they can be extremely difficult to follow at times for some of us (me at least). I reluctantly gave up at the fourth paragraph as I couldn't understand a word of it despite my best efforts.
Published: September 21, 2008 1:27 PM
Varun gajra
down down down ... global equities .... why dont they just send us 1 billion indians some money too .. like even 100 dollars a head would be great ! half of my country would swear alligence to the us flag for 100$ !
i wonder what these guys are really upto .... they are too smart not to realize what they are pushing the world into .. let me know your thoughts varungajra at gmail
Published: September 21, 2008 2:28 PM
Mike D.
Great analysis Sean
Correct me if I am wrong, but it seems to me that you can create a position long every S&P 500 stock minus the companies that you want to short, and then short the S&P 500 index futures? This portfolio is then net short the companies you want to short?
Published: September 21, 2008 3:10 PM
Clown George
markm --
I have to agree. This stuff is complicated and still somewhat new to me. But I'm definitely interested in learning, and I think I've made a decent amount of progress on that front in the past several months. I have the Mises site to thank for a lot of that progress.
But I'm still no expert, and whatever points Mr. Corrigan is trying to make fly right over my head.
Fair enough, if his target audience is other economics scholars like himself. But I do think that if the Mises Institute does want to convince folks like me that their ideas are worth considering, they have to be aware that many (probably most) people haven't studied and pondered this stuff for years. Some amount of -- for lack of a better phrase -- "dumbing down" is in order.
Published: September 21, 2008 3:21 PM
Sean Corrigan
Well, yes, but - again showing the lengths to which the authorities will go - this would possibly be illegal if done using Irish equivalents as the catch-all wording of their short-sale ban is that it is illegal to enter into ANY transaction which makes an economc profit from a decline in the protected financial institutions shares!
Published: September 21, 2008 3:27 PM
Danny
Sean
"Worse still, once the first better capitalised institution says, 'OK, Hank, I got this junk on my books for 70 cents on the dollar, but it's yours for 20c', - err - won't all the OTHER banks now have to revalue downwards accordingly since we have finally had a little, long-overdue 'price discovery' take place?"
Certainly these assets would sell today at a market clearing price, but no one can stand the balance sheet hit. Of course, the government will pay well above market, or possibly they will change the accounting rules -- maybe they can amortize the loss over 10 years or something!
Of course, bookeeping isn't cash -- come to think of it, the money being used to buy these "assets" isn't cash either!
Published: September 21, 2008 4:58 PM
Mike D.
Sean
What about 130/30's that have already shorted out the banking sector? (This is a very common play). Are they required to liquidate their short positions?
Published: September 21, 2008 6:05 PM
banker
Well, given the legal and moral precedents being set by Bernanke and Paulson, I think more care should be taken by people trying to save their wealth. I think it is becoming more apparent, as we see the US government's response to this unwinding, that the US gov is willing to do almost anything to prop up US financial institutions.
If one wants to really protect one's hard earned money, you should send it overseas and put it in gold bullion or a safe currency like the yen or Swiss franc. I am not sure a domestically held foreign currency denominated account will help much. To me, it seems like the US gov would do a 1930's repeat and start "taxing" (ie confiscating) savings accounts, especially gold ones. What do you guys think?
Published: September 21, 2008 7:27 PM
Bruce Koerber
Dear Treasury Secretary,
Where in your formal education or in your upbringing did you learn that it is OK (or even possible) to separate ethics from economics?
Since this is a character flaw of yours and it has now been brought to your attention you are obligated to resign. This character flaw of yours is enough to disqualify you to be the Treasury Secretary or any other position where deceitfulness can be covered up.
Fear God, or at least remember that your parents wished that you would be trustworthy and ethical.
Published: September 21, 2008 7:47 PM
gene berman
Hey, you guys:
You can read Mises and, after a few years (at least, in my case) you could say that you pretty well understand most of it.
But what Sean's throwing at you ain't economics--it's finance. And, if you could handle it the way (and at the speed) he slings it, you'd already be on Wall St. (or its counterpart elsewhere). About the best you can do (even taking a course in the vocab won't help except a little) it just to assume that, since he's an accomplished misesian, his analysis (and conclusions) are going to be about as good as it gets.
Published: September 22, 2008 9:20 AM
Mike
If you haven't already, you should listen to some of Sean's lectures in the media section. Very entertaining and informative.
Published: September 22, 2008 12:40 PM
markm
Gene Berman,
Yes I figured that. The economics I have read on this site over the years I can cope with (although I do not claim to be an expert in any shape or form). But Gene's stuff is all to do with the workings of the money markets and how they respond to mainstream macroeconomic policies and its virtually a different language to me. Don't get me wrong - I have great respect for the guy. I just wish I understood what he was saying thats all !!
Published: September 22, 2008 2:42 PM
markm
Gene Berman,
Yes I figured that. The economics I have read on this site over the years I can cope with (although I do not claim to be an expert in any shape or form). But Gene's stuff is all to do with the workings of the money markets and how they respond to mainstream macroeconomic policies and its virtually a different language to me. Don't get me wrong - I have great respect for the guy. I just wish I understood what he was saying thats all !!
Published: September 22, 2008 2:42 PM