Saturday, January 31, 2009

THE NEW REALITY

One of the folks that commented on my Seeking Alpha piece last week suggested that we should give the fiscal stimulus plan time to take effect before being critical of it. Sounds logical, but let's digress for a moment.

If the plan looks wrong, smells wrong, and sounds wrong, why hold back? I know this is an area where no one has the right answer, or at least an answer they know to be right, but there are certain things that we should by all rights have a good sense about being wrong. Then again, I am talking about the government here, so I should know better. Nonetheless, what is wrong with the "current" plan? - let me count the (many) ways:



  1. Well I am not really sure what the current plan is, for one thing. It seems to shift daily. Now I will give Obama some time to figure out what he is going to do, but we should not be getting reports daily on what is being considered. It just adds to the public belief that the administration has no idea what it is doing. From Bush, we expected it, but from Obama, we need leadership, we need confidence, we need conviction and we do not need a plan that shifts constantly.
  2. Buying toxic assets from banks seems pretty stupid. Okay, let's shift a lot of junk from their balance sheets to ours. First of all, if we pay what this is really worth, the financial institutions are confessing insolvency right away. So we have to pay more than fair value, which inflates the value of toxic assets we do not buy, thereby adding more doubt to investors (not to mention we are paying too much). If a bank has a lot of over-valued bad debts on their books, why invest in them or trust them. So I do not see this working out well. But let's say it works in terms of removing toxic assets off the books, then what?
  3. So we give them all this money. And then we let them do whatever in the world they want to do with the money. No, you say, we are putting strings on it this time. Okay, so we will put some restrictions on executive pay and bonuses and make them tell us how they are lending, but where does that get us? Why would we just give them this money and trust them to do the right thing? These are, after all, the companies that by-and-large got us into this mess. Can we trust them to lend to good companies that need the money to conduct business as usual or might they just use it to do what they think will make them the most money. WAKE UP PEOPLE!!!! These directors and officers are legally required to do what is best for their companies, not what is best for the U.S. taxpayers. And I suspect our interests are still not aligned just yet. Thus, I say we nationalize those "too big to fail" types that are technically insolvent so we can make the decisions on who needs and deserves the money. We can re-privatize later, but for now, we have the money, we call the shots. Cut out the middleman who has proven himself unworthy.
  4. There is a serious problem I have noted here both recently and historically about whether our trading partners will support our debt-laden ways. We seem to have this big assumption that China, Japan, the Middle-East and so many other countries will support us incurring trillions of dollars of deficit spending. Yes they are supporting it, by the way, so far, but we cannot do this deficit spending without them, and soon, if we continue on this path, they will stop lending us the money. They already have major doubts and that is starting to be a big issue. It will, in my opinion, be a bigger problem for us in the years ahead. Perhaps even a bigger problem than the financial mess we face today.
  5. Even if other countries support our deficit spending to support this plan, there is a major issue on whether we should incur this debt. I personally do not want to leave my daughter or grandchildren with having to pay off this massive deficit we are considering. I, for one, do not think we should be incurring trillions in debt for an ill-conceived or even a properly conceived plan. We cannot spend that much. OUR PROBLEM WAS SPENDING MORE THAN WE MADE SO THE ANSWER CANNOT BE THE GOVERNMENT ALLOWING US TO SPEND MORE THAN WE MAKE. Joseph Stiglitz, a Nobel laureate, can tell you better than me, and he thinks we are asking for major problems. http://www.bloomberg.com/apps/news?pid=20601087&sid=a.GJvNfWtCX0&refer=home
  6. We will not get out of this until housing hits bottom, and I am talking a true bottom. The government and everyone else seems hell bent on propping up the market so it does not hit bottom. Well, false support leads to delayed pain. Right now, absent the government doing something stupid, I think the market should hit bottom early 2010 and perhaps late 2009. Just a guess, but it is based on what I have been reading about Alt-A loans resetting, where we are in the cycle and how markets tend to overshoot the mean. When we do reach bottom, it will allow banks to finally value their toxic assets to a certain degree. We will get there and the government needs to focus on us to surviving until then.
  7. Last but not least - the new reality. This is probably my key comment here and perhaps one of the most significant I have ever noted on this blog. We have a new reality. The economy, at least in the U.S., was supported for the last five to ten years by consumers and home buyers spending more than we can afford. We were not living within our means. The fact that we are spending a lot less and that our houses are reverting to a proper price structure leads the government to think all is terrible. My take is that we are reverting to mean, we are correcting, we are arriving at price discovery, and our economy it reaching a stable level, a sustainable level. We may overshoot, but we are returning to mean. That is a very good thing. We need normalcy in our markets and pricing. This, to me, is not a recession, it is a correction. Let the economy correct, don't spend trillions to stop it. Yes, we need to spend money to control the pain and maintain companies that should be maintained, but otherwise, let us correct. As certain studies have shown, this new reality in some respects may be a better reality, at least for some.

http://www.nytimes.com/2009/02/01/business/01view.html?ref=business

Disclosures: None

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