Posted on 09/20/2008 6:04:43 PM PDT by BGHater
Turn on this morning’s business programmes, and what do you see?
In the middle of the worst financial crisis since 1974 - or is it 1929? -and share prices are soaring all round the world. As I write, the FTSE 100 is up 8%!
Why? Seems the so-called financial ‘authorities’ have had enough. Despite bigger and bigger bailouts, the nationalisation of large chunks of the US financial system – and part of the UK’s too – and pumping more cash into the money markets than Croesus could count, they hadn’t been able to stem the tide.
So the latest effort contains yet more stellar wheezes.
“Let’s set up a new firm to take over all that dud debt at the root of the problem. And while we’re at it, let’s stop people ‘shorting’ – i.e. selling shares they don’t own in the hope of buying them back later at a lower price – all those bank stocks whose prices have been plunging.” (That temporary shorting ban, by the way, includes 29 UK financial firms and 799 in the US. And the Fed will be acting as backer to money market funds, too).
This must do the trick, mustn’t it? Surely everything’s going to be all right now?
Well, no actually, it won’t. Here’s why.
On shorting, inevitably we’ve seen plenty of drivel about ‘spivs’ from politicians wanting their media moment. But as my colleague John Stepek points out today, shorting isn’t the problem. Brutal it may be, yet it’s just a symptom of a much deeper malaise.
And banning it merely adds to the sense of things being out of control. Short-selling “undoubtedly speeds up a share price in decline”, says Damien Reece in The Telegraph, but “these kind of panic measures after the event reduce, not increase, confidence”.
Then there’s the dud debt fund, or ‘Bad Bank’ as several pundits have described it. The proposal set to go before US Congress involves “moving troubled assets from the balance sheets of American financial companies onto a new institution”, says Bloomberg.
“I think the market’s just so relieved to see somebody doing something,” said Pavlic Investment Advisors’ portfolio manager Terence Pavlic, referring to the bounce.
We can understand the relief. But sadly, that’s all there is to this rally. Because all those dodgy loans won’t disappear overnight. They’ll just be shovelled onto the poor old American taxpayer, already lumbered with a massive possible $900bn (£496bn) bill for pledges on the bailouts so far.
Nor will property prices benefit. In fact, “we may just be prolonging the housing slump”, says Republican Congressman Scott Garrett. “We should let the markets work”. Peter Boockvar at Miller Tabak agrees that unless the Fed stops interfering, Wall Street's problems will continue. “The market can get to the right price on its own. Anything that prevents it from happening is just prolonging the inevitable”.
And with lots more defaults in the pipeline, this new deal might be the last straw. “A giant dumpster for illiquid assets brings up the troubling question of whether the US government is big enough to take on the whole problem”, says Mirko Mikelic at Fifth Third Asset Management.
“Random bailouts confuse markets”, says Professor Joseph Mason of Louisiana State University. “Such a policy will certainly draw out the economic effects of the crisis for far longer than would otherwise be the case.” And as Peter Schiff of Euro Pacific Capital puts it, “every time the authorities intervene, they do more harm than good.”
So it’s only a matter of time before that share price rally goes the way of the last one, i.e. disappears into thin air. But at least it’s a chance to dump any remaining financial stocks you have left – provided, of course, that you don’t sell them short.
Good article. The more the Government meddles then the worse it is going to be in the end.
It’s an election year. The one party cartel in DC has to prop things up until November.
Bad banks! No soup for you!-
Love the wild hogs analogy on your about page!
No amount of bailouts is going to stop this meltdown.
If this author, David Stevenson, is such a genius, why isn’t he sitting on a yacht in the Mediterranean instead of writing for this supermarket rag, “Money Week”?
Opinions are like a-holes.
The goal is no longer stopping it.
It's simply not being the one without a seat when the music stops.
I think that with every case where banning short selling has been tried, including Pakistan in June, the market got a very short term pop (a few days), then the downtrend resumed. And China, where short selling has not been allowed, is down almost 66%.
Japan lost a decade and has been flat for another decade since an acre in Tokyo had to go down from being worth California to just being worth Chad.
yitbos
A very wise lady recently said, “the government is the problem, not the solution”.
Honestly, what did you expect from a guy whose nickname is Helicopter Ben? He got that name by saying that $$ should be dropped out of a helicopter in order to prevent an economic downturn. I don’t know if that’s the most idiotic thing I’ve ever heard, but its close.
Sadly, his philosophy that extraordinary measures are required so that none of us feel pain is in line with our times. We’ve been trying to avoid a downturn by creating a series of bubbles, with the biggest bubble of all being the US debt. Sooner or later it will bite us in the ass. And its getting sooner all the time.
If this author, David Stevenson, is such a genius, why isn’t he sitting on a yacht in the Mediterranean instead of writing for this supermarket rag, “Money Week”?
“Did it ever occur to you that many of the people “sitting on a yacht in the Mediterranean” are the ones who profited from this mess in the first place (and got out in time)? “
Yes it did. And obviously, they are the smart ones. Hence, David is still writing for the supermarket rag.
Now that is damn good advise.
Agreed
Rather than denigrate the author, why don't you tell us where he is wrong, and what your solution would be.
I, for one, would be interested in hearing it...
Actually, what I should have said, is those that CAUSED this mess.
BTW—if you feel that opinions are like a-holes, then why waste you time on Free Republic?
” and what your solution would be.
I, for one, would be interested in hearing it... “
I have no problem with the current Fed solution of buying these debts for a set rate. The market is panicking and these debts are basically worthless at this point, which in turn is halting the ability to raise additional funds. The government taking on these debts helps to remove this uncertainty from the markets. The government, having the luxury of time, plans to hold this debts until maturity. Hopefully they will be able to earn more from these debts in the future than they are worth now. The only other option is to let the U.S. financail system collapse which would cost the taxpayers much more in the long run.
No one knows for sure, but I believe this is the best option.
“BTW—if you feel that opinions are like a-holes, then why waste you time on Free Republic?”
Because I am an a-hole! ;)
I don't think the American public understands just how close we are to total financial collapse, and if you don't think it will affect main street, just find someone alive from the 29 default, and ask them.
The financial sector is the heart of this economy and it pumps the blood or money and wealth into the farthest reaches of the economy here and abroad.
We are very, very close to collapse, and it won't take much, even now.
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