Sunday, February 08, 2009

The Spender of Last Resort.....

"The age of the U.S. and world economy being driven by the U.S. consumer may be in the past. We need to become more of a nation of producers rather than a nation of consumers.”
- Nigel Gault, chief U.S. economist for IHS Global Insight

This is the gist of my complaint with the stimulus plans and bank bailouts. The current issues facing our economy are simply the manifestation of 25 years of excess consumerism. Our country is an addict and easy credit was our drug of choice. The remedy for this addiction isn't more credit and more consumerism. Unfortunately, this seems to be our game plan right now. I think we've entered a phase of the Great Regression where we feel that the spending spree has to continue. The consumer isn't coming back so the Government has become the Spender of Last Resort. I wish if we were going to spend a trillion dollars we'd have a little bit more confidence in the plan than saying "we hope this will work".

The great needs facing our global economy for the next 100 years are clean energy, clean transportation, fresh water, healthcare and technology. As opposed to spending additional billions (or trillions) on trying to save a failed system of banks and chain stores, I think we'd see a far better return by investing in these industries and encouraging more magnet schools that attract the best and brightest (remind me to come back to the subject of magnet schools at some point).

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Well, now that we've got the stimulus passed, it's onto the next big bailout for the banks. My two great concerns with the rumors I was hearing were that Sec. Geithner was still too tied to "saving the banks" and that big money managers were going to get a piece of the action.

Unfortunately, they both seem to be true....

"Wall Street helped produce the global financial and economic crisis. Now, as the Obama Administration prepares to unveil a revised bailout plan for the banking system, policy makers hope Wall Street can be part of the solution.

Administration officials said the plan to be announced Tuesday was likely to depend in part on the willingness of private investors other than banks — like hedge funds, private equity funds and perhaps even insurance companies — to purchase the toxic assets that wiped out the capital of many banks.

The officials say they are counting on the profit motive to now create a market for those assets. The government would guarantee a floor value, officials say, as a way to overcome investors’ reluctance to buy them.

Details of the new plan, still being worked out over the weekend, are sketchy. And they are likely to remain so even after Treasury Secretary Timothy Geithner announces the plan on Tuesday. But the aim is to reduce the need for immediate federal financing and relieve fears that taxpayers would be paying excessive prices if the government took over risky securities the banks created when credit and home prices were booming a few years ago."

It's a nice idea, but some big money managers have already heard about this plan and have been front-running this idea. They started buying lots of toxic paper about two weeks ago, just as they ramped up their efforts to convince the government of what a great idea this would be. After the plan is announced, these assets that they bought two weeks ago are going to become much more valuable overnight and they'll likely sell some of those assets to the US government at they higher price. Nice work if you can get it.

Also, this plan remains committed to saving the banks. Mr. Geithner works for us and his obligation is to protect the US taxpayers first, but he's still determined to save the NY Banks at a cost to you and me. I hope I'm wrong on this issue, but so far Mr. Geithner seems to be in over his head.

Cheers!

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