Wednesday, April 08, 2009

Hmmm, I think I've seen this story before...

Why do I feel like this kid every night when I see the latest bailout news hit the screen....

US Imagines the Bailout as an Investment Tool

"During World War I, Americans were exhorted to buy Liberty Bonds to help their soldiers on the front.

Now, it seems, they will be asked to come to the aid of their banks — with the added inducement of possibly making some money for themselves."

Seriously, is anyone in Washington working or do they just sit around developing "plans" to be leaked to the media each night?

"The funds, the thinking goes, would buy troubled mortgage securities from banks, enabling the lenders to make the loans that are needed to rekindle the economy. Many of the loans that back these securities were made during the subprime era. If all goes well, the funds will eventually sell the investments at a profit.

But, as with any investment, there are risks. If, as some analysts suspect, the banks’ assets are worth even less than believed, the funds’ investors could suffer significant losses. Nonetheless, the administration and executives in the financial industry are pushing to establish the investment funds, in part to counter swelling hostility against the financial industry."

I can't believe we are still having this discussion. THE BANKS HAVE PLENTY OF MONEY TO LEND. They are choosing not to lend because they know their remaining assets are partially garbage and FRANKLY, THERE IS VERY LITTLE LOAN DEMAND. Americans are finally adjusting to a less leveraged life and that means less demand for loans. This is ok. The sun will rise tomorrow. Unfortunately, Goldman, Citi, Wells Fargo, etc, think the end of the world is coming if they can find a sucker.......I mean "investors" to overpay for their garbage.

As I mentioned way back in September 2008 in this post ---- A real proposal to solve the crisis --- rather than making investments in broken banks we should offer a real FDIC backed 12 mth CD paying a real rate and you'd have plenty of capital.

"If banks were to offer one year CD's paying say 7% and a national campaign was launched to encourage purchase of CD's as a patriotic act (like the old War bond commercials) money would flood the banking system (and while we're at it let's bump the insurance on these CD's up to $500,000).

Yes, you say, but banks would get killed paying 7% interest for a year. Here's where the government can play a role - the government could make up the difference between the market rate (about 4.5%) and the above market rate (in this case 2.5%). If the US citizens deposited a whopping $1 Trillion in 1 year CD's, the cost to the government would be $25 billion. The banking system would be saved, you and I would earn a decent return, capitalism can flourish again and American can regain it's status as a global financial power thanks to some creative thinking.

Unfortunately, we're going to proceed down the path of a bailout for the banks that has no guarantee of increasing liquidity and will likely lead to lower confidence in our US corporations."



Anonymous said...

It will never happen. The banks and brokerages do not want people to make money outside of the stock market and the bond game.

Anonymous said...

how low would the stock market go if a person could get a 7% cd. It most probaly would drive fear into the brokers and make some people much more honest.
ps been a reader since last fall keep up the good work.

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