Can President Obama impress Wall Street?
Posted on 24 March 2009 with no comments from readers
The initial US stock market rally suggested that the $500 billion toxic asset plan unveiled by President Obama yesterday will find support among investors. Yet there is still good reason to be cautious.
The monumental public relations campaign that accompanied yesterday’s plan was arguably far more impressive than the plan itself. There is even an article from the President in Dubai’s leading paper Gulf News.
PR plan
But winning the battle for public opinion is one thing, winning the hearts and wallets of investors is quite different. For investment is about self-interest and not public interest, and that is something that is being forgotten in Washington these days.
You can lead a horse to water, but you can not make it drink. Similarly investors can be invited to participate in a $500 billion private-public toxic asset plan, and politely decline to do so.
Why would anybody in their right minds want to buy bad debts off the banks? Quite a part from being chastened by only too recent experience, what is in it for the investors and their shareholders?
Apparently the plan is going to include subsidies in the form of low-interest loans to entice buyers. But then we hear this from President Obama in Gulf News:
‘We must put an end to reckless speculation and spending beyond our means’. Quite. Why would anybody speculate in toxic debt, even with government support? And what about your trillion dollar deficit?
And what does the new president offer Wall Street: ‘I am committed to seizing this opportunity to advance comprehensive reforms of our regulatory and supervisory framework’.
Wall Street rules
You do not bite the hand that feeds you. Wall Street is hardly going to speculate on a government that despises it on the one hand, and on the other asks for its help.
This really cuts to the chase. Ask yourself if this statement is correct: ‘I also know that we need not choose between a chaotic and unforgiving capitalism and an oppressive government-run economy’.
That is what President Obama states in Gulf News today. But it is precisely this choice which needs to be made and not a slippery compromise that just will not work. Wall Street will not buy it, after an initial rally.
no Comments posted by readers:
He must have in one way or another as we saw a 500 point gain yesterday. Let’s see if this Dead cat bounce with Inspector Gadget legs lives as this cat with Inspector Gadget legs made one hell of a bounce. Oil prices are up which is music to their ears in the Gulf.
Fair comment – and Asian and Gulf markets followed the US lead. The problem is still sustainability – and having thrown everything but the kitchen sink into the PR launch yesterday, what comes for an encore?
From The Business Insider, March 23, 2009:
Tim Geithner has finally revealed his plan to fix the banking system and economy. Paul Krugman, James Galbraith, and others have already trashed it.
[We spoke with noted economist Galbraith this morning. In the accompanying segment, he calls the Treasury Secretary’s plan “extremely dangerous.”]
Why?
In short, because the plan is yet another massive, ineffective gift to banks and Wall Street. Taxpayers, of course, will take the hit
Why does Tim Geithner keep repackaging the same trash-asset-removal plan that he has been trying to get approved since last fall?
In our opinion, because Tim Geithner formed his view of this crisis last fall, while sitting across the table from his constituents at the New York Fed: The CEOs of the big Wall Street firms. He views the crisis the same way Wall Street does–as a temporary liquidity problem–and his plans to fix it are designed with the best interests of Wall Street in mind.
If Geithner’s plan to fix the banks would also fix the economy, this would be tolerable. But no smart economist we know of thinks that it will.
We think Geithner is suffering from five fundamental misconceptions about what is wrong with the economy. Here they are:
The trouble with the economy is that the banks aren’t lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it. As consumers retrench, companies that sell to them are retrenching, thus exacerbating the problem. The banks, meanwhile, are lending. They just aren’t lending as much as they used to. Also the shadow banking system (securitization markets), which actually provided more funding to the economy than the banks, has collapsed.
The banks aren’t lending because their balance sheets are loaded with “bad assets” that the market has temporarily mispriced. The reality: The banks aren’t lending (much) because they have decided to stop making loans to people and companies who can’t pay them back. And because the banks are scared that future writedowns on their old loans will lead to future losses that will wipe out their equity.
Bad assets are “bad” because the market doesn’t understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are. House prices have dropped by nearly 30% nationwide. That has created something in the neighborhood of $5+ trillion of losses in residential real estate alone (off a peak market value of housing about $20+ trillion). The banks don’t want to take their share of those losses because doing so will wipe them out. So they, and Geithner, are doing everything they can to pawn the losses off on the taxpayer.
Once we get the “bad assets” off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating. So they’ll sit there and say they are lending while waiting for the economy to bottom.
Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they’ll be working it off for years. House prices are still falling. Retirement savings have been crushed. Americans need to increase their savings rate from today’s 5% (a vast improvement from the 0% rate of two years ago) to the 10% long-term average. Consumers don’t have room to take on more debt, even if the banks are willing to give it to them.
The two charts below from Ned Davis illustrate the real problem: An explosion of debt relative to GDP. The first is Nonfinancial Debt To GDP. The second is Total Debt To GDP.
In Geithner’s plan, this debt won’t disappear. It will just be passed from banks to taxpayers, where it will sit until the government finally admits that a major portion of it will never be paid back.
For more coverage including charts, see The Business Insider.
From The Telegraph today:
Internal European divisions are growing over the Prime Minister and US President’s strategies to fight the economic crisis just one week before a critical G20 summit in London.
Mirek Topolanek, the Czech prime minister who is running a caretaker EU presidency after the collapse of his government on Tuesday, highlighted European splits over fiscal stimulus plans promoted by Mr Obama, with Mr Brown’s support.
Mr Topolanek warned the European Parliament that the Obama administration’s stimulus package and financial bail-out “will undermine the stability of the global financial market”.
”All of these steps, these combinations and permanency is the way to hell,” he told Euro-MPs in Strasbourg
”We need to read the history books and the lessons of history and the biggest success of the EU is the refusal to go this way.”
His comments reveal European disunity just eight days ahead of the G20 summit of the world’s industrialised countries in London next Thursday.
Mr Brown will be hosting the event and trying to contain sharply diverging EU positions at the summit, which will also be the forum for Mr Obama’s first visit to Europe as US President.