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October 10, 2008
Death By A Thousand Bailouts?
With the global financial markets in a state of what can only be described as sheer panic, the point has arrived when the thought of the U.S. government buying out all of the mortgages in the U.S. sounds rational. To be sure, variances of this theme were recently suggested by Feldstein and Hubbard, two gentlemen not predisposed to fanatical thinking. For his part, Roubini – whose fanaticism is becoming more mainstream by the day – had this to say:
“At this stage central banks that are usually supposed to be the "lenders of last resort" need to become the "lenders of first and only resort" as, under conditions of panic and total loss of confidence, no one in the private sector is lending to anyone else since counterparty risk is extreme…”
As global finance ministers meet today and new and improved bailout ideas get hatched seemingly everyday, the theory goes that if policy makers can push enough capital into the right area of the marketplace investor ‘confidence’ will return. How much capital will it take you ask? Don’t ask, because no one else is. Rather, investors and policy makers will know when enough is enough.
But while investors wait for more extensive policy actions to bring confidence back, trillions in stock market wealth are vanishing, U.S. home prices continue to decline, and the real global economy continues to enter a deeper slump. This excruciatingly long pre-bailout waiting period, which has been a repetitious theme for more than a year now, is in many ways aiding today’s crisis. After all, policy makers can only tell someone ‘don’t panic’ so many times before these words ring hollow and have the opposite effect.
President George W. Bush will address the nation tomorrow to tell Americans they should remain “confident'” amid falling stock markets and a worldwide credit crisis, administration spokeswoman Dana Perino said
Having just watched the passage of the unprecedented $700 billion bailout fail to restore any confidence, something tells me that Bush’s words will not carry much influence.
Suffice to say, the bailouts are not working but it is much too late to stop the process. Should policy makers take a vacation now the credit markets could be left frozen, panic could spread even further, and the entire financial system could collapse. Talk about free markets if you dare, but freely allowing the financial marketplace to disintegrate into chaos creates potentially irreversible longer-term damage. Even if you conclude that all of these bailout efforts are really doing is delaying such damage standing idly by is not an option now, is it?
Incidentally, what today’s bailout/confidence game means to the average investor is that only two asset classes could exist for awhile: precious metals and everything else. For the record, precious metals are in the lead and everything else is at risk of being lapped. However, it should be noted that America’s piece of paper has held up well versus other pieces of paper during this crisis...
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