Tuesday, September 30, 2008

Wall Street Journal Op Ed by Nobel Prize Winner Edmund S. Phelps

We Need to Recapitalize the Banks
Let's have cash infusions in return for warrants.


When the speculative fever finally broke in America's housing industry and house prices began falling in search of equilibrium levels, banks everywhere suffered defaults and subsequent losses on a range of assets. In short order, the housing contraction morphed into a banking crisis.

David Gothard
Among most economists, it came as a surprise that the banking industry and, indeed, most of the financial sector, was so devoted to houses. We had not realized that the investment and innovation in the country's business sector was largely getting by on rich uncles, a tiny cottage industry of venture capitalists out West, and a few private-equity funds doing alternative energy. And we didn't foresee that a trillion or two of losses in an economy with $40 trillion of financial wealth could bring high anxiety and, two weeks ago, near panic.

The banks' losses might seem poetic justice after their abominable performance. But costly feedback effects on the rest of us are in prospect. Uncertainty over the quantity and valuation of banks' "toxic assets" has meant that many cannot count on loans from each other to meet daily needs, and this illiquidity in the markets has impaired their ability to lend. Among banks that had excessively leveraged their capital through borrowing and other devices, the losses wiped out much or all of their capital, and this near-insolvency has dampened their willingness to lend.

The resulting credit contraction is starting to crimp working capital and investment outlay at small businesses and is having wider effects on business activity through its impact on interest rates, exchange rates and consumer loans. This feedback is causing a fall of employment on top of the direct effect of the housing contraction on employment in construction and finance. The added fall in jobs will in turn add to mortgage defaults.

Will this chain reaction produce a deep slump, like Japan's in the 1990s or, worse, America's in the 1930s? In my view, the claim by Keynesians that the economy can be stabilized around a satisfactory employment level, thanks to economic science, is false. So is the claim by latter-day neoclassicals that such stability is automatic, thanks to the market. Both dogmas fatally miss the point that the normal activity level is driven by structural shifts, which monetary policy and price-level changes usefully accommodate but cannot reverse. The end of the speculative fever and the credit crunch each have structural effects on the real prices of business assets, real wages, employment and unemployment. As I see it, the former has pushed up the normal, or "natural," volume of structural unemployment. The latter (and the excess houses) is pushing the economy into a temporary slump. It will last as long as required for the banks' self-healing and government therapy to pull us out of it and into the neighborhood of our new, postboom normalcy.

I believe that leaving the process of recovery entirely to the healing powers of the banking industry, as libertarians suggest, would be imprudent, even if the banks could manage it. Lacking much government intervention, Japan's recovery took a decade. Sweden's recovery, with state intervention, took hardly any time at all.

Right now our banking industry is barely operational. Whatever the corrective surgery indicated, the priority is to get the system operating again. Delay would be costly and risky.

The most discussed of the proposed programs would address banks' toxic assets by authorizing the Treasury to buy them, issuing debt to finance the purchase. Proponents of this program add that the government's eventual sale of the assets purchased might repay the investment with a profit -- grossing, say, an 8% rate of return while paying 4% interest.

House Republicans and some economists object, saying that the government could attain its goal with a bigger or surer profit by selling the banks "default insurance" on their distressed assets: the premiums paid are hoped to far exceed the default costs. To me, government entry into the default insurance business is little different from government purchasing the assets. It is not clear to me that selling default insurance would be more profitable.

House Democrats want a parallel program that would help defaulting mortgage borrowers to avoid foreclosure -- to help them "stay in their homes." Such a step might set an undesirable precedent in economic policy. If, after investing in my vocational training, I cannot make it in the line of work I chose -- not at the real wage that the market has since established, at any rate -- will I be entitled to help from the government to "stay in my work"? Furthermore, many defaulters are housing speculators not families caught up in an adjustable rate mortgage they did not understand. Finally, the overinvestment in houses does not present the systemic risk of economic breakdown that the overextension of credit does.

However, the program to revive the operation of the banks through purchase of the toxic assets faces a sticky wicket. If the government sets the prices too low, the banks will supply little of their assets; they will prefer to hold them to maturity in order to get the price appreciation for themselves. The Treasury will then need to raise the terms. But that may cause the banks to hold off longer, speculating on still better terms ahead.

If, instead, the Treasury sets its prices too high, its funds will go far enough to buy only a portion of the toxic assets offered in response. Thus, it is not certain that such a program would work to clean out the toxic assets at all quickly. Subnormal operation of the banking industry might drag on for a few years.

A program of asset purchases, however needed, is limited in scope. It cannot be counted on to increase the equity capital of the banks -- to shore up their solvency. Underpaying for the toxic assets would actually inflict a further loss of capital. Overpaying the banks for their toxic assets could contribute capital, but that may not be politically feasible or attractive.

So it is clear that the main prong of any "rescue" plan must serve to advance the recapitalization of the banks. Cash transfusions in return for warrants are a good way to do it, as it lets taxpayers share in the upside. The rescue of Chrysler used warrants. This past Monday the FDIC got $12 billion in preferred stock and warrants in the deal that saw Citigroup buy Wachovia. The question is which banks are to be thrown a lifeline, which will have to sink or swim. This one-time dose of corporatism is unpleasant, though the banking industry is to blame for its necessity.

But these steps toward making the system operational again will leave it dysfunctional. We don't want to restore the system as it was. And the risk that the industry would cause another round of wreckage is not the only reason.

What has occurred is not just an old-fashioned banking crisis but also a banking scandal. Most of the big banks were shot through with short-termism, deceptive practices and self-dealing. We must institute basic changes in corporate governance and in management practice to restore responsibility and honesty for the sake of the economy and for the self-respect of the country.

We also need to return investment banking to its roots. There is more to the influence of the financial sector than merely its effects when it goes off the rails. The financial system is not a sort of circulatory system that passively carries fresh saving to the places in the economic body that demand the greatest investing -- as if guided by some "invisible hand." Judgment and vision -- of bankers, fund managers, angel investors and the rest -- matter hugely. So do the distortions, the limits and the license created by the regulatory system and the moral climate. To prosper and advance, the American business sector is going to need a financial system oriented toward business, not "home ownership."

Mr. Phelps, the winner of the 2006 Nobel Prize in economics, directs the Center on Capitalism and Society at Columbia University.


Some Words of Wisdom From Soros

Recapitalise the banking system
By George Soros
Published: October 1 2008 02:05 | Last updated: October 1 2008 02:05
The emergency legislation currently before Congress was ill-conceived - or more accurately, not conceived at all. As Congress tried to improve what Treasury originally requested, an amalgam plan has emerged that consists of Treasury’s original Troubled Asset Relief Programme (Tarp) and a quite different capital infusion programme in which the government invests and stabilises weakened banks and profits from the economy’s eventual improvement. The capital infusion approach will cost tax payers less in future years, and may even make money for them.

Two weeks ago the Treasury did not have a plan ready - that is why it had to ask for total discretion in spending the money. But the general idea was to bring relief to the banking system by relieving banks of their toxic securities and parking them in a government-owned fund so that they would not be dumped on the market at distressed prices. With the value of their investments stabilised, banks would then be able to raise equity capital.

The idea was fraught with difficulties. The toxic securities in question are not homogenous and in any auction process the sellers are liable to dump the dregs on to the government fund. Moreover, the scheme addresses only one half of the underlying problem - the lack of credit availability. It does very little to enable house owners to meet their mortgage obligations and it does not address the foreclosure problem. With house prices not yet at the bottom, if the government bids up the price of mortgage backed securities, the taxpayers are liable to loose; but if the government does not pay up, the banking system does not experience much relief and cannot attract equity capital from the private sector.

A scheme so heavily favouring Wall Street over Main Street was politically unacceptable. It was tweaked by the Democrats, who hold the upper hand, so that it penalises the financial institutions that seek to take advantage of it. The Republicans did not want to be left behind and imposed a requirement that the tendered securities should be insured against loss at the expense of the tendering institution. The rescue package as it is now constituted is an amalgam of multiple approaches. There is now a real danger that the asset purchase programme will not be fully utilised because of the onerous conditions attached to it.

Different focus
‘Tarp’s adverse consequences could be mitigated by using taxpayers’ funds more effectively. If Tarp invested in preference shares with warrants attached, private investors, including me, would jump at the opportunity’

Nevertheless, a rescue package was desperately needed and, in spite of its shortcomings, it would change the course of events. As late as last Monday, September 22, Treasury secretary Hank Paulson hoped to avoid using taxpayers’ money; that is why he allowed Lehman Brothers to fail. Tarp establishes the principle that public funds are needed and if the present programme does not work, other programmes will be instituted. We will have crossed the Rubicon.

Since Tarp was ill-conceived, it is liable to arouse a negative response from America’s creditors. They would see it as an attempt to inflate away the debt. The dollar is liable to come under renewed pressure and the government will have to pay more for its debt, especially at the long end. These adverse consequences could be mitigated by using taxpayers’ funds more effectively.

Instead of just purchasing troubled assets the bulk of the funds ought to be used to recapitalise the banking system. Funds injected at the equity level are more high-powered than funds used at the balance sheet level by a minimal factor of twelve - effectively giving the government $8,400bn to re-ignite the flow of credit. In practice, the effect would be even greater because the injection of government funds would also attract private capital. The result would be more economic recovery and the chance for taxpayers to profit from the recovery.

This is how it would work. The Treasury secretary would rely on bank examiners rather than delegate implementation of Tarp to Wall Street firms. The bank examiners would establish how much additional equity capital each bank needs in order to be properly capitalised according to existing capital requirements. If managements could not raise equity from the private sector they could turn to Tarp.

Tarp would invest in preference shares with warrants attached. The preference shares would carry a low coupon (say 5 per cent) so that banks would find it profitable to continue lending, but shareholders would pay a heavy price because they would be diluted by the warrants; they would be given the right, however, to subscribe on Tarp’s terms. The rights would be tradeable and the secretary of the Treasury would be instructed to set the terms so that the rights would have a positive value.

Private investors, including me, are likely to jump at the opportunity. The recapitalised banks would be allowed to increase their leverage, so they would resume lending. Limits on bank leverage could be imposed later, after the economy has recovered. If the funds were used in this way, the recapitalisation of the banking system could be achieved with less than $500bn of public funds.

A revised emergency legislation could also provide more help to homeowners. It could require the Treasury to provide cheap financing for mortgage securities whose terms have been renegotiated, based on the Treasury’s cost of borrowing. Mortgage service companies could be prohibited from charging fees on foreclosures, but they could expect the owners of the securities to provide incentives for renegotiation as Fannie Mae and Freddie Mac are already doing.

Banks deemed to be insolvent would not be eligible for recapitalization by the capital infusion programme, but would be taken over by the Federal Deposit Insurance Corporation. The FDIC would be recapitalised by $200bn as a temporary measure. FDIC, in turn could remove the $100,000 limit on insured deposits. A revision of the emergency legislation along these lines would be more equitable, have a better chance of success, and cost taxpayers less in the long run.


Saturday, September 27, 2008

What Next?

I must admit that I secretly hoped that John McCain would oppose the bailout, with the Republican Congressional Insurgency giving him the opportunity to be a “Maverick’. I thought he would then call this rubbish the Bush-Obama Wall Street bailout, thus covering his greatest weakness. But alas, it’s obvious after last night’s debates that it was just wishful thinking. In fact, it was like watching American Idol with two contestants singing the same song. So this is where we are. The Congress is receiving phone calls of up to 100 to 1 against the bailout, yet they are about to sign into law perhaps the most unpopular piece of legislation in the history of our Republic. So one has to ask. What will happen after $700 Billion is engulfed by the Disappearing Deep Hole of Derivative Destruction? What will happen after the MOAB (Mother of All Bailouts)?
One has to believe that there will be a temporary increase in liquidity, which will be quickly sucked up by the system. But it has been obvious that every Fed and Treasury intervention has had more ephemeral staying power. So this intervention will help for maybe 3-6 months. Maybe. But what will happen when the sequel comes out? MOAB II, or perhaps the Son of MOAB? Don’t you think Americans will be even more pissed off? They will say, and justifiably so, you told us that this will save the system and now we’re right back to where we were a few months ago, and you are asking for another massive bailout! I am afraid that we are going down the slippery slope of ill-guided intervention. Didn’t Paulson and Bernanke say that there is no housing bubble, then they said that Subprime is contained, then they said that by nationalizing Fannie and Freddie that it puts a floor under the mess? WHAT WILL THEY SAY? There will probably be new actors, buy they will still have to read the same poorly scripted lines.
We are going down the path of self-destruction. Lenin said that there is no surer way to destroy a nation than to debase its currency. There is no surer way to debase the dollar than to continue down this misguided path. We have become so caught up in stock market and real estate losses, that we have taken our eyes of the real prize! Our greatest asset as a nation is our currency. Today, the US Dollar reigns supreme. But one has to ask how much longer will our creditors keep the credit flows open while we debase and inflate our way out of this self-inflicted greed wound. There are already grumblings of a Sino-Russian alliance, one that could put significant pressure on other nations to abolish the dollar standard. Once the dollar standard is usurped, we are TOAST!!!!!!! Expect massive tax increases, spending cuts and a drastic decrease in our standard of living. Yet, the guys on the yachts are smart. They will have diversified into other currencies, homes in other nations, and accounts in safety deposit boxes around the world. Much like the Nazi’s who bought their freedom after WWII, these criminals will save their hides. Caviar for them and feudalism for us. You’ve been warned.


Tuesday, September 23, 2008

Full court press.

Emperor Paulson is testifying in front of the Senate as I write this piece, but I have some preliminary observations. It is obvious that he is using this moment of crisis (or as the Chinese would say moment of opportunity) to push forward on his Wall Street debt reduction plan. He very well knows that neither party wants to be viewed as anti helping America so close to the elections. So he is taking away space and time from Congress, in order that they make a costly (700 billion) turnover. His argument is oddly amusing. He is saying that these "various assets and instruments" are very complicated. So complicated are they that only experts from Goldman and Morgan understand them. Thus, he needs a clean and simple plan to have a resolution. Funny guy! The next amusing area is in the logic behind this bailout. He's saying that Main Street needs to give money to Wall Street so they can turn around and lend it back to Main Street. Well if Main Steet needs the money, why don't they just keep it in the first place. The reason is simple. This is your classic bait and switch routine where we talk about house prices and complex derivatives, but in point of fact are just covering Wall Street's bad bets. I hope the Senate has the courage to stand up to Caesar, but I highly doubt it.

Sunday, September 21, 2008

All Hail Emperor Paulson!

While the MSM lauds his actions, Emperor Paulson is about to impose economic martial law on the citizens of America. Outside the Treasury will read the moniker "Over 1 Trillion Served" (except not by choice)! I believe it is time that we change our Pledge of Allegiance to more accurately reflect the Imperial status of Mr. Paulson:

I pledge allegiance to the flag of the United States of Hank Paulson and to the kleptrocracy for which it has become, one nation, above God, divisible, with debasement and inflation for all.

Wall Street Perestroika

A Fait a Compli

Having watched the Sunday talk shows, it is obvious that the Wall Street Debt Reduction Plan is a done deal, with only minor detail to be discussed. I am not sure how to feel about it. But probably it is somewhere between bewilderment and incredulousness. Chutzpah, properly defined, is killing your parents and looking for sympathy that you have become an orphan. The one thing that this plan does not lack is chutzpah. The thieves on Wall Street have designed this plan so that they can improve their balance sheet, and in effect cover their losses on bad bets. Paulson will have absolute authority over the plan, and they will be able to buy instruments from foreign banks as well as commercial real estate paper. So the taxpayer has the added benefit of assisting his banker friends abroad and our Donald Trumps at home. This plan reminds me of another ambitious reform program. When Mikhail Gorbachev came to power, he knew that communism was not sustainable, and he believed it could be saved by a few reforms of the system, Perestroika and Glasnost (Rebuilding and Openness). The problem was that communism itself was a flawed system, and no amount of Perestroika could save it. The Soviet Union (and Russia today) had no finished product to sell abroad, and its collectivized farm system was unable to produce enough food for its population. It was completely reliant on oil exports to fund its ability to feed the masses, and when oil prices collapsed, it took out the USSR, despite all the attempts by the cronies to keep it propped up. So, as I look upon the landscape today, I see that Mr. Paulson is attempting a Wall Street Perestroika, so that the system can be saved!?!? However, one needs to ask a fundamental question, i.e. can our economic system, as currently designed, be saved? The parallels are frightening. As the USSR was dependant on oil exports to stay afloat, so to the USA is dependant on capital exports (treasuries/gse/mbs/derivatives etc…) to stay afloat. So just as a collapse of oil prices in the 80’s squeezed the USSR out of business, the last thing that the USA can tolerate is a new “price discovery’ on our capital exports. Because we are completely dependant on external powers to finance our budget and thus run our country is the reason why I believe these extraordinary measures are being undertaken. But just as Perestroika of the USSR failed because it was unsustainable, Wall Street’s Perestroika will probably fail. Adam Smith said that no country that has ever run up a large foreign debt has ever paid it back. I think that when foreigners understand that we do not have the capacity to pay back our debts, and that we are going to have to inflate our way our of our debt, they will pull the plug on the current finance agreements and in effect destroy the dollar’s standing as the world’s reserve currency. This may lead to the collapse of our whole economic system, despite Mr. Paulson’s best efforts to prop up the oligarchs.

Saturday, September 20, 2008

Trickle Down Tax Cuts.

It has become obvious that this ridiculousness has left the realm of economics and is now a political problem. There is no question but that the Bush tax cut, spending increases and decreased regulations, all financed by borrowing, have allowed the Wall Street oligarchs to game the system in their favor and make an inordinate amount of money (who wouldn't want to pay 15% taxes on 100 million dollar bonus?). But we are well past the point where anybody thinks that this is either right or moral. The question is, what's next? What Mr. Paulson suggests is the largest tax cut for the rich in American history. 1 Trillion dollars of debt relief for the Wall Street oligarchs, financed either by tax increases or inflation, is what is on the table for us. I cannot for the life of me understand why the Democratic candidate for the US president, Mr. Obama, is favor of this solution. The Democratic party has always been the party of the working Joe, so how can Mr. Obama support one trillion dollars of debt relief for the Morgan Stanley's of this world. He is such a big critic of trickle down economics (rightly so), yet he is in favor of trickle down debt relief. Can you just imagine that you had one trillion dollars to play around with. You could give back to Wall Street, who created this mess, or you could spend it as your wish. How many factories, roads, power plants, schools, bridges, solar farms, etc.... could you build? How many jobs could you create with a trillion dollars. How many fiscal stimuli could one inject with a trillion dollars? But Mister Paulson believes the best utilization of our fiat currency is to fortify the Wall Street Oligarchs, "so credit could flow through our system!" This is bull shit!!!!! This is a false choice that is being presented to us!!!! I implore any and all who read my little blog to contact your congressman and senator and tell him/her that you do not want your money to go to Wall Street. Do you believe that is fair that the taxes paid by the brave men and women of our armed services, who put their lives on the line for us day in and day our, be sent to people vacationing on their yachts? If there is any debt relief to be had, let it be had by regular working people who were ensorcelled into taking excessive debt by the oligarchs' sales force. I propose that people have direct debt relief by sending any kind of debt that was incurred from 2003-2006 (or so) to a DRC (Debt Reduction Corporation), and thus 1 trillion dollars of debt relief can be had by the American consumer. Thus, they will have excess capital that can be used for spending, saving or investing. Much of this can be taxed by the government, so they will have a return on investment. I am shocked that Democrats have allowed Wall Street to flim flam them into their nonsense. Please, America, let us unite in this effort to end the Wall Street Debt Reduction plan. They don't deserve it!!!

Thursday, September 18, 2008

That was short lived.

It obviously didn't take long for Misters Bernanke and Paulson to resume their bailout ways. I am not familiar enough with AIG to know how calamitous a Chapter 7/11 would have been, but I am sure that there could have been ways to work it out. Drexel and Lehman went belly up, and the world didn't end! Anyway, I have been thinking for a while as to what to post because I believe that at this point, the MSM has caught on to what has truly been happening vis-a-vis Wall Street, so I am not sure that I can add much, except my own little quirky commentary. As I am writing this blog entry, the government is considering the massive use of our money to buy "toxic debt" a-la RTC. I cannot even comprehend how much money all of this is going to cost, nor the consequences of such an action. It seems that at every stage of this crisis, the government has tried to throw good money after bad into some sort of damage control (does anybody remember the MLEC?). However, I cannot escape the feeling that this will not end well. The problems seem to be getting bigger and bigger, and the bailouts keep getting more and more expensive. Our government is now in the insurance, mortgage and securitization business. Barney Frank recommend that it opens up a Real Estate office with lots of new inventory. Far cry from laissez-fare. Everybody is now aware that the real culprits in this crime drama were the Wall Street oligarchs who, as financial mercenaries, have put this country on the precipice of disaster. I would like to offer one piece of advice, should anybody come across this little piece. I believe that it is absolutely necessary to prosecute the oligarchs! I know it may be extremely difficult from a political standpoint, but is so perversely injust that we will have to hand over our savings, while the oligarchs who pilfered this country's vast wealth are on their yachts. I believe that there can be great populist sentiment evoked if we prosecute and fine these criminals, as well as confiscate their wealth. This will end all moral hazard problems. If the federal reserve used special powers to assist in the take over of Bear Stearns, why can't we create a Guantanamo for Wall Street crooks (maybe we can even suspend habeas corpus). The government should have a rendition team ready to go to waterboard these guys into divulging information as to how these crimes were committed. But I digress. It need not go that far. Just take away their money in a grand public way, and use the proceeds to recapitalize the Federal Reserve, instead of printing $40 Billion new dollars.

Sunday, September 14, 2008

Lehman/Merrill Day!

This day will obviously be remembered in the history books, with the full ramification of these event not known for years to come. But I must say that today I am proud that Misters Bernanke and Paulson had the courage to stand up to the oligarchs. Winston Churchill once said that America always does the right thing, after it tries everything else first. I am sure it was an extremely painful decision to inflict the death blow to such a venerable institution as Lehman, but I am also sure it was the right thing to do. The sooner these leveraged, poorly run businesses get taken out, the sooner we can clean out our financial system and get back on solid ground. It's obvious that a combination of greed, leverage and fraud combined to take out some of our great financial institutions, but out of the ashes, new dynamic institutions will arise. This crisis seems far from over, so I hope that our leaders will continue to allow the market to unwind without further subsidy to insolvent institutions. The business of America is business, it is not leverage buy outs and real estate transactions. Hopefully, some of these great minds will turn away from coming up with "business models" and go to work for our struggling manufacturing sector. The sooner we realize that the fraudulent "service economy" cannot be sustained, the sooner we can regain our status. This delevereraging should also serve as a warning about our national debt. We all see how margin call can be a real bitch! We must stop spending, start saving and investing into our manufacturing sector. Green technology and energy independence with other innovations may still save us. The politicians have to stop flim-flamming us by paying for tax cuts with borrowing. We will all have to tighten our belts, and be a little wiser with our money. The sooner we bury these charlatans, the sooner we can get to work to saving our country!

Tuesday, September 9, 2008

Bill Gross' 2 Billion Dollar Day. Thanks Easy Al for all of your insights!

Bail-out hands Pimco $1.7bn payday
By Deborah Brewster in New York
Published: September 9 2008 19:49 | Last updated: September 9 2008 19:49
The Bill Gross-managed Pimco Total Return fund reaped a $1.7bn payday following the US government takeover of home loan giants Fannie Mae and Freddie Mac.

While shareholders in Fannie and Freddie suffered deep losses, the world’s biggest bond fund saw its highest ever one-day rise against its benchmark index on Monday, benefiting from the bet made by Mr Gross on mortgage bonds issued by the agencies.

Mr Gross had made a big shift out of US Treasuries and corporate bonds over the past year and into agency bonds, betting that the government would support Fannie and Freddie Mac. By May this year, more than 60 per cent of his $132bn fund was in mortgage debt.

Mortgage-backed bond prices rose after the US government seized control of the agencies.

Mr Gross’s fund, which side-stepped the housing market slide, had risen strongly before Sunday’s government bail-out. In the 12 months to August 1, the fund returned 9.2 per cent, beating all of its peers, according to fund tracker Morningstar.

On Monday, the fund rose by 1.3 per cent, or $1.7bn, its biggest one-day rise ever against the Lehman Aggregate Bond index.

Mr Gross, who co-founded Pimco and has managed the Total Return fund since 1987, was one of the first to call for a bail-out of Fannie and Freddie.

In his latest monthly commentary, he also said that the government needed to use more of its own money to support financial markets, or risk a “financial tsunami”.

Mr Gross’ style is to take a macro-economic view and make tactical changes based on short-term movements in the economy.

The recent success of the Total Return fund has helped Pimco to be the only one of the 25 largest mutual fund managers to lift its assets under management in the year to date, according to Financial Research Corporation data to the end of July.

By contrast, several well-respected equity fund managers are suffering in the wake of the government move, which leaves Fannie and Freddie stock almost worthless. Legg Mason’s Bill Miller, Fidelity, Dodge & Cox and Wellington are among the fund managers that had heavy exposure to Fannie and Freddie – and had lifted that further this year, according to Bloomberg data.

Copyright The Financial Times Limited 2008

Friday, September 5, 2008

What's wrong with the Economy?

This is too complex a question for me to answer, but any chance I can get to take a swipe at Wall Street, well I can't resist. As the political season heats up, and we get to choose between Burger King and MacDonalds, people around me keep asking questions as to how we got into this giant mess. Which candidate has the best "economic plan". First, let's start with who is to blame. That answer is simple enough. The Wall Street initiated and Federal Reserve enabled "service" (really finance sector) economy, run by the professional crooks and gamblers of Wall Street is what ruined our economy. There, let's get that straight. It wasn't the coal miners or the auto workers or the engineers or the farmers who destroyed us. It was a laundry list of characters including, but not limited to, guys like Rubin, Greenspan, Boskin, Weil and other elite financiers who have done us in. Until people in America understand this fact, it is impossible to move forward with any kind of debate as to how to solve our economic mess. I have yet to hear either candidate state this, probably because they saw what happened to Ron Paul when he touched on some of these issues. Even as I write this, news is coming out of another massive government bailout of Fannie and Freddie. Can't piss of the Chinese?! Anyway, I would like to post the amount that was paid in Wall Street bonuses over the last 20 years or so. This doesn't include the money the Hedgies or Private Equity boys made, or dividends paid out, but they earned it?! What's remarkable is that there has been a 10 fold increase in bonuses over the last 15 years or so. I know of no other profession with such income growth. Maybe before taxpayer funds are confiscated to bail out these institutions that are too big to fail, the wealth of these elites should be sold off to help offset the bill. I mean, if a company dumps toxic waste, they get a fine, why not Wall Street? I know I am just dreaming, but it will be everybody's nightmare. I believe that at this point, nobody really knows where this is heading, but it probably won't have a happy ending.