Economics 101 the Big Fix
THE OBVIOUS IS OBVIOUSLY WRONG
Time and again we have been witnessing a variety of actions taken by the FED as well as by the rest of the Worlds Central Bankers, each one thought to be the exact right thing to do and met with initially manipulative enthusiasm only to turn to back to despair in less than a mourning as the market not only stop rising but actually crashed. What is Happening and Why?
SOCIALISTS (Populist) policies always seem at first glance to be the obvious feel good actions that must be taken but in actuality are rarely true for two reasons. #1 they never take into account the unintended consequences and ramifications that are always there lurking in the background in any complex economy. #2 Of even greater importance is that the problem that these actions are designed to fix are NEVER the real problem but are only the effects or consequences of the REAL PROBLEM which by their very nature is never obvious.
THE REAL PROBLEM
From the very beginning: Government interference in the Market Economy, is and will continue to be the Real Problem; primarily by artificially lowering interest rates, increasing the money supply and lowering lending standards. Initially these actions were deemed to be very positive in stimulating job creation but the unintended consequences, such as inflation and the elimination of the allocation and risk function of interest rates take a while to build up before they come into play: The obvious one being INFLATION. A good example is drinking High in Sugar and Caffeine energy drinks. You get an initial burst of energy but it is not long before you come crashing down. You can try to extend the high by taking more and more sugar and caffeine but there is a limit and once that limit is reached the crash is much more severe. It is just impossible to keep on going on sugar and caffeine eventually the body must go to sleep or die. The economy works in exactly the same fashion.
A Second Problem and perhaps of greater underlying long term Importance are the UNINTENDED CONSEQUANCES that are always lurking beneath the surface but remain invisible to all but a very rare few, (who are always ignored): Such as the reduction in underwriting standards and risk and capital allocation. Capital is provided to borrowers that would never have qualified for loans under normal interest rates and if the banks were not flooded with created out of thin air money.
ECONOMICS 101: THE BIG FIX
If there is one thing that I know for sure, it is that socialist solutions can never fix economic problems. They are just “Feel Good” actions the merely paper over some of the side effects but actually end up making the real problems worse. If we ever hope to repair our banking and financial systems as well as save our Social Security and Medicare from bankruptcy and fix our schools - only Free Market Solutions can accomplish any of that.
CONFIDENCE AND TRUST
The root cause of our most urgent financial problems is the complete breakdown of confidence and trust throughout the world’s banking systems. One thing that should be obvious to everyone except the cadre of Ivy League Keynesian Socialists is that the $ trillions of socialist solutions that have been poured into the system have not only not worked, but have actually made the problem worse. The Economy has reached the maximum level of Caffeine and sugar it can tolerate. We now also have the car industry, homeowners, the States (soon to be followed by the cities) and every other group in trouble, all coming to the Federal Government with their hands out demanding bailouts. Is there no one but me who can see that we are doing the exact same thing here and now that Germany’s Weimar Republic did in the 1920 which resulted in HYPER INFLATION and DEPRESSION?
1: The financial institutions for whatever reason need a large injection of capital, but instead of getting it from the Government and socializing the industry, they should be getting their own money from their own shareholders along the same lines that GS and GE got money from Warren Buffet. However, instead of allowing outsiders to dilute the equity of the existing owners (the common stock shareholders, who are, by and large, the American People through their Pension Plans) lets reduce the role of government instead of increasing it. HOW? By simply suspending the audited statement requirement and simplifying the filing requirements necessary to have a rights offering: Offer the existing shareholder the right to subscribe to the exact same deals that were given to the Sheik and Buffett. The reason that the Banks have chosen the likes of Buffett to get money from is that he is considered an exempt institution and no prospectus is needed. Raising money from the public requires not only audited financial (which cannot be done at this time) but at least 6 months to a year, to file a complex and SEC approved prospectus. By suspending the highly complex Government regulations that actually serve no purpose; the banks in not time at all, could easily raise $200 billion minimum, from their own shareholders and the public: Assuming a 10% reserve requirement, would immediately make available $ 2 trillion for loans.
2: Let us have the FED do what it was initially set up to do; provide short term liquidity in case of an emergency and through the FDIC, guarantee 100% of all deposits while increasing the premiums that deposit institutions pay into the FDIC. After all, when did we pass a law that all men were no longer considered to be equal? And don’t the banks have to pay a premium on all deposits? Why discriminate against large deposits. Does the system not want their money?
3: Begin applying the most basic of all capitalistic principles that of Supply and Demand, by Increasing interest rates, NOT lowering them. Who in his right mind wants to lend money at 1.5% or some such low rate, which is in really a negative 10%, if you take inflation and taxes into consideration? That is why the Banks are hoarding their cash. Let the banks start offering 5% to 7% CD’s and you would see a flood of money from all over the world come pouring into our banking system. The banks, now flush with cash could start lending at reasonable rates of interest; between 8% to 15% and higher depending on the risk and credit worthiness of the borrowers. Even today, despite record high delinquencies, the Banks are still soliciting people to take out new credit cards, the simple reason being that they can charge upwards of 30% on credit card debt, which more than compensates them for the increase in losses. (At the same time, limit the amount that they can charge their credit card debtors to 15% while reducing fees to a maximum of $5 for late fees), It is about time we allowed Interest rates to accomplish one of their primary functions; that of allocating scarce capital to only the best projects as well as allowing a risk premium to be built into the rates.
4: Set up a modern RTC: History tells us that when even a small real estate BUBBLE bursts, it takes between 8 to12 years to clear the overhang of unsold overbuilt homes. An aggressive RTC can clear the foreclosures from the bank’s balance sheet that they cannot handle while taking all the un priced CDO’s that they have on their books at a punitive rate of 30% of face value. That would encourage the banks to work out their own solutions as much as possible and only sell to the RTC if they have to, while at the same time reducing the eventual cost to the taxpayers. Why, at that rate we may even end up turning a profit. The negative is that the prices of most homes not in foreclosure would also drop for a time but not that for long or as far as they will eventually drop to anyway. In so doing we could probably clear the deck in 3 to 5 years, instead of 15, while providing affordable homes to the masses at 7% 30 year fixed mortgages; which they could now afford to pay for as their taxes and insurance premiums would also be less based on their now lower priced affordable homes.
5: Five years of undeserved bonuses MUST be returned by all senior executives on anything over $100,000, since it was all paid out on Phantom Earnings. Franklin Rains, of FNM fame, took home over $90 million in bonuses plus a golden parachute, even though he resign after being forced to restate $5 billion of profits (on which his bonuses were based) into $5 billion in losses.
6: FMN and FRE are bankrupt, so declare them as such and then recapitalize them in the same fashion as we are recapitalizing the banks: In conjunction with offering all of their outstanding Preferred stock and Debt holders - 50 cents on the Dollar in 4%, 50 year U.S. Treasury Bonds. It’s no longer a matter of what is fair or not fair. It is a matter of saving the world’s financial system. It’s a matter of getting 50 cents with interest or ending up with nothing and a collapsed system.
There is more, but I am not writing a book here, it is just a bare bones proposal whereby we could restore CONFIDENCE and TRUST virtually overnight by simply announcing Capitalistic plans for a Capitalist economy. Every person with a modicum of common sense, except the Ivy League Keynesian Economists, would understand immediately the beauty and simplicity of the plan. After all, are not all good plans simple? We would also be demonstrating a sense of fairness to the people, that the fat cats cannot get away with their white collar crime living high on the hog while our country and the world sinks into depression due to their reckless (I am being kind) behavior, especially since it was not their own money that they were gambling with
CONFIDENCE AND TRUST can only return when it is in conjunction with fairness and must be restored to everyone not to just the privileged few
GOLD: THROWING OUT THE BABY WITH THE BATHWATER
On Friday we witnessed what a margin induced SELLING PANIC looks like. Even though everyone knows that you are supposed to cut your losses short and let your profits run, everything goes out the window once Panic sets in. When there are margin calls flying across the board (not to my subscribers) and you need money and you want out. Many of your positions have either very wide spreads or no bids: You dump what you can and still have a profit in, thinking, take the profit before you lose it. Plus you sell what you have that can raise the most cash. They DUMPED their GOLD to raise cash. They know it’s a mistake but they figure they will buy it back later after things calm down and with a little luck they will be able to buy it back at less than what they sold it for: But we all know that rarely if ever happens.
THE STOCK MARKET
After a troubled two nights that I had even though I have been right, and all I was doing last week was covering my short positions and although my next letter is not due until the November 1st I spent all weekend taking a long hard look back in time, examining all of my own as well as others research into Thursdays and Fridays action which seem to me to be screaming for at the very least, a temporary oversold bottom. As you all know I was looking for a bottom last Thursday, Friday, we got a climatic sell off but I did not foresee the degree of devastation that we ended up getting. However, even though it certainly was climatic deserving of a Dramatic Rally: I DO NOT THINK IT WAS THE BOTTOM. The expected bottom here, will, only be a technical corrective ziz zag 3 wave consolidation. However because of the sharpness and speed of the sell-off, the coiled spring effect that it created could rally the market maybe as high as 11,000: However the economic fiasco that I have been warning about for almost two years now has not yet hit home: Panic has not yet spread to the non investing public nor has it yet infected Main Street severe enough for a major low to have been made and is therefore Definitely not the beginning of a NEW BULL MARKET
THE BALANCE OF
THE Stock Market, The Bond Market, GOLD and What TO DO NOW
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“PROCRASTINATION IS THE THIEF OF LIFE”
October 13, 2008
GOOD LUCK AND GOD BLESS
UNCOMMON COMMON SENSE
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418