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A Mellenium View From the Frontline About the Bailout September 28, 2008

Posted by Daniel Downs in economy, finance, news.
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John Mauldin, President of Millennium Wave Advisors, has done it again. He accomplished what no other mortal has done and that is explain in plain (Financial Crisis for Dummies style) language what the Wall Street crises actually is and why the bailout (which it really is not) is needed now. Maybe I should have wrote down-home language. Anyway, this is another <a Thoughts from the Frontline column all Washington bureaucrats, their staffs, and the rest of us should read.

Of course it should be acknowledge that this good-guy financial expert has a slight interest in a quick fix to the portending money market seizure. It is an excellent work–actually presented as an open letter to his congessman Joe Barton–all the same.

His column titled “Who’s Afraid of a Big, Bad Bailout?” can not be easily summarized but here is my feeble effort. Banks, all businesses, homeowners, etc. all depend on raising money through equities and loans that are packaged and sold to other investors. Because of federal regulations, banks are must sell off illiquid debt. The problem is no one is buying what banks and corporations need to sell. Therefore, there is both serious panic and a freeze.

As Mauldin sees it, the federal is the only organization large enough and resourced enough to buy up the problematic equities. If the feds do not, Mauldin writes with confidence that America will surely experience at least a soft economic depression. Main street businesses will not be able to afford the commercial loans needed to finance their daily business. Double-digit unemployment will result. Spending will further decline compounding the economic decline.

He understands why most people are angry at both Wall Street and our government, but he believes they will only get even more angry if nothing is done.

If handled properly, Mauldin wrote:

There is no reason for the taxpayer to lose money. Warren Buffett, Bill Gross of PIMCO, and my friend Andy Kessler have all said this could be done without the taxpayer losing money, and perhaps could even make a profit. As noted above, these bonds could be bought at market prices that would actually make a long-term buyer a profit. Put someone like Bill Gross in charge and let him make sure the taxpayers are buying value. This would re-liquefy the banks and help get their capital ratios back in line.

I understand that this is a really, really bad idea according classical free-market economic theory. You know me; I am as free market as it comes. But I also know that without immediate action a lot of people are really going to be hurt. Unemployment is not a good thing. Losses on your home and investments hurt. It is all nice and well to talk about theories and contend the market should be allowed to sort itself out; and if we have a deep recession, then that is what is needed. But the risk we take is not a deep recession but a soft depression. The consequences of inaction are simply unthinkable.

If we act now, we will start to see securitization of mortgages, credit cards, auto loans, and business loans so that the economy can begin to function properly.

I encourage you to read his entire column “Who’s Afraid of a Big, Bad Bailout?” with graph. To do so, visit Thoughts From the Frontline.

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