Monday, November 17, 2008

T & A and the GS-20 Summit

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Last Wednesday Treasury Secretary Paulson announced the T&A would be taken out of TARP (the Wall Street bailout bill passed in early October). The raison d'etre given by the Bush administration to congress for passing TARP was that only by purchasing troubled assets on bank balance sheets could banks be freed up to lend again and get the economy going. After the legislation was passed, congressional leadership from both parties announced with great fanfare how they were saving the American economy with this program. The ink was barely dry on the bill however, before Paulson announced that preferred stock was going to be purchased in troubled financial institutions instead. While the first $250 billion will still be earmarked for that purpose, Paulson has now decided that the remaining funds should be used to support financial markets that supply credit for credit card debt, auto loans and student loans. Of course next week, there might be a better way to save the American economy and the six week old program could be changed even again. If all this looks like no one in Washington has the slightest idea what they are doing, it's because they don't.

This is not to say that the new ideas for TARP are not an improvement on the original provisions of the bill which were essentially a form of welfare for Wall Street. Unlike welfare for the poor though, welfare for the rich comes with fewer limitations. While TARP has a provision for 'restriction' of bonuses, it doesn't eliminate them, nor does it force companies that can't continue to exist without government support to pay their executives salaries that top government officials would get. Nevertheless, over the weekend seven top Goldman Sachs (Paulson's old firm) managers graciously renounced their bonuses for 2008. Why they would have been getting bonuses when the company's stock has fallen 70% in the last twelve months is not exactly clear. CEO Lloyd Blankfein received a Wall Street record $68 million bonus last year when he was making the decisions that lead to this year's disastrous performance.

Like everything else in the contemporary economy, lack of effective ideas for handling the credit crisis is global as well. The GS-20 meeting of world leaders this weekend in Washington produced mostly a commitment to free trade and further monetary and fiscal stimulus (in other words governments throughout the world are going to print more paper money which will be backed by nothing other than their leaders hot air). British PM Gordon Brown, who decided to sell half of Britain's gold at the bottom of the market in 1999 and has presided over a worse subprime crisis than in the U.S., led the charge for increased stimulus measures. Other ideas bandied about included multinational supervision for global banks, more oversight for credit rating agencies and regulation for hedge funds. These useful suggestions didn't get much beyond the bandying stage however. Essentially anything concrete was put off until the next meeting in April. The do-nothing summit was immediately declared a success by President Bush.

Shortly thereafter, Japan announced a second quarter of negative GDP confirming it was in recession as the euro zone did last Friday. Since this was not exactly surprising news, Asian markets were little changed overnight, even despite the drop in the U.S. on Friday. The out of the blue rally in American markets last Thursday faded almost as quickly as it arriveed with the Dow down 3.8% and the Nasdaq down 5.0%. Technically speaking this was another crash day on the Nasdaq, but as I have said many times, no one pays attention anymore to just a 5% or 6% drop - and that includes world leaders.

NEXT: Trojan Horse of Earnings Surprises

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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