Wednesday, February 11, 2009

It's Amateur Night at the U.S. Treasury

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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Markets hate uncertainty and the U.S. Treasury delivered it in spades yesterday. Several days ago, the Obabma administration floated the idea of a good bank/bad bank policy, where the U.S. government would buy up most of the toxic assets on bank balance sheets in order to get them out of the system. This was essentially the original concept for TARP before Paulson turned it into a direct corporate welfare program for Wall Street. The Street of course loved the idea of more bailout money to clean up their mistakes. In the long awaited for announcement by Treasury Secretary Geithner (who formerly ran the New York Fed and who is an admitted tax cheat) on Tuesday, suddenly a whole new approach was announced. The market, not liking surprises, had an almost crash level drop.

Media coverage blamed the stock sell off on the government's new plan - and for once I agree with the media. A number of articles had comments describing Treasury's new plan as 'muddled' and 'short on details', both of which are accurate descriptions. Essentially, the centerpiece of the plan is that the government will team up with the private sector to buy up to $1 trillion in toxic assets from financial firms (the big-money private sector buyers will get their purchases underwritten by the government, in what seems to be a riskless investment). A separate lending program would be expanded to as much as $1 trillion from $200 billion for consumers and businesses. Add up all the money involved (and it won't be enough by the way) to the $800 billion plus Stimulus Plan passed yesterday and the U.S. government is allocating between $2 to $3 trillion in new expenditures. Just think inflation and devaluation of the dollar.

Having read the speech that Geithner gave yesterday, I would say there is little hope that the current administration's economic team will be any more effective than the previous administration's. Geithner himself has been part of creating the current economic mess that we are in and sees the solution as pursuing the same failed financial policies that have lead to it. One of his comments that were particularly outrageous was that the Credit Crisis we are now in is only obvious in hindsight and could not have been predicted (even though probably hundreds of government throughout history have engaged in similar economic policies with similar results). At another point, Geithner stated that historically 40% of loans have been securitized (bundled into bonds and then sold and traded) and this needs to be continued. Where this 40% figure came from is beyond me, although of course it depends on the definition of 'historically' (Geithner's historical perspective may extend to only the beginning of last week based on these two comments). Securitization is what has led to our current problems, so of course we should continue to take the poison that is killing us. Not surprisingly, Wall Street makes a lot of its money from securitization.

While there is a lot of uncertainty in the government's handling of the Credit Crisis, there are some things which an investor can have great confidence in. The continued creation of money out of thin air to get the U.S. economy out of the economic pit it has fallen into is going to create a lot of inflation and a dollar that isn't worth the paper it's printed on. While the government's actions may fail for their intended purpose, they will be successful in creating this even bigger economic problem down the road.

NEXT: Market Doesn't Believe Retail Sales Report

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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