Monday, March 23, 2009

Making a Silk Purse Out of a Sow's Ear

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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The U.S. Treasury revealed its latest plan to rescue the collapsing financial system today. I have lost count of which number rescue initiative this is since there have been so many in the last year and a half. The need for a another new plan indicates the lack of success of all the previous plans that were supposed to fix things. Despite spending trillions of dollars so far, the government has not managed to get control of the problem - and for good reason. Essentially, all the government programs are geared toward making worthless assets worth something. If this is the goal, Harry Potter should be running the Treasury department instead of Timothy Geithner.

The latest idea is to take $75 to $100 billion (multiply this number many times) from the Troubled Asset Relief Program, aka TARP, and combine this with capital from private investors to buy up the toxic assets that are owned by the banks. Treasury claims that private investors participating in the new program could lose their entire investment in some cases and the taxpayer could share in profits (my guess is the chances of either are minuscule). The FDIC, which is close to being insolvent itself, will provide a guarantee for this public-private investment funding. It was not mentioned how the FDIC would be bailed out if any significant amount of these asset purchases went bad.

Under the Treasury plan, private-sector participants will compete to establish a price. Treasury claims that the public-private partnership is superior to a "bad bank" approach because because under the "bad bank" approach taxpayers would take on all the risk, and government could overpay for the assets (as if these two things aren't happening in their alternative approach). Treasury said that it expected a "broad array" of investors to participate in the program, including insurance firms (even though this industry itself is about to need a bailout - participating in this program should help push it over the edge). Treasury also claims that its new plan is designed "to make the most of taxpayer resources." This of course begs the question: What were the previous plans designed to do?

The ultimate goal of the latest, greatest, newest, improved government financial rescue package is to get banks lending again. As with all the other failed rescue packages, this is being done indirectly by attempting to solve some related issue and presuming that this will somehow magically jump start lending (the cause effect connection between the two is usually missing). The new plan is trying to restart trading in 'legacy securities'. The market itself has valued these as worthless and indicated that these are inherently non-viable financial instruments. Nevertheless, the government thinks it knows more than the market and insists on pouring more and more money into this financial black hole. Even though every previous attempt has failed, it is always hopeful that the next one will work. As I have said many time, nothing succeeds like failure in Washington. Where is Harry Potter when we need him?

NEXT: Print Enough Money, Everything Goes Up

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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