RSSSticking a Fork in the TARP: Don’t Blame Congress—Blame the Economists!
By Kevin Cook | October 02, 2008 | 1:25 PM | 0 Comments
Last week, I blamed Congress for not having the economic foresight to see how necessary the Paulson TARP plan was to save the economy from cascading into a credit seizure. I said, "How could they not see and understand the depth of this problem that Paulson was trying to solve, or why couldn't they at least trust that he knew what he was doing to take such drastic action?"
But, I am backing off this week because I've since heard from supposedly much wiser economic minds. It seems that none less than a roundtable of University of Chicago professors and economists were against the plan as early as Monday the 22nd. Then yesterday, I heard Dean Baker of the Center for Economic and Policy Research who basically said the problem was not that urgent and that a better plan was needed. How can I continue to blame Congress men and women when academics like this are in opposition to Paulson's "bailout of Wall Street?"
So, now I turn my critical questions to those economists. I am certainly no economist, but I think as a trader I understand markets well enough ask them why can't they see and understand these urgent realities:
(1) Large financial institution collapses are occurring like dominos. Is that good punishment for Wall St.? Maybe it is. But, that's not the only fallout. Every Lehman Bros. (NYSE: LEH), AIG (NYSE: AIG), WaMu (NYSE: WM), and Wachovia (NYSE: WB) has ripple effects for the rest of the economy, not least of which is the scramble to get liquid. Who can you keep your cash with? Who do you trust enough to lend to? As long as the overhang of the housing derivatives hangover is with us, it is still "shoot first" in the financials and that means credit markets don't function. The reverberations are being felt in hundreds of small banks and small businesses. Because it's not just about banks lending and extending credit-small businesses extend credit on orders all the time. The "gears" of the credit system are grinding in a bad way.
(2) Money market funds falling below $1.00 and overnight lending rates shooting 300 basis points higher... does that make the point? When they (investors and short-sellers) nearly imploded State Street (NYSE: STT), that was a big call to action for Paulson and the SEC. What do economists want, the complete destruction of Wall St. and credit markets for the principle of free market justice?
(3) Bottom line: Putting a floor under mortgage-backed securities is "bailing out" the economy, not Wall St. Yes, mistakes with risk and leverage and others' money were made. But, it's too late now to worry about how we got to the "precipice" (Warren Buffett's word last week for our economy's situation). Those horses have left the barn.
I trust Hank Paulson because he understands markets. But, I can understand why others might not trust his judgment or allegiances or motives. The challenge then was for us to give him the benefit of the doubt because even though a better plan with more time is a great idea, it's not realistic when the economy is on the brink of a credit collapse. The problem is that markets are not rational, while they certainly are the victims of short-term psychology and panic where dominos don't stop falling while we stop and think. Trust Hank in the short-term, and you might buy yourself more time and save years of damage and pain. Too much uncertainty in financial markets and a housing market that may have further to fall means we can't wait for more evidence of a possible disaster. It's been unfolding for all to see for weeks now.
So, the ivory tower economists can speculate and theorize about the "best" solution, but meanwhile tens of millions of middle class American workers and their families will suffer if the credit system continues to deteriorate. Every single day that credit contracts might extrapolate to 100 or 200 days that the economy recedes and investors retreat as orders fall, new investment falls, assets are liquidated for cash, and fear reigns. How can I blame Congress when the economists advising them don't get it?
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