The Economy Guy

Stocks exploded today on the announcement that Treasury has a plan to eliminate the “toxic securities” held by the big banks.  Stocks went up 497 points.  Bonds were steady, as was the Dollar

Oil and gasoline gained on this latest news as speculators are gambling that this major Treasury step will lead to a recovery in the economy.

Gold held steady, only losing $4 on the news.  The steady gold price shows the battle between the “economic recovery proponents” which would bet on lower gold prices, and “inflation hawks” who would bet on higher gold prices.  I believe in the latter.
 
In the news today…..

Treasury Secretary Geithner today announced his not too hidden plans on solving the toxic mortgage securities problem that our big banks have.  Here it is in a nutshell:

1. He plans that $1TRILLION of this “toxic waste” will be purchased
2. It will be purchased by 3 groups
   1. 7% by Private individuals  
   2. 7% by the Government  
   3. The remainder (86%) by the government – probably the FDIC – as a “loan”.
3. The “toxic waste” will be valued by the private sector.
4. Not much detail in this plan, but a lot more than the “hope and a prayer” stated before.  The devil is in the detail!!!

Here is my observation and opinions on this plan:

1. Geithner thinks that the problem with the economy is that banks aren’t lending,
2. and they aren’t lending because they have these “toxic securities” on their books, and they are worried the future value of these securities will be going down making them insolvent.
3. So, let’s question this basic assumption.
4. Is that banks aren’t lending, or people aren’t borrowing?  I think it’s the latter, and my opinion is backed by the decreased public spending and increased public savings.  Remember that at least 2/3 of the economy is driven by the general public consumption.
5. Banks are lending because they don’t want to lend to deadbeats anymore. Remember that the government forced them to lend to people who couldn’t possibly pay back their mortgages.  They fully understand the ramifications of that line of action in spite of the fact that they make a ton of money doing it, and loved it.
6. Banks believe that house prices will continue to decline, and therefore, the value of their toxic securities will continue to decline.  A future decrease in their value if taken onto their balance sheet would force the FDIC to take them over – probably today.
7. The value of these assets are worth less than the banks state they are worth.
8. Geithner’s belief that our economic recovery will be lead by the banks if false.  It will be lead by consumers.
9. Geithner must believe there is no alternative.  Naturally, this is false.  The tried and true FDIC takeover of banks has a proven track record.
10. Only 7% of this “deal” will be offered to the private enterprises, like pensions and insurance companies and rich individuals??  WHY ONLY 7%?????  If this is such a great plan, don’t you think that private investment would want more than 7% of it?  Or, is this the maximum amount of money that the government thought they could get out of private investment?  Just the 7% figure raises a big RED FLAG for me.
11. If the value of this great investment actually goes down in the future, who bears the loss?  Do the 3 classes of investors share in the loss proportionately, or will one class (and I’m thinking the taxpayer) bear the entire loss?   Another way of addressing this question is “Are there any guarantees for the private investors?”  Details, details, details.

What is wrong with this plan???

1. The debt remains. It isn’t going to be written off.  
2. The taxpayer is holding the bag, and the banks get off scot free – well, that hasn’t been truly determined yet because the banks should have to sell this junk at less than they think it’s worth.  We’ll have to wait and see.  I wonder how “transparent” the valuing process will be???   For sure, the banks won’t have to worry about their future as they do every minute of every day today.
3. A major portion of this toxic waste will never be paid back – and no one – neither the banks, nor the government – has addressed this issue head on.  You and I will be stuck with the loss.
4. Oh, by the way, when this additional cash comes home to roost, there will be more inflation created.

My conclusion:

This should help the big banks take a deep breath, and allow them to go back to business as usual.  I don’t like business as usual, as the banks were one of the major factors in getting us into this mess.  Where’s all the needed regulation by the government that was missing the last time around????

Without knowing the details, it is impossible to determine exactly how badly the taxpayers will get screwed, but you can count on it.

Without a complete destruction of this toxic waste, it will linger and be an albatross around the President’s neck.  The press will try to hide the truth of the demise of the money going down this rat hole.  

I think this is just another nail in the inflationary coffin that will hit the US in the future.  The only way this won’t be a major inflationary force is IF the housing prices of the US stabilize immediately and start back up.  I don’t see that happening soon.

 
Here are the last numbers for today:
Dow Jones 30 Industrial – 7775 (up 497 points)
10 Year Treasury Bond – 2.66% (up 0.04%)
Euro – $1.3655
Gold – $953 (down $4)
Oil – $53.80 (up $1.73)
Gasoline – $1.49 (up $0.03)