Monday, December 29, 2008

Fallout of a fallout

Excerpts from a NYT news item -

"In a normal economy, couples typically build equity in their homes, then divide that equity in a divorce, either after selling the house or with one partner buying out the other’s share. But after the recent boom-and-bust cycle, more couples own houses that neither spouse can afford to maintain, and that they cannot sell for what they owe. For couples already under stress, the family home has become a toxic asset."
Who says mortgage crisis ruins families...? Stressed partners will soon feel living inside a ruptured marriage is better than getting stuck with a dead cow :-)


Monday, December 22, 2008

"Goldman Sachs, you're clearly out of touch..."

Living under a communist regime comes with its own unique State-Citizen communication logistics. For instance, the Chinese cannot express their discord with administrative fiats by ballot. They take a different route. They riot.

So when Chinese workers get laid off, they take to streets. It takes a constant 8% plus GDP growth to absorb all the graduates churned out by Chinese institutions every year. If growth sputters, China is in trouble.

The urban middle-classes also have reason to be unhappy: there have been severe stock-market and property crashes in China over the past year. The government – like its western counterparts – has already made it clear that it will respond to the new downturn with a massive fiscal stimulus package.

China’s trade surplus hit a new record last week because imports are falling even faster than exports. The Obama administration is certain to want China to allow its currency to appreciate, to close the deficit. But the domestic pressures on China will point in the other direction – to allow the RMB to fall in value in an effort to boost exports and keep more factories open.

When it rains, it pours. Remember it was the same China whose economy was predicated to beat U.S economy by 2027, courtesy Goldman Sachs research. Like many other predictions (Oil to hit $200 per bbl, now quoting $40) by it, this one too is headed to go off target by a mile – all within an year of its prophecy. If you want sure bets, you know whom to ignore!!!

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Wednesday, December 17, 2008

Scourge of the bailouts

The scourge of the bailouts is that it helps an addict get deeper into the malaise. First it was the Wall Street Banks, then it’s the Big three and even Biotech companies in Britain that line up with hat in hand. John Grapper in his FT column hollers “it’s time we stop improvising our way out of trouble”.

Steven Horwitz, an economics professor at St. Lawrence University, got it right when he wrote, “There will be short-term pain if we don’t bail out these firms, but that is the hangover price we pay for 15 years or more of binge lending. The proposed bailout cannot prevent the pain of the hangover; it can only conceal it by shifting and dispersing it among the taxpayers and an economy weakened by the borrowing, taxing and/or inflation needed to pay for that $700 billion.”

I look at a basic aspect. Somebody makes a mistake, a very big mistake and everyone is made to suffer. How long can this amnesty go on? Call it moral hazard, but it’s perpetuation of the ineptitude. It’s like serving more booze to an alcoholic.

Take the big three case for bailout. Isn’t it better to float three new car companies with the money that they say they need? Doesn’t that make better sense? Buyout the assets of the existing companies in their bankruptcy proceedings (liquidation) and then rejuvenate them under a new name, minus the union commitments. The only commitment to the organized labor should be just jobs. No huge healthcare excess baggage or other perks for the wily top managements.

The only condition should be make profits and share the loot. I think that sounds more like it. Hank Paulson should be pleased.

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Thursday, December 04, 2008

Have no mercy, Junk'em all

Eliot Spitzer in Slate magazine is close to suggesting a serious rethink on the massive US bailouts of giant financial institutions. He asks -

“The CACC story highlights the risk that current bailouts—a remarkable $7.8 trillion in equity, loans, and guarantees so far—may merely perpetuate a fundamentally flawed status quo. So far, at least, we are simply rebuilding the same edifice that just collapsed. None of the investments has even begun to address the underlying structural problems that are causing economic power to shift away from the United States, sector by sector”.

The great irony is that our new place in the global economy is a direct consequence of our grand victory over the past 60 years. We have, indeed, converted virtually the entire world into one integrated capitalist economy, and we must now bear the brunt of serious and vigorous competition. In the immediate aftermath of World War II, the United States was essentially the only nation with financial capital, intellectual capital, skilled labor, a growing middle class generating consumer demand, and a rule of law permitting safe investment. Now we are one of many nations with these critical advantages.

But even more important, from a structural perspective, our dependence on entities of this size ensured that we would fall prey to a "too big to fail" argument in favor of bailouts. In that case, vast sums now being spent on rescue packages might have been available to increase the intellectual capabilities of the next generation, or to support basic research and development that could give us true competitive advantage, or to restructure our bloated health care sector, or to build the type of physical infrastructure we need to be competitive. It is time we permitted the market to work: This means true competition with winners and losers; companies that disappear; shareholders and CEOs who can lose as well as win; and government investment in the long-range competitiveness of our nation, not in a failed business model of financial concentration and failed risk management that holds nobody accountable.”

It’s a refreshingly different take from most arguments that favor a bailout just because America needs its lenders that are too big to fail, no matter how imprudent they were. Here is Spitzer calling a spade exactly that. Have no mercy, junk’em all…

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