Sunday, October 5, 2008

I'm from the goverment, I'm here to help you...

Former laugh-line becomes policy...

Ronald Reagan made the line, "I'm from the government, I'm here to help you,' a laugh line in his campaign to make government smaller. Of course his scheme which saw a stronger military, smaller deficits, a reduced role for government and lower taxes became known as Voodoo economics. We could use a little Voodoo right now.

Voodoo was merely a failure to express what would happen when push turned to shove...
The Reagan approach did not deliver on these promises so in the end there was no voodoo. There were instead much larger deficits, lower taxes, more military spending and a reduced role for government in some places. The pledge on deficits was the one that solved the riddle that the voodoo assertion was aimed at, namely that you can't do all those things at once.The pledge was, in fact one of mutually inconsistent promises. Still, Reagan had vision and and a keen grasp of politics. In the end he kept the promises people wanted most to be kept.

What do we learn from that as government comes to 'help us?'

Full Speed Ahead - Into Reverse, Please
So now the government has a pile of money it has handed over to treasury. We all assume treasury will be able to raise these funds since the US is the centerpiece in a global growth revival plan. The Fed plans to come forward by conducting 'reverse auctions'. We have no idea how speedily this process will move forward, how effective it will be, or what the Fed will do. We would expect it to start slowly since the Fed has never done this before. Unfortunately the economy and the financial mess is unraveling quickly and... THIS is the way we are supposed to stop it? With slow-acting medicine? Great solution. Expect a rate cut too.

Cracks in the facade of "help" - Meanwhile the economy seems to be getting worse (see my previous post). To make matters worse-still the government-brokered takeover of Wachovia by Citibank/Group is now a SNAFU as Wells Fargo has stepped in with a a superior offer private sector-only offering. The legal experts are very mixed on where this all stands. But Wachovia has 'welcomed' Citi to make a fresh offer. This is not to say that a private sector offer isn't good especially if it really is superior for the the taxpayers, as this one seems to be... but who will want to go along with the government's next arranged marriage if this one fails? So, in the end, is government really helping?

The European approach: I'm From the Government and I want to PRETEND TO HELP YOU -
In Europe the skein of yarn is bumping down the stairs leaving a huge tangled mess in its wake. While Europeans have gloated and chortled that they don't need a US-style plan. Still, Europe is beginning to unravel. At a Saturday summit all the Big-Four Euro-leaders could agree to was to coordinate not to have a real plan. EMU is a currency area. EU is a customs union and an area with certain harmonized rules including some fundamental free passage principles for residents. But fiscal policies are still separate. This is one of the great failings of EU/EMU. The states without dominate financial sectors do not want want bailouts for the states whose institutions are embroiled in trouble. In this matter Germany is to France what each is to the US. Their common euro-ness gets them nowhere- no greater coordination.

Meanwhile Europe has issues -
The consortium of banks cobbled together to bail out Hypo the second largest German property lender has fallen apart. The government had promised an injection of 27billion. In the original plan The consortium of banks was to put up some 10bln in the bailout effort. Hypo is now hanging by a thread and who knows where Europe/Germany stand?

Fortis, a Belgian-Dutch insurer/bank is also the object of public help. The Dutch government stepped in late Friday to break up and nationalize part of Fortis NV after the previous weekend's rescue plan failed to work. It's a lot like the situation we are seeing with Hypo...The plan is for the Dutch government to buy most of the bank's assets in the country for €16.8 billion ($23 billion) to contain the fallout. The deal follows an €11.2 billion rescue for Fortis funded by the governments of Belgium, Luxembourg and the Netherlands announced a week ago Sunday. The Dutch government said it plans to privatize the operations again after the financial turmoil subsides. The deal breaks up a company that was created by the 1990 merger of Dutch and Belgian insurers. What's left of Fortis will be a dramatically scaled-back version of a company that until recently had ambitions of becoming a major global financial player. Well it did or it had become a major global player and it got what other globals also got. Now Dutch central bank governor Nout Wellink says that ABN AMRO/Fortis integration must be completed before it can be privatized again. This depends on the length of the financial crisis he says. Fortis is a strong, well capitalized concern according to Wellink. Wellink also claims that Fortis suffered from big clients that didn't trust it anymore - but that has been the hallmark of this crisis. Surely Europeans, like Wellink, don't think that different rules apply to them? Wellink also says that, "we are in big shift in financial sector, will have consequences for real economy." I can agree with that. Look for the ECB to do the unthinkable sooner than expected and cut rates; it's no longer a matter of choice.

And then there was Dexia
The chief executive of Belgian-French bank Dexia SA said Friday he won't seek a golden parachute when he steps down from his post in the next few months after much pressure for him to shun his golden pillow. Dexia ran up huge losses in its U.S. operations, causing its shares to close nearly 30% lower last Monday and triggering emergency talks with government officials. This came barely two days after Belgium, the original Netherlands and Luxembourg moved to save Fortis on Sunday,a week ago. No Europe does not the the problems of US firms; it has its own. And because we wonder even more about Euro-transparency we wonder about what is being covered up...

Welcome to my world
So Europe has its hands full and seems to be interested only in giving us the pretense of supporting markets and their troubled players. As we see in the US with the Wachovia situation sometimes government arranged bailouts don't work. The failure in the US surrounding Wachovia may not have a bad repercussion; Europe's failures are having bad repercussions. As we saw previously in the US with the Fannie and Freddie and then Lehman stance's by policymakers, each spread their own ripples. The ripples are still spreading. The credit crunch is still severe and the economy is getting worse. It's not about the government as savior, but as the last source of capital when the private markets become dysfunctional or just too risk averse. Europe just doesn't get it.

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