Tuesday, October 14, 2008

Mixing the message

Hank Paulson, "...today's actions are not what we wanted to do.."
I bet the consequences aren't either...

Rich getting richer?
So the government is putting capital into banks and while the Treasury says the program is voluntary we have heard some stories of arm twisting behind the scenes. We are told that these are good banks apparently that means that the tax payer money is safe. But does it also mean that the tax payer money is being wasted? if the Fed is putting money into good banks (...and Merrill is being acquired by B of A) what good is it doing?

Moreover, if that is true what about the banks the Fed is NOT putting money into? Aren't they the ones that need stabilizing? And won't not putting money in them de-stabilize them further?

Is this the law of unintended consequences at work again? It is not what the Plan is doing that is dangerous but what it is not doing. By saying that the banks that are getting money are safe the implication is that other banks are not as safe. And there are a lot of banks in the US and its hard to get capital into all of them at once.

Special fairy dust capital from the Government
Of course, if Treasury did inject capital into all of them what would be the message about bad banks? Do good and bad banks get capital or just good ones? Can banks fail once they have been injected with special government fairy dust capital? Or is that injection a signal to markets that all these banks are good? If that is the case what is going to done with BAD BANKS?

Heads I win tails you lose
So this program, while promising, and, while much faster than reverse auctions, is not without its problems. Who decides who gets capital and who does not? The plan is picking and making winners and losers.

The FDIC part of the plan to insure bulk demand deposits is a very good spin on a real world problem. It is justified and helpful.

But we still have a long way to go just to stabilize the banks.

Meanwhile the economy is getting weaker and is on automatic pilot on the way to a deeper recession. And so is the housing market, along with it..

A stimulus plan won't avert recession but a housing plan could help homeowners and keep bank assets from deteriorating much further. Is one in the offing?

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