Not So Dismal

Making Economics a Little Easier to Understand

Posts Tagged ‘Markets

Bailout 2.0

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From today’s Politico Arena question, which is “Bailout II: Does the New Plan Sound Better Than the Old? What else must happen?”

It’s “better”, but only insofar as it’s shoving open the credit markets.

One of the weapons that has helped most in the past few days is one that is hardly being mentioned: FASB, an accounting standards organization, released changes regarding mark-to-market accounting for illiquid assets, suggesting that it might be okay to value mortgage packages and other securities that simply aren’t being traded at their cash value, rather than at the bidding price. This is important because the bidding price is far below both the actual hold-to-maturity value of these securities and even discounted prices many companies might accept to simply get rid of them. If the change is enough to allow auditors the latitude to sign off on less paranoid financial statements, then we may see that many companies on the cusp of problems are, in fact, doing okay from a cash flow perspective.

But the crush of new money bursting through the gates remains a big part of this, to be sure. And that’s what should be most concerning: this money may be useful to break open the clogged pipes, but now the fear should be focused on when they burst. In other words, having hundreds of billions of new dollars in the market that aren’t really needed will lead to massive inflation, and sooner than many people think.

Written by caseyayers

14 October, 2008 at 8:34 am

Government’s Role in Stability

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My answer to today’s Politico Arena question, “What can government do right now to stabilize markets or reassure the public? Bonus question: How low will the Dow go?”

The best thing government can do to stabilize the market is to declare fully, and with the greatest finality possible for such a tenuous situation, the level to which they intend to continue meddling in the markets. The reason we keep seeing day after day of multi-hundred swings this way and that is that noone can price the market. There are too many shadowy variables for traders to really get their hands around this thing.

Protect all deposits to an unlimited value. This should help to stop any runs on banks in their tracks. Provide short-term liquidity to businesses that prove both creditworthy under normal circumstances and unable to obtain credit in these troubled times. Don’t buy stakes in banks, don’t keep throwing money blindly at the sector. Doing this does very little to truly help break the credit logjam; rather, the money is simply being brought in by the truckload to any destination that might have given the slightest hint of illiquidity. This will lead to massive inflation later when we finally figure out that smaller, far more targeted sets of money, such as those the Fed auctions using its term lending facilities, were the smarter solution.

The Dow will go as low as fear can take it. But salvation here lies in greed: already valuations on some companies are absurdly low. Many companies with no exposure whatsoever to housing and with more than enough cash on hand to survive any credit freeze have been trashed. Somewhere between 7000 and 7500, the bargains will become too great to ignore for the savvy investors.

Written by caseyayers

10 October, 2008 at 8:48 am