Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21
Bitcoin Halvings Price Forecast and Stock to Flow Analysis - 18th Jul 21
Dell S3220DGF Unboxing and Stand Assembly - 32 Inch 165hz Curved Gaming Monitor Amazon Discount - 18th Jul 21
What Does The Fed Mean By “Transitory Inflation” And Why Is It Important To Understand? - 18th Jul 21
Will the US stock market’s worsening breadth matter? - 18th Jul 21
Bitcoin Halving's Price Projection Forecasts Trend Trajectory - 18th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why the Bank Bailouts are Not Working

Politics / Credit Crisis Bailouts Feb 12, 2009 - 05:46 AM GMT

By: MoneyWeek

Politics

Best Financial Markets Analysis Article800bn, 1trn, 2trn – just think of a number. Then double it. That seems to be the approach behind the latest batch of bail-outs.

To 'save' their economy, America 's politicians are churning out even more 'rescue' packages. All with more noughts attached. Now they've just "placed an eye-watering $2.3trn price tag on bailing out the US banking system", says The Independent's Stephen Foley , opening up "a second front in the battle to pull the country out of recession".


Hmm. History's taught us what happens when you open up a second front in a battle before you've won the first – you tend to lose the war.

There is a better way to fix the banking system – the 'free market' may yet have the answer, and without taxpayers having to pick up the bill. We'll get to that in a moment – but first, what's this latest bail-out package all about?

The problems with America 's latest bail-out plans

For the politicians, bashing bankers' big bonuses is the easy bit. But the sums involved are absolute peanuts compared with those needed to sort out the whole banking mess. And headline-grabbing sound bites don't keep financial markets happy for long.

So the acid test had to follow. America 's lawmakers really did have to sound as if they knew how they were going to get us out of this mess.

And on Wednesday, US Treasury Secretary Tim Geithner gave it his best shot: "The battle for recovery must be fought on two fronts: jump-starting job creation and private investment, and getting credit flowing again to businesses and families". He wants to inject more government money into some of America's biggest financial firms, set up a public-private partnership to buy up to $1trn of banks' bad assets - loans where lenders won't get much of their money back – and start a $1trn credit facility to push lending to consumers and businesses.

But then he made his first big mistake. He said he needed more time to work out the full details "so we don't put ourselves in the position again" of "quick departures and changes in strategy". Then he "ducked the tough questions investors want answered" about the latest shore-up scheme, says Bloomberg's Rich Miller .

In other words, trotting out his plans with a $2.3trn price tag – money that the US government doesn't have, so would have to get from taxes, borrowing or printing - just didn't cut the mustard. "He should have waited until he had his ducks in order", said Stone & McCarthy's Ward McCarthy. "The lack of detail leaves too much confusion, misinterpretation and speculation."

So the Dow dropped 4.6%, with bank shares hit by double-digit plunges. And although US shares nudged up a little yesterday as the previous 'stimulus package' passed muster with Congress, the big questions remain.

Can banks saddled with oodles of toxic assets really be saved?

If not, will they be nationalised?

And how big a bill will taxpayers have to pick up?

Because if all the dodgy loans on bank balance sheets are priced at what they're really worth, those banks will go bust. But if the banks get paid more for this rubbish than its 'true' value, taxpayers take a bath.

Why tax payers are right to be sceptical

And taxpayers are right to be sceptical. After all, if you set politicians loose with unlimited sums of money, you're just asking for trouble. The US Treasury has just admitted to "overpaying" $78bn for stakes in troubled banks as part of the $700bn TARP – Trouble Asset Relief Programme – bailout set up by Hank Paulson.

In short, vast chunks of taxpayers' dollars have just been wasted. Yet despite lawsuits from news services Bloomberg and Fox, there's been continued stonewalling on where the stuff actually went – the government clearly feels that in an "emergency" situation it doesn't need to be accountable for its actions. And all the while, US government borrowing is soaring.

Will we do a better job in Britain ? Given that we're following roughly the same path as the Americans, almost certainly not.

How to save the markets without costing the taxpayer

So is there another solution, that doesn't involve state guarantees, bad banks or nationalisation?

University of California Professor Roger Farmer reckons so. "We just need faith in free markets and a little creative intervention", he tells FT Alphaville.

You can read the whole piece here: How to fix the banks , but here's a rough summary of how his idea works. You create a fund of bank shares which investors can buy and sell. And the key is that the fund is backed, and the fund's price regularly guaranteed, by a country's central bank – like the Fed or the Bank of England.

Investors would be encouraged to buy the individual bank shares in the index to cash in on the central bank's backing. As bank shares are bought, prices rise until their collective worth equals the underwritten fund value.

What does all this mean in English? Well, in a nut shell, the central bank stands behind the banking sector as a whole with a chunk of money, but it's then left up to private investors to decide how this cash is split between the banks.

So the market sorts the wheat from the chaff. Any bank with a high proportion of toxic assets will lose capital to better-run lenders. And so new, well managed banks would attract capital, while old ones would fall in value, or fail.

Would it work? It would need some 'out of the box' thinking. Further, it certainly wouldn't be without pain, because some banks would inevitably go bust. But it takes the politicians out of the game. And here's the bit I really like. "This scheme could recapitalise the banking system at little or no cost to the taxpayer", says Professor Farmer.

That's the best notion I've heard in a very long time.

By David Stevenson for Money Morning , the free daily investment email from MoneyWeek magazine .

© 2009 Copyright Money Week - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Money Week Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in