Wed, 24/09/2008 - 10:41
Vienna-based Salus Alpha questions the wisdom of recent intervention by US regulators in this no-holds-barred analysis of the impact of recent events.
Mr. Bernanke. Mr. Paulson (Mr. BP) - This is your Plan B? Nationalisation of the US financial system? Or is it just another US gimmick?
A lot of the troubles the system and the markets are currently facing are produced by the Fed. With their 'chart reading trial and error after the fact policy' the market lost the conviction in a solution. It seems one misjudgement follows another big misjudgment. There are some facts which make us wonder if the new plan for saving the financial system is another misjudgment.
Manipulating the markets instead of solving the root of the problem
Manipulating the markets through curbing short selling is not a long-term healthy practice especially when you do not tackle the root of the problem. Since the problem is the falling housing market the FED should have intervened on the real housing market a long time ago.
The free market psychosis prevented the FED from doing so. The current proposed solution to intervene in the mortgage related securities markets instead the real housing market saves the rich investment bankers and puts the burden on the US tax payer. The goal from the beginning should have been to stop foreclosures of people's homes and not to put a floor on highly leveraged derivative assets of the real housing market.
Saving the financial economy at the expense of the real economy
The US government will become one of the biggest asset managers on the globe. The plan is to buy mortgage related securities in a reverse bid auction, i.e. at the lowest price. Mr. Paulson wishes to have full discretion under the plan and not being accountable to any court.
The US debt ceiling will be raised to USD 11.315 trillion from USD 10.615 trillion and US financial companies will dispose their toxic assets to a US government sponsored entity. The fact that there are no information on the price the U.S. authorities are going to pay for the toxic assets should be scrutinised. Either the assets will be bought at the lowest price which will entail loss for the financial institutions or the assets will be bought at a higher price which will bring a loss for the tax payer.
This is the greatest market manipulation since the existence of financial markets. The financial economy will be saved but the real economy will
go off the cliff. US financial institutions have lost all the credibility someone can loose in a global financial market. In the long run, the plan will be a burden on the U.S. economy as taxpayers will have to pay. This will hurt the US dollar and the rating of the United States as a borrower eventually.
The market will teach us one more lesson - The market is always right.
By curbing short selling Mr. BP produced the biggest short squeeze party in history of financial markets but be aware the market will teach us the next lesson. The US financial system got overleveraged in the most stupid 'no money down highly leveraged long real estate trade' which does only exist in the US and nobody not even the smart market wizards from Harvard questioned the assumption of ever rising real estate prices.
Capitalism brought down communism and leverage nearly brought down capitalism. Mr. BP if you do not know already. The market is always right!
So far the US system kept on working because there was always a greater fool buying any US asset and most of the time it was an international greater fool. The greater fool now is the US tax payer. If you are still asking yourself if the troubles will be reaching the real economy - here is the news! It already has done so and will worsen significantly. US credit markets are dead and will not be enlivened until money has a cost of close to zero and credit spreads tightened significantly.
The Fed as well as the ECB will need to lower interest rates soon while equities are continuing to fall in this bear market environment.
Especially Europe will be facing deflation with economies that do not have flexible free markets with rules and regulations that do e.g. ban business people from doing business after bankruptcies. We will see spiking company default rates on a global scale even after financial institutions have been saved but their balance sheet has shrunk significantly as well as their risk appetite and they will continue to stockpile cash.
We will further face incredible high market volatility until the middle of next year. As investors are digesting further details of the plan of the US government, asset classes with low correlation to traditional assets will be more important than ever before. In every crisis there are also opportunities as long as there is a trend and even if it is downwards there is always potential for profit.
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