Friday, September 26, 2008

How About a Plan That DOESN'T Bankrupt the Country

By now I've made clear my disapproval of the socialist programme Paulson proposed. What a disappointing liberal in conservative clothing. I'm slightly softer on Bernanke, who's still trying to recover from his delivery from the womb of academia into the real world where execution is the bugbear of pristine theory.

I understand that "everyone" (read: those loud enough to get Washington's attention; read again: whomever can wield the most bucks and/or votes for the politicians) is in a hot lather to secure their place in history by putting their fake-smiling face on something impressive.

Guys, what would impress ME is something WORKABLE, SIMPLE, TRANSPARENT, SUSTAINABLE, FISCALLY SOUND, PRO-LONG TERM GROWTH (as opposed to pro-short term bubble, leading to long-term crash), PRO-CAPITALIST, PRO-GDP.

I do NOT believe ... in fact it's just asinine and insulting to think we would believe ... that credit has flatly "siezed up" and the only answer is a bail-out. Perhaps the borrowers don't like the current rates, but there is ALWAYS money available to be lent if the rate is high enough. Yes, it will hit their profit and thus their stock price and thus their bonus. Deal with it or get out!

Same goes for equity issuance: if the firm is, indeed, a going concern with a simple liquidity problem, there are ALWAYS investors available to buy in if the value is good enough. As we saw this week with Buffett and Goldman, a true value investor sees through the temporary assyncronicities and depressed market valuations created by the "fire sale" prices at which the so-called "toxic" assets are currently trading ... and the mark-to-market rules which are launching these depressed asset prices like cannonballs into the accounting hulls of these financial ships.

But I'm not just here to carp about others' plans ;-)

Without further ado, I offer my own rescue plan:

  1. Central banks manage market liquidity and interest rates via open-market operations ... as they've been doing all along
  2. Central banks act as lenders of last resort ... as they've been doing all along. They must, however, lend at market-equivalent (risk-compensating) rates, not politicized giveaway rates. If the (true, non-hyped) size of the crisis merits, these central banks should be allowed to lend at longer maturities (30 days up to 2 years) in order to provide some financial stability for borrowers. Collateral requirements must NOT be softened.
  3. Congress must immediately cancel their winter hibernation. They can go on vacation once they've balanced the ENTIRE Federal budget, not a day before. If they can't do it before the election, they should be replaced by the voters. I don't care what it takes, we have to stop living on credit, and Washington is the best place to start.
  4. Insolvent companies must go bankrupt. Period. Using the money available via points 1 and 2 above, new entrepreneurs will have a spectacular opportunity to take over businesses and run them better.
  5. Insolvent households must go bankrupt. Period. They don't have to lose their jobs. They don't even have to lose their roofs (they can rent their McMansion from the new owner or they can negotiate a new lending arrangement via mandatory bankruptcy arbitration). But the Escalade must go. The European trip must go. The morning Starbucks must go. The 52-inch flat screen must go ... which means the digital cable can go too. Groceries must come from Costco, not Whole Foods. Yes, I love these things too, but those who have put themselves in a financial pinch must now do whatever it takes to get current expenses below current income so they can start paying down debt or building up savings. Period.
  6. Incompetent politicians, bankers, and executives must be demoted. Just one notch. There's never been clearer vindication of the existence of the Peter Principle of promoting people until their job is beyond their capabilities.
  7. The mark-to-market rule must go. Accountants and regulators over-reacted to earlier problems by creating opposite but bigger problems. Something better must be found in short order, but for now it's just causing unnecessary liquidity crunches and extreme volatility. Next time: try matching asset valuation to it's NPV based on expected length of holding, not frenetic current market price.

If I have to concede a point it is this: If the US government MUST take on assets, they should be placed in a new US SWF. For expediency, this SWF can initially be managed using the governance and by-laws of Temsek (a long-standing Singapore SWF). Everything must be transparent and done at market rates. The fund should be managed for profit by a set of (private, contracted) fund managers using the afore-mentioned Temsek goals on profitability and long-term stability. Period.

I'll be back with a post about longer-term steps...

... Suffice it to say banking regulation must be revised, not to increase the presence of government, but to bring it up to the 21st century and to set capital free to seek the proper balance between maximized returns and minimized risk without economic/financial/business novices in the government meddling.

... Suffice it to say bankruptcy regulation must be more expedient and cooperative without economic/financial/business novices in the courts and law firms meddling.

... Suffice it to say we need an entirely new take on government accountability.

... I'll be back!

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