Bail-out

There is some, albeit small, satisfaction in being right, in having said something and watching it come true. In July of 2007, I said that that I was liquidating all the stocks in my 401 (k) retirement fund except the Canadian oil stocks, (which I did) because I saw a shaky market ready for a downturn.  It may have taken longer to get here than I imagined, but here it is.

But then, last Thursday, 25 Sep, I posted these thoughts. Now, I admit that I hold no advanced degrees, nor do I hold any economic degrees.  All I have is a Bachelor of Science in Business Administration, Summa Cum Laude, from Franklin University, Columbus, Ohio.

So, it is with that educational experience and many decades of watching the U.S. economy operate and politicians pontificate, that I offer these pearls.

The Wall Street Journal has this opinion piece by a whole bunch of authors in which they say

As we see it, the real concern about the financial sector is that it is undercapitalized, both because of the losses it has sustained and because of the growing risk aversion of lenders.

I want to concentrate on “the growing risk aversion of lenders” part of the statement.  At best this is a slow moving phenomenon, certainly faster than glacial speeds but nothing when compared to NASCAR speeds.  Yes, over time the credit markets could, and I want to strongly emphasize C-O-U-L-D, dry up.  We could notice a contracting of the credit market by next spring.

But bankers are not going to stop lending right now, when they can see a way to have their money make more money.

The WSJ opinion piece ends thusly

It would also be wise to require additional capital, even for well-capitalized institutions. This may seem like penalizing shareholders of well-performing firms. But in fact these are institutions that could use the fresh capital very profitably in buying underpriced assets, making more loans, and taking over weaker financial firms. Well-managed institutions flush with capital will be key to averting a credit crunch, and drawing private institutions into illiquid markets.

The two components of the plan work together. Better-capitalized financial institutions have the capital to bear the losses if they sell assets at market prices. They can also raise new capital more quickly if they have sold off some of their dodgy assets and can present stable balance sheets to prospective investors. Nevertheless, while raising the level of capital in levered financial institutions is important, it need not be subject to the rushed schedule of the modified Treasury plan. It would be best, though, to pass both components together.

We believe our proposals would reinforce the Treasury plan, give it a greater chance of success, and make it appear less unfair in the eyes of the U.S. taxpayer. And if the financial sector is to escape the excesses of regulation that are likely to follow the recent period of under-regulation, it is extremely important that any rescue been seen as fair.

Messrs. Diamond, Kaplan, Kashyap, Rajan and Thaler are professors at the University of Chicago’s Graduate School of Business.

Given the employer of the authors, this quote from the last graf says it all

And if the financial sector is to escape the excesses of regulation that are likely to follow the recent period of under-regulation,

In my opinion, the University of Chicago, its Business School and its Law School are part of the right-wing, neo-conservative drive that has landed us in the trouble we are in.

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