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« ETF Update: Implications from the Bailout Plan | Main | Market Prospects: Bailout Vote »

September 29, 2008


Bill aka NO DooDahs!

You drastically reduce the leverage allowable and you kill the golden investment banking goose. They have enough political leverage (pardon the pun) and generate enough tax income that it seems unlikely to me.

The government loves the Fed; it gives them power, which governments rarely willingly relinquish, and allows them to inflate at will. The last thing any government wants to do is force itself to be fiscally responsible. Until the country collapses completely (next century, perhaps?), we are stuck with the Fed.

Now mark to market is probably toast ...


It is relevant not to fix blame at this point, but it is not all that difficult to determine what brought us here, and thus the solution becomes self-evident.

The debt-to-capital ratio of investment banks was allowed to expand to as much as 30-1 (enabled courtesy of the SEC). How about rescinding the rule and firing Mr. Cox?

The biggest fix: rescind mark-to-market and return to fair market value. This was a controversial and widely derided rule when it was put in place just 4 or 5 years ago. It the largest reason we are in this mess. Rescind mark-to-market.

Finally, the Fed reduced interest rates far too much in the wake of 9/11 and left them there far too long. The result: overinflated home prices. Rein in the Fed or abolish it altogether.

If you did these three things I think the bear market would literally vanish overnight.

The real question is, why aren't doing it already?

gaius marius

rb -- it seems to me that reacting to failures will very soon not be enough.

it's been so long since it happened that i'm not sure any of us really understnad the ramifications. but what is under threat is the core purpose of the financial system -- not speculation or investment or capital allocation, but the payments system.

if the CP and bank debt markets don't unjam, we may well see cascading failures within weeks -- too many too fast to broker individually, and not just financials. government will be forced to triage and allow most failures. it is not inconceivable, it seems to me, that basic payments systems -- credit cards, checks -- could fail in the duress.

what i'm saying is that waiting to mop up carries some very serious risks. this is a time for governemtn to be proactive -- which, as prof has pointed out many a-time, is not what they do best.

Bill aka NO DooDahs!

Dontcha know God created the "popemobile" on the eleventh day?


Not only an act of nature but the deserved punishment of a vengeful god. Reminds me of a joke about the pope talking about how our lives are in god's hands, speaking from his bulletproof popemobile.


If this results in handling crises on a case-by-case basis but results in desperate banks willing to give government a sizable equity share that significantly dilutes existing shareholders as well as gives better control over compensation, would you consider that a better outcome? It would certainly have a punitive measure that most would find more agreeable. A deep recession is probably unavoidable anyway now.


Evander -- Check out the last two paragraphs again. This is a story about the failure of leadership -- the problem too tough and the time too short.

BTW - I don't think I have ever commented on "intellectual betters." I frequently suggest that investors would be better off in respecting expertise. When I call in my plumber, for example, I am recognizing his education and experience. I do not feel stupid or inferior as a result. I have been wise enough to know when to respect someone else.

Thanks for commenting, and I'm glad you feel better.


So in other words, we should do what you always advocate, defer to our intellectual betters. They have our best interest at heart and we are just too stupid to know it. The fact that those are the people who caused this problem should be of no concern. The fact that this bill was initially larded with pork should be ignored. I feel so much better now.

Bill aka NO DooDahs!

Although I found the "asteroid" analogy amusing, you missed two salient points.

These "extinction-causing asteroids" tend to strike every 5 to 10 years. :-)

They are also man-made, and launched primarily from NYC.

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