Friday, October 17, 2008

Smart Money Wants To Keep The "Free" In "Free Market"

A close friend of mine sent an email out yesterday to most of his address book. This person has been involved in GOP politics at substantial levels for quite awhile. He's a recognized authority on finance, and someone to whom I always listen whether I agree or not. With the exception of one identifiable remark that I've omitted, I'm reposting his email with his permission. Everyone regardless of political affinity should read it and consider his points.

With the exception of routinely voting against ***** *****, I don't think I have ever voted for a Democrat before, but I will be voting for Obama. The people in charge are the worst administration in history (with the possible exception of FDR). We are in fact looking at a Great Depression scenario.. and not the way that the pundits have described it for the last few months. It has nothing to do with a big bust must follow a big boom. Recessions have been getting shorter and milder as we have off-shored most of our cyclicality and our domestic markets are able to shift and reach equilibrium quicker and quicker.
The reason we now face a depression scenario is the petty dictator Paulson and the bumbling and corrupt GOP beaureacracy in Washington.

They are destroying the markets through policy decisions, or in some cases the uncertainty created by a lack of policy decisions. As in the depression, markets are freezing due to constantly changing rules and perverse incentives. The first article I link to below is one small example.

The other day, the petty dictator Paulson called in the heads of the largest banks and told them they must sign on the dotted line before they leave the room. This is unprecedented. Good banks.. bad banks.. good decisions.. bad decisions.. no longer mean anything in the marketplace.

Paulson is going to borrow ~750 billion from the credit markets: the very same credit markets that he claims are frozen, in order to prop up said credit markets. The credit markets are frozen due to uncertainty, that is all. If capital is available to loan to Paulson, then it is available to loan to these banks. It is not going to the banks because nobody wants to loan to a group of a**holes who pay out 50% of net revenues to employees while leverages up 30-1 on subprime mortgages. There is no free lunch. ~750 billion to bad credit risks is ~750 billion that will not go to good credit risks. It is a straight transfer of assets from productive centers of the economy to unproductive ones. The long term damage is huge.

No, I am not saying that the answer is a perfectly textbook Austrian approach. The reality is that markets don't adjust immediately as they do in textbooks. If all the banks are allowed to go under, it will hurt the economy as the structural difficulties in liquidating banking assets and passing them on to new owners would take a long time. The gov't does, however, have the power to effectuate one week
bankruptcies.. that is, when a bank goes under, take it over, prop it up for a few weeks, wipe out the equity, and sell off the ongoing business to the highest bidder (possibly wiping out the bondholders as well).

Meanwhile, while facing a lending crises, who does have the power and the structural ability to quickly adjust to conditions and lend to the sectors of the economy that need it most? The hedge funds do, yet Paulson is trying to wipe out the hedge funds, having put a scarlet letter H on their chests. (See the other link at bottom of page)

Let's be clear, the Democrats (as much as they suck) would never have gotten away with this. If John Kerry were President, he would probably would have proposed some dumbass Keynsian "pump priming" solution that would be bad, but it would not be shutting down our entire free enterprise system the way Paulson is.

The people in power must lose, and they must lose resoundingly and everything they have done must be rejected and repudiated, and I will do my small part in that.

."Utah foreclosure auction flops"
Grace Leong - DAILY HERALD
An auction that netted $7.5 million in bids on 56 distressed Utah
properties fell through last week after the owners -- three banks and
two private lenders -- decided they may get a better deal by holding
out for the government's bailout plan.

"There were buyers, but we couldn't sell the homes because free
enterprise has gone out of the market," said Eric Nelson, founder of
Las Vegas-based Eric Nelson Auctioneering.

An email from from Richard Fuld Jr., Lehman Brothers Holdings Inc.'s
chief executive to Lehman General Counsel Thomas Russo on April 12,
2008, shows why hedge funds are so worried. In the email, Mr. Fuld,
summarizing the points from a dinner with Treasury Secretary Henry
Paulson, said Mr. Paulson wants to "kill the bad Hedge Funds and
heavily regulate the rest.

This comment (while obviously not in favor of any presumptive Democratic policy suggestions) should underscore just how seriously financial professionals view the current economic situation and this administration's proposed fixes. The very fundamentals of the market are being diminished by Paulson's proposals. Those proposed measures provide yet another example of how so many people trumpet "free market" this and that, but expect an exemption when they make a mistake and face "punishment" by the very same market. You can have a free market, or you can have a proposed bailout that may or may not work. You CANNOT have both.