thoughts on the bailout

howdy, y'all, i'm back after a modest hiatus. i've been watching with interest all the plans and machinations for trying to "fix" the economy, and you won't be surprised to learn that i don't think very highly of any of them. i don't want these posts to take on the character of a political rant, so i'll make this a short post before returning to what interests me more, which is the larger view of what the economy and the markets are doing, independent of any efforts to manipulate them by government or otherwise.

essentially, my objection to the bailouts is pragamatic; i don't think they will work. in fact, i am among those who think they will make the situation worse, in addition to costing the treasury an arm and a leg to carry them out. what i believe is that the markets, for stocks, bonds, real estate, commodities, instruments of mass destuction, you name it, all have to hit a real bottom before any recovery can begin. contrary to popular opinion, there are many folks who were not taken in by this massive bubble in all of these markets, who have kept their powder dry and are waiting for the opportunity to invest in real assets at realistic prices. (i would like to believe that some of my readers are among those). these people were willing to forego the potential profits which others were reaping during the bubble phase, in order to be in a position to purchase assets at lower prices after the inevitable crash. included in this category are quite a number of solid banks, who resisted the lure of highly leveraged high yield assets (ie. toxic assets) and kept their feet on the ground doing solid conventional banking (more on this subject below).

these people and institutions are not stupid, although many would have thought them so during the height of the bubble. if they were not taken in then, they surely will not be taken in now. they are waiting for the above-mentioned real bottom before they part with the cash which they have so patiently and carefully held on to during these troubled times. (if you are asking, when will this bottom occur and how will we know when we get there, i will be discussing this with great enthusisam in future posts, as it is the 64 trillion dollar question).

so, what does this have to do with the bailouts? it is my contention that the bailouts are merely delaying the inevitable collapse in the prices of the assets, and thus delaying the recovery. there is no avoiding the pain associated with a collapse in these assets, but there could be some benefit to shortening the period of time during which we have to endure this pain. every element of the various bailout plans is an attempt to prop up the prices of things by injecting liquidity (ie. money) into a system in which the very problem was too much liquidity in the first place. but the mood has changed, and people just aren't "buying it" any more. they've got all the crap they need, be it goodies from walmart, gas guzzlers, vacation condos, or stocks and mutual funds. they're selling, not buying, and it's not just the smart ones now, everyone's doing it. so it's all going down, and the sooner the better, says I, so that a real recovery may begin.

a couple of additional notes:
1. about those banks i mentioned above who acted prudently during the bubble, even though it meant lower profits and derision from the analysts at the time. they deserve the competitive advantage that such prudence confers. it is not right nor useful that their competitors who acted imprudently should be propped up by the government.
2. consider this irony: we hold that home ownership is a wonderful value in our society. what better news then, that home prices are falling, bringing the price of a home within the reach of so many more americans. instead, the bailout folks are doing everything they can to prop up the prices of homes, in direct conflict with our cherished values. i would hold that the real american dream, over the past 15 years or so, has not so much been home ownership, but home price appreciation, a wonderful way to riches without effort or sacrifice. this is pure bubble thinking, and must of course die out as the bubble deflates.