Thursday, October 9, 2008

More On The Dark Cloud...

...spreading across the economy.

Bob Murphy, at Free Advice, has expanded on my column, THE DARK CLOUD IS GETTING THICKER: Treasury May Take Ownership Stake In Banks

He correctly highlights this part of the NYT report:

Fed officials increasingly talk about the challenge they face with a phrase that President Bush used in another context: “regime change.”

This regime change refers to a change in the economic environment so radical that, at least for a while, economic policy makers will need to suspend what are usually sacred principles: minimal interference in free markets, gradualism and predictability.

Murphy, also, correctly comments:

Here's another interesting twist: In the original Paulson Plan, he didn't ask for authority to acquire equity in the banks. Remember, that provision was slipped in later, allegedly with the "free market" Republicans kicking and screaming, at the insistence of "liberal" Democrats who wanted "taxpayer protection."

Now, they haven't even started buying up the $700 billion worth of bad assets, as far as I know. I know for sure that as late as YESTERDAY, Bush and Paulson were saying, "You've got to give this plan [of buying assets] time to work."

And yet, now they have decided that that option by itself is NOT working (even though this contradicts the timetable they laid out just YESTERDAY for it), and have decided instead that the government needs to "aggressively" purchase ownership in banks, though it might be seen as "punitive" by some analysts.

Now how the heck is an injection of capital in exchange for equity going to be construed as "punitive"? Oh, well maybe it's because the new plan isn't even clear if bank participation will be VOLUNTARY, and even HEALTHY banks may not be safe.

Do you folks see what that means? Once you take away the requirement for the recipient bank to sign off on the transaction, then there's no way to determine a "fair" price. So if those two vague principles come down on the side of more government power (and why wouldn't they?--the markets will be in need of "help" for years to come), that means the government can look around and spot a company it wants. Then it gives some bogus reason that it needs to ensure stability with this company--remember, the company itself doesn't need to be in trouble--and it can say, "We'll give you $x billion and in exchange we own y% of your stock." And remember, the company can't even say, "No thanks."

This is not good.

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