On September 23, direct infusions of cash into the banking system, according to Treasury Secretary Paulson and Fed Chairman Ben Bernanke, would be “about failure”, they said in testimony before Congress. Now it is about “success”, according to the same individuals.
How can the markets have confidence when they hear one fairy tale less than three weeks ago and another now? Which is it gentlemen?
The truth is that no one really knows how to deal with this global breakdown in the financial markets. It appears that purchasing “toxic” assets didn’t work, primarily because no one could identify which assets are toxic until they fail. In fact, the treasury still doesn’t have a mechanism to do this. Goodbye $700 billion of taxpayer money. Purchasing commercial paper isn’t enough either. The British want to guaranty short- and medium-term loans between banks. The US Treasury is considering taking ownership positions in banks as part of its $700 billion rescue package. However, by their own admission, this plan is less developed than purchasing toxic assets.
The fact is no one knows what to do. So far, the only thing that has been done here in the United States is a pledge by Congress of taxpayer money to do something that is now considered inadequate and never had any chance of short-term success. Wall Street knows that our Princeton Professor Fed Chairman has no idea and our Goldman Sachs Treasury Secretary has even less of a clue.
In the meantime, markets continue to crumble. The stock market has lost more value since this time a year ago than it did in 1937. Approximately 40% of the equity value of US markets has vanished in this time.
Is there a credit crunch? Auto dealers are eager to lend at 5% to entice purchasers. Fifteen year fixed rate mortgages can be obtained right now for 5.73% if you have a good credit score. Banks are not turning away borrowers with good track records. There is no liquidity crisis for the average American. The only problem is with banks that made bad mortgage loans, insurance companies that guaranteed pools of these loans and derivatives thereof, and investors who invested in these pools. This is not a bailout of the average American; this is a bailout of bad investment decisions.
There most likely is no government intervention that will satisfy investors. The markets must be allowed to shake out. The only other alternative is to abandon capitalism and nationalize the banking system. The government will most likely do the same in the form of purchasing ownership shares of these major employers. In that the owners of corporations, the stockholders, make the decisions, it looks more and more like we are heading toward a “managed economy”. Even Alexander Hamilton must be rolling in his grave over the idea of the government owning banks and major corporations.
Boom and bust is the nature of our capitalistic system. When things are going well, everyone cheers and proclaims that we have the greatest system ever created. When things go poorly, the same people gnash their teeth and scream for government intervention. We can’t have it both ways. We have to decide what it is we want. My vote is for capitalism. Allowing supply and demand to determine the price of goods and services, including the value of corporations and credit, is the only efficient way to distribute such goods and services. Managed economies do not work because those who manage these economies have a very different goal than those who invest.
The solution to the worst economic crisis since the Great Depression depends on what one wishes to accomplish. If one owns three percent of General Motors and wishes to protect his investment, one would want the government to step in and guaranty one’s fortune. If one works for General Motors, one wants the government to step in and guaranty one’s job. What no one realizes is that when the government owns the means of production and the banking system, the government makes all the decisions and the market becomes a slave to the whims of politicians instead of laws of supply and demand.
Professor Kupferman is an adjunct professor at Polytechnic Institute of New York University’s Executive MBA program.