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November 19, 2008

Auto Bailout Polls

Andrew Roth

SurveyUSA has been surveying various cities on whether or not the federal government should bailout out the auto industry. Here are a few:

Portland, OR: 60% say "allow them to fail"
Boston, MA: 64%
Tampa, FL: 54%
San Diego, CA: 54%
Seattle, WA: 60%
Oklahoma City, OK: 63%
Louisville, KY: 58%

Posted at 9:41 AM, November 19, 2008 | Trackback | Print | #

Ready to Get Angry...Again?

Andrew Roth

A Dutch insurance firm wants to buy a U.S. thrift company so that it can get its hands on some bailout money.

HT: Demian Brady

Posted at 9:23 AM, November 19, 2008 | Trackback | Print | #

November 17, 2008

Auto Bailout -- Four No Votes

David Keating

It is a bit discouraging to see how Washington views the proposed auto bailout. The Democrats say let's give them another $25 billion or so. The Republicans say we already passed a bill to give them $25 billion, but let's let them use it to try to get back on their feet instead of using it for new technology.

Two articles in The Wall Street Journal provide interesting viewpoints on any bailout, and both are worth reading -- Why Bankruptcy Is the Best Option for GM appeared today, and Just Say No to Detroit appeared in the Weekend Journal.

The first article notes that any path will be grim, but the bankruptcy one has the best chance of long-term survival and prosperity for the company and as many workers as possible.

GM's solution is to ask the federal government for the cash that will allow it to do all of this piece by piece. But much of the cash will be thrown at unproductive commitments. And the sense of urgency that would enable GM to make choices painful to its management, its workers, its retirees, its suppliers and its localities will simply not be there if federal money is available. Like AIG, it will be back for more, and at the same time it will be telling us that it's doing a great job under difficult circumstances.

Federal law provides a way out of the web: reorganization under Chapter 11 of the bankruptcy code. If GM were told that no assistance would be available without a bankruptcy filing, all options would be put on the table. The web could be cut wherever it needed to be. State protection for dealers would disappear. Labor contracts could be renegotiated. Pension plans could be terminated, with existing pensions turned over to the Pension Benefit Guaranty Corp. (PBGC). Health benefits could be renegotiated. Mortgaged assets could be abandoned, so plants could be closed without being supported as idle hindrances on GM's viability. GM could be rebuilt as a company that had a chance to make vehicles people want and support itself on revenue. It wouldn't be easy but, unlike trying to bail out GM as it is, it wouldn't be impossible.

In the "Just Say No" article, NYU Professor David Yermack says "We would do better to set this money on fire rather than using it to keep these dying firms on life support, setting them up for even more money-losing investments in the future."

Excerpt:

Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM's physical plant during this period was $128 billion, meaning that a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998. As a society, we have very little to show for this $465 billion. At the end of 1998, GM's market capitalization was $46 billion and Ford's was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. Along with management, the companies' unions and even their regulators in Washington may have their own culpability, a topic that merits its own separate discussion. Yet one can only imagine how the $465 billion could have been used better -- for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.

Two other excellent articles appeared on Friday on the proposed auto bailout. "A Lemon of a Bailout" by Charles Krauthammer and "Bailout to Nowhere" by David Brooks.

Posted at 5:19 PM, November 17, 2008 | Trackback | Print | #

'Don't Bail Out My State'

Andrew Roth

South Carolina Governor Mark Sanford seems to be the only governor who don't want a handout from Washington. Good for him.

Posted at 4:44 PM, November 17, 2008 | Trackback | Print | #

November 14, 2008

The GOP Message on the Auto Bailout

Andrew Roth

With the Republican Party going forward after losing more than 50 seats in the House over the last two elections, and more than 12 seats in the Senate, I think it's important to analyze the messages coming from GOP leadership in Congress. Because, without a clear national leader steering the Republican Party, John Boehner and Mitch McConnell and their leadership teams ARE the de facto leaders for now. Consider the auto bailout [emphasis mine]:

From the New Zealand Herald:

House Republican leader John Boehner of Ohio yesterday promised to oppose any new vehicle industry loans. "Spending billions of additional federal tax dollars with no promises to reform the root causes crippling carmakers' competitiveness around the world is neither fair to taxpayers nor sound fiscal policy," he said.

Senate Republican leader Mitch McConnell of Kentucky - home to a General Motors and two Ford plants - has been noncommittal. His office says Congress should instead speed release of US$25 billion in loans approved by Congress last month to help carmakers develop more fuel-efficient vehicles.

Posted at 10:57 AM, November 14, 2008 | Trackback | Print | #

November 13, 2008

You've Got to Be Kidding Me

Andrew Roth

From Bloomberg comes this headline: "Bush Warns Against 'Too Much' Government in Markets."

Gee, do you think?

Posted at 4:13 PM, November 13, 2008 | Trackback | Print | #

The Trouble with Bailouts

Andrew Roth

Megan McArdles asks, "who's next?"

Posted at 3:59 PM, November 13, 2008 | Trackback | Print | #

Washington Watch with Glenn Reynolds

Andrew Roth

I was on Washington Watch with Instapundit's Glenn Reynolds yesterday. Along with Bill Allison, we talked about the auto bailout and the lack of accountability in Washington (our segment starts at the 16-min. mark). Click the image to watch:

Posted at 11:52 AM, November 13, 2008 | Trackback | Print | #

November 10, 2008

Open Letter to Secretary Paulson

Andrew Roth

As far as I know, Gov. Mark Sanford is the only governor who has been vocally opposed to the $700 billion bailout. Check out this great letter that he wrote to Paulson.

November 7, 2008

The Honorable Henry M. Paulson, Jr.
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Dear Mr. Secretary,

As you enter the closing chapter of your work as Treasury secretary I wish you well. You have certainly held that post in the most tumultuous of financial times and accordingly I hope that you take time for a break in the New Year.

I write to let you know of an unintended consequence that seems to be surfacing in local banks. I've gotten several reports from board members of community banks whose balance sheets were strong and their credit good - who nonetheless would be eligible for "their" portion of the $700 billion bailout. So-called free money going to local banks I think is a real problem for taxpayers.

More egregious is the way that some banks are gaming the system.

In the free market model that we both believe in, if a firm takes unwarranted risk and fails, many in that firm who in fact did good work and added to the bottom line become casualties to the process. It is tough medicine but necessary to temper the excess capacity that would come without it. That's why I think it's unconscionable that someone affiliated with a bank like Citibank would be receiving a $125 million bonus as reported in the Wall Street Journal of November 6. Why employees under the Citibank umbrella should be immune from this dynamic while taking federal money I don't understand, but in fairness to you what I read may not represent the whole of what's taken place.

I have a much stronger grasp of what is happening locally. The federal government, and by extension taxpayers, are being gamed. I think it's dangerous over the long run the way that taxpayers are being sapped, and this dynamic is playing out in South Carolina.

In early September, the CEO of South Carolina-based South Financial Group, Mack Whittle, announced his pending retirement and the $18 million golden parachute that came with it. Most recently, however, the bank moved up his retirement by two months, and many have surmised it was done so the bank could apply for federal money tied to the $700 billion bailout without disallowing Whittle's golden parachute. I applaud the fact that you have placed limitations on executive compensation for those receiving federal money, but you need to be aware of how these limitations are being circumvented.

I'd appreciate you looking into this and seeing if there is anything that can be done to keep each one of the taxpayers I represent from in essence having this $18 million, or other millions like it, plucked from their respective pocketbooks and wallets.

In the meantime please know that I wish you well in life's next chapter, and I hope our paths cross again in the not too distant future.

Sincerely,

Mark Sanford

Posted at 2:33 PM, November 10, 2008 | Trackback | Print | #

October 31, 2008

Where's My Bailout?

Andrew Roth

Posted at 9:04 AM, October 31, 2008 | Trackback | Print | #

October 29, 2008

The Cuban Missile Crisis and the Stock Market

Andrew Roth

It was 46 years ago yesterday when the Cuban Missile Crisis ended. At the time, nuclear brinkmanship between the U.S. and the Soviet Union was so high that everyone thought we were going to bomb each other into oblivion (Remember Kevin Costner's line in Thirteen Days? "If the sun comes up tomorrow, it is only because of men of good will"). So how volatile was the stock market back then compared to today's rocky financial environment?

On Oct. 22, 1962, President Kennedy addressed the nation, making public the fact that the U.S.S.R. was installing nuclear missiles just 90 miles south of Florida. The next day, the Dow Jones Industrial Average actually traded 1.9% higher. For the next four business days until after the crisis ended, market volatility averaged 1.5% daily. Trade volume was up more than 27% compared to the daily average for the year.

Fast forward to today. Over the last six trading days, similar to 1962, volume was up 26% on average. But the market moved no less than 2% daily! The worst drop was 5.8% on the 22nd and the biggest gain was yesterday's 10.9%. All told, the average volatility over six days was 4.5%. That's 3 times as much movement now than during the Cuban Missile Crisis!

When I told my girlfriend this, she eloquently said, "I guess if everyone is going to die, then no worries, but if we all have to live in a hell hole, big worries."

Of course, there weren't credit defaults swaps back in 1962, or program trading, or online speculators. But it does provide a good measure on how crazy this market is right now.

Posted at 3:06 PM, October 29, 2008 | Trackback | Print | #

Mark Sanford

Andrew Roth

South Carolina Gov. Mark Sanford is testifying before the House Ways and Means Committee right now. He is speaking out against the bailout. You can watch here.

UPDATE: Part of Sanford's testimony included this simple plea:

"I'm here to beg of you not to approve or advance the contemplated $150 billion stimulus package," Sanford said. "This $150 billion salve may in fact further infect our economy with unnecessary government influence and unintended fiscal consequences."

Posted at 10:36 AM, October 29, 2008 | Trackback | Print | #

October 27, 2008

Government Owning Banks

Andrew Roth

What happens to innovation when the federal government starts owning banks? From the New York Times' Tom Friedman:

Let’s imagine this scene: You are the president of one of these banks in which the government has taken a position. One day two young Stanford grads walk in your door. One is named Larry, and the other is named Sergey. They each are wearing jeans and a T-shirt. They tell you that they have this thing called a “search engine,” and they are naming it — get this — “Google.” They tell you to type in any word in this box on a computer screen and — get this — hit a button labeled “I’m Feeling Lucky.” Up comes a bunch of Web sites related to that word. Their start-up, which they are operating out of their dorm room, has exhausted its venture capital. They need a loan.

What are you going to say to Larry and Sergey as the president of the bank? “Boys, this is very interesting. But I have the U.S. Treasury as my biggest shareholder today, and if you think I’m going to put money into something called ‘Google,’ with a key called ‘I’m Feeling Lucky,’ you’re fresh outta luck. Can you imagine me explaining that to a Congressional committee if you guys go bust?”

And then what happens if the next day the congressman from Palo Alto, who happens to be on the House banking committee, calls you, the bank president, and says: “I understand you turned down my boys, Larry and Sergey. Maybe you haven’t been told, but I am one of your shareholders — and right now, I’m not feeling very lucky. You get my drift?”

Maybe nothing like this will ever happen. Maybe it’s just my imagination. But maybe not.

Note how Friedman was smart enough to show how it cuts both ways. With the government, you're damned if you do and damned if you don't.

HT: Ron Bailey

Posted at 1:56 PM, October 27, 2008 | Trackback | Print | #

Negative Effects of the Bailout

Andrew Roth

Consider this Exhibit #1 of the Bailout Fallout. From the Associated Press:

The bailout is now the hottest lobbying game in town.

Insurers, automakers and American subsidiaries of foreign banks all want the Treasury Department to cut them a piece of the largest government rescue in U.S. history.

The betting is that many with their hands out will be successful, especially with financial markets in a stomach-churning dive and predictions the economy is about to tumble into a deep recession.

These groups argue that the credit squeeze is so severe and the risks to the economy so dire that their industries need financial support as well.

The Treasury is considering requests from a variety of industries, but has not decided whether to expand the program, officials said Saturday.

Posted at 9:37 AM, October 27, 2008 | Trackback | Print | #

October 7, 2008

Wesbury's Latest Economic Forecast

Andrew Roth

From economist Brian Wesbury (PDF):

We are witnessing economic weakness the source of which is different than every recession in the past 100 years. Other recessions have been caused by some combination of monetary tightness, higher taxes, or protectionism. The current weakness is not due to any of these factors. Instead, it is the blowback from a massive amount of bad lending (itself ignited by loose money) mixed with overly harsh mark-to-market accounting rules.

The combination of bad loans and prevailing accounting practices has caused fear and panic in the financial system, in turn causing a huge decline in the velocity of money – how quickly money turns over in the economy. We believe the Federal Reserve will respond to the current situation by cutting rates by 100 basis points, back down to the 1% level that prevailed in 2003-04.

A slowdown in velocity will not only suppress real economic growth but also slow inflation. However, the credit crunch will not last forever. We expect the lack of confidence now permeating the financial system to dissipate in the next few months, leading to a return to healthy real GDP growth and rising inflation in the second half of 2009.

Posted at 8:30 AM, October 7, 2008 | Trackback | Print | #

October 6, 2008

Depressing Bailout Stats

Andrew Roth

We could be on the hook for $1.8 trillion.

Posted at 10:23 AM, October 6, 2008 | Trackback | Print | #

The Size of the Bailout Bill

Andrew Roth

Bill Whittle has the scoop for Pajama Media TV.

Posted at 10:11 AM, October 6, 2008 | Trackback | Print | #

Saturday Night Live on the Bailout

Andrew Roth

Posted at 8:51 AM, October 6, 2008 | Trackback | Print | #

October 3, 2008

House Passes Bailout Bill

Andrew Roth

The vote was 263-171. I'll post the tally once it's available. The bill will now go to the President. The stock market sold on the news.

UPDATE: Here's the official tally.

UPDATE II: Here are the House members who originally voted NO on the first bill, but were persuaded to vote YES on the second bill:

Posted at 1:33 PM, October 3, 2008 | Trackback | Print | #

Sky is Falling, Martial Law, Dow Drop 2000 Pts

Andrew Roth

Here's the hysteria that one congressman says is being pushed around in the halls of Congress.

Posted at 12:28 PM, October 3, 2008 | Trackback | Print | #

House Members Switching Their Votes

Andrew Roth

According to The Hill, here are the House members who have publicly stated that they plan to change their votes from NO to YES on the $700 billion bailout:

Democrats
Shelley Berkley (NV-01)
Emanuel Cleaver (MO-05)
John Lewis (GA-05)
Hilda Solis (CA-32)

Republican
Gresham Barrett (SC-03)
Howard Coble (NC-06)
Jim Gerlach (PA-06)
Tim Murphy (PA-18)
Jim Ramstad (MN-03)
Ileana Ros-Lehtinen (FL-18)
John Shadegg (AZ-03)
Lee Terry (NE-02)
Patrick Tiberi (OH-12)
Zach Wamp (TN-03)

Posted at 11:59 AM, October 3, 2008 | Trackback | Print | #

Tweeting the Bailout

Andrew Roth

I'm on Twitter again tracking the speeches on the House floor ahead of the vote on the bailout, scheduled for early this afternoon.

Posted at 9:56 AM, October 3, 2008 | Trackback | Print | #

California Wants a Bailout

Andrew Roth

Schwarzenegger wanted the federal government to give his state a $7 billion loan.

Posted at 8:28 AM, October 3, 2008 | Trackback | Print | #

October 2, 2008

An Alternative Bailout Plan

Andrew Roth

Steve Stephens, a valuable director on the Club’s board, submitted the following proposal as an alternative to the current $700 billion bailout plan. The Club remains opposed to the bailout plan and currently has not endorsed a comprehensive alternative, but Stephens’ idea is both rational and creative.

Dear Pat,

What is the goal of the U.S. Government in this financial crisis? To provide a bailout for excessive, tax incented behavior or to inject capital into the banking system? If it is the former, then the current $700 billion bailout plan is the answer. If it is the latter, then may I propose an alternative?

The U.S. Treasury should purchase bank owned real estate, that is main or branch buildings, funded with a debt service schedule to match the terms of a lease back to the selling institution. The new U.S. debt would pay no interest until a balloon maturity using these bank assets as collateral. Any bank gains from this transaction would be postponed until the end of the lease term. A bank which currently leases space could also avail itself of this low cost financing.

The results would be that banks owning non-performing loans would free up non-earning assets substantially adding to their capital base (lending capacity) while working out of their bad loans. Banks which are not in trouble could also avail themselves of the sale/leaseback which would eliminate the pitfall of rewarding poor lending practices. Additionally the U.S. taxpayer would have earning assets as security.

Along with the recommendations that you have already made, suspending mark to market requirements and the FDIC guarantee of overnight bank lending, ideas such as this will employ the market to work out of the credit implosion and the resulting deflation.

I know the current plan is likely to pass, but we should encourage alternatives up to the last minute.

Sincerely,

J.T. "Steve" Stephens, Jr.

Posted at 3:57 PM, October 2, 2008 | Trackback | Print | #

Jim DeMint on the Bailout

Andrew Roth

Posted at 9:38 AM, October 2, 2008 | Trackback | Print | #

Trouble at Home for Barney Frank

Andrew Roth

Rep. Barney Frank, who won re-election unopposed in 2006, is taking heat from his constituents back home in Massachusetts.

HT: Steve Bartin

Posted at 9:11 AM, October 2, 2008 | Trackback | Print | #

Senate Passes Bailout 74-25

Andrew Roth

The Senate passed the $700 bailout bill last night, 74-25. Below are the 25 Senators who voted NO (15 R, 9 D, 1 I). Note how a lot of states are represented by both Senators. That usually suggests that the vote was political. That's not to say that any particular Senator had certain motivations, but overall, it suggests that some Senators paired up to provide political cover.

Posted at 8:25 AM, October 2, 2008 | Trackback | Print | #

October 1, 2008

RomneyCare Gets a Bailout

Andrew Roth

Jason Pye has the details.

Posted at 11:57 AM, October 1, 2008 | Trackback | Print | #

New Senate Bailout Bill

David Keating

If you wonder what is in the bill the Senate plans to vote on tonight, here is a current draft. It is 451 pages, but the vast majority of it relates to tax relief extender provisions tacked on to the bill. The Paulson provisions take the first 112 pages of it.

Some notable changes from the failed House bill:

1. The Senate bill says the SEC “shall have the authority . . . to suspend, by rule, regulation, or order, the application of Statement Number 157 of the Financial Accounting Standards Board [mark-to-market rules] for any issuer . . . or with respect to any class or category of transaction if the Commission determines that is necessary or appropriate in the public interest and is consistent with the protection of investors.”

2. The bill does have a temporary increase in the deposit insurance limits to $250K. There would not be any increase in FDIC fees for this extra insurance.

3. The bill bans any future guarantee of money market funds using the exchange stabilization fund.

The bill still gives Treasury the authority to buy all these assets, but there appears to be no provision for Treasury to just issue loans against the collateral for the same low price. How on earth would Treasury service the assets or monitor them? I guess it will hire a lot of contractors, and one can only imagine how badly that might turn out.

Posted at 10:53 AM, October 1, 2008 | Trackback | Print | #

Mark to Mayhem Reform?

David Keating

During our opposition to the $700 billion Paulson plan we urged that something be done about the ridiculous mark-to-market accounting rules that we believe play a key role in the credit crunch.

Yesterday, the SEC attempted to provide some additional guidance in response to this concern, saying "When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable."

Today there are two important articles on this issue in The Wall Street Journal.

In "Mark to Mayhem" Holman Jenkins writes that "we're talking about a regulatory trap for equity, created as an unintended consequence of a well-meaning accounting rule. Short sellers see this trap and try to exploit it. Uninsured lenders and depositors see it and worry about not getting paid back. That fear is why banks have all but stopped lending to each other -- and why Henry Paulson launched his plan, and why the SEC made its move yesterday."

More:

A mere accounting rule can't alter the underlying economics of a lending business -- then again, no longer worried about insolvency-by-accountant, investors might discover new confidence to inject capital and improve the underlying economics of a lending business.

No accounting rule is worth $700 billion. Then again, the essence of the Paulson plan was to raise the value of bank assets to help banks escape the regulatory equity trap. Does that mean we can change an accounting rule and save Congress from having to appropriate $700 billion?

Let's find out.

In "How to Start the Healing Now," Brian Wesbury explains how reform of these rules could help right away:

Mark-to-market accounting causes so much mayhem because it forces financial firms to treat all potential losses as if they were cash losses. Even if the firm does not sell at the excessively low price, and even if the net present value of current cash flows of these assets is above the market price, the firm must run the loss through its capital account. If the loss is large enough, then the firm can find itself in violation of capital requirements. This, in turn, makes it vulnerable to closure, nationalization or forced sale.

Relaxing mark-to-market rules [will not] allow losses to be hidden or ignored. Basing prices for illiquid assets on cash flows would still reflect impairment, but not allow them to dip down to fire-sale levels.

Once private investors know they cannot be taken out by accounting rules and illiquid markets, their cash will flow freely. And if the real issue is to find a proposal that will help fix the problems in our financial markets urgently, then the current Treasury plan fails the test. Because of government bureaucracy and legal issues, the first purchases by the Treasury plan will not be made for at least two weeks and possibly four weeks. Mark-to-market accounting changes could start the healing overnight and prevent the U.S. from moving further away from free-market capitalism.

Posted at 10:22 AM, October 1, 2008 | Trackback | Print | #

Senate to Vote on $700B Bailout

Andrew Roth

The Senate will have a vote later tonight on the $700 billion bailout.

Posted at 7:46 AM, October 1, 2008 | Trackback | Print | #

September 30, 2008

An Open Letter to the Left

Andrew Roth

Steven Horwitz, an economist at St. Lawrence University, has written an open letter to his friends on the Left who contend that the free market is to blame for the financial crisis. Excerpt:

I know, my friends, that you are concerned about corporate power. So am I. So are many of my free-market economist colleagues. We simply believe, and we think history is on our side, that the best check against corporate power is the competitive marketplace and the power of the consumer dollar (framed, of course, by legal prohibitions on force and fraud). Competition plays mean, nasty corporations off against each other in a contest to serve us. Yes, they still have power, but its negative effects are lessened. It is when corporations can use the state to rig the rules in their favor that the negative effects of their power become magnified, precisely because it has the force of the state behind it. The current mess shows this as well as anything ever has, once you realize just what a large role the state played. If you really want to reduce the power of corporations, don't give them access to the state by expanding the state's regulatory powers. That's precisely what they want, as the current battle over the $700 billion booty amply demonstrates.

By the way, Horwitz is also an economist who signed our petition in opposition to protectionist policies against China.

Posted at 5:34 PM, September 30, 2008 | Trackback | Print | #

72% of Conservative Bloggers Oppose the Bailout

Andrew Roth

John Hawkins does a short and informal survey of right-of-center bloggers.

Posted at 9:28 AM, September 30, 2008 | Trackback | Print | #

September 29, 2008

Brian Wesbury on the Bailout Vote

Andrew Roth

When it comes to understanding the economy, it's always smart to find out what economist Brian Wesbury is thinking. Here's his reaction (PDF) to today's vote in the House and the subsequent market decline. I highlighted what I thought were very strong points.

Since the subprime crisis first became evident, we have steadfastly believed the US would avoid a recession. And, at least so far, it has. But with today’s vote, two things have happened. First, Congress finally said enough already with the knee-jerk responses to the crisis by Treasury. Second, any immediate relief (if there was really any coming) to credit problems and confidence has been put off. However, these issues will be short-lived; once the nation is able to focus on the long-term again, all will be well.

Up to this point, economic weakness has been isolated in the housing market or financials exposed to it, and in sectors affected by energy (airlines and autos). The weaknesses in these areas have not dragged down overall GDP. Real GDP grew at a 2.8% annual rate in the second quarter and is up 2.1% in the past year. Excluding home construction, real GDP has grown 3.1%.

Our argument has been that the economy does not experience recessions when productivity is strong, the Fed is easy, and tax rates are relatively low. These things are true today and this has kept the economy from falling into recession.

However, panic is spreading. Forget job security...normally positive and optimistic people are now worried that they will lose their money. President Bush said that that if the Treasury Plan was not passed very bad things could happen. He said, “banks could fail, including some in your community,” further stock market declines could “reduce the value of your retirement account,” “the value of your home could plummet,” and “millions of Americans could lose their jobs.”

From a President, these kinds of statements are unprecedented. In fact, the only parallels we can think of were 1977 and 1979 national TV addresses by Jimmy Carter, talking about energy and a crisis in confidence. Like then, much of our current economic crisis has been caused by government failure, even though conventional wisdom is blaming market failure.

The isolated storms in housing, finance and energy, are now being exaggerated by excessive government intervention (on a knee-jerk basis), mark-to-market accounting and panicky words from political leaders. As a result, consumers are pulling back, credit is being squeezed even to solid, well-run businesses and the economy is being threatened by this spreading panic.

If the economy fell into recession because of this it would be an unprecedented event. Consumer psychology has never caused a recession…never! In fact, there are only three times in history that psychology has impacted the economy in any significant way.

First, at the beginning of the Korean War people worried that goods would be rationed (like WWII), so they spent like crazy. The same was true for the introduction of muscle cars in the mid-1960s, which led to an almost crazy spending spree on autos. And, finally, in 1999 when everyone bought a new computer because they were fearful of Y2K. Each of these spending sprees was followed by an offsetting slowdown in the quarters that followed.

Never in history has a drop in consumer confidence caused a recession. But that does not mean there won’t be a first time. It could happen in the next few months and we would expect to see some very negative data on economic activity. But this would be followed by an offsetting increase in activity following the psychological slowdown.

Productivity is still booming, and so are exports, the Fed is exceedingly accommodative and tax rates have not been hiked. Moreover, oil prices are below $100 per barrel. Finally, all it would take to fix financial market problems today is a temporary suspension of mark-to-market accounting for a targeted set of illiquid assets.

In other words, any economic problems that the US faces in the next few months or quarters is temporary. Financial markets have priced in Armageddon, and as a result still present one of the greatest buying opportunities of our lifetimes.

Posted at 4:21 PM, September 29, 2008 | Trackback | Print | #