Sunday, September 21, 2008

The High Cost of Bailouts Lies Ahead

Fortune Magazine says rather than government intervention, the financial industry needs consolidation:
Henry Paulson and Ben Bernanke have saved us, for now, from a market meltdown — but at the cost of allowing the folks who caused the current crisis to keep ducking reality. ...

The Treasury secretary and Federal Reserve chairman have spent September dashing off blank check after blank check in a bid to quell turbulent markets. ...

Ultimately, what could prove to be the most expensive aspect of the bailout spree is the message the government is sending to firms in which the market has lost confidence. Prudent management, it seems, will be punished, while the status quo — however unhealthy — must be maintained at all costs.

The strong stock-market rally of the past two days aside, intervention that fails to foster a shakeout of weaker firms will only delay the reckoning that must occur before a sustainable economic recovery can take shape.

"We continue to believe that the financial sector is in need of massive consolidation because the sector simply has too much lending capacity left over from the credit bubble," Merrill Lynch investment strategist Rich Bernstein writes Friday. "History shows well that consolidation is the primary driver of post-bubble economies." ...

Though the free fall in financial shares over recent weeks wasn't pretty to watch, it had the sanguine effect of forcing businesses with questionable fundamentals to confront an uncertain future. ...

But for the rest of us, the feds' rush to defend teetering financial firms only defers the tough decisions that will need to be made before this crisis subsides — at the expense, perhaps, of repeating Japan's so-called lost decade of economic stagnance after its property bubble collapsed around 1990.

History shows that setting up bad banks without forcing financial firms' managers to confront their problems won't solve anything.

"This seems to us," Bernstein writes, "to be a very Japanese approach to solving a credit crisis."
Fortune Magazine obviously disagrees with The Wall Street Journal about whether we're repeating Japan's mistakes. We don't need to keep guessing who is right. In time, we'll all know the answer.


  1. Goldman, M.Stanley to become bank holding firms

    By Mark Felsenthal and Jessica Hall
    Sunday, September 21, 2008; 11:12 PM

    WASHINGTON/PHILADELPHIA (Reuters) - Goldman Sachs and Morgan Stanley got approval on Sunday to become bank holding companies regulated by the U.S. Federal Reserve, a move that ends the traditional investment banking model. ...

    Well ... Washington has just become the financial capital of the US ... and the world. No, no new paradigm here ... Washington's the same old sleepy southern town ... NOT!

  2. Anyone else notice how active Lance has been lately. He was silent for the last 6 months or so, but now hes back - and trolling with a vengeance. Maybe his presence (or abscence) tells us somehting about the real estate market - maybe in addition to case shiller, MRIS data, etc., we should enact the "Lance O meter"!!!

  3. Anon 7:13, No, my presence is a reaction to recent events. I guess you could say I'm feeling vindacted in that I "warned" about this occuring, yet was not taken seriously. My warnings were dishonestly misinterpreted as "pumping" by some.

  4. This will lead to a faster home price decline since there will no longer be pressure for the banks to get as much as they can for the house.

  5. From The Times
    September 22, 2008

    No theory can stop recurrent boom and bust

    Since the 19th century, economists have sought to stabilise the trade cycle and prices at the same time, but without success

  6. Lance - Actually, according to the Lance O Meter (TM), your incessant pumping is a sign of overall market optimism. Not that you have any idea about anything, its just the way the Lance O Meter works. Thus, your re-emergences is a sign that housing might be at a bottom.

    Similar to the sentiments of Lawrence Yun - if that ass clown ever states something like "we have a long way to go til bottom" trust me, that means bottom.

  7. Dude, we ain't even close to bottom.

    But since you have never lived through a Depression, I wouldn't expect you to have a clue about that.

    And "lance" is so f**cked he doesn't even know it.

  8. How dare you challenge the Lance O Meter (TM) and the obviously tounge in cheek call of the bottom!

  9. Incidentally, anyone using the word "dude" has obviously never lived through a depression either -indicating that in terms of life experience, you have no clue about living through a depression than I do.

    Hello Pot, its Kettle yere - your black!!!!

  10. Apologies for challenging the Lance O Meter.

    Got the "dude" from my grandkids. It rubs off on you when you hear it all the time.

  11. You know if we cut/trim the defense budget, which both B. Hussein and Johnny Mac have suggested needs to be done, Raytheon might be in for some downsizing.

    I'm just sayin'

  12. "Raytheon might be in for some downsizing."

    Ghad - not to worry though. Ive done some regression analysis so I know it cant happen.

    Got bacon?

  13. "Ghad - not to worry though. Ive done some regression analysis so I know it cant happen."


    How I love thee, Sizzle-Lien!

  14. "How I love thee, Sizzle-Lien!"

    Thank you my minions - I am glad to know my sage counsel is appreciated. If I may, direct your attention to my earlier entry that went largely unnoticed

    Note too, the presence of the evil popcorn man...Fear not though, for he will be vanquished through our collective strength. Faux Bacon is vastly surperior weaponry to Popcorn, and our armies will ride to victory and free Palos Verdes from the tyranny within!!!!

    Got Bacon?