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Why the Bailout Cannot Solve a Thing: Nobody Is Blaming the Right Culprit

by: Enzio von Pfeil October 03, 2008 | about stocks: EWH / EWJ / FXI / PGJ    
Enzio von Pfeil

Enzio von Pfeil

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Excerpts from Dr. Enzio von Pfeil's October 3, 2008, appearance on Channel News Asia:

  1. Dr. Enzio, some say the bailout package doesn't address underlying problems, and that it is not going to prevent the US economy from falling into a recession. Do you share this view?
    • It does not address the culprits to be blamed. The common denominator is “conflicted research”. Where were these guys in the build up to this volcano of greed and avarice?:
      • Rating agencies.
      • Regulators.
      • U.S. Congress.
      • At some major investment banks, surely the “chief economists” and “chief strategists” who decided that securing their own bonuses and jobs – on the orders of these banks’ proprietary trading desks – was more important than giving an objective assessment of what was happening? Even the blind would have recognized that at recession/stagflation was in the making as early as 2006! We “called” stagflation in May 2006.
    • Besides which, the Economic Time™ has been worsening in America since 2006; however, given the point that I just made, by deliberately misleading the investing public, these highly paid individuals have wasted many institutional and personal investors’ money…I wonder when they will be investigated by the FBI?
  2. But, a package will go some way to restore confidence in the markets. And, there is no question that the US financial sector needs to be restructured. So, what else could the US government do?
    • Yes, and this is the good side of America (one of the places where I grew up): Americans act more decisively than the other cultures which I have grown up/live in.
    • So yes, it is a true “bailout”, which is a nautical term….
    • And in the short-term, what the Administration and Congress are doing – firefighting – is fine.
    • But the real solution to this problem is simple: NOT “more” regulation, but more self-regulation – and more un-conflicted research!
      1. We recently had dinner with an old friend in Germany. He is partner in a private bank there. He is liable for five years after he leaves his bank for any of his decisions…..That law in America would do wonders in curtailing avarice that ultimately is paid by tax-paying “Ma and Pa Kettle” in Eugene, Oregon…
      2. Next to self-regulation, the other solution has to be to ensure that un-conflicted research is written. How about splitting brokers from their research providers?
  3. The housing credit crisis is already spreading beyond the US to Europe. Will there be a spillover to Asia? How is it going to affect Asian economies?
    • Badly.
      1. First, just because Asian banks are not telling us what is really going on does not mean that “everything is ok”. Witness our recent bank run in Hong Kong: the population is nervous and trigger-happy.
      2. Secondly, in the real economy, slower imports by Americans and Europeans have to hurt Asian exports.
      3. Thirdly, higher US bond yields (off the back of higher US federal debt) will drive up Asian debt yields, hurting the property market.
  4. Are we going to see a repeat of the Asian Financial Crisis more than a decade ago or are Asian economies fundamentally strong enough to weather this turbulence?
    • No, no repeat pattern of the Asian financial crisis.
    • This time, things are “different”, and their gravity is more severe:
      1. Stagflation. We are moving into stagflation.
      2. Volume. The size of the US derivatives market is USD 455 trillion-that is THIRTY times the size of the US economy!
      3. Speed. Also, with the internet, information just travels so much faster….exacerbating greed and fear…

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This article has 14 comments:

  •  
    Oct 03 04:14 AM
    watched your interview on channel news asia (singapore). i had one question: why cannot the majority of the most explosive derivative contracts be legislated as null-and-void (all payments to be returned)?
    Reply
  •  
    Oct 03 08:26 AM
    The base cause of this is greed. It infected every part of the capital system whether it be homeowners, politicians, banks, rating agencies, and regulators. We have all experienced the ugly side of capitalism and now we need to fix it.

    This contraction is going to be brutal and humbling. Dr Enzio I like your point of accountability of holding German bankers accountable and this should be applicable here in the states. My other question where were the board of directors on these investment decisions by these CEO's of these banks?

    Reply
  •  
    Oct 03 08:57 AM
    capitalism isn't to blame. Its the government. They are the ones who urged lenders to have lax lending standards....plus they set interest rates. This all started in 1999 under the clinton administration for to increase home ownership rates among minorities and low-income consumers. Ground zero started at Fannie Mae as a pilot program.

    Capitilism is not the cause of these failures....its the government. They set up the conditions for the housing bubble...and even encourged it.

    and the sad part is.....they tried making homes more affordable....and they did the exact opposite. I don't think the government tries to create bubbles....they are just THAT encompetant.
    Reply
  •  
    Oct 03 09:12 AM
    incompetent.
    Reply
  •  
    Oct 03 09:18 AM
    @ Andy
    Governments don't set interest rates. Central banks do. In theory, they're independent from each other. In practice, it probably varies.

    Re the housing bubble, governments didn't instruct banks to lend more than 100% of the house value to low income creditors. The banks figured this out on their own. Again, not the governments' fault.

    Reply
  •  
    Oct 03 11:04 AM
    Maybe your analysis is factually workable, but it overlooks the problem with US consumers who are literally out of the market for anything beyond subsistence goods. This says the US recession will become the central problem and one the US and worldwide are not willing to acknowledge and deal with presently. We can agree that the policy makers missed the target badly. The credit default swaps are the lose end of the derivatives market and the one that will lite the fuse for the final blow. The Treasury deal is just a diversion to avoid, if we can, the house of cards in CDS.
    Reply
  •  
    Oct 03 11:17 AM
    Oh please. I have just about had it with people blaming the financial crisis on too many black people getting mortgages. I know I can't stop you from doing it, so I will just vent -- AAAAAAAAAAAAARGH! At least our international readers will see that not all Americans are ignorant in this way.
    Reply
  •  
    Oct 03 11:52 AM
    SuperBOB, The FHA guaranteed 103% loans back in the 80s.
    Reply
  •  
    Oct 03 12:17 PM
    THE CULPRIT IS STOCK OPTIONS AND BONUSES.

    WHEN SOMEONE GETS A STOCK OPTION THEY SHOULD HAVE TO PAY INCOME TAX ON THE BLACK SCHOLES VALUE OF THAT OPTION AT THE TIME OF GRANTING.

    BONUSES SHOULD HAVE A 3 YEAR CLAWBACK PERIOD
    Reply
  •  
    Oct 04 01:08 AM
    selene,

    No one said it was just "black people", although back in the 80's, the largest "minority" was Afro-American. Enough foolish "white people" jumped on the band wagon, once it started rolling.
    Reply
  •  
    Oct 04 06:55 AM
    1957 Bought three room house. payment & escrow= one week pay.
    1960 Bought five room 0ld house. same formula.
    1964 built 3 bedroom brick home. same formula.
    2008 retired and owe NO ONE!
    Reply
  •  
    Oct 05 02:42 AM
    Let all the banks fail if they can't compete or made poor decisions. Let the Treasury set up a U.S. National Bank that will make commercial loans and write mortgages to creditworthy people all day long at fair interest rates. Have the FDIC insure the deposits of the failing banks, but if the banks have not maintained adequate reserves to pay the under $100k depositors, put the bank presidents in jail for a decade or two on fraud charges or other criminal charges (they must be guilty of something; if nothing else, we can detain them indefinitely as financial terrorists and send them to Gitmo). I suspect the number of bank failures would magically diminish overnight, with executives taking pay cuts, reducing dividends and taking other measures to ensure financial stability. Meanwhile the U.S. National Bank would be making huge profits to generate a surplus. Foreign investors would swoop in and buy up the failed banks from the FDIC for pennies on the dollar, and we'd be back in business (after a severe recession, I admit). Then we could dismantle the Fed (a private, for-profit bank), since we'd have a national treasury from our surplus. Once the surviving commercial banks got rolling again, we'd liquidate the U.S. National Bank and turn it into a sovereign wealth fund, and have it be a national endowment for America, investing in profitable energy research companies and other real assets. After a few decades, if properly managed, the average American would pay no taxes, because we'd have enough growth in the endowment to start subsidizing our people. The Kuwaitis and Saudis do it. Why not us?
    Reply
  •  
    Oct 05 04:20 AM
    No down payment, no need to prove employment, the option to pay or not on an irregular basis, monthly mortgage payments low enough that it was cheaper to buy a home than rent an apartment. The ability to get a home equity loan 25% more than the home was worth.

    What did the Government expect with these type of enticements. The Realtors, Banks, appraisers, Celebrity endorsements all and sundry piled on and looked the other way as long as they were paid.

    After the Internet Bubble, people were looking for a safe haven to invest there money. Along came housing and all of Congress pushed it as the American Dream. Own your own home, it will never go down in price.

    It didn't matter. Young, old, religion, race, rich, poor everyone was sucked into this. It was too good to pass up. And it wound up as being too good to be true.

    Everyone was to blame in some form or another, people who couldn't get a loan and suddenly could didn't question why. Those who should have known better looked the other way.

    When it all started to become unglued with the initial Sub-prime exposure, it was estimated to be $50 Billion. The Secretary of the Treasury was the former head of Goldman. He was part and parcel of the system that created the packaging and repackaging, leveraging and releveraging of the present House of Cards. Why hasn't anyone asked why he never informed B. Bernanke of the actual situation. Or if he did, why did the Fed Head(like in potato) ignore the facts presented.

    It could have ended before it began in earnest. Sub prime could have been guaranteed by the Fed/Treasury and The Mark to Market Rule could have been suspended indefinitely. They knew but they let it play out to the present situation.

    So instead of being treated as part of the problem, they are being treated as the heroes coming to the rescue. This is how I see it, my opinion only.

    Reply
  •  
    Oct 05 12:43 PM
    Basic math dictates that if interest rates are set lower than inflation, asset values will skyrocket, towards infinity, until something eventually gives. Regulation or not, it is a single-parameter problem: Interest Rates.
    Reply
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