Assumptions can Kill You (and your economy)

Those most familiar with the industry – the folks who made millions, even billions from a business sector – are the best suited to become the federal regulators who can oversee that sector. After all, they are clearly the most knowledgeable. The “best protector of hen houses would be the fox” theory of government. Let mining and logging interests become the environmental “deciders,” petroleum industry barons draft and implement oil-related tax and regulatory statutes, and investment bankers and financiers rule the SEC, Treasury and Commerce Departments, etc.

We cannot apply the Constitution of the United States of America , which every elected federal official is sworn to uphold, when times get tough. That’s the “when times get tough” exemption in Article… er… I can't find it, but I know it’s here…. We should let power concentrate in one branch of government, surely an efficient choice, without legislative and judicial checks and balances, and we know that the executive branch has everything under control and will always make the right decision.

Our houses are really our saving accounts, which will be there on a rainy day and we can use a home loan or a HELOC (home equity line of credit) to cover an emergency, a lay-off or putting our kids through college. We really don't need a separate savings account, since home prices are solid, right?

We are the most competitive nation in the world; we rock, so we really do not have to fix our infrastructure or educate our children, because we are Americans and we are so far ahead of the rest of the world!

We do not need government interference in business, since corporate America is responsible and will not pollute our air or water and they will only sell pure food and drugs without all those terrible regulations. We need to be more like the wild laissez faire markets of Asia , real “capitalism”!

We don't need government to run Social Security – that's too “socialist”; we'd be much better off if individual Americans could instead invest that same money in the stock market instead of having the government administer the program! The private markets will make that social security payment much bigger. Hey, we don't want government in health care either for the same reason.

I’m Peter Dekom, and I am shaking my head.

What’s Going On?

Okay, the Treasury just announced that is implementing that part of the bailout that raises the government guarantees on bank deposits, even beyond the $250,000 per account temporarily increased Federal Deposit Insurance Corporation (FDIC) coverage that was specifically approved. About $1.5 trillion in bank debt and half a trillion dollars in deposits in banks and savings & loans will be eligible for new government guarantees, and the program will expand to providing unlimited coverage for “non-interest-bearing accounts” and the highest levels of unsecured loans of such lending institutions (debt that is not tied to a security interest in a specific asset or revenue flow). That’s good. Sort of a back-handed way of doing a modified European plan.

But since it doesn’t apply such open-ended to protection to the larger interest-bearing accounts, it a. doesn’t reward saving and depositing money into banks and savings & loans where it would provide liquidity, and b. doesn’t exactly guarantee banking in the broad-based, confidence building assurances found in Europe. Coupled with a cram-down of the Treasury’s new forced preferred stock buy-in (which carries interest at 5% for 5 years, and 9% thereafter) on all levels of banking, whether they want it or not (hey, is that the American way?), we are a long way from seeing the credit and stock markets issue a vote of confidence in the new bailout announcements from Treasury.

Sure Treasury seems to be trying to level the playing field by making solid banks carry the same preferred debt load as the smaller banks that might (few seem to want it) need the Treasury’s money with that huge and expensive interest string. But how do banks pay for higher costs? Trust me, they will find a way to sock it to the consumer and the business borrower. By putting borrowers and transactions in higher risk categories – even where not necessarily merited – they can raise interest rates charged at the grassroots level. Raising financing & service fees and transaction costs is another route.

So Treasury wants the taxpayers to benefit from the interest they believe will be generated by these preferred stocks, except that the same taxpayers – directly or indirectly through higher prices – are funding that same interest cost (because the banks are passing it on to them anyway). Huh? So Treasury is prepared to let confidence and trust in the credit markets erode further – with all the nasties that I have described in earlier blogs – just for the cosmetic appearance that the banks are paying the load? It doesn’t matter that the money they are putting in one pocket is the same money – less a transaction charge – they took out of the other pocket… of the same taxpayer’s pants? And still nothing directly for the homeowners and small businesses?

The markets are plunging, and we are watching you, Mr. Paulson!

I’m Peter Dekom, and I approve this message.