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Understanding Where Politics and Finance Meet
Posted by: reachablestar (IP Logged)
Date: March 18, 2008 02:00AM
I recently had a lunch meeting with a bright, popular NYC hedge fund manager. He outlined the severity of the sub-prime crisis and foresaw gov't intervention to prevent collapse. We agreed that America's new president, on day one, would use a government agency to buy all these toxic sub-prime loans. This agency would administer the loans while providing credit counseling and greater flexibility of terms than banks can provide. The US gov't did this once before during the Great Depression. That agency actually closed its books in 1951 showing a small profit.
Recent events have overtaken our timetable which we should have easily forseen considering how toxic we knew this mortgage paper to be. Sometimes it's hard when you're short the market to see how the gov't will act decisively to stop a collapse. A casual look at US history since 1929 shows that they normally do.
It now seems that there is no way that a government bailout of sub-prime mortgages is going to be able to wait until January 22, 2009. Bush, in all his ideological denial, is probably being schooled daily on the increasing severity of the crisis and the risk to the backbone of the US and World financial systems.
I predict that Paulson and Bernake will keep coming up with creative uses of Fed tools to continue buying time. Ultimately, however, the Congress (or possibly just the Fed) will act to end this crisis before financial armageddon is unleashed upon the world. On second thought, Congress isn't going to let the Fed and Bush get all the credit for this and even Bush isn't so out of touch or ideological (or just plain dumb enough) to risk a legacy of being tarred as the "Herbert Hoover of the 21st Century."
A likely scenario is that an act of Congress harkens back to the Great Depression and institutes a "Relief, Recovery and Reform" package. That's what they called it in the 30's.
Relief will come in the form of the current tax rebate, buying troubled mortgages and helping buyers stay in their homes. Recovery may come thru infrastructure spending projects or perhaps just helping the mortgage holders will spur recovery. Reform will come in the form of a slew of new laws aimed at preventing such things from happening again. Unfortunately, such things will happen again. Human nature and greed will find a way to game some other part of the financial system probably about 7 years from now or so. The best an investor can hope to do is recognize the signs of bubbles, manias and the madness of crowds.