Monday, March 23, 2009

Obama and Geithner's "Money PPIP"

So far, it looks like the White House couldn't make up its mind what to tell Martin Crutsinger about the name of the new bureaucratic boondoggle. This version of his article calls it the "Public Investment Corp." This version calls it the "Public-Private Investment Program."

I prefer "PPIP" because it sounds like the 1986 comedy with Tom Hanks and Shelley Long, so named because the lead characters keep pouring money into a house that's falling apart. The federal government is simply pumping our money into sustaining companies that should be allowed to fail, and propping up asset values that need proper valuation. Once more, the government has been behind everything that precipitated this mess, from instituting mark-to-market accounting at the worst time possible to "rescue" efforts like TARP and PPIP that prevent us from placing true values on these assets.

Few realize how government has sparked the "crisis" and is purposely continuing it. I've written about this across many posts over several months, but I'll put it all here; just follow my explanation for each link in the chain. Right when markets panicked and CDOs and other securities plunged in value, the feds deliberately imposed mark-to-market so that banks' balance sheets would be impacted negatively -- and banks are forced to cease lending if their net assets became negative. The assets are deemed worthless, though, only because TARP and the like are discouraging people from sitting down and determining a real value (as opposed to a bureaucrat's politically motivated guess). Let's say an asset on the market is worth 1 cent on the dollar, and an investor might buy it at 10 cents in the hope it will eventually be worth 50. But the feds are talking about buying it at 70 (easy when taxes always come from other people!), so how can anyone determine the true value? Why would anyone bother?

See, it's all "legal" when the feds create a shadow holding company to hide AIG's bad assets on another ledger, the same fraudulent practice that got Enron and WorldCom in trouble. When it comes to mark-to-market, however, banks must list all assets on their balance sheets, thus assuming all liability for losses! So when one doesn't have positive net assets so it can lend under FDIC rules, the feds so graciously step in with a cash infusion (courtesy of everyone who doesn't make a living via government, in the form of taxes and inflation). Now PPIP will "help" banks by effectively whiting-out these assets, putting taxpayers even more on the hook for the initial purchase plus any future losses. The circle is complete.

I've explained before that "There's plenty of investable money around the world, but no one wants to sink it in *these* securities. They're really that bad. Even Warren Buffett wants the federal government to bail things out, instead of seizing a profit opportunity and jumping in himself. Surely he could put up a 'mere' $1 billion without blinking, but he's smart enough to recognize that the possible returns aren't worth the current asking price." Why do so few see the warning sign that when the private sector is staying away from buying these assets, maybe they're not such great deals? Now, a lot of these assets are worth next to nothing and even zero, but some still have value. Who's to say that a particular security, comprised of notes from such-and-such a neighborhood, isn't a good return in the end? Actually, none of us can -- unless you're well-connected with the government, none of us can really tell if any given neighborhood has people who will get a housing bailout!

Note that I was wrong, though, about the source of the funding for all these programs. However, last September I (and most people) just couldn't imagine the initial $750 billion TARP, then the $787 billion "stimulus," the $1.2 trillion the Fed recently announced it will create, and now the new $1 trillion so that the Treasury can buy up "toxic assets" under PPIP/PIC. Every new dollar that the feds are spending can come only from whatever new money the Fed can create. There just isn't enough of a tax base; there just isn't enough money to borrow.

Trillion, billion, the prefix to the "illion" has sadly lost all meaning. This is pure insanity, and with Obama and Geithner accelerating what GWB began, things will stop only with a disastrous crash.

Update: what irony in Christina Romer's misuse of "silver bullet." Over time, it's been twisted into the simple meaning of something that will work effectively. Proper usage refers to killing an otherwise invulnerable creature (like vampires in old pre-Stoker folklore, or Wolfman in modern monster tales). Romer said, "I don't think Wall Street is expecting the silver bullet," so Wall Street had better beware.

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