I Am Toning Down My Disagreement With Buffett
I had been critical of Buffett regarding his thinking behind the government bailout but I am changing my opinion slightly. Buffett seems to be of the opinion that the government is going to buy the mortgage assets at market prices. He seems to repeat that point several times in his Charlie Rose interview. This seems to go against the Bernanke and Paulson notion of using "hold to maturity" prices.
If you buy at market prices then there is low risk for the taxpayer and the government doesn't need to punish anyone by seeking an equity stake. It will also be hard to game this system.
In any case, this bailout still doesn't inject capital into the banks nor does it increase confidence in any of the financial institutions. You will end up swapping mortgages for cash but the banks can already do that right now. Contrary to what many seem to believe, the problem is not a lack of money. There are many private equity, foreign central banks, and private investors with cash sitting on the sidelines. You can sell to these funds at (depressed) market prices if you wanted to. The massive injections of liquidity by the central banks also implies that cash is not a problem. For instance, if capital was short, you would see interest rates skyrocketing but that's not the case. Companies like Microsoft, regardless of how strong they are, would face some difficulty issuing debt yet Microsoft isn't facing that. The real issue is trust! No one trusts anyone or anything.
It's not that interest rates are rising and companies are unable to pay them. Rather, the market has almost completely dissapeared because of lack of trust. The commercial paper market that a lot of businesses rely on for short-term financing--I am talking about non-financial institutions without questionable mortgage assets--is not functioning properly.
Some suggestions that are floating around, such as the goal of getting the Federal Reserve to intermediate transactions between banks that don't trust each other, can help significantly.
(BTW, looks like I sold my TSX inverse ETF too early, as always. Missed out on big gains today. Oh well)
If you buy at market prices then there is low risk for the taxpayer and the government doesn't need to punish anyone by seeking an equity stake. It will also be hard to game this system.
In any case, this bailout still doesn't inject capital into the banks nor does it increase confidence in any of the financial institutions. You will end up swapping mortgages for cash but the banks can already do that right now. Contrary to what many seem to believe, the problem is not a lack of money. There are many private equity, foreign central banks, and private investors with cash sitting on the sidelines. You can sell to these funds at (depressed) market prices if you wanted to. The massive injections of liquidity by the central banks also implies that cash is not a problem. For instance, if capital was short, you would see interest rates skyrocketing but that's not the case. Companies like Microsoft, regardless of how strong they are, would face some difficulty issuing debt yet Microsoft isn't facing that. The real issue is trust! No one trusts anyone or anything.
It's not that interest rates are rising and companies are unable to pay them. Rather, the market has almost completely dissapeared because of lack of trust. The commercial paper market that a lot of businesses rely on for short-term financing--I am talking about non-financial institutions without questionable mortgage assets--is not functioning properly.
Some suggestions that are floating around, such as the goal of getting the Federal Reserve to intermediate transactions between banks that don't trust each other, can help significantly.
(BTW, looks like I sold my TSX inverse ETF too early, as always. Missed out on big gains today. Oh well)
Hi,
ReplyDeleteRodrik's comment on Paul Krugman's model seems relevant to the contention on the validity of the bailout.