Mar 9

Stewart v Cramer: Financial Populism and Bailout II

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“These guys’ companies were on a Sherman’s March through their companies, financed by our 401ks, and all the incentives of their companies were for short term profit. And they burned the f–ing house down with our money and walked away rich as hell, and you guys knew that that was going on.” – John Stewart, The Daily Show, 3/12/09

Most of the media covering the media lashing provided in the recent Stewart v Cramer interview thought it was all about them.  Mr. Stewart lambasting CNBC and its ilk for covering investing as a game instead of a serioius part of our long term economic well being.  However, like the egotists noted by Stewart, the media has once again largely missed the underlying point:  The public is generally upset with what has occurred in the markets and blames ‘those in the know’ — and that will soon include the architects of the numerous attempts at bailing out the financial sector.

You can already here it in the lambasting of the Billions given to companies like AIG, Citicorp, et. al. on other comedy shows.  And, remember, it is the palace ‘fool’ who can safely say things that the palace ‘advisors’ would never say in public. 

There is little doubt that the financial sector will continue to require more ‘bailouts’ as the ‘Greatest Deleveraging in the History of the World’ continues.  And, as before, some will applaud and some will complain about those efforts.  However, the next set of measures MUST take into account the significant public outrage and, some may call it, class warfare, caused by what has occurred and the results of the previous bailout actions.

Thus, we will, once again, bring up the idea of the Federales setting up an agency to become the biggest landlord in the world and buy all foreclosures, fix them up, cut the grass and rent them out…and, importantly, keep them OUT of the supply of homes for sale.  Eventually, perhaps a decade or so later, we can always begin the process of selling them…slowly… into the market.  This supply reduction would put a floor and, dare I say, put some mild upward pressure on home prices in some regions.  And, if home prices stop declining, we can begin to get fair pricing on risk assets like MBS, ABS, etc.

We also think that growing financial populism makes it very difficult for the Federales to inject more and more billions into the zombie infected institutions like AIG, Citicorp, etc.  A fairer, and perhaps more transparent solution?  Break them up now.  Distribute stock in the operating subsidiaries to the existing shareholders (that includes ‘we the people’) and have the Federales start a new agency that takes on the risks that cannot be sold (for AIG, that would be risks like the CDS positions, etc.).  Who would manage these positions?  There are a lot of out of work folks on Wall Street who would welcome a government salary versus zero income.  And, finally, because ‘we the people’ have no business being in some of these risks, like CDS, perhaps we could make illegal all CDS contracts after a certain date in the US and work with other developed nations to outlaw these derivatives.

The key in both of these future baiout ideas is that no dollars go to prop up zombie infected instittuions…and they can produce solutions that fit within the growing financial populism and related class warfare that appears to be growing as unemployment rates rise, providing the population with time on their hands.