Wednesday, 28 January 2009 23:00

I guess I need to go back to DC

From Bloomberg on Stimulus Bill Mish-Mash:

Senate Version

The Senate version of the stimulus bill already differs from the House plan. The Senate Finance Committee voted this week to add a $70 billion alternative-minimum tax cut to the package.

Lawmakers in the two chambers also differ over how much to spend on highway projects, renewable-energy tax breaks and expanding access to broadband.

Senate Minority Leader Mitch McConnell, a Kentucky Republican, said the House plan doesn’t include enough tax cuts and that many of them that are in the bill would go to those who don’t pay federal income taxes. He said Republicans want to add provisions aimed at fighting the housing crisis by having the federal government back fixed-rate 4 percent mortgages. Why? Why! Why?

“It’s clear that we need to go directly at the housing problem,” McConnell said. “Republicans have a proposal for lower-interest rate mortgages that we think would help ease the problems that started the economic downturn.” Oh, that's why. Let me quote this again, “Republicans have a proposal for lower-interest rate mortgages that we think would help ease the problems that started the economic downturn.”. I'll forgive Senator McConnell since he may not read my blog, but lower interest rate mortgages (in combo with "It ain't my money" style underwriting) is what provided the fuel for the economic downturn. We wouldn't be in a downturn if we didn't climb so damn high up the bubble mountain in the first place. Now, you want to bring us back up to the peak of market distortion?! Overproof rum makes a pretty poor remedy for a hangover! I really don't understand why politicians think that more of the problem will lead to the solution! Interest rates are already hovering near a historical low. Houses are not selling, except for the synthetic sales which are actually banks flushing bad assets out of their system at lower and lower price points. See my explanation of this phenomena (be sure to review the comments below the article), and the more detailed review by Mr. Mortgage.

True stimulus in an environment such as this should not rely on dated and stale academic dogma. No tax cuts, no cutting already very low mortgage rates after a low mortgage rate inspired property and credit bubble, no additional nonsense. Let the fragile break, let the insolvent fail, and let the imprudent risk takers face the consequences of their actions. I heard Nassim Taleb state the other day, that the US is allowing the pilot that crashed the plane to continue flying. Here are some REAL solutions to some very real problems:

  1. Stimulus dollars should be spent on direct stimulus. The smaller community banks and private investors should be given guarantees (similar to those used in government guaranteed student loans) for lending to small businesses. This will create a multiplier to leverage government funds by a multiple, stimulate lending, but to a sector than is not overly bubblified, and most importantly - it will create jobs, and it will create jobs now, not later, next year or whenever.
  2. Stimulus dollars should go into very limited guarantees (ex. non-recourse loans) to risk takers who are willing to sift through the garbage of the big and medium banks and buy the assets off of them. I know I would be first in line for such a deal. Now we have instant price discovery (albeit, not true price discovery since the government had to give away near risk free money, but beggars can't be choosers, now can they?), and a clearing out of bad debt. But that price discovery may bankrupt many banks, right? Well, it's going to happen anyway. It's just a matter of whether it will happen now, or then. At least with this plan, there is a less painful pricing point, due to the government's less intrusive (but still evident) market intrusion of supplying overly favorable access to funds.
  3. Admit the banking system is insolvent and let the (if not force the) most insolvent to fail. Solution number two (above) will insure that capitalists will be there to pick up the pieces before they even hit the ground and put them to work immediately, for the opportunity for outsized profit will create a mad rush. This mad rush will force prices to equilibrium, which is how Mother Market is supposed to work in the first place. Why let greed only effect this country in a negative way?
  4. Harness the massive stores of intellectual capital to be found in this country. Create perpetual licensing and financing arrangements for patented technology and ideas sitting idle in universities of this country. Combine this with idea number 1 above, and you will create a new technology and idea export boom. Think Google, Intel, Apple - all companies that created over a trillion dollars (combined) of wealth and productivity by leveraging patented ideas and technology found idle in our system of academic universities. This means, more jobs, more organically generated wealth, and more GDP growth. Remember, when people are making money, they don't need subsidized mortgage rates. They can buy their houses, cars and baubles, the old fashioned way - ex. through work and compensation for work.
  5. Once, we get back onto our feet, make real substantive investment in our public education system and make it accountable - without excuses. If you really want to give tax breaks, give them to for-profit elementary and high school enitities and sit back and watch them compete with public school system and the not-for-profit private schools. No matter who wins or loses, the students will win. Just imagine a high school where BoomBustBlog was required daily reading!
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Last modified on Wednesday, 28 January 2009 23:00


  • Comment Link 123burke Thursday, 29 January 2009 09:48 posted by 123burke

    Unfortunately, I shorted at 57, and the lowest it got was 55. Seemed hardly worth covering for two points. Oh well, I will sit tight for now.. My only concern, is perhaps people are trading down to generic brands during these tough economic times. Hope I'm wrong.

  • Comment Link Reggie Middleton Thursday, 29 January 2009 09:34 posted by Reggie Middleton

    No, it hasn't changed and there is no reason to be bullish on the company. I am saying that once you have money (significant profit) on the table, you should lock it in. You can easily lock in profits without closing out your position. It just costs you a little money if you are wrong.

  • Comment Link phirang Thursday, 29 January 2009 09:31 posted by phirang

    Seems that RAH still has plenty of downside at 60. I wrote a bunch of calls on it at this price recently, but I'm confused: the target price hasn't changed, right?

  • Comment Link Reggie Middleton Thursday, 29 January 2009 09:27 posted by Reggie Middleton

    PS Spreads on puts and SSF are murder, and SSFs arent' that liquid.

  • Comment Link Reggie Middleton Thursday, 29 January 2009 09:27 posted by Reggie Middleton

    Subscribers should have booked profits on a RAH short/put combo. I profited from it. Set a profit target (a realistic one) and once it is is reached, be sure to lock in profits. Depending on the situation, you can buy calls to lock in put/short positions, single stock futures, or simply close out the position partially or fully and go back in.

    I will post occasional cash management and risk management quips that have served me in the past.

  • Comment Link phirang Thursday, 29 January 2009 09:10 posted by phirang

    but Reggie's thesis on RAH was that their earnings were unsustainable, especially in a soft CPG market. I've been looong dated calls on RAH to cover the losses I have so far on my puts for RAH.

  • Comment Link 123burke Thursday, 29 January 2009 09:05 posted by 123burke

    Reggie has not looked at it in a while and I don't know if I shold cover my short. Any thoughts would be appreciated.

  • Comment Link phirang Thursday, 29 January 2009 08:57 posted by phirang

    choose one, because both are unsustainable.

    Also, Reggie, there may be some "upside" (;) ) with GS yet again: there's a bill circulating in the house to ban naked shorting of bonds, aka CDS' without underlying! You know what THAT would do to GS' earnings!!!

    I think Mr. Middletown has another appointment in DC!

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