Diary

Two Bad Plans Don't Equal One Good One

Good Friday means the markets are closed and thus it is a slow news day.  But, as I cracked open my Wall Street Journal, I came across an interesting op-ed piece written by Michael Pereira on solutions for making the bank rescue plan a success.  In his piece, Mr. Pereira outlines some of the key concerns that investors have in regards to the Public-Private Investment Programme, and although he attempts to explain how the plan theoretically addresses those concerns, I am afraid the main message that I (and no doubt many readers) walk away with is just that many concerns remain, with no real long-term solutions in sight. 

In brief, the article outlines four key concerns that the markets have with policymakers’ efforts to rescue the banking system, specifically in relation to the emergence of Public-Private Investment Funds (PPIFs).  First, investors are concerned about the idea of “partnering” with the government.  Second, investors are wary of future gains being overshadowed by new tax programmes that Congress and the Obama Administration are promoting.  Thirdly, since the forming structure of PPIFs involve “rigorous [government] oversight,” investors are hesitant to get involved in a “partnership” where they have less than a partner’s say in the matter.  And finally, some foreign investors are concerned that these funds will leave them exposed to U.S. taxes.  

To be perfectly honest, I am not so concerned about the fourth item, primarily due to the fact that the laws are set-up to prevent this from happening, in addition to the fact that the structure behind the PPIFs will not require such a burden on private investors that are already exempt from U.S. tax requirements.  The author explains this in further detail, which I will leave to you. 

Furthermore, the problems with this model being proposed by the government is more practical in nature, as opposed to problems around the actual execution of the programmes.  What I mean by this can be explained in the first and second points outlined by Mr. Pereira.  

Let’s get something straight right here and now … no one really wants to “partner” with the government, because in essence, no one actually “partners” with the government.  The U.S. government is a behomoth plagued by inefficiencies that represent the worst aspects of true economic efficiency.  There’s a reason that people are pessimistic about the government getting things done, and it isn’t just in their heads.  So, when I am thinking about my role as an investor and the targeted objectives I have in that role, depending on the government to drag it’s fat a** across the finish line in a reasonable amount of time is not very appealing, particularly when the far majority of investors have plenty of challenges they’re already dealing with.  

The points below are how the author responds to the concerns outlined above … 

Specifically, with respect to the first two issues, the government can offer participating funds reasonable exemptions from any future regulation or tax that would otherwise hit them because of their participation in the PPIP. On the third issue, the FDIC can soothe concerns by issuing detailed and binding guidance on its oversight rights.

Forgive me for being a little negative here, but these “explanations” hardly address the heart of the concerns that investors have with the government’s initiatives around the Public Private Investment Programme (PPIP).  In terms of the concerns around taxes, I think that’s actually the smallest concern investors should be thinking about.  Although we’re not completely exempt from new tax burdens emerging through new government policies, I don’t think this is a direct concern for investors in the short run. 

However, the idea that the FDIC can aleviate concerns through the issuance of “detailed and binding guidance” on oversight rights is hardly sufficient for me to feel comfortable partnering with the government.  I’ve already commented on the time and urgency concerns I would have, in terms of trying to stay nimble with the equivolent of Peter Griffen trying to run a marathon against Olympic marathoners from Kenya.  But, that’s just part of the concern. 

The thing I would really be worried about is that the government can change their approach and role within these programmes just as fast as they established them in the first place.  You see, as an investor partnering with the government, we move from being dynamic players playing within the activities of the marketplace as the game, to being thrown at the whim of a volatile political landscape, which is no doubt only going to get worse as we near another election cycle next year, which by the way will come at the same time when the markets will be most likely to show more long-term turnaround.  And that’s just one point in a world of new concerns to worry about as a “partner” of the government. 

So, the idea that investors are going to rebuild the marketplace by “partnering” with the government is not only unrealistic, it will likely be a stimulus for increased exposure to unnecessary risk and increased volatility, in which case, we will be left without the flexibility to act as nimble investors, because of the “partnership” dragging us down.  Moreover, there are more concerns in this overall picture as well, such as why the government really wants to “partner” anyways, instead of remaining at a distance (as they always should in the markets) and let the market correct itself and then the strong and most nimble players will emerge therefrom.  I think the oversight variable here is extremely big, and it is no doubt a major reason why the government is interested in “partnering” with private investors.  

The previously implemented plans to “rescue the markets” have been no more successful than if we were to sit and do nothing.  I was a supporter of TARP, not because it was a good plan, but because I believe in the role of the Fed as the lender of last resort (and it was a time when the LOLR was needed).  But, a good plan it was not.  Moreover, it led to what I believe was one of the worst pieces of economic policy since the New Deal – the stimulus act, which was a $900 billion blindfolded spending spree sans strategy and complete with an 8% increase in the federal deficit.  And, now we’re here staring in the face of another plan that shares the fate of being doomed to failure that it’s predecessors in Obama economic policy shared (I know, TARP was a Bush economic policy, so yes, the blame in this case goes beyond the Obama Administration).  

But, I think investors still have plenty of opportunity to “just say no” to government inefficiency, and instead, turn to efficient strategies that will lead to long-term sustainability.  The government forcing inefficient solutions (or perceived solutions) is not going to result in growth that is sustainable over the long run.  As I said yesterday, such a thing is just another short-term strategy that policymakers in Washington are turning to so save face and look like they’re doing something to fix this mess.  In the long run, they will only make it worse with things like this.

[NOTE] This post was originally published on the author’s blog at www.reiboldt.com.