2009-03-25 | Filed Under SteveG's Posts |
On March 23, Charlie Rose had a show discussing the pros and cons of the Obama bank rescue plan.
Follow this link to the video of the first half of the show.
Follow this link to the video of the second half of the show.
The first half of the show was with Andrew Ross Sorkin, Paul Krugman and Joe Nocera. Sorkin and Nocera are mainly journalists. Krugman is a Nobel Prize winning economist Professor at Princeton University and also a columnist for the New York Times.
The second half of the show was with Thomas F. Steyer – a San Francisco based founder of Faralon Capital Management whose clients are foundations and college endowment funds, and Daniel Alpert – Managing Director of Westwood Capital an investment bank in New York.
I happened to see the second half of the show live before I was able to view the video here of the first half.
Half way through watching the presentation by Krugman in the first half, I began to think that he really was ignoring a lot of the details of the Obama plan. A lot of what Krugman said was refuted in the second half of the show by representatives of the types of investors that Obama’s plan hopes to entice into working this issue out.
The second half of the show explained why the Resolution Trust model for rescuing the Savings and Loans won’t quite work in this situation. Most of the S & L banks were fairly small and the problem was small enough to be manageable. The current crisis involves some of the largest financial institutions around.
Contrary to Krugman’s assertions, the Obama plan is not to pretend that all banks can be made solvent again. As explained in the second half, the idea is to make as many of the banks solvent again as is
possible. Then whatever banks are left that must be put into receivership represent a small enough bundle that they can be handled like the S & L problem.
Even Andrew Sorkin fails to see the substantial difference between the Krugman plan and the Obama plan. To use some leverage to accomplish with your money more than you could with 100% usage of cash is not a trivial difference and it is not smoke and mirrors.
Krugman does not seem to understand how the investment business operates. He talks about having investors pay more for the assets than they are worth as if knowing what an asset is worth is a trivially
obvious thing to know. As explained in the second half of the show, the worth of an asset to an investor crucially depends on the financing arrangements to buy the assets. If the asset can be financed at a low interest rate, then you can afford to spend more for the asset and still make a profit. Anybody who has been able to buy a more expensive house because of lower fixed rates on the mortgage interest knows that this is true.