I'll be honest here: I spent a good part of today trying to figure out what is going through Tim Geithner's head and I have no idea. To great fanfare he announced the Treasury's new plan of attack against this crisis but the only change I detected was that is should be larger and more transparent. Well thank you Captain Obvious. Really, this is your great plan Mr. Geithner?
According to the speech's text, it is a three-pronged strategy very short on detail. Has Tim learned nothing from watching the crisis unfold: empty speeches make the matter worse. Just ask Hank.
The three legs to this wobbly stool are: A more transparent, restrictive and comprehensive form of providing capital to banks- basically Paulson's version of the TARP with window dressing. Second is a public-private investment vehicle presumably, but one can't be sure due to the lack of detail, "bad bank" strategy. This is merely a more evolved form of the original TARP purpose: to buy bad assets. Third, to help jump start lending by "supporting" consumer and business lending. This third leg entails expanding existing Fed programs.
Perhaps most frustrating, was this sentence in the speech "we will seek input from market participants and the public as we design it." Are you kidding? What have you been doing for the past two months then? No wonder the stock market fell 5% today. I am fast losing confidence in the vaunted Obama economic team. Frankly, I expected more- a lot more from Geithner. Let's hope he has a lot more juicy detail to provide in the coming days.
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I'm not a Financial Guy, so I'm curious to hear what you Rationally Thinking Financial Guys think of the following:
ReplyDeleteIs the core of the financial crisis uncertainty? I've heard arguments that the crisis started because of all these illiquid, opaque assets made everybody uncertain about who was solvent and who wasn't.
And that the crisis is continuing because:
a) That's still uncertain. And:
b) There's even more uncertainty because the Fed and the Treasury keep changing the rules, trying different things.
That seems correct to me; it seems like any concrete, certain policy (even a "bad" one!) would be better than Mr. Geithner standing up and saying "we're not sure EXACTLY what we're gonna do, bear with us..."
Great question/observation Gavin. You may not be a "finance guy", but you do grasp the concepts very well. On to your question:
ReplyDeleteUncertainty is ALWAYS a problem in finance. Investors abhor uncertainty- after all, if you are giving your money to a third party (which is what all investments are), you want to be reasonably sure what to expect.
In times of crisis, uncertainty increases greatly which affects how much risk investors are willing to accept (or conversely, how much they are paid for the same amount of risk. This is known as the 'risk premium'.) ALL forms of uncertainty have this effect, whether it be war, terrorist attack, uncertain election, etc.
It becomes a bit philosophical to say that 'the crisis started because of the uncertainty'. It is more of a valuation problem- if I can't be reasonably sure of the value, I don't want any part of it. That is 'uncertainty' by definition, but not exactly the same. Investors are always willing to assume risk- at an appropriate price. If you can't figure out that price even roughly, you won't invest.
But uncertainty is only part of the problem. Once the problem was identified- that the financial system is nearly bankrupt- a new can of worms is opened: do we sink into the abyss or is there a cure? Is the cure almost as painful as the disease (abyss)? These unknowns escalated into outright fear last fall, which is why Paulson and Bernanke had to do something. Honestly, anything big, dramatic and/or unprecedented would have worked to break the nose dive.
Today, Geithner is not introducing uncertainty (we know it will cost a lot and take sweeping action) as much as causing a lack of confidence. If it seems like I am parsing words, I probably am. There is an enormous emotional component to the financial system because we are all human. (This is a great argument against free-market fundamentalists BTW). A Vulcan would be a super-investor. Perhaps Buffett is part Vulcan?
Ben Graham once wrote that "in the short-run, the market is a [emotional] voting machine; in the long-run it is a weighting machine". I inserted the 'emotional' for clarity. He meant that the market collectively votes with emotion or popularity day to day, but eventually it weighs the facts and prices accordingly.
I do think a 'bad' but certain policy would make things worse medium-term, just as some of Roosevelt's policies prolonged the Depression. But Tim & Co should know full well that when you do have a plan that is NOT in the midst of a death spiral that Paulson faced, it better be complete, detailed and confident. For whatever reason, perhaps inexperience, Geithner thought he could attack this like Paulson, but the conditions are entirely different.
Sorry to be so vague, but I can't quantify or solidify these concepts very well. This is one of the "gut" teachings that experienced investors learn (at least the good ones). It is part of the art of finance- dealing with the human factor in a complex system and often only truly observable in hindsight.
Brett hit the two main reasons the market is thrashing around. Geithner nor Obama for that matter are helping to boost confidence. I see a razzle-dazzle and a couple of Hail Mary's being thrown up. If Obama and team score, they'll be heroes. If not, we'll all be wondering why they just didn't run it up the middle and go for a few dull first downs.
ReplyDeleteGeithner was the only one who could fix the financial mess we're in and so far he has underperformed to the expectations Obama set.