Not so populist look at the dealings of the biggest market participant a.k.a U.S. Government
Those who know me personally will attest on my conservative economic and financial views. Biggest pillar of which is least government’s intervention possible. Being a realist I understand that some measures government provides are necessary and modern economy needs them for order and stability, the same way modern society needs police. But how much of those controls are essential and where is that magic line? Is the government playing a role of a referee or perhaps it becomes 800 pound speculator with abilities to change rules of the game at will? Do FED conspiracy theorist have it right? Let’s find out…
To start we’ll go back in time at the beginning of the millennia. Massive capital misallocation to telecommunication companies and .com startups eventually resulted in famous bust. Followed by terrorist’s attacks on September 11th country dived into recession on Main Street. Government decided to intervene and help electorate from loosing jobs. This aid resulted in massive credit expansion prompted by aggressive FED’s policy which kept interest rates at laughable levels far too long. Average people who got burned by stock market collapse lost any appetite for financial markets. Real estate was becoming the new game in town. It never goes down, was a typical thinking. Not without massive brain washing (and lever pushing) from the top under sexy agenda of “ownership society” prices started to rise. Modestly in the beginning, but more aggressively with each year. Other significant forces were at play aside from cheap credit as well. But who was financing all that debt? Who was buying all these securitized mortgages? I bet lion’s share of these “securities” was sold to foreign investors. Some greedy investment banks in the US loaded up too; we already know what happened to them lately.
So how all that has anything to do with U.S. government, one will ask. Well, wasn’t our government, with the help of FED and others, unintentionally or not pushing asset prices higher and selling them to foreigners in the process? If we accept this premise, then next reasonable question would be - WHY? Isn’t our government supposed to protect us instead of selling American’s assets to outsiders? What if I speculate that answer to that question is to make enormous amounts of money by purchasing those assets back at far lower prices?
About a year ago so-called “credit crunch” unraveled. It was time for things to correct and some were waiting. A financial storm slowly but surely resulted in a hurricane, which culminated (I hope) yesterday. Some were saying it was the biggest panic selling since 1987. So let’s skip the rhetoric and look at facts.
In week prior U.S. assumed ownership of Freddie and Fannie, while totally diluted existing holders, not that they didn’t deserve it. Shortly FED acquired 80% stake in AIG via mechanics of a loan on very unfavorable (read confiscatory) terms. Since FED doesn’t have resource to swallow everybody, Lehman was “disposed” of. In a way teaching market that playing the game of chicken with government can’t be one-sided game. During this turmoil market players’ en masses run for safety of U.S. treasuries further driving their prices higher and you know who sells those bonds. But yesterday things took a 180 degree turn. Gov't plan to attack financial crisis which initially surfaced as rumors later became news. No wonder markets had tremendous rally. I was told that market timing is a very risky business, but government was making ticks here. If this is not buying at the bottom, I don’t know what is. Add run on short sellers to the mix and you have a perfectly orchestrated market corner. There is something to think about.
Finally where do they going to come up with money to purchase all that junk that got us into this mess in a first place? Well government has few ways of raising revenues. Its two most popular and most effective ones are inflation and higher taxes. So seeds for the next calamity in financial markets are being planted today. How’s that for a government intervention.
P.S.
Due to the lack of time no solid data and references were provided. This shouldn’t stop one from digging a little deeper for them.
To start we’ll go back in time at the beginning of the millennia. Massive capital misallocation to telecommunication companies and .com startups eventually resulted in famous bust. Followed by terrorist’s attacks on September 11th country dived into recession on Main Street. Government decided to intervene and help electorate from loosing jobs. This aid resulted in massive credit expansion prompted by aggressive FED’s policy which kept interest rates at laughable levels far too long. Average people who got burned by stock market collapse lost any appetite for financial markets. Real estate was becoming the new game in town. It never goes down, was a typical thinking. Not without massive brain washing (and lever pushing) from the top under sexy agenda of “ownership society” prices started to rise. Modestly in the beginning, but more aggressively with each year. Other significant forces were at play aside from cheap credit as well. But who was financing all that debt? Who was buying all these securitized mortgages? I bet lion’s share of these “securities” was sold to foreign investors. Some greedy investment banks in the US loaded up too; we already know what happened to them lately.
So how all that has anything to do with U.S. government, one will ask. Well, wasn’t our government, with the help of FED and others, unintentionally or not pushing asset prices higher and selling them to foreigners in the process? If we accept this premise, then next reasonable question would be - WHY? Isn’t our government supposed to protect us instead of selling American’s assets to outsiders? What if I speculate that answer to that question is to make enormous amounts of money by purchasing those assets back at far lower prices?
About a year ago so-called “credit crunch” unraveled. It was time for things to correct and some were waiting. A financial storm slowly but surely resulted in a hurricane, which culminated (I hope) yesterday. Some were saying it was the biggest panic selling since 1987. So let’s skip the rhetoric and look at facts.
In week prior U.S. assumed ownership of Freddie and Fannie, while totally diluted existing holders, not that they didn’t deserve it. Shortly FED acquired 80% stake in AIG via mechanics of a loan on very unfavorable (read confiscatory) terms. Since FED doesn’t have resource to swallow everybody, Lehman was “disposed” of. In a way teaching market that playing the game of chicken with government can’t be one-sided game. During this turmoil market players’ en masses run for safety of U.S. treasuries further driving their prices higher and you know who sells those bonds. But yesterday things took a 180 degree turn. Gov't plan to attack financial crisis which initially surfaced as rumors later became news. No wonder markets had tremendous rally. I was told that market timing is a very risky business, but government was making ticks here. If this is not buying at the bottom, I don’t know what is. Add run on short sellers to the mix and you have a perfectly orchestrated market corner. There is something to think about.
Finally where do they going to come up with money to purchase all that junk that got us into this mess in a first place? Well government has few ways of raising revenues. Its two most popular and most effective ones are inflation and higher taxes. So seeds for the next calamity in financial markets are being planted today. How’s that for a government intervention.
P.S.
Due to the lack of time no solid data and references were provided. This shouldn’t stop one from digging a little deeper for them.