The ABCs of Screwball Economics

We've had TARP (and the return of the TARP), we've had TALF, now we've got the PPIP. Our government's interventions into the economy have come hand in hand with a great propensity for acronyms that are becoming less clever all the time. (I mean, come on, PPIP?)

I've got some great acronyms for what I think these are going to do for our economic situation, but most are not appropriate for our family-friendly site. Here's one that makes it through: SNAFU. Or how about ROFLMAO, if you've got a gallows sense of humor. I still see little possibility that the government's actions are going to help our economic situation in the least.

IPS (It's the price, stupid)
The new PPIP basically fails to admit what more and more people have been arguing, and that is that the major banks like Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , and Wells Fargo (NYSE: WFC  ) don't have liquidity problems, but rather solvency problems.

There is toxic garbage on their books (and continued lack of transparency on them). The prevailing idea that it's acceptable to price these assets at fantasy levels sounds absurd to me, but the banks want to price these assets at unrealistic levels, and the recent loosening of mark-to-market rules pretty much tells you what you need to know -- somebody wants the fantasy to continue. (Even worse, some are wondering if the banks are just going to sell the assets to one another, with government help.)

The real marketplace wants to price those toxic assets, as low-down and nasty as those prices may be, and doesn't want to pay artificially inflated prices. (Meanwhile, why would we want the government to subsidize purchase of these assets at artificially high prices anyway?). Suffice it to say, it doesn't follow that prices should be whatever these companies decide they should be and the government should support that.

IDS (It's the debt, stupid)
The government's programs have been geared toward stimulating lending again. But here's the thing that's been driving me crazy for ages: There's a heck of a lot of indebtedness in our system already; it's part of the problem, and that goes for corporations, consumers, and our government itself.

Of course, the government wants to kick up lending again. Our past economic growth was based on an artificial daisy chain fed into by bubbly asset prices, low interest rates, and the inevitable loads and loads of debt being taken on. Of course, this has to correct because if you really think about it, it's been utterly unsustainable, but nobody wants to take the inevitable medicine. The smart consumers and companies that didn't dig themselves into massive debt holes probably don't want to borrow right now. So, who's left?

Consumers were melting the MasterCard (NYSE: MA  ) and Visa (NYSE: V  ) cards buying up Coach (NYSE: COH  ) handbags and Tiffany baubles, or flat-screen TVs or Sirius XM (Nasdaq: SIRI  ) radios. Unfortunately, we can now gather that a heck of a lot of their spending wasn't based on real income, but rather subsidized by debt or taking equity out of their bubbly priced homes. Now many consumers are busted broke, with slashed credit lines, defaulted loans, and lost jobs. Should they borrow more?

Meanwhile, many corporations loaded up on debt, too. I remember thinking it was weird for companies to take on debt to say, pay dividends or buy back shares (much less to finance their operations). Back then, it made sense to just about everybody, and everybody was doing it. But now? It's pretty clear that many companies weren't concerned about a rainy day coming, a day when it might become difficult for them to service that debt. Well, it's come. Should they borrow more?

IES (It's the economy, stupid)
It's morally reprehensible that the government should expect already overly indebted consumers to keep on borrowing to reinflate our deflating economy. Some of us are concerned that our economy has been an accident waiting to happen, given the fact that consumer spending represents 70% -- the lion's share -- of GDP. The emphasis on services and the financial industry's love for pushing pieces of paper around has put us in a precarious position indeed, as has the emphasis on debtor spending to make our economic world go round.

Meanwhile, it looks like my fears of a zombie apocalypse economy are coming to pass. Throwing good money after bad not only robs taxpayers, but it also robs healthy companies of capital as the zombies are kept alive. Propping up losers means that soon, all we'll have are losers, and an awfully big bill to pay.

BBIAF, with more bad acronyms
There are many arguments emanating from many different schools of thought about what to do. I've always thought that the government should stay out of this so we could have a difficult, but likely shorter lived, correction, clear out the artificial excess, and get to work on moving back to an economy with real innovation and truly healthy businesses -- all the while leaving bubbly fakery behind.

I know many people don't agree with my point of view, but it seems like more and more people from many different economic camps are starting to come around to the idea that the fixes from government intervention from both the previous administration and the current one are simply helping politically connected bankers and doing little to actually fix what ails the real economy. The word "oligarchy" seems to be cropping up an awful lot, in fact. 

Let's hope that the next acronym program won't be one that denotes being completely out of luck, but after endless government interventions that don't seem to help and seem more likely to hurt, it's starting to feel like that's our destiny. Let's hope not.

Coach is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (20)

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  • Report this Comment On April 13, 2009, at 4:46 PM, colleran wrote:

    I am not sure that if you were running the government you would want to take the chance of not intervening. This is especially true after what happened to the financial system when Lehman Brothers went under. There may be better solutions than the ones that were chosen. I'd be interested in what you would do in same situation.

  • Report this Comment On April 13, 2009, at 7:29 PM, 7footmoose wrote:

    I love the effort to summarized a very complex situation in a few paragraphs. It reads like a sound bite from one of the many financial pundits interviewed on the evening news. There is nothing fundamentally incorrect about your point of view. Any economist would revel in its theoretical construct. After all, that is the world of economics. From a pure bankruptcy point of view most if not all of the banks in the world are insolvent. That problem begins with the fact that most of their deposits are either demand in nature or very short term and most of the assets (mostly loans) those deposits support on the bank balance sheet are longer term in tenure than the deposits. This makes for baked in insolvency. Also just because there is an irrational market for an asset does not make that asset worthless. That is worthless not worth less. If all of the assets held be the banks are written down to the irrational market value then the corresponding decline in asset value would indeed exceed the capital base of the institutions. Leverage is your friend when values are increasing and your worst enemy in times like these. If you already have liquidated all of your assets and invested heavily in the products of Smith & Wesson you might be ready to nationalized the banks ala Dr Doom but if you are still counting on a recovery someday you might just pray for cooler heads to prevail.

  • Report this Comment On April 13, 2009, at 10:31 PM, jesse2159 wrote:

    After several years of reading Motley Fool's columns, I think this one is the most accurate. It was right on target. This recession isn't an illusion, it's a very, very scary financial meltdown. Except, that the government, banks and insurance companies want the wishful thinking illusion to never end. Does anyone really believe GM won't file for "structured bankruptcy" on June 1st? (which is not exactly bankruptcy but another illusion) Does anyone really think that changing the mark-to-market rule made the banks have less bad loans on their books? Fact or illusion. I pick illusion. An ounce of reality is long overdue.

  • Report this Comment On April 14, 2009, at 1:43 AM, tfirst wrote:

    There are laws in place that are being ignored. Insolvent institutions are to be put into receivership immediately. The Fed has been unconstitutional since it's inception. The bubble has been passed down to where the buck stops, our government. When this bubble pops, will we be able to suck the rest of the world into an inflate and spend new world currency? Will the fools who made their fortunes using this system be willing to sacrifice their gains to save America? Or will they just continue to make their gains from the new emerging markets? Wow! What a question....You already know the answer.

  • Report this Comment On April 14, 2009, at 10:49 AM, Big50Shooter wrote:

    Amen Alyce... Good article...

    7FootMoose, baked insolvency, fried insolvency, it's still INSOLVENCY... Irrational Market? Would that be the REAL market; the one which ignors the over inflating/false valuation which has been going on for so long and allowed these banks to leverage themselves into insolvency...? Or is it the market which rides on the trumped-up-over-inflated values that the insolvent banks WANT to use to value their assets...? No disrespect intended here Moose, but you sound like a few UAW types that I know here in Detroit which think the spigot of money will never dry up as long as we just "wish" it not to... And, if it does dry up due to the ineptitude of management, the taxpayer is somehow responsible to sweep up the mess...

    How about the new record "Profits" to be posted by Goldman and others for this first quarter '09? Are they really profits, or does the back-door channeling of the taxpayers money to the tune of hundreds of billions through AIG have anything to do with these "profit" figures...?

    It's all a sham, and it's all going to implode...

    Don't be surprised by it, or it will be a Sham-Wow for you! LoL...

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