The winner of the 2008 Nobel Prize in Economics and Op Ed writer for the New York Times
His tagline is “The Conscience of a Liberal”
What does Obama think about Krugman?
“If Paul Krugman has a good idea, in terms of how to spend money efficiently and effectively to jump-start the economy, then we’re going to do it.” (01/09/2009)
So I think Krugman is very influential in Liberal circles and he has some pull in the Obama Administration. I think he echoes the beliefs on many influential Liberals and that they believe the Bailout Plans of the Bush Administration were misdirected and harmed the taxpayer at the expense of the shareholder.
I think that if Obama doesn’t listen to Krugman, then there are going to be a lot of ticked off Liberals and at least one ticked off Conservative (me).
What did Krugman have to say this weekend?
“(M)embers of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking.”
For insolvent banks, “value is entirely based on the hope that shareholders will be rescued by a government bailout.”
“What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.”
“A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.”
“Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job.”
Slow Motion Nationalization Has Hit the Fast Lane
The only question now is how is the pain shared by the Taxpayer, the Stockholder and the Bondholder? I have no clue. But I will closely watching the prices of assets that will show me how Big Money is positioning their money ahead of the policy decisions of the Obama Administration.
Big Money will know who will pay and who will benefit, long before you ever read about it. That is why I look at charts. Big Money can’t hide when they are buying and selling. I just have to put in the time and observe what is taking place. I then have to make decisions and protect myself (Stops) incase I am wrong.
The banks I detailed over the weekend as having the biggest exposure to derivatives are getting annihilated today (as of 11:48 am PST 1/20/2009). They are pricing in nationalization with taxpayer protection –
BAC – 19.64%
C – 14.00%
WFC – 22.43%
HBC – 15.64%
BK – 24.83%
STT – 53.54%
STI – 20.86%
PNC – 37.03%
NTRS – 10.71%
KEY – 4.28% (Barron’s told you this one can triple on 1/18/2009)
USB – 9.88%
RF – 20.10%
BBT – 8.43%
FITB – 18.05%
UBS – 14.53%
DB – 17.72%
MS – 13.09%
FHN – 3.63%
Here Are The Asset Classes I Will Be Observing
In addition to the share prices of banks, I will watch the following closely –
Bank Preferred Stock
I am closely watching how the Preferred Stocks of Banks are trading. I consider this asset class to be the “canary in the coalmine” for how the government is going to nationalize insolvent banks, which are “too big to fail” and “too big to save”.
This asset class is effectively worthless, unless the Government buys bank holdings for a lot more than they are actually worth.
If these shares crack, then it will tell you that Obama will be favoring the Taxpayer over the Shareholder / Bond Holder.
I use the Flaherty & Crumrine Preferred Income Fund (PFD) as my proxy for Preferred Stocks. You can see the holdings of PFD here –
Look at those holdings! I have had people trying to get me to buy junk like this, because they are “looking for yield”. After reviewing the horrible quality of the holdings in this sector, do you see why I have totally avoided it? If Obama doesn’t immediately give the banks another $400 or $500 billion of taxpayer money, then PFD and the majority of the Asset Class and all of those “Closed End Bond Funds” are worthless.
If you own this garbage, then you could literally lose ALL of you money by the end of January! Is that a risk you really want to take? The only way you will not get cleaned out is if Obama screws the Taxpayer and buys worthless assets from Banks at fraudulently high prices. Is that a bet you are willing to make?
Here is the chart of PFD. Do you see how it tagged the Blue Line almost to the penny? Do you think these Moving Averages matter? You have to know what to look for if you are going to manage money.
The bigger the bailout needed, the harder US Treasuries will be hit. I am reluctant to short Treasuries here, but may have to put in stop orders and hold my nose.
Same as above. I may just have to put in stop orders and hold my nose.
Gold will also price in the amount of money that needs to be borrowed and printed to recapitalize the banking system.
Once the banks are in the process of being recapitalized, then Government will begin the process of recapitalizing the Consumer. They will do this in the form of Mortgage Principal writedowns (“Cram Downs”).
Nationalizing the banks and nationalizing the debt of irresponsible consumers is the only way to get the economy going again.