Dylan Ratigan

350218427 1931102fda George Soros Invokes Santa ClausBillionaire investor George Soros gave an insightful interview on CNBC today at the World Economic forum with Maria Bartiromo (who is much easier on the ears than Dylan Ratigan)…

It’s interesting how he says that we shouldn’t put money into creating banks for bad assets, but recapitalize the good ones. Good point, but it strangely made me imagine him with a Good Bank/Bad Bank list, smoking a pipe and talking to elves.

Our problem is two pronged: banks ain’t lending, and people ain’t spending.

The overriding reason for all of this is fear.

Do you remember when Lehman collapsed? Didn’t that make you want to hide your money in little cans all over your house?

No doubt that scared you into wanting to hold onto your money, but it also scared commercial banks. Banks have feelings too, y’know.

Banks need deposits and loans from other banks in order to meet their overnight capital requirements. Once the amount of cash in their vaults goes below a certain level, they either need to get more money (via deposits and borrowing) or shut their doors.

In return for your deposit, banks offer you a nice interest rate on your accounts and CDs (e.g., your deposits). They then lend out your money at a higher interest rate to folks wanting a mortgage or car, and as that person pays back the loan, they pay you the promised interest and pocket the difference.

Now, imagine the scenario where they give cousin Ray Ray a car loan, and Ray Ray is late paying it back. On top of that, imagine that you the depositor want to pull your money out of your account in order to stuff it in your mattress.

And the cherry on top would be if the bank could not get a loan from another source (like another bank) in order to replenish its cash reserves after you take out your money and Ray Ray disappears?

Imagine no more–scenarios like this happened to IndyMac and Countrywide, which are both no more.

And to make matters worse, what if a source of capital for you the commercial bank was the interest that you were earning on the mortgage-backed securities your bank owned? Now, imagine that those became worthless.

Where can you get the money to keep your doors open? These days, there aren’t many places. So all you can control is lending–e.g., no more lending, just in case you run into a Ray Ray or Pookie, or even a nice hardworking couple who just ran upon hard times. And just in case the economy gets worse, no lending may put you less at risk of having to close your doors one day.

What a mess. It’s like our capitalist system was a machine that became overheated and busted a gasket. Heck it’s blowing steam and spurting out screws. And I think a small rat just ran away with a guilty look its face. It’s just not working right now.

So the TARP stimulus is intended to give banks on Wall St the cash and confidence to lend, and the ARRP stimulus by President Obama is intended to give Main St the confidence to do business and spend money.

Whether it means disbursing stimulus money according to whose been naughty or nice, folks like Soros have it right. We need government money in order to help restore confidence.

It’s going to kill the dollar in the long run and our kids’ kids will be holding the bill long after we’re gone, but the alternatives (private sector funding, letting the economy fix itself, etc.)…well, I disputed that in an earlier post.

Ho ho ho.

Want more geeky analysis? Please buy my book Three Little Securities!

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Senator Paul is right in that the economy needs to deflate to a level that’s able to self-support without the goverment’s help, and that the government is spending too much (which will weaken the dollar, and leave our grandkids’ kids still holding the bill). And I agree to lowering overseas spending, and using that money to invest in infrastructure spending and other domestic needs.

But he wants to put a brick wall in front of a speeding car instead of an airbag.

His solution to our economic issues is to get rid of income taxes to spur spending, allow the economy to deflate without government intervention, and rely on the private sector to provide the funds to keep businesses afloat.

If we get rid of income taxes (and corporate taxes), how do we replace the crater in the federal budget that this will create? Reducing overseas spending will help. Yet overseas spending to some extent boosts our interests internationally and helps us either monetarily or politically.

But will reducing taxes spur spending? In particular, when there are people who don’t pay income taxes and won’t reap the benefits of getting rid of these taxes? Reducing income taxes by itself won’t necessarily spur spending because we have to also create an environment where individuals aren’t afraid to spend (for example, for fear of losing their job).

Plus, don’t forget that many people are losing their jobs and as a result, paying less income taxes already. Bloomberg is dealing with a $2B loss of income to New York City because fewer people (in particular, in finance) are paying income taxes–they’ve lost their jobs. Continue these job losses, and noone will be paying income taxes. And Senator Paul will get his wish.

Let the economy deflate without government intervention? He seems to be ok with double digit job losses–in particular, while he’s still employed as a Senator and getting a paycheck–but I don’t believe our psyches can survive that. Try convincing someone to spend when they’re frightened that they’ll lose their job. Which is leading to more job losses because businesses are losing income from sales revenue (which the economic bailout–not TARP, but AARP–is intended to replace until people spend again).

And private sector spending? Some in the US private sector have money (e.g., Buffet who invested in Goldman). But overseas folks have money too (Saudi/Citigroup, China/Morgan, Mexico/New York Times). What will it mean for the future of the US economy if we have a Bank of Dubai instead of Bank of America? Would we psychologically and monetarily recover? Can we say that we’re the most powerful country after potentially some serious international rebranding?

I don’t like the bailouts, but it’s lose/lose–a more contained mess than what Senator Paul is recommending. Plus, comparing deficit spending today to deficit spending in the past isn’t an apples to apples comparison.

As a side note–Dylan Ratigan gives me a splitting headache and I often wonder either what point is he trying to make or when will he let the guest speak. But he won me over at minute 7:20.

Once again, it’s not about giving Americans ipecac but rather Children’s Tylenol…now’s not a time to teach people a lesson even though we really deserve it after overspending and overinflating our economy to an unsustainable level. Do we want to give our grandkids a bill, or a country formerly known and branded as America?

Want more geeky observations? Please buy my book Three Little Securities!

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