This blog is normally reserved strictly for my business strategy and marketing ideas for startups,entrepreneurs and VC's. I think that what the government is doing right now however (destroying capitalism as we know it) is horribly flawed, and important enough that I want to share my ideas on what they need to do now!
I originally alluded to my idea on Stocktwits (Created by Soren Macbeth and Howard Lindzon). Since all the bigwigs in Government, On Wall St, and at the Fed read Stocktwits, I am certain they saw my idea earlier. For those not familiar, Stocktwits is the first vertical on Twitter to be wrapped up and aggregated. It allows you to view and share ideas, and investment strategy along with some of the smartest investors out there. If you have not seen or tried Stocktwits yet, I suggest you do. Even if you do not have an interest in stocks, it should give you entrepreneurial types ideas on just what you can do on the Twitter platform, and what you can build for just a few pennies.
OK now to the meat of this post. See the graph above? What you are looking at is the DJI during the 1929 Crash and subsequent "Great Depression" overlayed with a graph of the NASDAQ starting from the 90's bubble and subsequently the current "Great Deptpression".
The experts will all point to how it is much different today, because we have learned from out lessons of the past (after the 1929 crash government tightened up credit). I say BULLSHIT, it is exactly the same, and the overlayed charts echo that sentiment.
While the Government IS doing things differently in reacting to this crisis, it is still doing it wrong. The Fed is pumping BILLIONS of liquidity into the markets. The Fed is (will) spend over (at least) one TRILLION dollars on recapitalizing the banking system before this is all said and done. This is KEY to the failure. Even in the face of all this money, we are watching the Banking system as we know it fall into the abyss one by one. While I recognize that the over 80,000 banks in the US is too many - Letting them all fail in this manner is just bad for everyone.
Without our banking infrastructure, there can be no economy. Let me state that again NO BANKS = SOUP KITCHENS AND FOOD LINES!
The reason that TARP and the recapitalization (socialazation) of our banking system is a failure is a result of their recent capital structures. Banks have (had) been leveraged and allowed to loan against there asset base way in excess of their capital base. That worked fine until the FASB changed the rules and instituted "Mark to Market", and underlying assets plummeted in value "the perfect storm".
For those who might not know, this is how it works. Banks are required to have a certain percentage of assets in relation to the amount of money they loan. Mark to Market requires a bank to carry those assets on their books at their CURRENT value. For the purpose of this post, look at a typical asset as someone's house. Let's assume that the bank made a loan for someone to buy this home a few years ago, and lent $500,000. Now, that same home is only worth $400,000. So that $500k asset on the bank's books needs to now be written down to "market value" - or $400k. As banks write down all of those underlying assets to reflect the current downturn in the housing market - they fall below capital requirements and technically become insolvent.
On top of the dozens of large banks that have already failed as a result, Citibank (once the worlds largest bank) is trading as a pennie stock ($3 per share). Though a Citibank failure by itself will not bring down the entire banking system, it is just the latest one to do so. The stock market as a result can and will do NOTHING but go down, as long as the ailing financials keep failing.
The government needs to immediately STOP the TARP and bailout. Even if this was effective (it is not), they are simply printing more money = Dangerous implications for the value of our currency (US Dollar), and the inflationary pressure that will ultimately result.
What the government can and SHOULD do is change/remove the "Mark to Market" rule that is currently in place. When I pose this idea to friends, they all suggest that somehow this is simply pushing the problem out to the future. To which I say RUBBISH!
Let's revisit our earlier example of a bank that lent out on a $500k asset now worth only $400k. Yes, we have been in a housing bubble, and yes the values can decline even further but hey - What do you think that home will be worth at the maturity of the loan (30 years)? You would be hard pressed to find anyone who thought that it would not be worth AT LEAST $500k, if not more.
So Government get rid of Mark to Market, and let the banks Mark to Maturity. Any bank marking to maturity should subsequently be required to hold that underlying asset until either it is sold at par, or till it's maturity.
This action will allow banks to recapitalize organically, and without further socialising our banking system and most importantly without printing Trillions of new dollars in the process.
How would you fix the banking system? Please leave your comment.
Do you agree with the logic of my argument, if you do please consider DIGGING it.
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