Jeez, our post from two weeks ago, which noted the similarities between TARP and GARP, makes us seem almost prescient.
Like T.S. Garp, it seems that Mr. Paulson is jettisoning letters as he continues lonely and aimless pursuit. In fact, we’d prefer that he take up Mr. Garp’s hobby as it is less damaging to the economy and our well-being than many of Mr. Paulson’s extant actions.
We base our statements on today’s announcement that the Treasury Department will not purchase any Troubled Assets: Treasury Not Planning to Buy Bad Loans, Assets.
This is one case where we hate to be correct, but it is exactly what we wrote about in September and early October, when we wrote exhaustively that the government’s government-run ”bailout” could not be implemented quickly and would fail. (Search, bailout, for example, for our many posts on the topic.)
We’d also note that it is not too late to attempt a private solution to the problem. As we mentioned repeatedly–including in earlier posts today–the problem is that no one has confidence in their own valuation methods, and that lack of confidence is justified thus the mortgage market is paralyzed. (The broader credit crisis also involves a paralysis, but that lack of movement relates to distrusting each other rather than one’s self. Although there is a self-referential aspect to it that we wrote about in Financial Projection in a Crisis.)
However, as we proposed in September in A Better Solution (than a government takeover), private buyers could be induced to purchase the troubled assets with the proper (and simple) tax incentives.
Either permit buyers to immediately expense their purchase price (and then pay low rates on future sales or cash flow realizations) or provide an equivalent mortgage, investment tax credit.
Such tax incentives would provide a cushion or margin of error of 30% – 40% of the purchase price and would likely be large enough to stimulate a substantial demand for the mortgages and the mortgage-related products thereby providing liquidity without the heavy hand of Uncle Sam splashing around. (We suspect that many traders, structurers, and modelers know that they were/are wrong, but doubt that it is by an additional, say, 35%.)
Now that our officials seem less in the full-panic mode than six weeks ago, perhaps they’ll take the time to ponder or think or consider about reasonable, simple, and relatively cheap alternatives to their now discarded scheme. We know it is a stretch for many of them, but what else can they do? Garp. Garp. (Or is it rp, rp.)
