Spero Consulting

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.)