Spero Consulting

If you haven’t read it, For the Vix, 40 Looks Like It’s the New 20 in today’s The Wall Street Journal please know that is a decent column.

We particularly like the paragraph:

“Volatility may not return to its highs, but it isn’t clear when it will get back to normal, either. Volatility breeds fear, which breeds more volatility. There is still too much uncertainty about the losses lurking on bank balance sheets and about the depth and breadth of the current recession to inspire much calm.”

Now, the first sentence is true but says absolutely nothing.  We’re not trying to ridicule Mark Gongloff the writer of the Ahead of the Tape column; instead, we empathize with the difficulty he faces writing about markets and uncertainty.

The notion of uncertainty about uncertainty—and the inability to measure it in a simple manner—tends to make statements about the topic either sound overly-complex and overly-qualified (by all of the necessary descriptive qualifications to the statement) or makes them sound trite.  Sometimes that’s the writer’s fault, but often it is the reader’s fault, too, especially when the reader incorrectly possess no uncertainty about their own ”knowledge.”)

Now, we especially like Mr. Gongloff’s following sentences because that’s almost exactly what we’ve written during the past several months—almost three months now.

The mortgage crisis that created the confidence and liquidity crisis and the resulting equity market volatility all continued unabated.  Last Wednesday, in The Mortgage Crisis: Why Not Incentivize the Private Sector? we wrote: “By the way, folks who think this Thanksgiving week’s mini-rally signifies that the worst is over are likely to be sadly mistaken.  We do hope that we’re wrong, but doubt it.” 

While we try not to make much of one-day changes, even when they are as large as today’s drop of 680 points in the DJIA and the nearly 9% decreases in the S&P 500 and NASDAQ indices, we do believe both the continuing volatility and losses provide evidence that the government’s actions to date have not helped instill confidence.  In all likelihood have hindered economy and financial activities by not allowing any resolution of the uncertainty of the value and viability of large financial intermediaries.

We wrote about that in Could a “Bailout” Prolong the Financial Crisis? and The Uncertain Value of Mortgage Securities (among other posts) in late September.  However, the government’s execution and lack of planning has been even worse than we could have imagined, and we had extremely low expectations to begin with. 

As we have been mentioning since that time, we wish federal government would provide tax incentives—say, mortgage investment tax credits—to motivate private purchases of troubled assets. 

We also wish the government would expropriate the worst offenders—the most poorly capitalized large banks.  We know that the Treasury can’t run banks any better than the existing managements, but that’s not one of our reasons.  A main reason is to motivate other healthier institutions to act.  Having ready buyers—motivated by such tax credits—would certainly help those banks exchange assets for cash, and that lack of trade keeps the analyses of each bank’s financial conditional needlessly opaque, and that’s (by definition) no way to resolve uncertainty.

We’re not sure when during the day, Mr. Paulson spoke of new programs (Paulson Says Treasury Actively Mulling New Rescue Programs), but we doubt if that stemmed the (ebbing) tide of sharply decreasing equity values.  Unfortunately, there is no reason to expect any positive news any time soon.