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Marc Faber has no use for the Paulson-Pelosi Bailout Bill:

Any proposal to rescue the US financial system will fail to avert a recession said Marc Faber, the Swiss fund manager and Gloom Boom & Doom editor and publisher, now based in Thailand.

A stock rally in the event that a package is approved will be temporary and should be used as 'an opportunity' to sell, said Faber.

"The rejection of the package is good because it shows that some people in the US are still sane," Faber said... "A bailout will not buy the US a way out. The government is less powerful than markets in fixing this mess."

Who is Marc Faber and where does he think things are headed?

Marc Faber

Yves Smith at Naked Capitalism says this about Faber:

We have a certain fondness for Marc Faber: he knows financial history, he is refreshingly direct, not attached to conventional thinking, and has a record of generally good investment calls (and admits to his mistakes).

Faber warned of the 1987 market crash a month before it happened and called the Dot Com bust (though a little early).  He's a habitual bear as evidenced by the name of his newsletter, Gloom, Boom and Doom.

The problem is not a dearth of liquidity that can be solved by another $700 billion.  If it were, the hundreds of billions already poured into the market and the banks by the Federal Reserve would have solved things.  Instead, Faber says, its excessive leverage:

I should add that, unlike what Mr. Paulson says, falling house prices are not the problem. It is the huge leverage that is the problem. If your house is 100% self-financed (no mortgage outstanding) a rise or a decline in the value of your house has no direct economic or financial impact. In short, my view is that the bail-out plan is not addressing the cause of the problem, which is excessive leverage. Moreover, it is unlikely to help struggling homeowners but is designed to encourage even more speculation by financial companies. Peter Boockvar of Millar Tabak is furthermore concerned that it will lead to further bailouts.

The Paulson-Pelosi Bailout Bill will not stabilize markets.  It will certainly not halt the plunge in housing prices.  It won't save the banks.  Treasury admitted as much in its Sunday night telephone conference when it said that it would not even begin using the money for several weeks.  "But many banks will fail in that time span," someone objected.  "The plan is not designed to save banks.  It's designed to save the market.  (Paraphrase)

Faber says the Paulson-Pelosi Bailout Bill will have unintended, likely negative consequences, but he does predict some particular bad outcomes that will come from passing this bill:

The Paulson bailout plan is a government bailout of the previously failed government bailout which was a bailout of the previously failed government bailout etc... Each bailout had its own unintended consequences which the next bailout tried to address. Greenspan bailed out the economy after the stock market bubble popped with 1% interest rates which sowed the seeds for the credit bubble. In order to bail us out, Bernanke slashed interest rates to 2% and a dramatic rise in commodity prices ensued. When that bailout didn’t work, he instituted a bailout of the investment banks with the initiation of the TSLF and PDCF credit facilities for investment banks. That slowed down the deleveraging process as it gave the investment banks a false sense of security. I highlight Dick Fuld’s comments soon after it began where he said it takes the liquidity issue off the table. The lack of dramatic deleveraging brought us to last week’s panic in GS and MS, a failed LEH and a shotgun wedding for MER which led us to the Paulson bailout. The unintended consequence of this bailout will be a much lower US$ and selloff in the US bond market which will leave us with higher interest rates and higher mortgage rates throw’s the intentions of the Paulson plan out the window. Who will bailout this bailout"?

What do you care about a weaker dollar?  It will result in higher prices for everything the U. S. imports from oil to cars to clothing to a lot of food items.  And what will be the result of higher mortgage rates.  A further decline in house prices, the opposite of what people think Paulson-Pelosi will achieve.

Does Faber have any positive ideas?  Sure:

.....here's a plan for Washington DC, tell the banks to stop paying dividends to their shareholders. I went back and looked at just 20 of the top banks, including GS, MS and MER and saw that they are paying out $40 Billion per year out in dividends. The lending rule of thumb is $1 of capital can service $10 of lending. That is $400 Billion in lending capacity that can get freed up. That is more than half of the Paulson bailout plan and it costs the taxpayer ZERO.

But those holding GS, MS and MER stock wouldn't like that idea, and who falls into that category?

Faber can even see a market recovery IF Paulson-Pelosi doesn't screw it up.

The bill put before Congress by Henry Paulson and given a cosmetic makeover by Pelosi and Frank is not a "rescue" but another in the series of disasters and missteps perpetrated by Bush and his financial advisors.  It will help Paulson and his friends, but damn the economy to years of misery.

For other smart finance and economics experts who hate this bill, people who have foreseen this market collapse unlike Paulson and Bernanke, go here:

Roubini (NYU Econ Prof)

Joseph Stiglitz - A Good Day for Democracy (Columbia, former World Bank chief economist)

If you're truly worried about the economy, look to the solution offered by the Progressive Caucus that is highlighted on the front page at dKos.

Originally posted to goinsouth on Wed Oct 01, 2008 at 05:14 AM PDT.

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Comment Preferences

  •  Alms for the poor. (11+ / 0-)

    Send 'em a message:
    Withdraw $700 from the bank

    by goinsouth on Wed Oct 01, 2008 at 05:14:46 AM PDT

  •  Our leaders are not talking to economists (0+ / 0-)

    just businesses.  

    AFTER they pass the bill, they expect the businesses and banks to do what is right about new rules and regulations.

    Are they even going to charge interest for the money that is tied up for 5 years?

    •  Nonsense. (0+ / 0-)

      Economists are domiciled in every meaningful institution in the financial system but heaven help us if we rely on economists only for an academic solution.  

      I would suggest reading up a bit on the issues.  They are complex but I think you'll discover in your reading that reregulation is a meaningful part of virtually every proposal put forward so far.

      "Those dunes are to the Midwest what the Grand Canyon is to Arizona and the Yosemite is to California." - Carl Sandburg

      by Critical Dune on Wed Oct 01, 2008 at 05:52:49 AM PDT

      [ Parent ]

      •  Exactly (0+ / 0-)

        You said:

        Economists are domiciled in every meaningful institution in the financial system....

        They need to listen to economists who aren't paid by those who want our money.

        If you mean they are inside congress and the senate, maybe they need replaced?

        •  Not sure what you mean (0+ / 0-)

          Economists are everywhere. On congressional staffs and as advisors, at the World Bank, IMF, and every financial institution, meaningful educational institution, and think tank around.  Exactly which pure as the driven snow academic economist do you propose we "listen to"?

          Academic economists?  Who the heck do you think funds their chairs and schools? Everyone is "compromised" but that doesn't mean some don't have good ideas.

          "Those dunes are to the Midwest what the Grand Canyon is to Arizona and the Yosemite is to California." - Carl Sandburg

          by Critical Dune on Wed Oct 01, 2008 at 06:24:25 AM PDT

          [ Parent ]

      •  I am listening now to what they are saying (0+ / 0-)

        on TV. I have read so much since Saturday, I have eyestrain. Even my mind is tired, which is rare.

        When Kerry was asked if he had talked to an economist, he said, "I have talked to the businesses." He was asked three times in different ways and each time he seemed to think talking to businesses was all that was needed.

        A senator said that about after they pass the bill, they expect the businesses and banks to do what is right about the new rules and regulations.  So, it could be taken two ways.  Maybe he was trying to make it clear they would be enforced.  I took it that they were not in the bill.

        I don't pretend to be an expert, I am trying to figure it out for the people who are working their arses off and can't keep up with it all.  

        I would rather be told that I am wrong, than continue to get it wrong. But I am not sure I am wrong.

        Is there new rules and regulations in the bill? Or will the come later, maybe, at the discretion of business?

                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

        •  Excuse the grammar (0+ / 0-)

          Are not is.

          •  There is oversight in the bill (0+ / 0-)

            and a boatload of it in the pipeline.  I'm not sure Kerry is the best person to listen to.  Dodd and Frank are the main people and Obama/Volcker/Rubin are highly involved.

            "Those dunes are to the Midwest what the Grand Canyon is to Arizona and the Yosemite is to California." - Carl Sandburg

            by Critical Dune on Wed Oct 01, 2008 at 08:05:42 AM PDT

            [ Parent ]

            •  Now you're just shilling. (0+ / 0-)

              I'm not buying.

              Send 'em a message:
              Withdraw $700 from the bank

              by goinsouth on Wed Oct 01, 2008 at 08:21:57 AM PDT

              [ Parent ]

              •  That is an offensive accusation. (0+ / 0-)

                And I really dont care if you buy my arguments but please do spend a little time seriously studying the issues. Here's a start for you on Obama's framework for reregulation:
                http://www.nytimes.com/...

                Then read the revised bill...
                http://online.wsj.com/...

                4Oversight: The legislation creates multiple levels of oversight. There would be a Financial Stability Oversight Board, composed of the Federal Reserve chairman, the Treasury secretary, the director of the Federal Housing Finance Agency, the chairman of the Securities and Exchange Commission and the secretary of Housing and Urban Development. The bill also creates a congressional oversight panel and requires the comptroller general to make bimonthly reports to Congress. The bill also installs an independent inspector general to monitor and audit Treasury's decisions.

                Paulson first suggested legislation with virtually no congressional oversight. The compromise bill is much closer to early Democratic proposals.

                "Those dunes are to the Midwest what the Grand Canyon is to Arizona and the Yosemite is to California." - Carl Sandburg

                by Critical Dune on Wed Oct 01, 2008 at 09:07:33 AM PDT

                [ Parent ]

                •  This is trickery. (0+ / 0-)

                  This is insulting.  The oversight is Paulson and Bernake and their ilk.

                  There would be a Financial Stability Oversight Board,
                  composed of the Federal Reserve chairman, That is Bernanke.

                  The Treasury secretary, That is  Paulson.

                  the director of the Federal Housing Finance Agency,
                  the chairman of the Securities and Exchange Commission and
                  the secretary of Housing and Urban Development.
                  Securities and Exchange Commission and the secretary of Housing and Urban Development.

                  The rest of them are from the stock exchange and housing.

                  This is a farce.

        •  Here what DeFazio has to say. (0+ / 0-)

          Send 'em a message:
          Withdraw $700 from the bank

          by goinsouth on Wed Oct 01, 2008 at 06:56:55 AM PDT

          [ Parent ]

  •  Oh, if it were only so black and white... (0+ / 0-)

    It is not simply a bank issue, as Roubini and Faber well know.  Leverage creation was disintermediated to unregulated entities, thanks to Big Al Greenspan.

    Sure, by all means cut dividends (and tank the stock).  Fine with me.  But you grossly underestimate the 2nd, 3rd and umpteenth derivatives of the large institutions failing to function.

    It is called "whack a mole".  We've been playing it for 2 yrs now in global credit markets. Theoretical economists don't dirty their hands with the mechanisms and stresses.  They like elegant solutions.  Guess what? There aren't any.

    Here's today's 50B problem.
    http://www.bloomberg.com/...

    Tomorrow's is HBOS.  CDS counterparty risk looms large on the near term horizon. FHLB? Asia selling? Who knows?

    A bill, even if a largely Democratic one must be passed now to (at least) slow this train down.

    "Those dunes are to the Midwest what the Grand Canyon is to Arizona and the Yosemite is to California." - Carl Sandburg

    by Critical Dune on Wed Oct 01, 2008 at 05:47:41 AM PDT

  •  Good work (1+ / 0-)
    Recommended by:
    goinsouth

    The Bailout bill may accidentally help with liquidity in the commercial paper market.

    But as written it is a sham and will not prevent the inevitable deleveraging, which must happen.

    "When the going gets tough, the tough get 'too big to fail'."

    by New Deal democrat on Wed Oct 01, 2008 at 06:14:51 AM PDT

  •  DeFazio CNBC interview: (0+ / 0-)

    DeFazio talks about his alternative to Paulson-Pelosi.

    Here.

    Send 'em a message:
    Withdraw $700 from the bank

    by goinsouth on Wed Oct 01, 2008 at 06:54:06 AM PDT

    •  DeFazio is exactly the type of person (1+ / 0-)
      Recommended by:
      goinsouth

      we need in government. I am proud he is a Democrat. He makes sense.

       A friend of mine was President of a savings and loans when they had that debacle. She said that their bank was doing great, but that the gov devalued their loans so that they closed it down.

      The government uses mark to market and goes by market price.

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