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?
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:
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.