How broke is it?
A common sense conservative refrain is “If it ain’t broke, don’t fix it.” So now that the House of Representatives (including 90 some Democrats) have rejected the Mother of All Bailouts and the market is dealing with the news, before the next round of political tinkering we can take the time to ask “How broke is it?”
The talking point has been that “credit is drying up and businesses can’t get funding.” The theory is that somehow what looks to amount to a battle between the healthy banks and the unhealthy ones that will wipe out some investors and enrich others is going to wipe out everybody else in the process.
So, in that environment, venture capital is dried up, bank lending is dried up, it’s all dried up, right? You’re ATM card won’t work and when you go to buy the new cheap gas, you won’t be able to pay at the pump with your credit card, right? Wrong. Digg just raised a round of financing of $29 million which puts a market value on the full company of $175 million. Were the terms especially bad for the company? No. :
The valuation seems about right for the company, which attracted 15.7 million worldwide visitors in August, up from 10.1 million a year ago (Comscore) (click here for Quantcast data, which shows much higher traffic). The financing was a second choice for Digg, which thought it was getting bought by Google for $200 million until a last minute glitch killed the deal. After it was clear the deal wasn’t going to happen, the company pursued a financing instead.
Speaking of Google, how about the Google Plan instead of the Paulson Plan? The artist formerly known as Jane Galt says this:
This means there’s a gigantic asymmetrical information problem: the owners of these securities know much more about them than the Fed. And there isn’t (obviously) a large liquid market for the Fed to check against. So the Fed is likely to overpay, because there won’t be a lot of bidders in any one auction.
And what company has $100 billion in spare cash and a mission of “organizing the world’s information” with a promise to “not be evil”? Maybe these banks just need to post the data on their securities on their websites and let the spiders work. No, I don’t seriously expect Google to fix this. But, seriously there are companies out there with the money and knowledge to buy these assets if those holding them are realistic about selling them. Yes, that will mean more bad banks will fail, especially if the pressure of mark-to-market and current capital requirements continue.
The biggest threat is not bank failures, consolidation in the financial industry or even this so far mostly theoretical “drying up” of cash to finance nonfinancial companies. And it’s not one that private companies can easily fix, but it is one that Helicopter Ben is on the job fixing in a big way.
The biggest threat is a threat of deflation. The basic money supply indicators published by the Fed – M1 and M2 – are flat to slightly down the last two months. But the broader indicator – M3 – is estimated to be down 20%. That’s a huge number, in the trillions of dollars, just gone. Today’s Fed action injecting $630 billion into the global banking system (funny how close that number is to $700 billion, isn’t it?) should offset most of that though, as it’s in the form of the M1 and M2 money that banks use to create the other. Basically, the Fed printed $630 billion electronic dollars early this afternoon and banks can turn around and lend that out several times over when they are ready. They can use it to buy other banks that fail. They can use it to pick up mortgage backed securities at bargain prices (with no gain for taxpayers, by the way, since they’ll be borrowing the money at 2.25% from the Fed). I’m still waiting to find out when and where the helicopters will be dropping the cash though, so I can go buy some of these cheap stocks.
In purely political terms, this is a positive thing. Nothing to do with Republican versus Democrat. The American people overwhelmingly showed in grassroots opposition that they were willing to take the risk of a serious economic downturn rather than engage in a huge government takeover of financial institutions. Plenty of smart, free market experts were more than willing to sell their souls on this deal and plenty of people like myself were ambivalent about it all. But the American people overwhelmingly said “no” to this bizarre reverse socialism. I bet they’d say “yes” to some big tax cuts that would allow strong corporations to step in and fix things a little quicker naturally. That’s the medicine this economy really needs.