Buying Stocks and Shares
"Permanent revolution" is a Marxist concept most closely associated with Leon Trotsky, to explain how "socialist revolutions could occur in societies that had not achieved advanced capitalism. " Well,
Henry Paulson seems to be taking the idea a few revolutionary steps further.
In an extraordinary move the US treasury has jettisoned the plan it had to spend billions of dollars buying up
toxic mortgage assets. It has decided instead to concentrate on helping the consumer credit sector.
This surprise shift in policy sent shares tumbling, Henry Paulson, who looked somewhat nervous and uneasy, announced that he had decided to abandon the idea of helping US banks by taking over toxic mortgage assets. This was the core of his $700bn “troubled assets relief program”, or Tarp.
"Our assessment at this time is that this is not the most effective way to use Tarp funds," Paulson said.
A large part of the $700 billion set aside for Tarp has already been allocated for buying stakes in the US’s largest banks. Paulson now says that he wants to develop a programme to ensure that credit is made available for buying products such as cars, and for student loans and credit cards.
"This market is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt. Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy," he said.
As a result the treasury may invest in a more extensive range of companies, along with private shareholders.
The Tarp was not very popular when it was first introduced and only got through Congress after much criticism. The news of the change caused markets to fall around the world – the Dow fell more than 3% to 8420. The FTSE 100 fell 65 points to at 4182. The Dax and the CAC 40 also fell.
Analysts were generally pleased to see the changes made by Paulson's, although it surely casts doubt upon his original judgement.
"The argument for buying the bad debt was never a strong one to begin with," said Howard Simons at Bianco Research, "the problem is ... declining asset prices in the real estate area. Until you see housing prices stabilise you will continue to have a growing supply of bad loans. We have better use for the public money than buying assets or loans that should never have been created in the first place."
It now appears that it’s consumer spending that’s the problem not subprime mortgages. It seems to me we are entitled to ask « do they actually know what they are doing ? »
“I will never apologise for changing an approach or strategy when the facts change,” Paulson said. Cool, way to go Hank!
Speaking to the Financial Times one senior hedge fund manager said : “Removing the bad assets from the balance sheet is the only way to stop the losses. Injecting capital is just a temporary band-aid – and had the Tarp been executed when it was proposed, the huge mark to market losses of the last few weeks would have been avoided.”
Democrats have expressed concerns that banks were not using the money to encourage lending but instead were using it to rebuild their balance sheets and hand out bonuses to their incompetent executives and buddies.
Barney Frank, Chairman of the House financial services committee, has specifically said that Congress could block the release of the remaining $350 billion if banks do not lend the money more aggressively.
It still seems to me that the great and good at the top of the pile are running around like headless chickens. Viva la revolucion !
