Good Riddance to Bad Rubbish

Posted by: Michael Mandel on September 29

I may regret saying this, but the Paulson plan was bad, just bad. As Peter Coy wrote in this week’s issue, this was not the best way to spend $700 billion. The Paulson plan had virtually no support from economists.

Now it’s time to come up with a real plan. The Galbraith plan is a good start, but anything which actually supports the financial system would work as well.

As for today’s drop in the stock market—well, now investors are finally coming back to reality. We were at this level in 2005, while everyone was still fat and happy with the real estate boom. (right now the S&P500 is at 1141, just where it was in April 2005).

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Reader Comments

Kartik

September 29, 2008 04:50 PM

I called 1160 an attractive entry point. I stand by that. The market is presently below that level, but can't stay below that for long.

I would continue to go long on ETFs like :
IWN
XLF

Keith G

September 29, 2008 08:04 PM

What about a plan that addresses the problem in the credit market with transparency and trust? Why not have a temporary credit clearing-house where all repayments to lenders are FED insured? This would not need a cap of $700bn it would all be based upon what is available to borrow. The problem seems to be those who have the money aren't willing to lend it because of fear. Deal with the fear and the blood starts flowing again.

Joe Cushing

September 29, 2008 10:13 PM

The only bet I would make on stocks now, is on volatility. I can't say if it will be up or down, I don't even have a hunch. I'm certain that it won't stay still though.

I hope you are right about the Paulson plan and I hope things don't fall apart before they come up with a better one. What if things go beyond the government's ability to patch up?

Baboon

September 30, 2008 12:45 AM

Whatever Paulson's solution was it definitely displayed a very poor grasp of human psycology. Nobody in the 'working classes' - the Republican Party's heartland - loves bankers. For years they've inflicted pettiness and expense on the only face these people see. They've told us how smart they are (which proved false) and at the top taken salaries and bonuses that made our eyes water. Now we're expected to fund a bail-out for smart-asses we don't like? Yes of course it is phrased as rescue for the manking system. And maybe it is in an inept fashion. But any student of human psycology will tell you people are prepared to take pain to punish someone they feel has unfairly benefited. The Republicans in congress know this was suicide to vote for. The simple answer is that unless the measure comes with serious penalties for the 'fat cats' and some fairly major crawling from the banking industry, it's not going to go well with the public who have to pay for it.

Kartik

September 30, 2008 04:52 PM

"The only bet I would make on stocks now, is on volatility."

Joe Cushing,

Then you could profit heavily from options strategies like straddles, butterflies, etc.

Petras Vilson

September 30, 2008 07:37 PM

Why not the Warren Buffett Plan ?

Invest just $250 billion in the 50 best banks preferred shares... yielding a very nice 10% return... thats $25 billion a year for taxpayers risk.

Bingo... bad banks fail. good banks get re-capitalized.

That was Easy ! That is what Buffett has done with Goldman Sacs.

Joe Cushing

September 30, 2008 09:13 PM

Kartik,

I looked into it after I wrote that and almost sent a second comment. Now that you replied I feel I have to. Volatility is pretty much priced in to the options markets. I looked last week and saw opportunity, I looked yesterday and even with a 500 point swing, ( compared numbers from mid day to close) I would have lost a tiny bit of money on a straddle. The key would have been to predict volatility and get in before the market when nuts.

Kartik

October 1, 2008 02:41 PM

Joe,

I still think that going long on stocks with the S&P at any level below 1160 is a very good long-term entry point.

Small-cap value is at the best prices in a decade.

Mark

October 1, 2008 05:03 PM

Here's a solution as to what to do about ceo's compensation and golden parachutes: if they are dismissed from their companies let them stand in the unemployment line like the rest of us.
Perhaps these guys should think about having to live and support a family on $250.00 a week and they won't take so much risk with other peoples money.

joe citizen

October 2, 2008 02:19 PM

well boys and girls - no plan? or a whole arrays of plans? ok - let me give you a simple plan that can work right now and not cost us american working class or poor any hardship or money. we must remember that all started with a simple program of no money down and a 3%-4% bait. this of course was a variable rate with the promise of being able to get a fix after a year! the fact is that after that year - the program for the fix was too demanding that it denied anyone access to it and so now the water was getting full of fresh new victims and was getting bigger and so now the sharks were ready to jump in and chow down!! so to fix this mess = simple mandate that all those homeowners who lost their homes be put back in them and all those who are about to lose them all be put into a fix program paying the intial rate of the bait of 3%-4% @ fix of course!! let not forget that homeowners were paying their mortages at this rate but fell under when they got socked with a rate of 9%-11%. now the money is back in the markets and the everyone makes money as before but its just a lower rate of return!!!! problem solved! it just goes to show " GREED CAN DESTROY - EVEN THE MOST POWERFUL". NO BAILOUT OF WALL STREET AND NO SELLOUT OF MAIN STREET!!!!!!!!!!!!!!!

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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