Economics 101
The New Economics?

As we all know by now, there is a credit crisis. Who is at fault will be a political football for months to come. Congress gave treasury $700B to solve the problem. After changing course several times, Treasury opted for the European way as a first step. That is, capital was injected into the 9 largest banks in the country. There are conflicting reports about the willingness of the banks to go along, but it is a done deal. Thus, the American banking system is now partially nationalized and the first checks go out today.

There is much hooha about this being an attempt to save capitalism, not take over capitalism. Now, it is true that the London Interbank Offered Rate [Libor], the rate banks charge each other to borrow money has been trading way above three month Treasury bill rates. And, when this is the case, no one lends. It creates anxiety because no one knows if they are lending to the next Lehman Brothers. So, money floods the safe haven of treasuries. Until the rate spread [the TED] narrows money will not come out of treasuries and to borrowers. It is too risky. So, by injecting capital, the Treasury hopes to create lending in spite of the TED.

Is this a good idea? Well, consider this. The palookas in Congress who got us into the credit mess by changing the requirements for mortgages will now have some say in our largest banks. Can they resist the type of meddling that Congressional types like to engage in? When things get better will the government want to get out? Wells Fargo announced they are looking for capital to repay the government pronto because they want no part of government ownership.

In Saturday’s Wall Street Journal there was a report of Democrat Senators such as Schumer wanting more controls over this money going to banks to make sure they make loans. What type of loans? Hopefully not the risky ones pushed by Congress that are now under water. And, was not the dividend to be paid on the preferred stock issued in exchange for the loans what the government was to receive? We were assured they were not getting into the banking business.

All of this new socialism in banking may just be a precursor to more socialism in general. Joe the Plumber has been made into a media star by the GOP and a villain by the Dems. But, he did extract a real issue…….redistribution of wealth which is a tenet of socialism as an economic system. The Speaker has already signaled a new stimulus package of $300 M is on the way. Pile that onto Bear Sterns, AIG, TARP, $ to auto makers and everything else in the pipeline and you have enormous government intervention into the marketplace. What will it be like when Dems control Congress and the Executive? The invisible hand of Adam Smith will be replaced by the visible hand of the government.

Remember when the Paulson/Bernanke/President/Democrat Congress warned us that if the stimulus package was not passed there would be Armageddon? Since its passage the Dow has dropped another 2000 points. The mortgages in trouble have yet to see TARP relief. The stock market may not yet have fully absorbed the full brunt of the recession. Stocks are wonderful bargains today, but investors are skittish because of not knowing the government’s next step. All things economic are in turmoil. Welcome to the Twilight Zone of the New Economics!