Lieutenant Island Views : Commentary About Finance, Politics and Baseball

Paul, We Love You But Get a Grip! | March 27, 2009


The same guy who says that the Obama Administration should be spending trillions more on everything does not like the government’s plan to liquify toxic bank assets. He also seems to hate the capital markets. I guess he thinks that the incremental trillions he wants us to spend come from the printing press rather than the global markets.

What is the real source of his problem? He is is a truly smart guy but today’s piece in the New York Times really lacks clarity. His article “The Market Mystique” fulminates on multiple topics but never really specifies the underlying sources of his problems.

He clearly sees a need for more regulation of markets and then grudgingly admits that the Obama Administration is moving to significantly increase regulation. He dislikes markets and won’t come to grip with the fact that they can’t be ignored. He seems to forget that even in his favorite generation, the fifties, the government used markets to finance its operations. Maybe he thinks that in that era, America was like the Fonz and always had money but did not have to do anything to get it! Only the Fonz failed to realize that there is no free lunch.

It is less clear what Krugman wants other than for banks to admit that the assets have a low value. The argument comes down to what is fair value. If banks follow Krugman’s draconian solution, it could be Lehman redux, unless mark to market rules are eliminated, which his logic would argue against. Forcing big markdowns triggers capital inadequacy issues and, probably, government takeover (s) of some big banks. In this scenario, the FDIC gets to own the assets and probably lots more as a result of a collapse in market confidence (remember what happened when Lehman fell). The government would have to step in and, like it or not, figure out how to finance everything it acquired. It would have to go to the markets. The fellows who make up the markets might not have a Krugmanesque point of view (those Chinese fellows, in particular, have no sense of humor when it comes to losing money in American assets). The elegant thing about the Geithner plan is that it does not deny the valuation issue and provides government funding. The difference in the plan versus Krugman is that it does it by attracting outside capital and reigniting trading in the assets. Krugman’s plan lays it all on the government’s shoulders to finance after triggering a very negative series of events. We saw this with Paulson at the helm. do we want to watch it again?

Paul, please take a bite of a reality sandwich. You can’t avoid markets so use them for our benefit. Obama, Geithner and equity investors get the joke. Why can’t you?

http://www.nytimes.com/2009/03/27/opinion/27krugman.html?_r=1&ref=opinion

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2 Comments »

  1. Another bizarre, inexplicable column from Krugman. As usual, he reads Obama’s mind, and now he’s starting to read Geithner’s. (Not a good idea, Paul. It’s probably pretty dark in there.} I’m with you in wondering what in the world Krugman wants. Doesn’t he realize that the Administration is giving artificial respiration to the financial system? Give them some damn room! He admits that they’re proposing sensible regulations, and yet somehow they remain a misguided bunch, bent on more securitization folly. I wonder what they, and Obama in particular, would have to do to get on his good side.

    Comment by drtone — March 27, 2009 @ 5:18 pm

  2. The inexplicable and sometimes contradictory comments might lead one to believe that he is either doing too much and not focusing on what he writes or bitter that Obama is listening to University of Chicago guys instead of him!!

    Comment by bosox4 — March 27, 2009 @ 6:12 pm


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About author

Mr Thaler is currently the Managing Partner of Lieutenant Island Partners, an organization providing corporate finance advice and general consulting to corporations and not-for-profit organizations. Mr Thaler retired as Vice Chairman of Deutsche Bank Securities in early 2008. His background includes experience as an investment banker, senior manager, business builder, college professor, not for profit board chair and trustee. In his thirty plus years as an investment banker for Deutsche Bank and Lehman Brothers, he has been involved in numerous significant debt and equity financings, mergers & acquisitions, leverage buyouts, restructurings and cross border transactions. Of particular note, Mr Thaler has been one of the most active participants and strategic advisors to the homebuilding industry. In a period of significant turmoil and losses, he was one of the few active bankers to the industry who did not have either a loss or credit write down. He is currently advising several public builders on strategic matters and is an adjunct professor of finance at Morehouse College in Atlanta, Georgia. Though he lives in New York, he is a life long Red Sox fan! www.LieutenantIslandPartners.com

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