World Stimulus Packages Shovel-Ready

It won’t be long now before billions of the world’s tax dollars are “shovel-ready” and all that money shoveled into the governments’ winners’ bank accounts, distorting capital markets even more that what has been done by the Investment Banks.

Whilst all this is going on you can bet on one thing. The big powerful private money is going to sit tight. They are all on their yachts getting a measly 3% on their money but capital preservation is king right now.

Mr Geithner has yet to publish his economic plans and create the new regulatory framework under which the US and ultimately much of the world will operate. Judging by the 381 point drop in the DOW the quicker it is published the better. Uncertainty kills the market more than knowing things are really bad.

It occurred to me most of the people working on saving the world economy keep harping back to the 1929 Crash. Mr Bernanke is an expert on it. But the world was a different place then.

The western economies WERE the world economy. They were an exclusive club. Investments were “simple” back then too. There were no highly leveraged derivative markets thousands of times large than the stock market. There were no emerging economies. Much of Eastern Europe were serfs working on farms working for rich land-owners. The Middle East were mostly Bedouin tribes and the Asian Countries were still under western domination.

This time there are the tiger economies and the BRICK states. Both with highly developed manufacturing bases and their own sophisticated financial markets. Okay they have been hurt too by this financial crisis. But many of them still have their economy intact because they didn’t binge on the derivative party pies. Many also have a good manufacturing base that produce REAL products.

If the US government over-regulates or delays with their plans to regulate, then there is a good chance that the smart money will go to these other economies rather than the US. No one knows what over-regulation is though. They will only know when the smart money starts appearing elsewhere.

It’s like all the private money guys will wake up one morning and move their money in the direction of the most likely best returns. If it is away from the US it will take years for the US to recover.

How likely is the smart money going to invest in the major US banks who owe tax-payers billions of dollars. This is the wildcard as Colin Barr calls it in his article, “Private Capital: The Bailout Wildcard“.

“The administration is having to juggle three different chain saws,” said Brian Olasov, a managing director at McKenna Long & Aldrige, a law firm in Atlanta. “The key question is, does the plan make it attractive for the private sector to participate?”

In addition banks have to pay interest on the money and if I am not mistaken have to pay the government its share of dividends as a preferred shareholder BEFORE private or public investors get any reward.

When these banks were failing the headlines were all about saving the depositors and the banks but the shareholders could go to hell. Like it was their fault the management and board destroyed their shares 😉

In the article, “Few Stand to Gain on This Bailout, and Many Lose“, Eric Dash said,

“Over the years, Fannie Mae and Freddie Mac showered riches on many winners: their executives, Wall Street bankers and Washington lobbyists. Now the foundering mortgage giants are leaving some losers in their wake, notably their shareholders, rank-and-file employees and, in the worst case, American taxpayers.”

Who is going to invest in any venture in the US when Mr Geithner says he wants to help by shoveling more money into banks and business. But he also wants to ensure that the tax-payer gets their money back. He is guaranteeing risk just like the investment banks did with the CDO’s and with Portfolio insurance in the 1987 crash.

It doesn’t work that way. Business succeeds or fails. There are no guarantees. If everything is guaranteed who is going to pay out the guarantee when it all falls apart? Mr Geithner is trying to pick winners and losers by propping up essential businesses or industries. It is all well-intentioned but misguided.

Private Money flows to where it can provide the best returns for a given risk. With good regulation and no government interference that’s exactly what it will do. Right now Private Money is scared like the rest of us and so is flowing nowhere. Mr Geithner wants to get it flowing again but he cannot have it both ways.

On the one hand he wants private money to flow into business and corporations but at the same time he is shovelling billions of tax dollars into these same lead businesses to prop them up. Government money is limitless and can easily swamp private money and gets preferential treatment.

Also governments are fickle. Today’s policy may change tomorrow. Witness Mr Paulson’s original plan to bail out mortgages and then he changed his mind almost overnight and shovelled billions of tax payers money into the big banks, where it disappeared!

The DOW dropped 411 points on the news.

In 1929 private money did not have too many choices. This time around there are many other places to do business in the world rather than just the US.

The quicker the US tell us all the new investment rules and regulations and gets out of the way the better for us all.

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