President Bush gave an excellent speech on the financial crisis this evening. If you haven't seen it yet, I encourage you to watch it. Just click here and you will be taken to a CNN video link.
My readers and clients know that I have some real problems with many of the policies of this administration. I hope no one reads into my endorsement of this speech that I have suddenly dropped all my previous reservations about the past eight years. I have not. But I do believe President Bush spoke clearly and persuasively about the current financial conundrum and the package he is proposing to deal with it. He made three key points, that resonated with me.
1) This package should not provide any sort of windfall to failed executives.
2) This package is not targeted to bailout any one company or industry.
3) This package will purchase troubled assets at their current values and hold them to sell when prices become more normalized. In this way, taxpayers will receive most, if not all, of their money back. If you want more of my thinking on this last point, please read the post from 9/17 titled An "Adverse Dynamic"--How accounting is hijacking economics.
In discussing this last point, the President reiterated a point that has been lost in most press coverage of the financial crises, i.e., that the vast majority of mortgages are paying on time and that the vast majority of mortgage-related assets are money good. The problem facing financial institutions is that the normal market for trading these securities has seized up and so their values are being driven to unreasonably low levels. Under current accounting regulations, firms have to reflect the current values of these assets on their balance sheets. As the values drop, so does the capital of firms who hold them and these firms get pushed closer and closer to insolvency.
In President Bush's speech, he said that the Federal government has "the patience and ability" to hold these undervalued assets until the market for them recovers. The reason the Federal government has this patience and ability is because they do not have to mark them to market. Given its unique accounting treatment, it may well be that the U.S. Treasury will find itself buying low and selling high.