Monday, February 9, 2009
The Details: It's In The Details
The Stimulus Bill has been in the news for days now and while many knowledgeable economists, both conservative and liberal, have said that the stimulus package needs to be bigger, there remains for me the nagging questions about fixing the playing field.
The politicians, like the talking heads on TV, do not have an understanding of the problems at the cellular level when it comes to economics or the way the capital markets function, and I find this very frustrating. It is like talking about a cure for cancer and no one in the discussion is talking about the work being done with proteins at the cellular level to stop the flow of blood and nutrients to the cancer cells in the body. Shut down the capillary development of blood to the cancer cells in the body and the cancer cells die. It is that simple, but doing that without killing the patient is the challenge.
The movement of capital within our economy today is a big piece of the puzzle, but there are few people around that understand what appears to be a small thing is actually holding back the renewed movement of capital from the borrower to the investor. Yes, the investor. Banks do not hold onto the loans they give like they did in the old days. The era of structured financial products have changed the way America does business.
Mortgage-backed bonds, manufactured-housing bonds, car loan bonds, credit card debt bonds are all part of the capital market today. The market for these bonds extends around the world. Investors don’t have to speak a word of English to understand what they are buying as the numbers tell the story. The only English that needs to be improved on is the English that goes into the letters AAA, or AA, or A. Yes, bond ratings need to be dealt with before the fixed-income markets can function effectively again. Until the conflict of interest between the underwriters and the rating agencies is corrected, the capital markets as far as structured finance is concerned is not going anywhere. And, structured finance is the way Americans are able to drive our domestic economy.
The U.S. Treasury is coming up with some new ideas with regards to the banking industry in the very near future. I hope that some of their energies are directed at solving the problems of the movement of capital within the capital markets.