Monday, February 16, 2009
The Work Is Not Done
The Stimulus Bill has passed Congress and now will be signed into law by President Obama on Tuesday February 17.
The Republican Party is fighting for its life. And, it should be no surprise that no one in the House of Representatives voted for the economic stimulus plan. After eight year of President George W. Bush, a President whose policies almost destroyed the middle class, the Republicans are in serious trouble. As the old saying goes, you can fool all of the people some of the time, but you can’t fool all of the people all of the time, has placed our two party system at risk. The Republican Party will, if it is to survive as a major political party, have to turn to serious thinkers with a sound political philosophy. It will have to be based on something more than the destruction of the middle class. As I am not a Republican, and never have been, this is not my problem, but if I was, I would not be looking to talking heads on the radio to rebuild the party. There is a conservative political philosophy, and while I do not agree with it in this age of interdependence and a very complex economic society, there may be areas for discussion that have not been explored. Perhaps men like George Will and a few other thoughtful, and not mean spirited souls, will emerge to lead them.
Money and banking in today’s world can be summed up in one word, securitization. Securitization is the process where a number of unrelated borrowers of mortgages, car loans or credit card debt is bundled into a large package of like debt and then divided up in to securities, bonds, and sold around the world. This process brings together, in a very efficient way, borrowers and investors. The problem we have seen as a result of the housing bubble and the eventual meltdown of the structured debt financing market is the fraud that crept into the process of correctly rating this kind of debt obligations. As a result of this wide scale fraud, the markets do not operate for these debt vehicles and they have now become referred to as toxic assets.
The challenge for the U.S. Treasury is to get the markets to function again, because in the 21st century, money and banking is on an international scale, and, while English is not a requirement, mathematics is the universal language, and everyone who trades these bonds knows that without confidence in the rating system, there is no market. The issue of “mark to market” was discussed last week and how it impacts the capital requirements and lending ability of banks was covered.
So, now that the Stimulus Bill has been passed and is ready to be signed into law by the President, the only thing left for the smartest people in the room is to take care of the conflict of interest inherent in the rating agency business. Once these bright fellows solve that problem, I would think that next to buying up some of those toxic assets, the capital markets would once again be ready to trade structured financial assets.