Public-Private Investment Program Won’t Help Consumers
Global stock markets celebrated Secretary Tim Geithner’s toxic-asset plan yesterday scoring their best single-day performance in years and cutting this year’s losses to just 9% for the S&P 500 Index. The MSCI World Index is now down 10% in 2009.
In March, global equities are in the midst of their first monthly gain since December and their best month since December 2003, up 10.6%. The MSCI Emerging Markets Index is now in positive territory this year and is up 16% in March.
Global credit markets saw spreads tighten on Monday – a positive sign. But some disturbing market indicators failed to ease significantly, mainly the VIX Index, Treasury bonds and gold. Though each of these assets declined yesterday, a rally of this magnitude should have resulted in far lower asset values for safe-havens, namely Treasury bonds and gold.
The Treasury’s new Public-Private Investment Program (PPIP) hopes to alleviate stressed bank balance sheets by removing toxic and hard to value mortgage-backed securities while structuring a fund to encourage private capital to buy the distressed securities. The Feds are hoping that by allowing up to six times leverage hedge funds and other institutions will apply to participate. The goal is to have the Feds seed the plan with funds to place a floor on the assets while seeking private capital to hopefully narrow the huge discount and, ultimately, realize a profit for their investors and taxpayers.
Though Geithner’s PPIP is definitely a positive development allowing debt-burdened banks to dump these distressed securities and open their lending spigots, it won’t do very much for the consumer. U.S. domestic consumption is almost 70% of GDP. None of the several plans – loaded with acronyms like TARP, TALF and now PPIP – really address domestic consumption. The hope is that by freeing up clogged bank capital that the latter might start lending again to viable consumers. I don’t think that will happen.
The PPIP does nothing to address consumer woes, except perhaps allowing some banks to free capital to consumer loans, like mortgages. But how many people are scrambling to buy a new home today? Not many. Consumers have been battered by plunging equity and home values and, since last fall, soaring unemployment, too. Consumer balance sheets are in “repair mode” as the domestic savings rate climbs to 5% from 0% just six months ago.
The Treasury’s new Public-Private Investment Program should help to unclog bank lending, assuming hedge funds and other players grab the bait. I think they will because mortgage-backed securities are probably selling at discounts that exceed their true value following a massive crash in asset values.
What might be good for Wall Street (or what’s left of it) might not be good for Main Street. All this money won’t find its way into consumers’ pockets. And that’s where the drag on consumption lies. This plan does nothing to help the poor, unsuspecting consumer and, instead, just puts new money into already Fat Cat pockets.
In March, global equities are in the midst of their first monthly gain since December and their best month since December 2003, up 10.6%. The MSCI Emerging Markets Index is now in positive territory this year and is up 16% in March.
Global credit markets saw spreads tighten on Monday – a positive sign. But some disturbing market indicators failed to ease significantly, mainly the VIX Index, Treasury bonds and gold. Though each of these assets declined yesterday, a rally of this magnitude should have resulted in far lower asset values for safe-havens, namely Treasury bonds and gold.
The Treasury’s new Public-Private Investment Program (PPIP) hopes to alleviate stressed bank balance sheets by removing toxic and hard to value mortgage-backed securities while structuring a fund to encourage private capital to buy the distressed securities. The Feds are hoping that by allowing up to six times leverage hedge funds and other institutions will apply to participate. The goal is to have the Feds seed the plan with funds to place a floor on the assets while seeking private capital to hopefully narrow the huge discount and, ultimately, realize a profit for their investors and taxpayers.
Though Geithner’s PPIP is definitely a positive development allowing debt-burdened banks to dump these distressed securities and open their lending spigots, it won’t do very much for the consumer. U.S. domestic consumption is almost 70% of GDP. None of the several plans – loaded with acronyms like TARP, TALF and now PPIP – really address domestic consumption. The hope is that by freeing up clogged bank capital that the latter might start lending again to viable consumers. I don’t think that will happen.
The PPIP does nothing to address consumer woes, except perhaps allowing some banks to free capital to consumer loans, like mortgages. But how many people are scrambling to buy a new home today? Not many. Consumers have been battered by plunging equity and home values and, since last fall, soaring unemployment, too. Consumer balance sheets are in “repair mode” as the domestic savings rate climbs to 5% from 0% just six months ago.
The Treasury’s new Public-Private Investment Program should help to unclog bank lending, assuming hedge funds and other players grab the bait. I think they will because mortgage-backed securities are probably selling at discounts that exceed their true value following a massive crash in asset values.
What might be good for Wall Street (or what’s left of it) might not be good for Main Street. All this money won’t find its way into consumers’ pockets. And that’s where the drag on consumption lies. This plan does nothing to help the poor, unsuspecting consumer and, instead, just puts new money into already Fat Cat pockets.
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