Suddenly, it becomes harder for Henry Paulson to sell his $700 billion taxpayer bailout. With Warren Buffett willing to invest $5 billion of his money — rather than the taxpayers’ — in a Wall Street institution that made the right calls, don’t we have a powerful argument that the market is working, and correcting itself?
Buffett Deal at Goldman Is Seen as a Sign of Confidence
Warren E. Buffett, the country’s most famous investor and one of the world’s richest men, announced on Tuesday that he would invest $5 billion in Goldman Sachs, the embattled Wall Street titan, in a move that could bolster confidence in the financial markets.
Until now, Mr. Buffett, who has navigated the stock market with legendary prowess, has largely refrained from investing in the stricken financial industry, saying repeatedly that things could get worse.
Thousands of people on and off Wall Street follow Mr. Buffett’s moves, so his decision to invest in Goldman immediately heartened investors….
I’m no expert on capitalism, but how do you argue that it’s breaking down and needs a government takeover if firms that made bad decisions are failing, and those that made good decisions are attracting capital?
Yes, I know it’s more complicated than that. But I’ll be watching to see what effect this has on the debate.
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An Alternative Plan to Paulson’s Bailout Plan
Bailout = Inflation = Bankrupt US
Gingrich’s four-point plan includes:
(1) suspending immediately mark to market provisions (the accounting practice of valuing a financial position in an investment at its current market price) in the hopes of stopping the downward spiral in asset values and eventually replacing it with a three year rolling average;
(2) repealing immediately Sarbanes-Oxley, the 2002 accounting law Gingrich described as “an enormous drag on small business”;
(3) setting the capital gains tax rate at zero “matching the Chinese and Singapore” (to encourage private capital to flood into the market picking up properties without the taxpayers being at risk); and
(4) passing an “extraordinarily powerful” energy bill (“to return $500 billion a year to the American economy that are currently going overseas”).
Raghuram Rajan and Luigi Zingales of the University of Chicago suggest ways to force the banks to raise capital without tapping the taxpayers. First, the government should tell banks to cancel all dividend payments. Banks don’t do that on their own because it would signal weakness; if everyone knows the dividend has been canceled because of a government rule, the signaling issue would be removed. Second, the government should tell all healthy banks to issue new equity. Again, banks resist doing this because they don’t want to signal weakness and they don’t want to dilute existing shareholders. A government order could cut through these obstacles.
Robert Borosage of Campaign for America’s Future invokes Naomi Klein’s “Shock Doctrine in asking whether we’re going to “get fleeced in this crisis” But depressions have some salutary effects – the scoundrels go belly up, the weakest get purged, and in the wake of the disaster, people demand strict regulation of the money lenders to keep their greed and predatory behavior in check, and government spends money on the real economy to put people back to work.
The immediate consequence of the bailout will be the devalue of US dollar that will lead to inflation. Americas dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.” The consequences of Trillion dollar Treasury debt is called “Crowding Out”. Crowding Out is the phenomenon that occurs when the US Treasury sells debt in a world where foreigners and Americans are no longer flush with dollars. That means that the dollars to buy the debt must be squeezed out of the financial system and interest rates are forced up. Trillion dollar deficits aren’t chump change! However, squeezing a trillion dollars out of the money markets of the world is clearly impossible and the only remaining option to fund the US Treasury’s insatiable appetite is through “monetization”. Monetization means that the Federal Reserve would step in and print up new money out of thin air and buy the Treasury debt. If that occurs, monetary growth rates would soar and, in turn, create very high inflation as too many dollars start chasing too few goods. Rising inflation forces interest rates up, and rising interest rates always have devastating consequences for the prices of financial assets such as stocks and bonds.
Add to that:
* Stop all government subsidizing of mortgage and business loans, including Freddie Mac, Fannie Mae, FHA, and SBA. Too many of them are fraudulent or impossible to repay.
* Abolish federal flood insurance for those high-risk mortgages which the private insurance industry will not touch.
“* Abolish federal flood insurance for those high-risk mortgages which the private insurance industry will not touch.”
I have never understood the federal government being willing to rush in and rebuild places that are just going to get destroyed again in the not too distant future. At the very least, shouldn’t we have a “no more than 2 dollops of federal reconstruction assistance in 100 years from any one type of disaster” rule (whether it is flood, hurricane, tornado, earthquake or volcano)?
Ok, I surrender. I’m now ready to join the Republican party. They may be an evil bunch of SOBs who drive the economy into the ground but at least they win. The Democrats have now caved on the offshore drilling issue without getting anything whatsoever in return. In addition, the Pentagon will now waste even more money, $488 billion next year alone, not counting the occupation of Iraq and Afghanistan.
http://www.usatoday.com/news/washington/2008-09-24-pentagon-budget_N.htm
OH, NO, it’s the Trilateral Commission.
Hide your children.
Take out the trash.
Throw the main breaker and go hide in the ditch.
But, seriously, Brad, might not Buffett’s move have anticipated the bailout rather fly in the face of it?
With the bailout coming, his investment might have a windfall return, sooner rather than later.
I mean, Buffett’s spent his life making money. You think he’s given up on that?
Rather than fly in the face of it. I have committed another sin of omission. Oh me oh my.
Mr. Buffett got a very favorable deal from Goldman — the kind of deal that billionaires get from desperate company. You and I would never get such a deal.
Also, in this WSJ story, Mr. Buffett (I call him "Mr. Buffett" rather than "Warren," in hopes that someday he’ll haul off and give me that half a billion, or even a little less, now, for that little project I’ve long had in mind) indicated that his plan’s success depended on the bailout going through. So maybe is deal ISN’T a clean, obvious reason not to pass the plan. So never mind on that, for now. I think p.m. has the right of it.
Yesterday afternoon, I saw that Buffett had already profited $783 million on his $5 billion investment.
On paper, I suppose that is. Stock value up 15 percent or so, I would guess, if stock in Goldman is what he bought.
Such numbers awe me. I can scarcely conceive of $5 million or $783,000, numbers one-thousandth the size of Buffett’s.
Remember that when Warren Buffet says you need to pay more taxes, that 99% of his money is in a holding company which avoids personal income taxes and even the capital gains taxes. That is how he has become so wealthy, by multiplying all his capital, while the rest of us can only reinvest what the government leaves us each year.