Monday, October 06, 2008

Investors fear Bailout will not work; "virus" spreads to Europe

Joshua Rosner of Graham, Fisher & Co is calling current bailout situation “the bubble of bubbles,” as he explains in an interesting video available on Yahoo! Tech-Ticker. The story is “Paulson’s ‘Bottomless Pit’: Beware Law of Unintended Consequences” by Aaron Task here.

Rosner believes that the problem is that buyers control the wealth rather than sellers, and that entities who won the gamble (like pension funds) are being vilified to defend the banking industry, which he sees as a “dinosaur.” He disagrees with the government’s reverse auction, and believes that the government should bring buyers together in conventional auctions.

Roubini writes “’Much More Radical Action’ Needed as Bailout Fails to Lift Confidence,” link here. Roubini believes that there needs to be unlimited deposit insurance (to protect institutional deposts) and a formal “triage” on the banks now

The Dow opened down moderately this morning but then plunged below 10000, falling as much as 550 points before bouncing slightly to -450. Various media reports point to a rapidly growing crisis in European banks, and the difficulty of European governments in figuring out a consistent policy for assistance of an American style “bailout.”

The real problem is that we spent money building people more house than they could afford, often with “bad karma”. Instead, we should have been building more modest housing, made it affordable and secure, and emphasized spending on things like local renewable energy and other infrastructure.

Post script: Evening:

The Dow was down by 800 points in the early afternoon before regaining over 400 of the points, but still closing before 10000. Still, some normally stable stocks were hardly affected.

Jim Cramer, who has become very influential, has a piece on "The Street" called "Preventing Great Depression II", link here. He feels that a "Depression" is unavoidable. He talks about keeping the Dow floor at 8400 (instead of 5000). His recipe is very complicated (just try to follow the details). He is rumored to have said today that people should get out of stocks if they need their money in the next five years (he made an alarming comment on the NBC Today show), but now it's apparent he just said don't be too deep in stock -- make sure you protect the money you need for the next five years separately. His remarks may have alarmed traders today in the short term. Cramer usually aims his remarks at investors, in a manner similar to Suze Orman for consumers.

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