Market Review and Trends
How Much is Enough?
By Musicwhiz  •  February 14, 2009
[caption id="attachment_1777" align="alignright" width="167" caption="Photo by tj scenes"]Photo by tj scenes[/caption] In case you were wondering that the title implied that this post will be about money, you're not too far off. But for this case, it's meant to ask how much money is required to "flood the system" to enable the USA to lift itself out of this persistent downturn. Just yesterday, the US$838 billion "Financial Stability Plan" was approved by the Senate and it was prepared by the new Obama Administration, with a speech delivered by the Treasury Secretary Mr. Timothy Geithner. The next step is for them to detail the use of the remaining US$350 billion of the original TARP (Troubled Asset Relief Program) fund of US$700 billion to get troubled assets off major banks' balance sheets to be able to allow them to lend again, as well as tackle the worst housing crisis since the Great Depression. Wow, seems like this new administration really has their hands full ! The question is: how much is enough, and what will the tipping point be? The issues here involve not just the banks, but also how to stimulate domestic spending in order to provide a fiscal boost to the economy as well as kick-start the dying housing market where foreclosures are mounting daily. So the US Government needs a three-prong approach, and admittedly it's not easy being where they are due to the fact that such a situation is unprecedented (with the closest comparison being the Great Depression of the 30's) and requires many untried and untested methods to solve. So far, the Bush Administration kept on getting it wrong by doing stuff which did not help, but in fact was blamed for worsening the crisis (and causing the collapse of Lehman Brothers in October 2008). The reason being that no one really knew the effective way of saving the financial system as a result of excessive and wanton leverage, and so everything was being thrown at the system to try to see which would work. Apparently, this did not go down too well, with the result that the Obama Administration has to work to pick up the pieces of the shattered plan(s) and come up with some new, bold initiatives of their own. In assessing how much is enough, one must question if there is currently ample liquidity flowing through the banking and financial system for normal credit to flow and markets to function normally. Liquidity is being constrained because of banks' tattered Balance Sheets, which make other banks hesitant to lend for fear of the loans becoming NPL; while loans to corporations have also dried up due to fears of companies not being able to service the principle and interest due to waning demand for products and services. It's a vicious cycle which feeds on itself, and only Government intervention through the injection of money into the system can counteract such effects. Thus, one might be tempted to place a dollar value on this crisis, whether it be US$800 billion, US$1 trillion or even as much as US$10 trillion (a truly astounding number, no doubt !). However, my view is that it is not just a matter of liquidity, but also one of confidence. Restoring the mental capacity of banks, hedge funds and private equity funds to invest and keep credit flowing is paramount, and it's a matter of sending them to a psychologist who will counsel their problems away and allay their fears, providing reassurances that "things will be all right". The reality is that everyone knows the world has gone topsy-turvy, and so such advice tends to fall on deaf ears and the same problem crops up repeatedly, one of fear, trepidation and anxiety. Read more...
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By Musicwhiz
Musicwhiz who is in his 30s is educated in accounting and works in the investment line (but not in a bank, financial institution, brokerage or fund house). He has a have a full-time job and investing is his side-line as well as passion. Musicwhiz is a value investor and his technique is derived from the teachings of Warren Buffett, Benjamin Graham and Phil Fisher. He incorporate all aspects of their investing style, and modify his value investing style to the Singapore market.
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