PPIP is Evil:
The government thinks the solution to end the recession is the PPIP program (Public Private Investment Program). I hardly know the details of the program until I read the following article from thestreet.com. More Leverage Won’t Solve Bank Mess. The more I understand the program the more upset I get. Look at the following details it is basically a program to shift the risk of the banks holding the toxic asset to taxpayers. It is indeed
“An example of banks trying to profit through financial engineering at taxpayer expense, because the government would subsidize the asset purchases.”
PPIP Details:
- Banks will remove troubled assets from their balance sheets and receive a value determined by a bid/ask negotiation process with investors bidding and the banks asking.
- The negotiated price will be paid from the following sources: 7.5% private investor, 7.5% government (taxpayer) funds, and 85% loan from the FDIC.
- The FDIC loan is non-recourse. If the assets ultimately prove to be worth less than 85% of purchase price, the 15% of investor funds are wiped out and the FDIC will own the assets.
- The FDIC, a government sponsored enterprise (GSE), will be bailed out by the government (taxpayer), if necessary.
The PPIP program should not be implemented without taxpayer’s approval because you can see that FDIC will become the trash can holding the toxic asset eventually and the government have to use taxpayer’s money to bail it out. I emphasize it needs taxpayer’s approval. I am hard working taxpayer for the pass 11 years and I still didn’t get the dame right to vote. That really makes me angry.
The logic behind the government’s PPIP program is that the banks will become more willing to lend once the toxic asset is removed from their books. Does that mean the government through the PPIP program encourages the banks to do the 100% finance based on stated income for home buyers again? Does it mean the government encourages people to buy 3 or 4 houses while in fact they only need one? Suppose the PPIP works and housing price is pushed upward over the next two years gradually to 2006 price level. The current toxic asset become very liquid and can be traded and change from one hand to another. Then what? Another mortgage crisis? Another trillions of new toxic asset created? It doesn’t need an MBA degree to know it doesn’t make sense
The Solutions:
Frankly I think the US economic cycle is a cycle of bubble creation. We have the housing bubble. Before that we have the internet bubble and before that we have the saving and loan bubble. We simply need to create the bubble somewhere else to draw people’s attention to it, to make them believe into it and make them act on it. Creating bubble in the same place is just not going to work because the memory of the public is longer then an economic cycle.
Where is the best place to create the bubble? I guess it could be green energy or it could be some innovating technology like the invention of television and telephone many years ago. The smart grid could be one. What if we can’t find a place to create a big enough bubble to expand the economy long enough? Well I think inflate the currency is the only solution. Warren Buffet said Well Fargo could earn its way through the recession. Why it can? Because Wells Fargo can borrow money at zero percent interest from the Fed and lend it out at 4 or 5 percent to you and me who want to buy a house. That has no difference then the Fed printing money and giving it to the banks. I think the Fed instead of giving money to the banks it should just give very one who want to buy a house the down payment. Why should the bank owners be benefited in the middle when the ultimate purpose is to help the home buyers? It just doesn’t make sense.
