$12 trillion @ New Ruskin College
Lecture Notes: 9-30-08
www.NewRuskinCollege.com
Upper class Warfare Part VII: Political Discourse Part III
$700,000,000,000 sounds like a lot of money. But when you consider that Mr. Paulson proposes to float $12 trillion worth of securities on a pool of liquidity of just $700 billion the question becomes is the $700 billion enough? What Mr. Paulson wants to do is establish a market for the securities. Why? In order to establish a market price. Why? So the holders of the securities will be able to assign a market price to their securities, a so called Mark to Market value. (Jonathan Weil of Bloomberg calls this Mark to Paulson Accounting.)
In this scheme the $700 billion is only incidental. It is needed to establish a “market” so the $12 trillion in securities can have a market value established. It is possible that this plan will make things worse for some holders of the securities if the Mark to Paulson “market” price is lower than what the owners had valued the securities on their books, as the director of the CBO, Peter Orszag, has warned. (CBO Head: Bailout Could Make Crisis Worse. The Washington Post reports, The Financial Times and New York Times also report on Orszag's comments.)
Most people think that the bailout is about the $700 billion being paid out to someone, a bank perhaps, never imagining that the true objective for the Paulson Plan is the $12 trillion in mortgage back securities. The $12 trillion is said to be “frozen” because no one trusts the paper as long as the housing market continues to plummet. Because it can not be traded it is worthless.
As I write this the stock market has lost $1 trillion in market value falling 6.98% or 777 points. For a long time stock traders “trusted” valuations of 25 to one. That is they thought it fair to value a stock at $25 for every one dollar in expected earnings. This is the price/earnings ratio. This when the market was at 14,000. More recently the price/earnings ratio has decreased to $20 to one. Historically the average price/earnings ratio has been $10 to one. So you can see the market has a long way to fall.
Will Mr. Paulson ask for a few trillion to buy stocks that have fallen into disfavor? Try and establish a “market” price for them too? After all if you thought the pricing was just temporarily “wrong” and that values will soon return then you would have only to weather the storm for a few days or weeks and wait for values to resume their former positions.
But what if these market conditions are not to quickly correct. What if the nation has been living beyond its means for a generation? What if there has been a stock bubble just as there has been a housing bubble? What if houses are not going to quickly return to their former values?
Suppose that we are at peak oil in a country that has assumed cheap energy. Suppose we must start paying off that mountain of debt we have accumulated instead of buying goods and services from one another or more likely from the Chinese. Suppose companies that were earning $5 a share will now only be able to earn $1. And suppose the correct valuation of those shares is 10/1 not 25/1.
What if we are facing a once in a century down turn? A black swan event.
Well then we should introduce Mr. Paulson to Mr. Market.
Over the next few days we are going to separate out the capitalists from the rest. It was easy to be a capitalist when everything was going up. Houses, stocks, everything.
But now what will you think when the market corrects stocks just as it has corrected houses? You have gotten so fat and lazy are you sure you want to be a capitalist anymore?
It was easy when prices were rigged to always go up. I mean it was easy if you had a home, and stocks, if you were part of the oligarchy.
But now what are you going to do? Try socialism?
For myself I am going to remain a capitalist even during the Second Great Depression.
So come and get me Krasny, Owens, Weiner. Imus? Do your worst. Fools. Cowards.
www.NewRuskinCollege.com
www.NewRuskinCollege.com
Upper class Warfare Part VII: Political Discourse Part III
$700,000,000,000 sounds like a lot of money. But when you consider that Mr. Paulson proposes to float $12 trillion worth of securities on a pool of liquidity of just $700 billion the question becomes is the $700 billion enough? What Mr. Paulson wants to do is establish a market for the securities. Why? In order to establish a market price. Why? So the holders of the securities will be able to assign a market price to their securities, a so called Mark to Market value. (Jonathan Weil of Bloomberg calls this Mark to Paulson Accounting.)
In this scheme the $700 billion is only incidental. It is needed to establish a “market” so the $12 trillion in securities can have a market value established. It is possible that this plan will make things worse for some holders of the securities if the Mark to Paulson “market” price is lower than what the owners had valued the securities on their books, as the director of the CBO, Peter Orszag, has warned. (CBO Head: Bailout Could Make Crisis Worse. The Washington Post reports, The Financial Times and New York Times also report on Orszag's comments.)
Most people think that the bailout is about the $700 billion being paid out to someone, a bank perhaps, never imagining that the true objective for the Paulson Plan is the $12 trillion in mortgage back securities. The $12 trillion is said to be “frozen” because no one trusts the paper as long as the housing market continues to plummet. Because it can not be traded it is worthless.
As I write this the stock market has lost $1 trillion in market value falling 6.98% or 777 points. For a long time stock traders “trusted” valuations of 25 to one. That is they thought it fair to value a stock at $25 for every one dollar in expected earnings. This is the price/earnings ratio. This when the market was at 14,000. More recently the price/earnings ratio has decreased to $20 to one. Historically the average price/earnings ratio has been $10 to one. So you can see the market has a long way to fall.
Will Mr. Paulson ask for a few trillion to buy stocks that have fallen into disfavor? Try and establish a “market” price for them too? After all if you thought the pricing was just temporarily “wrong” and that values will soon return then you would have only to weather the storm for a few days or weeks and wait for values to resume their former positions.
But what if these market conditions are not to quickly correct. What if the nation has been living beyond its means for a generation? What if there has been a stock bubble just as there has been a housing bubble? What if houses are not going to quickly return to their former values?
Suppose that we are at peak oil in a country that has assumed cheap energy. Suppose we must start paying off that mountain of debt we have accumulated instead of buying goods and services from one another or more likely from the Chinese. Suppose companies that were earning $5 a share will now only be able to earn $1. And suppose the correct valuation of those shares is 10/1 not 25/1.
What if we are facing a once in a century down turn? A black swan event.
Well then we should introduce Mr. Paulson to Mr. Market.
Over the next few days we are going to separate out the capitalists from the rest. It was easy to be a capitalist when everything was going up. Houses, stocks, everything.
But now what will you think when the market corrects stocks just as it has corrected houses? You have gotten so fat and lazy are you sure you want to be a capitalist anymore?
It was easy when prices were rigged to always go up. I mean it was easy if you had a home, and stocks, if you were part of the oligarchy.
But now what are you going to do? Try socialism?
For myself I am going to remain a capitalist even during the Second Great Depression.
So come and get me Krasny, Owens, Weiner. Imus? Do your worst. Fools. Cowards.
www.NewRuskinCollege.com
0 Comments:
Post a Comment
<< Home