THE PAULSON PLAN: TAXPAYER INVESTMENT OR EXPENSE

Virtually all other events in our economy and society have been overshadowed this week by the wrangling in Washington DC regarding the proposed bailout of the US credit complex, capital markets, and investment banks; and for good reason. This is perhaps one of the most important pieces of legislation to have crossed the house and senate in our lifetimes. There is more than enough blame to go around regarding how and why our financial system got to where we are today, and the politicians seem to love spreading that blame to anyone and everyone else. The reality is that we are all to blame, in one way or another, and virtually every one of us benefited from the scenario that brought us to where we are today. Conversely, it will take the efforts and resources of all of us to bring this situation under productive control.

You may not agree with me on this, but it is absolutely the case. Regardless, it is clear to all of us that something must be done to turn the situation around. What is less clear, thanks to those politicians who’ve been grand-standing before their constituents, is the real outcome of various elements of the Federal Reserve and Treasury proposal – the ‘Paulson Plan’.

At its core, the Paulson Plan would have the US taxpayer purchase the troubled assets of financial institutions critical to the operations of the credit and capital markets. With the liquidity provided these institutions, they can return to the profitable lending and investing process so vital to our economy. Without it they are all but frozen, and the economy would suffer a significantly greater slowdown than we’ve imagined or experienced thus far.

Why then is there so much posturing over what could have been a relatively simple, though major, solution? Because those tasked with making decisions for the population at large have lost confidence in the very markets they are working to correct, and in the executive branch of our government. With less than six weeks to go before the entire US House of Representatives, fully one third of the US Senate, and Senators McCain and Obama face an election, they are all posturing before the nation. They are doing their level best to act as though they have the knowledge, expertise, and credentials to make better decisions than the US Treasury, SEC, and Federal Reserve, whom many see as agents of an unpopular president.

It is reasonable to expect that executives of companies that will benefit from a federal bailout ought to be limited in their compensation packages, and that there should be responsible oversight of those making decisions with $700 billion dollars of taxpayer money. It is not reasonable to place other onerous requirements and limitations on those executives and shareholders, or to cloud the issue by labeling the enormous taxpayer investment as a taxpayer expense. Doing so not only hinders the timely passage of the legislation, but also lessens the likelihood that it will have the desperately needed outcome for which it was designed. For important participants in this process to come forward fully one week into what must be a very short process, and start proffering alternative proposals, is irresponsible and shameful.

POLITICIANS! Can’t live with ‘em, can’t ..…. , well, you know.

Contrary to what many politicians and the media have represented, The Paulson Plan would not be a $700 billion taxpayer expense. No more than buying a house or investing in your 401(k) is an expense. It would be an investment. It would exchange dollars for valuable assets that should be able to be sold in the future for more than what was paid for them. While there would certainly be some considerable expense in managing the investment, buying the assets and selling them at appropriate prices and advantageous time frames, the expense would be far less than the expense to the US taxpayer and economy of not taking the appropriate action now.

Bill Gross of PIMCO, one of the most respected bond investors in US history, estimates that The Paulson Plan would yield 10-12% for the taxpayers if handled reasonably. Ben Bernanke, Henry Paulson, Chris Cox, and many others, are leaders with the appropriate credentials, knowledge and expertise, who employ some of the best trained and most knowledgeable financial minds in the country. They likely stand to have little personal gain from the passage of this plan. They’ve jointly recommended it to the president and have continued to work tirelessly, with amazing flexibility, to bring it to fruition. Though I’m not sure any of us should expect the federal government to hand us a profit, I do think we can look at this and accept the beneficial outcome the plan has to offer. That is, bringing liquidity to a very illiquid market, restoring confidence in the US financial system, and restoring value to a depressed real estate and volatile equities market.

For those who want to further punish corporate executives and shareholders for their parts in this debacle, there is resistance to the administration’s recommended course of action. Others want to target resources to homeowners and taxpayers directly, supposing that this will remedy the situation. And others still want additional language added to the legislation that would specifically benefit their own agenda, regardless of what is good for the country and the economy. These are short sighted and wrong minded individuals who haven’t the proper perspective on the situation at hand.

Executives and shareholders have already lost hundreds of billions of dollars as their stock values have disappeared before our eyes. Though many homeowners and taxpayers face tremendous difficulty due to this crisis, many of them have also benefited directly from the causes of it over the last five to ten years. And those opportunists that want their own agendas catered to at this time of crisis deserve nothing less than to be exposed for what they are.

President Clinton came to the nation almost 16 years ago and asked us to invest in various state and federal programs though increased taxation. He effectively persuaded us that our sacrifice then would pay off later, and in large part it did. Towards the end of his term in office critical decisions were made that laid the foundation of what we are living through today. In the early days of his administration, President Bush asked that we support an effort to rid our world of terrorists and terrorism. He warned us that it would be a long and unpopular effort, and that it would come at a terrible cost. Like Clinton before him, he was correct. Each of these presidents has had to deal with the issues left behind by previous administrations, just as all leaders do. The next president, Obama or McCain, will have to do likewise. We will need to trust in those they appoint to positions of power and authority, just as we need to continue to have trust in those in the very same positions in Bush’s administration today. This is not a time for political posturing or the self-serving actions - it is a time to take a unified stance for the benefit of the economy and the nation.


A WORD ABOUT DELEVERAGING

The effects of deleveraging have been discussed thoughout the markets over the past few weeks. Deleveraging takes place when numerous financial institutions reduce the financial leverage applied to certain assets, either in an attempt to exercise caution, or as a byproduct of the decrease in the value of the asset, and they do it all at about the same time. This reduces the amount of working capital in our markets and, depending on which economic philosophy you might adhere to, can slow the growth of an economy, or stimulate new growth through economic determination and innovation. Regardless of the anticipated outcome, the process of deleveraging can be uncomfortable, especially at a time when there are so many other factors working against our economy.

Brian Wesbury of First Trust Advisors posted a short video presentation on the internet regarding his take on deleveraging and what it might portend for our markets. It’s worth viewing. Go to the following link to see Wesbury’s comments: http://www.ftportfolios.com/Commentary/EconomicResearch/2008/9/25/bailouts,_de-leveraging_and_japan.