The stock market and the liquidity crisis.

I have been watching the stock market's financial crisis this week.

I think the fundamentals of our economy are just fine. The problem is one of liquidity and greed of the financial companies. When congress repealed the laws in the late 1990s that were keeping banking, insurance, and brokerage as separate business, they freed banks and other financial companies to get into each others business. We now have the unintended consequences of repealing those laws, plus the greed that never leaves the wall street boys as they chase those big bonus checks.

Our government has been doing an admirable job of managing the crises and they should be left alone. But alas, it is not to be, congress is getting involved, greed is emerging and we will have a new form of the resolution trust that cost us tax payers lots of moneys in the early 90's.

The problem is that the financial instruments that were created to fund the housing boom and other debt instruments are so contorted that they can not be valued. Panic and the fear of the unknown makes valuing these securities very difficult. Thus banks and others are afraid to lend over night or even longer to each other because they might get caught up in a bankruptcy or insolvency, which might throw them into a similar situation. Thus it is a liquidity problem.

Our government has been plugging the liquidity holes and extracting tough terms for doing so, which is the correct and prudent course of action to take. Our big financial firms want a all-in-cumbering solution so they do not have to go begging for help, it is wrong to do so, and the terms will end up costing us the tax payers money. When our government loaned money to AIG (I own 800 shares of AIG) it extracted tough terms. Those terms will make AIG use any of the funds they draw on that loan prudently, and the terms will encourage AIG to repay the government quickly. The AIG loan protects the consumer, and gives us the tax payer security for the loan. There is more then a good chance that the government will make a profit on the AIG deal. It is not a bail out, but rather a loan of last resort.

The new plan, what ever it is that comes from congress will more then likely cost us money. We will end up buying the securities from the financial institutions giving them the cash needed to correct their balance sheets, and to get back to doing business. Keep in mind that the securities do have value and in time most of the money would be repaid on the underlying mortgages, if only they could be held to maturity, and if a system to manage all this was established in the beginning, or even at this late date. My best guess is the securities are worth about 70% of the original value.

I suggest we, as tax payers buy the securities from the financial institutions at prices between 100% and 60% of the original value. Let the sellers establish the price they want with this caveat, if you want 100% of the original value we get 40% of your companies stock. If you want 75% of the original value we get 15% of your companies stock and so on. Then we, the taxpayer will not loose money on the deal. Do you think our representatives are smart enough to figure this one out.? The new resolution trust they create would collect on the securities over time as best they can, and we then sell the stock we get to make up for the losses. Everyone wins.

Well that is Jim Glasgow's take on all this.

Your opinion?