Tuesday, September 23, 2008

Contagion: Toxic Stocks, Toxic Securities, Toxic Paper

Blue chip securities are not what they used to be. Now many are being described as 'toxic.' The stock market environment is clearly contaminated. Emergency mitigation is being contemplated by Congress, which is considering making the Treasury Department the financial markets EPA. Wall Street is on Congress' Superfund List and is being scheduled for clean up. Let's hope there is less litigation that in EPA's real Superfund Program. Of course, this toxic paper from money market funds is needed to keep factories open so that people can keep their jobs. This money market paper was supposed to be available to maintain confidence in the financial markets, particularly banks borrowing from banks. Unfortunately when this commercial paper became toxic, the Fed, which is supposed to be the lender of last resort, has become the bailout lender of first resort. Now Treasury wants to buy up these bad loans and assets from troubled companies and could auction them off at some point in the future.

Now the Treasury Department wants Congress to approve a $700 billion blanket bailout power so that the Treasury Department can buy illiquid asets from American financial institutions in order to stabilize markets. This comprehensive approach quickly replaced the one-at-a time rescues of the previous weeks. Unfortunately, before this legislation could be approved quickly, Congress, particularly the House, is very reluctant to give the Treasury Department this much money and that much power. They will probably approve something that has them looking over Treasury's shoulder and maybe even needing Congressional approval for purchases over a certain amount. Plus, seeing that it is an election year, many members want a special funding mechanism that would help homeowners in trouble with their mortgage payments. Such assistance, combined with fixes, such as the Federal Housing Finance Agency running both Fannie Mae and Freddie Mac, will get our economy back on track. In a perfect world, maybe recession can even be avoided.

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