The Acceleration Through the Turn Will Make All the Difference

I am pleased to see that the Senate has passed the Financial Crisis Bill. I will be bold and suggest a prediction that the House vote is already a foregone conclusion – done and done. This just has to happen.

Once we have the green light, the Fed can do this the right way with the competency to mange this properly by bringing in the business acumen from the private sector to ultimately aid in what will be a very elaborate auction system. The assets that will be purchased from the government need to be purchased in a way to allow it to sell into the markets, once stabilized, at a profit – and that is the opportunity for the Fed in tandem with the challenge.

Mark-to-Market is a tricky issue – but we can deploy the proper intelligence to act – and act in time. Can the Fed accomplish this? Yes, I believe it can. In decades past, the government had very sophisticated national asset auctions that took into consideration every variable relating to geographic values, credit model characteristics, asset types, socioeconomic issues – you name it. As a nation we have the competency to do this right and we have the experience from the past that can be pulled out, dusted off, and deployed yet again.

Moving forward, we need to accelerate faster into “the right turn” (emphasized in a previous post, My Ten Cents). The commercial paper market is the key to getting the ball rolling.  Made up of money from Main Street and global markets, the commercial paper market keep money flowing into institutions with investment vehicles which is then lent back out into the business world. When a Goldman Sachs stands up and says, “We need $100 million to do X”, due to its size, reputation and ability; the commercial paper market steps in and provides the needed liquidity. In addition, when a small business steps up and makes the same request, it also has the ability, based on its credentials, to borrower from this ocean of funds to operate on a daily basis.

There are two sides to this issue – businesses need to borrow money at interval times to operate, and in addition to that they need to take cash on hand and invest it in ways that will provide the best yield – which are investment vehicles beyond a regular checking account providing FDIC insurance coverage. With that said, if a business is not comfortable putting their money into a fund outside of a FDIC insured account, it ultimately chokes off liquidity flowing into the commercial paper market. The problem now is that the ocean has turned into a pond. 

As you can imagine, if money is not coming into the commercial paper market it cannot go out to businesses and provide the essential short term liquidity to cash-flow operations. Without the Fed’s intervention and Congress finally agreeing to approve the initiative, the commercial paper market would be completely frozen shrinking the pond into a puddle or simply drying up all together. In this scenario, only the businesses that have enough cash on hand to operate without short-term financing survive. Even this minority will eventually fall onto massive problems simply due to the fact that the entire economic supply chain is disrupted and the smaller business down the line that supplied the minority with cash on hand, with raw materials, or endless other necessities, is not able to stay in business due to the small businesses’ inability to cash-flow operations. There is no escaping the catastrophic negatives that would be imposed on the world economy if we did not support the latest initiative to support the flow of financing for all businesses — large and small.

Now that we have hit the gas pedal as we make the turn, it is essential that we are not timid in the process. Before businesses, public, or world markets will start to place their money into uninsured financial vehicles (money flowing into the commercial paper ocean, pond or puddle); they will watch to see when the Fed starts to pump money into the mechanism first. If this goes as planned, the Fed will have a BIG pile of money sitting around and it is essential that they act fast to show a commitment to expeditious action to provide liquidity to flow into the commercial paper market.

So, who acts first? It is essential that the Fed jump starts the process and fast. Main Street needs to feel comfortable and confident that money is flowing properly. Once a large or small business sees that liquidity is flowing, they will ultimately jump into the equation and the pump will be primed and money will flow accordingly.

On another note, but obviously connected, I like the idea of creating a higher FDIC insurance cap to $250,000 – who doesn’t? However, this does create motivation to reduce money flowing into the commercial paper market – but to what extent? Who knows – we shall see.

I believe that the Fed can make a profit on this package and that the housing prices will stabilize as we properly adopt current action and help support the liquidity that is so essential to capitalism. As businesses are stabilized and money is flowing properly; businesses will become stable and successful, hire additional employees, and provide higher pay.

It’s simple. If people have money to spend, they will spend it. And they will spend it on real estate. There are amazing bargains to be enjoyed and demands will begin to increase. With these demands, prices will inevitably start to climb at some point. I predict this will occur (if current plans are executed properly) by the end of 2009. As prices climb the government will have an opportunity to bleed these same assets off at greater yields – and this will come back to all of us as tax payers.

The next steps are essential – but more important is the timing and commitment by the Fed and the entirety of world markets to adopt new confidence and invest into the great ocean of money that makes the world go around.