Previously I suggested that the US and other governments take possession of their banks’ ‘toxic assets’ so that they could raise fresh capital in order to start lending again. To reduce the cost to taxpayers I also suggested that those governments could get warrants when they acquire such assets that would convert to bank stock which could be sold on to private investors, and hire private equity managers to oversee the process.
Well it now appears that the US government is going to pursue a hybridised version of what I suggested. Instead of taking these ‘toxic assets’ off the banks’ books and creating a ‘bad bank’ to hold and dispose of them, President Obama’s economic team is proposing to set up several public-private ‘vulture funds’ to compete with each other in valuing and buying these bank assets, with the US government limiting the risk for potential investors. While this proposal isn’t as clean as what I proposed two weeks ago, I am cautiously optimistic that it might succeed in realising the same goal.
In the meantime, I believe the economic situation in the US and the rest of the world will continue to get worse before it gets better. They say it’s always darkest before the dawn, after all. But I am now detecting glimmers of light on the horizon. The first indication that the worst may soon be over will be the bottoming out of the stock market in the United States, which may be closer at hand than most people currently think. So why exactly do I believe this?
Last week the US stock market dropped to its lowest level in 12 years, and while it may have a bit further to fall yet, I suspect it is now fairly close to its bottom. That means there are some really good companies with strong balance sheets and excellent future earnings potential available at relatively low stock prices. Savvy investors will begin to buy these stocks now or in the near future while they are cheap, which will in turn stabilise the overall market. Note that I said ‘stabilise’, not ‘reverse’ the current downward trend of stock markets around the world. The markets won’t rise again until a majority of private investors become confident that the financial crisis is well on its way to being resolved.
The smartest investors are the ones who step in and begin buying stocks or investing when the market in one of these troughs. They don’t wait until they are certain the market has bottomed out, but instead buy whenever they see weakness in an already down market. They do so because they know that once the majority of other investors regain confidence in the market, they will then be competing with them for the best investments.
Other signs of light include the rate of consumer spending in the US (which actually rose a modest 0.06 per cent in January for the first time after six months of decline), the return of some private investors to a bottomed-out housing market (a sign that upward trends are predicted, if not expected) and an increase in manufacturing activity, signalling an end to the contraction of US business and industry.
Nevertheless, we should expect US economic, employment and spending reports to continue to be pretty dismal for the rest of 2009. But the good news for Ireland and the rest of the world is that just as the US led the world into the current economic recession, so too will the US lead us out of it.
Charles Laffiteau is a lifelong US Republican from Dallas, Texas who is currently pursuing a PhD research programme in Environmental Studies at Dublin City University
