Government Investment Program Misses The Mark
The Public-Private Investment Program seems to be stalled before it really got going. This idea has been floated in one form or another since late 2008 and it has its merits.
What Needs To Happen
The crises won't go away until legacy assets - that is, the assets formerly known as toxic - are priced to sell. The government is seen as the only player big enough to act as market maker and also provide funding, theoretically seeing that all deals are done in a way that maintains both financial stability and profitability for private investors.
Unfortunately, there has been a lack of real enthusiasm, and for a very good reason.
Money managers know there is money to be made - perhaps lots if the fire sale prices go low enough - but they fear the government. No matter the promises, the drama over AIG bonuses and other unpredictable reactions from Washington and Congress have potential investors worried. (To learn more, read Falling Giant: A Case Study Of AIG.)
The Downside
More than compensation, investors should worry about windfall profits taxes swooping in if they make "too much." What's too much? It'll be an arbitrary number at which the public and politicians get angry.
Oil companies found this out in the late 70s and early 80s when inflationary monetary policies drove commodities prices, especially crude because of an OPEC embargo, very high. A windfall profits tax was enacted to punish oil companies for continuing to produce oil and price it according to demand - in other words, for doing business.
So, the government is ok with business as long as no one makes too much money. With P.P.I.P., however, it doesn't end there.
Despite the risks, some banks were thinking about creating spinoffs to buy the parent company's toxic assets using government backed funding - something that makes economic sense but is not politically saleable. A quick flurry between Washington and Wall Street quashed this notion.
Where Do We Go From Here?
So we're back to a situation where no matter potential return, the risk created by uncertainty overWashington' Washington
What Needs To Happen
The crises won't go away until legacy assets - that is, the assets formerly known as toxic - are priced to sell. The government is seen as the only player big enough to act as market maker and also provide funding, theoretically seeing that all deals are done in a way that maintains both financial stability and profitability for private investors.
Unfortunately, there has been a lack of real enthusiasm, and for a very good reason.
Money managers know there is money to be made - perhaps lots if the fire sale prices go low enough - but they fear the government. No matter the promises, the drama over AIG bonuses and other unpredictable reactions from Washington and Congress have potential investors worried. (To learn more, read Falling Giant: A Case Study Of AIG.)
More than compensation, investors should worry about windfall profits taxes swooping in if they make "too much." What's too much? It'll be an arbitrary number at which the public and politicians get angry.
Oil companies found this out in the late 70s and early 80s when inflationary monetary policies drove commodities prices, especially crude because of an OPEC embargo, very high. A windfall profits tax was enacted to punish oil companies for continuing to produce oil and price it according to demand - in other words, for doing business.
So, the government is ok with business as long as no one makes too much money. With P.P.I.P., however, it doesn't end there.
Despite the risks, some banks were thinking about creating spinoffs to buy the parent company's toxic assets using government backed funding - something that makes economic sense but is not politically saleable. A quick flurry between Washington and Wall Street quashed this notion.
Where Do We Go From Here?
So we're back to a situation where no matter potential return, the risk created by uncertainty over
by
Andrew Beattie
Andrew Beattie has spent most of his career writing, editing and managing Web content in all its many forms. He is especially interested in the future of search and the application of analytics to the business world. In addition to being a long-time contributor to Investopedia.com, Andrew has been working on ForexDictionary.com.
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