The man with a plan

Yet again, as in October, ‘buy on the rumour, sell on the news’ has been the financial markets’ reaction to the latest efforts to solve the financial crisis. A 5% fall on Wall Street last night, in response to the Geithner plan, tells its own story. The blog is also unconvinced that this further $2.5 trillion will solve the problem.

Back in September/October, it raised 5 questions about the spending plans. None have yet been properly answered. And crucially, for the chemical industry as well as for the economy, nothing has yet been done to solve the root cause of today’s problems, namely “the excess supply of homes and the large number of mortgage borrowers in dire straits”.

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Today, however, former Treasury Secretary Brady has put forward a plan to address this issue. Brady was the man who gave his name to the Brady bonds, issued during the first Bush administration to resolve Latin American banking problems. He has a good track record, and the blog agrees with his diagnosis and proposed solution. His plan focuses on the two key issues that are currently depressing the US economy:

Deleveraging. Brady argues that this process has to be eased. One key step would be to abandon ‘mark to market’ accounting. This creates a vicious circle, whereby today’s low value becomes the norm tomorrow. In turn, this destroys the banks’ capital base, forcing them to further reduce lending, and causing more bankruptcies.

Foreclosure. As Brady notes, you can’t begin to rescue the US financial system without first confronting the mortgage problem. His first step would be to make a realistic calculation of the “true scope of the problem”. At the moment, neither the public nor the financial markets believe that this has been done.

The essence of Brady’s plan is that the authorities need to get a handle on the amount of money that needs to be written off, as a result of the reckless lending that took place in the housing sector. People then need to be given support to help them stay in their homes, rather than being pushed onto the street, leaving their property to become derelict.

At the same time, the financial system needs to be given time to begin to repair itself. The US Treasury will need to pick up the tab, and the US taxpayer will end up paying the bill. But as Brady says, quoting General George Patton, ” a good plan, violently executed now, is better than a perfect plan executed next week”.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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