Why the Bailout Cannot Solve a Thing: Nobody Is Blaming the Right Culprit

Excerpts from Dr. Enzio von Pfeil's October 3, 2008, appearance on Channel News Asia:

1. Dr. Enzio, some say the bailout package doesn't address underlying problems, and that it is not going to prevent the US economy from falling into a recession. Do you share this view?
* It does not address the culprits to be blamed. The common denominator is “conflicted research”. Where were these guys in the build up to this volcano of greed and avarice?:
o Rating agencies.
o Regulators.
o U.S. Congress.
o At some major investment banks, surely the “chief economists” and “chief strategists” who decided that securing their own bonuses and jobs – on the orders of these banks’ proprietary trading desks – was more important than giving an objective assessment of what was happening? Even the blind would have recognized that at recession/stagflation was in the making as early as 2006! We “called” stagflation in May 2006.
* Besides which, the Economic Time™ has been worsening in America since 2006; however, given the point that I just made, by deliberately misleading the investing public, these highly paid individuals have wasted many institutional and personal investors’ money…I wonder when they will be investigated by the FBI?
2. But, a package will go some way to restore confidence in the markets. And, there is no question that the US financial sector needs to be restructured. So, what else could the US government do?
* Yes, and this is the good side of America (one of the places where I grew up): Americans act more decisively than the other cultures which I have grown up/live in.
* So yes, it is a true “bailout”, which is a nautical term….
* And in the short-term, what the Administration and Congress are doing – firefighting – is fine.
* But the real solution to this problem is simple: NOT “more” regulation, but more self-regulation – and more un-conflicted research!
1. We recently had dinner with an old friend in Germany. He is partner in a private bank there. He is liable for five years after he leaves his bank for any of his decisions…..That law in America would do wonders in curtailing avarice that ultimately is paid by tax-paying “Ma and Pa Kettle” in Eugene, Oregon…
2. Next to self-regulation, the other solution has to be to ensure that un-conflicted research is written. How about splitting brokers from their research providers?
3. The housing credit crisis is already spreading beyond the US to Europe. Will there be a spillover to Asia? How is it going to affect Asian economies?
* Badly.
1. First, just because Asian banks are not telling us what is really going on does not mean that “everything is ok”. Witness our recent bank run in Hong Kong: the population is nervous and trigger-happy.
2. Secondly, in the real economy, slower imports by Americans and Europeans have to hurt Asian exports.
3. Thirdly, higher US bond yields (off the back of higher US federal debt) will drive up Asian debt yields, hurting the property market.
4. Are we going to see a repeat of the Asian Financial Crisis more than a decade ago or are Asian economies fundamentally strong enough to weather this turbulence?
* No, no repeat pattern of the Asian financial crisis.
* This time, things are “different”, and their gravity is more severe:
1. Stagflation. We are moving into stagflation.
2. Volume. The size of the US derivatives market is USD 455 trillion-that is THIRTY times the size of the US economy!
3. Speed. Also, with the internet, information just travels so much faster….exacerbating greed and fear…