I have maintained since its grand inception, that the PPIP would not work. Bob Pisani of CNBC is now reporting that the plan might be scrapped altogether. He cites stronger markets as the potential reason, but I have an inkling that the Treasury has seen the TALF results and investor demand for the PPIP and concluded that the plan will simply not work. The government induced rally, first quarter earnings and subsequent capital raises have given the banks the impression that they can earn their way out of this toxic asset mess. Thus, they have zero incentive to sell these assets at distressed levels via the PPIP. Especially if they believe the housing market is rebounding.
This is all well and good assuming the U.S. economy is indeed experiencing a sustainable long-term recovery, however, I view this as nothing more than a gamble. The history of consumer based de-leveraging recessions tends to point to very long drawn out recessions as opposed to quick v-shaped recoveries.
In addition, we’re hoping that our banking sector is stronger and different than Japan’s. Despite a relatively short credit crisis, the write-downs in Japanese banks plagued the lending markets and the Japanese economy for years after the actual credit crisis ended. By not forcing these banks to take the write-downs we are at risk of experiencing the same cash flow problems caused by toxic assets that destroyed the Japanese economy for 25 years.
I sincerely hope this recovery is for real, but I would have preferred to see the administration take a proactive response and force these banks to clean up their balance sheets as opposed to risking the potential “lost decade” that Japan experienced. They’ve rolled the dice with our futures. Let’s hope they don’t roll snake eyes….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.