Business News

Don’t bag intervention

| More

by Peter Switzer

Anyone looking for market guidance right now might take this warning — beware the prophets of doom who will tell you we’ll all be ruined. Sure there are still challenges ahead but the intervention, especially from the US Government and the Fed, can be believed in.

In fact, respected US banking analyst, Dick Bove has gone so far as to describe the much-maligned TARP program as the best ever!

Spook factor

One of the current spook factors which has undermined confidence recently — the shakiness of the Irish economy — is in part a function of the inept and too hands-off approach of the European Central Bank.

It’s the lack of leadership in the Eurozone that has made the region’s economic recovery all that more challenging.

When I bounded out of bed this morning, the Dow Jones was up 80 points but over the hours going into the closing bell the gains were whittled away. But what I like about the recent US sell offs is that there’s no real conviction to take the market down big time. However, if the European news gets more ugly than we expect, this reluctance to sell could easily ‘turn on a dime’ as the Yanks love to say.

Government intervention

My general view is that governments shouldn’t be too involved in an economy except when we face the chance of a Great Depression re-run. The madness was created by too much free market mayhem and uninspired regulation. The only way to restore confidence to business and then consumers is to intervene.

The day Lehman Brothers collapsed one economist admitted: “We are all Keynesians now!”

Of course, he was wrong but most economists saw the value of government intervention which John Maynard Keynes recommended when demand was set to gurgle down the plughole — my words, not his, but you get the idea.

TARP success

What I found interesting was the view of Dick Bove on the Troubled Assets Relief Program or TARP, which saw the Bush Administration approve the US Treasury allocating $700 billion to US financial institutions to avert a potential liquidity crisis.

Bove told CNBC that TARP was the “most successful government financial program ever”.

The action saved US banks and the US economy and the 10 per cent unemployment that some Americans complain about could have hit 20 per cent without it.

And for those who gasped when they saw the size of TARP, the news even gets better.

Over 50 per cent of banks that received the TARP funds have paid the money back and get this — the US Treasury has made a $28 billion profit so far.

Bove rightly claims that TARP “reversed a decline in the economy which would have resulted in even more bankruptcies, lost jobs and wealth destruction.”

Buddy, can you spare a dime?

Generally since this financial drama has unfolded, the long line of critics of people such as Ben Bernanke, who I think has done a marvellous job considering the challenge, are genuinely so poorly qualified to hold themselves as an expert on how to make the world’s biggest economy recover from the worst financial mess since the 1930s.

Anyone who doesn’t agree should revisit films of that era, which made such lines as “Buddy, can you spare a dime?” eternally memorable.

This is what I can’t forget when I look at the outcomes of the interventionists’ rescues around the world following the crash of 2008.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer and Paul Rickard the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

Published on: Tuesday, November 16, 2010