Wednesday, September 24, 2008

Change The Rules First

Treasury Secretary Paulson wants 700 billion dollars immediately to rescue the economy. The stock market has been operating under bad rules or no rules, it turns out, and he needs the money to pump it up.

My dad always said that you needed to plug the leaks in the bucket before you tried to fill the bucket. You could just pump and pump and never have a full bucket.

We saw a lot of rusty buckets on the farm. Even the galvanized buckets eventually leak.

Some rules have been changed. Investors can no longer short-sell the stock of financial institutions - for a few weeks. Naked short-selling - where more shares can be sold short than a company has issued - has been severely hindered. But a free-wheeling derivatives market has pyramided into a bubble that threatens to avalanche.

No rules govern it.

Paulson wants taxpayer dollars to go in at one end of this mechanism so they can be dispersed into the hurricane at the other end. Where no rules govern.

If short selling is limited to 2/3 of a company's shares, then the sharks will only trim the fat off our dreams and not devour us whole.

If corporations are required to disclose their "credit default swap" obligations on their quarterly reports and connect them to their balance sheet, the market will determine the true value of their shares. Some are shells and no longer have any real value. They have traded their worth for profit.

If first of all the bucket is fixed and the leaks are plugged, then a government bailout won't trickle out through all the holes. And be needed again and again.

Where no rules govern.

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