Thursday, May 21, 2009

Unintended (and Predictable) Consequences

Credit card reform bill

  • Intention: To protect consumers from "unfair and abusive" practices by credit card companies.
  • What many consumers are already getting: Notice from credit card companies for increased rates and fees, reduction of borrowing limit, or outright cancellation.
  • What all consumers will eventually get: higher rates across the board, regardless of their spending and paying habits.

Federal Reserve's decision to buy longer-term Treasuries

  • Intention: To keep the interest rates on longer-term loans low.
  • What's happened: Fed becoming the buyer of last resort. 10-year and 30-year Treasury yields have gone up.

Bank "Stress Test"

  • Intention: To restore public confidence
  • What's happened:
    - The test itself, and the test results are perceived as joke or worse.
    - Has helped banks to raise capital at a much higher level, which has made investors more suspicious of the test's intention.

The White House and Congressional outrage over AIG bonuses

Chrysler's bankruptcy/restructuring

  • Intention: To restructure Chrysler into a viable, competitive business; to protect US workers [=UAW workers] and keep the jobs in the US.
  • What's happened so far:
    - Fiat is getting a free lunch with no money down.
    - 1st-lien secured bond holders got half of unsecured claim holders (totally ditching the bankruptcy law).
    - Investors will be wary of investing in any troubled US company receiving any form of US government aid.
    - It looks more and more like Chapter 7, not 11. Chrysler and soon-to-be bankrupt GM are shutting down their dealerships which will result in job loss and bankruptcies.
    - GM says it will import cars made in China.

I hope they were at least "unintended".


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