Bank plan a cure-all? Don't bet on it

By Bill Fleckenstein

No shortage of ink has been spilled on the PPIP, the Treasury's $1 trillion Public-Private Investment Program. With this week's Contrarian column being the first since the plan was announced, let me add my view to the debate.

I believe it will be difficult for the Treasury to make its plan work. But I don't want to be dogmatic and state that the proposal cannot work.

Why? Because it's not impossible to think that the government (the Treasury or the Federal Deposit Insurance Corp.) may coerce reluctant institutions -- as, say, part of upcoming stress tests of bank solvency -- into selling some portion of their troubled assets.

The plan envisions public-private partnerships that buy up to $1 trillion of these so-called toxic assets.

The government could say: We want you to sell X% of a certain asset that is impaired, just to test the market (in an effort to begin to establish market prices).

So, while it might be true that no banks will want to participate, it is also true that behind the scenes, arm-twisting may get the thawing process started.

But I believe that as bad as the financial problem is, the economic problem is worse. I don't see how the Treasury's program and other facilities would alleviate the economic problem.

None of these maneuvers to plug the holes in the dike of the United States' and the world's financial systems will necessarily do all that much for the overall economy. Thus, as the pure financial crisis recedes from center stage, the economic crisis lies front and center.

As for the looming funding crisis, the third part of the three-baseball-game analogy I first explained in my Nov. 3 column, "Economy sinks as we save bankers."

In a potential harbinger of the timing, a United Kingdom bond auction last Wednesday -- worth a modest $2.5 billion in bonds -- failed to find enough buyers. That, even as the Bank of England has embarked on quantitative easing, the polite name for debt monetization, or the conversion of government debt into money.

Perhaps it's just noise, but perhaps it's the canary in the coal mine. Sooner than predicted, we could see the funding crisis I expect governments to face as they try to finance debt.

Scant provocation stokes stocks' jubilation

Turning to the intersection of the economy and stocks: Last Wednesday's rally was aided by the fact that orders for durable goods were reported to be 3.4% higher versus expectations of 2% lower. That data series got folks excited about the prospects of better economic times dead ahead.

I have been expecting a bit of an economic bounce (and a coincident overreaction to it), as I noted Jan. 19: "That scenario will increase if some economic bounce, however small, begins to take shape. (As weak as the economy appears, the data now suggest it is even weaker.) Assuming the economy does bounce, a rally could occur sometime later in the first or second quarter -- as the bullish contingent seizes on the bounce as a sign the economy is recovering for real (a belief I do not share)."

Continued: A simplistic definition

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