A Crisis of Faith

Paul Krugman has a decent opinion piece in the NY Times today.  If you’ve read any of his stuff before, you know that he thinks government has all the answers – and that government can fix whatever is wrong with (pick your topic!).

Todays’ article basically blames everything economic on “A Crisis of Faith”.  He says that investors have lost faith in the security of the underlying investments, and their lack of faith is causing the Port Authority’s borrowing cost to go up.  Technically that’s true, but he doesn’t go deep enough into “why” investors don’t have faith.

It’s not that they distrust the Port Authority ability to raise taxes to pay them back – it’s that the insurers are technically bankrupt – IF the Port Authority doesn’t pay the money back, there’s no second layer of protection.  It’s the same as if you were thinking about putting your money into a bank that has a great reputation but isn’t FDIC insured.  If you can get the same return on your investment from an FDIC insured bank – why would you bother with the non-insured bank?

When Ambac and MBIA are technically bankrupt, why bother with anything they insure?  There are safer places to put your money.  Not necessarily big FDIC insured banks – sure you’ll get your money back if the bank fails, but it may take quite a while.  Local banks that didn’t resell the mortgages they wrote should be fine – they were conservative in writing the loans, so they won’t be hit as hard when a lot of people default over the next couple of years – but I think gold and/or silver will have better returns than most other common investment over the next 1 to 2 years.  This financial crisis is just getting started.

gk

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