Yesterday's move by the US Federal Reserve, the European banks and the Bank of Japan to douse the global banking system with $184bn (£101bn) may get us through the week without another catastrophic failure, but it does nothing to halt the downward spiral into debt deflation.The Real Effect
The yield on three-month Treasury notes remains near zero - a level last seen after Pearl Harbour - reflecting a near total loss of confidence in all financial instruments. The five-year CDS credit default swaps on a great clutch of America's biggest companies are flashing imminent bankruptcy signals: Washington Mutual (2638), General Motors (2284), MBIA Insurance (2187), Advanced Micro (1773), Ford Motor (1718).
Former Fed chief Paul Volcker is now calling for a vast sink - underwritten by the US taxpayer, and modelled on the Resolution Trust Corporation (RTC) - to soak up trillions of dollars of toxic debt and asset-backed securities once and for all.
"Until there is a new mechanism in place to remove this decaying tissue from the system, the infection will spread, confidence will deteriorate further, and we will have to live through the mother of all credit contractions. This contraction will undercut the financial system, and with it, the broader economy," he wrote in a joint article with other elder statesmen.
"It will in the short run require serious money. But a failure to act boldly would cost the taxpayer and the country far more. The pathology of this crisis is that unless you get ahead of it and deal with it from strength, it devours the weakest link in the chain and then moves on to the next link. Crisis times require stern measures."
How much would it cost? Prof Kenneth Rogoff, former chief economist at the IMF, says the bill would run to at least $1 trillion. This would increase the US government debt from 48pc to 55pc of GDP (under IMF measures) - still lower than that of Germany, France, Italy or Japan. (Reminds me of the argument used for gas prices)Oh, only a 48-55% increase in government debt, well at least we're not crazy like Japan. At least we're not selling our children into slavery with interest payments via the IRS.
Let's get a few things straight here:
- "They" are not "us". If the banks fail, then let them fail! It is the consequence of their consummate greed in over-leveraging these loans. This money used for the bailout is coming out of your pocketbook and going into theirs. When was the last time a bank or corporation was this nice and allowed you to set your debt aside at their expense?
- "You" will be left holding the bill. Your children and grandchildren will be held responsible for paying off this debt when it comes due.
- This will not fix the real problem. Do you really think giving someone a free ride when they are being greedy is going to change the behavior? There is no negative incentive for them not to participate in the behavior.
- The downside to this is way above one trillion - This figure is optimistic. If things get ugly, the taxpayers are holding tens, if not hundreds, of trillions of dollars in these "toxic" loans. Oops...
"President George W. Bush, flanked by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, acknowledged that the program will put a "significant amount of taxpayers' money on the line."Think for a moment. If they are admitting that this will "put a "significant amount of taxpayers' money on the line."", what do you think is really going to happen? This -
"The administration is asking Congress to give it sweeping new powers to execute the plan."Now where have I heard that before? Hmmmm... 'Give me power and I'll fix it'. Stalin? Nah. Hitler? Couldn't be...
Notice how on the above picture that the bottom of the "Great Depression" didn't come until much later than the intial plunge? The market is reacting like an addict, convulsing with desire for more goods (I.E. - Fiat debt-based liquidity). This will only make the fall that much harder.