I am convinced President Obama is a decent person. I am also convinced he is championing solutions that will never work when it comes to the trainwreck that is our economy, and especially our financial system.
The new stimulus bill, should it pass, will create a few jobs. All at the taxpayers' expense. How can you spend more without raising taxes? Can't be done. Somehow, someway, taxpayers will pay for it. If you spend it before you make it, that means going into debt. Going into debt to buy things now you cannot pay for means you will pay more for those things later, due to the exponent function of interest on the money you borrow. Should you not continually get a return which is greater than the sum of what you borrowed, plus the interest owed, you are worse off than before.
Because congress is under the delusion that you can also give tax cuts while spending more (the Republican ideology from 2001 -2008), combined with lax oversight of how that money is spent, you get a bad outcome.
Even worse is what is to come next. Timothy Giethner, our new Secretary of the Treasury, will unveil a plan to help save the banks. At the center of the plan is the idea that the "bad assets" on the banks' ledger sheets prohibits them from lending, and if they could be momentarily relieved of them, then they will again lend.
Very Bad Idea.
It is bad because of this - The "bad assets" are derivatives (bonds) which were predicated on housing prices always going up. In the risk models Wall Street used, it was never factored in what would happen should housing prices remain level, let alone go down. These derivatives would have rendered massive losses even if housing values remained flat. Housing values haven't remained flat, they have gone down, in some markets by 50% from the 2006 peak.
Most of these derivatives will eventually realize a 100% loss, or very close to it.
The idea that a rescue plan for these assets will work is lunacy, pure and simple. Think of it this way; The top 50 holders of these derivatives, which include banks, corporations, pension funds, money market accounts, plus others, have a combined total $200 Trillion in derivatives, maybe more. What Mr. Geithner is proposing is the government take those bad assets, and exchange them for US Treasuries.
The US Treasury may only give 70 cents on the dollar in exchange. Yet, most of these bad assets will have at least an 80% loss, probably greater.
70% of $200 trillion = $140 Trillion.
80% percent loss of $200 Trillion = $160 Trillion.
$200 Trillion - $160 Trillion = $40 Trillion.
$140 Trillion - $40 Trillion = $100 Trillion total government loss.
That is best case scenario. The amount being held in level3 accounting rules by corporations and banks in offshore accounts may greatly exceed $200 Trillion.
My proof that the new bank plan cannot work? How much benefit did the first $350 Billion give the credit markets? Nada. Zilch. Zero. Bumpkus. The money is being used by the banks to meet rising reserve requirements as the value of the derivatives they hold melt away.
In fact, the equity markets gave a resounding reply - they crashed fully one-third in value. Almost half the value from the 14,400 DOW high. And those "smart" analysts on all the media talk shows said the Dow would go up, even set new, record highs, with the first bailout.
Sigh.
As I have said before, until ALL level3 assets are removed, and the losses taken by the companies that invested in them, every dime used to solve this "problem" will be wasted. Yes, some, maybe many, of the biggest corporate names will cease to be.
That is far, far better than the US ceasing to be.
We cannot absorb $100 Trillion in losses. Should the administration's idea go forward, the bond market will respond, and not in a positive way.
The bond market dwarfs the equity market. That means there is several times more money in bonds than stocks. If bond investors feel they are being thrown under the bus, they will sell their bonds, no matter the losses, and take their money and go home. They WILL wait for prudence to return.
That is what happened in 1931 - 1932, and caused the crash. The economy could have fended against the stock losses. But when the money from bond investors left, so did the economy. Bonds are the economy. Forget all the media tells you today, BONDS ARE THE ECONOMY.
That is why there were over $600 Trillion in derivatives sold from 2001 - 2007. The big money doesn't like to play in equities, for the returns are volatile. Bonds give a known return. The bond money realizes what most of America doesn't, Wall Street, with the help of the Fed and overall market mentality, created and profited from a scam with these derivatives. What bond investors want to see is the perpetrators of this scam to be held accountable. This is one of the big factors of the liquidity problem. They are waiting to see what the government does, and have refused to rollover their money into new issues, for fear they might be buying the next scam.
If our government passes Mr. Geithners plan, bond investors may decide the chicanery has undermined their current safe investments, and made them not so safe. Then a sell off of bonds will begin.
We must do everything we can to keep that from happening. Call your friends, call your senators and representatives. Go protest in Washington. But do something.
The time is nigh.
Update; 12:06pm: After reading numerous articles on Mr. Geithners' new and revised plan, it seems he will ask for Wall Street to help support at least some of the purchases of derivatives. The government will come in and create a "floor" or amount at which they will guarantee against losses. That is a little better, for the government won't eat all the losses, just most of them.
But, it still won't work.
Here's why - Asking Wall Street to buy these securities, from basically private money, or worse, themselves, is like asking the counterfeiter to buy the bills he counterfeited. Why would he do that, when he can go to several gas stations, pass off the phony $100 bills, and get $98 back after purchasing some gum?
The government will ask Wall Street to pay (itself?) $90 for a fake investment. The government will then guarantee at least $70 for that fake investment. Wall Street will still lose $20 dollars, and the government will still lose $70, because in all likelihood that fake security could well be worth $0.
So, the counterfeiter loses $20, as opposed to $2, and he has no gum to boot.
3 comments:
where is all the money. isn't it a zero sum game? if i spend $500, that money exists but with another party. where is the 600 trillion? if its bets, isn't there one final holder?
Not really.
If you bought a couch for $500 from a store, the owner has to pay the furniture maker $250 for the couch. He paid 10% commission to the salesperson, part of your $500 went to the overhead of lighting, salaries and taxes. He would be lucky to pocket $100, which he immediately sends to the private school his daughter attends.
As with housing. 2 years ago, the entire housing stock in the US was valued at $40+ Trillion. Today it is less than $30 Trillion. It's like asking me where did that money go?
Just as with housing, the profits were taken and spent. Some of the $600 Trillion went to profits for the investment houses and banks, after all expenses are paid. Much of the profit was then used to borrow more. Some went to the ratings agencies. Some went to the MBS holders. Some CDO's etc still have some value.
More importantly, the value today is predicated on what someone will pay for it.
You ask a good question, and the buyers of those CDO's are asking the same question. Unfortunately for them, the money sits in mansions, boats, second homes, new office buildings and bank accounts of tens of thousands of people involved with selling derivatives. And the value of all of those things they bought has dropped. That does not include the perks of the good life - wine that was drank, meals eaten, vacations, high end parties, the list goes on and on.
That is where the money is.
average credit card 10K debt, each lost job drops home values - i lave in central or. was real estate hot spot. now 11.5% unemployment. 6 jobs listed in the newspaper.
when the us depression hit, no one ion debt and strong dollar. my 70 year old stock trading buudy sayd dow goes to 3000. tough stuff.
enjoy your site. i have learned much. thank you.
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