Bailing on the Bailout Adds to Market Uncertainty

Bloomberg news reported that the Bush Administration will not be seeking the remaining $350bn in funds approved for the $700bn financial rescue plan. Instead, this matter will be deferred to President-Elect Obama’s Administration. In fairness to the existing administration, the financial crisis is a problem that cannot be addressed adequately in the short-term interim.

Throwing good money after bad is not such a good idea and doing nothing when one knows not what to do is often wiser than "just doing something". The initial purpose of the plan was to help banks shore up their balance sheets and stimulate lending, which none were willing to do because of undisclosed third party risks. In his speech before the ECB in Frankfurt, Germany last week, Fed Chairman Bernanke openly acknowledged that the "monetary policy actions taken have not resolved the ongoing strains in the financial markets, including interbank funding markets."

Bailing on the $700bn bailout plan adds to the market’s uncertainty and we all know how much Mr. Market feels about uncertainty. In the midst of a crisis, the two months between now and passing the baton to the Obama Administration can be an eternity and potential for further collateral damage. Once again, the S&P 500 finds itself hanging on to crucial support at the 845-850 level and hoping to avoid 2002-2003 lows ranging from 775 to 794 while the politicians and Wall Street go back to the drawing board.

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Cargoes are rotting on the docks around the world, unable to be delivered, due to a lack of financing. The shipping business depends upon letters of credit: for cargoes to move, the shipper needs to know when he puts a cargo on a ship that the buyer at the other end will be able to pay for it, and this is where the banks come in. Banks provide the guarantees of payment through letters of credit and related credit lines, so that the goods upon which the world depends can move. This system has functioned for hundreds of years, but is now breaking down. Due to the collapse of the banking system, banks are increasingly reluctant or unable to issue these letters of credit, and charge significantly more for the letters that they do issue. The result is that an increasing number of shipments are sitting on the docks, in warehouses, or in the cargo holds of ships, orders are being canceled, or not even placed. The global supply chain which connects producers with consumers is breaking, and the consequences will be dire indeed.

The leading edge of this trade crisis is in bulk commodities, which have been hit with a dual whammy of plunging commodities prices and trade-finance shortages. Adding to the difficulty is that many bulk cargoes are financed in dollars, and dollars are increasingly difficult to obtain due to the demands of the multi-quadrillion-doll... derivatives market.

The world depends upon trade, especially during this age of globalization, with nations more dependent than ever upon foreign suppliers for the necessities of life. When this trade slows, people begin to die. When the wheat doesn't get exported, the mills cannot produce flour, the bakeries cannot produce breads, and the stores have no bread to sell. When the iron ore doesn't ship, no steel can be produced, which means factories begin to shut down, and so on, until the entire economy grinds to a halt.

We can live without the derivatives markets, the CDOs, and the other alphabet-soup financial gimmicks, but we cannot live without global trade, and we cannot survive if the supply chain breaks. That means we need a functioning banking system, one which can meet the needs of the population. What we have instead is a system that has failed to the point that it can no longer meet its basic responsibilities, and must be reorganized according to the principles outlined by Lyndon LaRouche.

The consequences of a collapse of the global supply chain would be catastrophic for all of mankind--death, famine, pestilence, the breakdown of civilization itself. The failure to solve this problem, whether by incompetence or deliberate intent, is genocide. The Anglo-Dutch Liberal financial system has failed, and we must abandon it in favor of an American System credit system, quickly.

2008 Nov 18 09:51 AM

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Harvard Economics Professor Alberto Alesina, whose book The Size of Nations against nation-states has become the Bible of Belgian separatists, is now saying that it's okay for governments to shell out state money for banks, but industries should be left to die.

In an interview with La Repubblica, Alesina says: "There is a difference between the intervention to avoid the failure of a bank ... and the failure of a non-financial company, or the crisis of an industrial sector." Banks should receive state money, but the state "should stay away from managing and conditioning the credit issued." Further, industrial firms should not be supported. Let them die, and give the money to the newly laid off workers. "Instead of giving money to a declining industry, it would be better to give it to those unemployed from that industry, in order to keep demand up." He expanded: "Moments of crisis are also moments of creative destruction; companies die that have no future, and new ones are born, which instead have a future." And don't heed the cries coming from industry so much: "Companies are interested in being dramatic in order to get more state aid."

2008 Nov 18 10:14 AM