Bailout Nation and Future Impacts

To save our economy and the financial future of America, the U.S. government is taking over our financial system by changing the rules and becoming the backstop for all the junk in the current financial system. While this may save our skins in the near term, I think it is going to put America in a big black hole for the next decade or more. Below is a quick recap of the key elements of the latest mega-bailout plan – which is equal to more than $2,000 for every man, woman and child in the United States:

1. Give the Treasury the authority to buy up to $700 billion in devalued mortgage-backed securities [MBS]. This will allow the treasury to take on the “toxic” MBS from the financial firms and out of the financial system. I dub this as the government creating and running the largest ever-Toxic Hedge Fund [THF] in history. This is in addition to the purchase of short term debt obligations from Freddie Mac (FRE) and Fannie Mae (FNM) (remember them?). The potential exposure of the THF fund could be ten to thirty times its underlying assets base thanks to the leverage and derivative nature of the MBS, which made them so fatal for financial institutions. If this “Toxic” fund collapses, we, the American taxpayer, could be on the line for trillions of dollars. Only God could save us in this scenario and the latest crisis will be a walk in the park by comparison.
2. The Treasury Department will guarantee the assets in money market mutual funds to reassure savers and investors. This is probably the only sensible component of the plan. This money is really quite safe, but the Treasury’s reassurance will make people feel much better about their holdings. I still feel that people should move to an online saving account for the greatest protection and return of investment as detailed in this post.
3. The SEC is temporarily banning the short selling of almost 800 financial stocks. Short selling is a bet the stock will fall. It is legal, but has been blamed for worsening the crisis by putting added pressure on stocks. Most market traders see this is a knee jerk reaction, which doesn’t address the root cause of the crisis. However, there are no rules now, except the ones the Fed and the Treasury create. Therefore, like the rest of us, these Wall Street professionals will have to suck it in and deal with it. I can also bet a number of companies are clambering to get on the “no short sell list” to boost their share price, which will mean more bonuses for their CEOs come year-end.

With all of the bailouts to date, including the most recent mega-bailout, here are some of the long-term problems being created for our futures:

• Inflation: While the Fed has about a trillion or so dollars currently on its balance sheet, it is likely the cost all of the bailouts will be much more. In order to get more funding, more money will have to be printed by the Fed and added to the money supply. Economics 101 says that this will lead to inflation as the purchasing power of the currency declines. Therefore, while we save the economy now, in real terms we will all be poorer in the future.
• Too much government authority: The $700 Billion rescue plan gives Treasury power unchecked by courts – so who is overseeing the overseer? With all this economic, regulatory and political power, do you think the government will easily give it up - particularly under a pro-government control democratic administration? Furthermore, if the government is so good at managing debt, why do we already have the highest national debt in recorded history? Joshua Rosner, an analyst at the independent research firm Graham Fisher & Co. in New York, stated:
• The proposal is a clear abdication of all oversight and fiscal authorities to a Secretary of Treasury that has bungled this crisis from the beginning. This is Marxism. And I mean Groucho not Karl.
• National debt: If you think it is high now, then you haven’t seen anything yet. National debt will be a problem for years, if not generations, to come. One of the reasons the Treasury had to make moves now was pressure from foreign banks in China, Korea and Japan who own a significant amount of MBS. When foreign governments and banks can start putting pressure on the U.S. because of the growing amount we owe them, we are slowly but surely losing control of our own economic future.
• Bye-bye U.S. dollar and hello $150 oil: With inflation, slower economic growth and uncertain financial markets, the U.S. dollar is set to lose a large portion of the gains made over the last few months. The long term the trend for the greenback is down, which coupled with global demand and limited supply will mean $150 oil in the not to distant future (It was already back above $100 this week).
• Limited scope for future administrations to reduce taxes, improve our health system or reform social security. There just won’t be any money to do so. Unlike the big financials, don’t rely on the government to bail you out in retirement.
• The U.S. loses its position as the world’s premier economy: Japan went through an eerily similar scenario in the early 1990s, when their financial institutions collapsed. It has been more than 15 years and they are still recovering from that crisis. America may be more resilient and actions were taken sooner, rather than later, but it could take until 2015 or later to recover the bailout funds and get the financial system back to its world-class status. By then the emerging super powers India and China will have made significant ground and it could too late for America to take back the mantle of the world’s most number one economy.
• Bad examples for future management: Unless some serious regulatory and structural changes are made most of, the management of these bailed out companies will get off with a relatively minor rebuke. Yes, they may not get their big bonuses but most of them had already made their millions before the financial crisis really struck. So don’t feel too sorry for them while they take a couple of years off to live on their yachts and spend time in their holiday homes. In a few years, when the dust has settled and the crisis and the faces behind it have faded into distant memories, a number of them will return to Wall Street as "consultants."

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There you have it. My view on things as they currently stand and unfortunately not a very rosy picture painted. What are your thoughts – do you agree/disagree?

Disclosure: None

Comments

[williambanzai7:]

CHARGE "OFF" THE TARP BRIGADE

(Charge of the Light Brigade, Alfred Lord Tennyson)

(Modified by WilliamBanzai7)


Half a trillion, half a trillion,
Give or take 200 billion, onward!
All in the valley of Balance Sheet Death
Rode the seven hundred billion tax dollars.
"Forward, the TARP Brigade!
"Charge for the ABS Credit Default Swaps!" he said:
Into the valley of Balance Sheet Death
Rode the seven hundred billion tax dollars.


"Forward, the TARP Brigade!"
Was there a politician dismay'd?
Not tho' the Congress knew
Some guy named Hank had blunder'd:
Their's not to make reply,
Their's not to reason why,
Their's but to do and die:
Into the valley of Balance Sheet Death
Rode the seven hundred billion tax dollars.


CDOs to right of them,
CDSs to left of them,
AIG and the GSEs in front of them
Volley'd and thunder'd;
Storm'd at with Wall Street shot and shell,
Boldly that load of Federal largesse rode and well,
Into the jaws of Balance Sheet Death,
Into the mouth of subprime contagion Hell
Rode the seven hundred billion.


Flash'd all the workout sabres bare,
Flash'd as they turn'd in air,
Sabring the asset backed losses there,
Charging an army of tawdry bankers, accountants, and shysters, while
All the world wonder'd:
Plunged in the seedy subprime-smoke
Right into the red numbers they broke;
Lehman and Bear Stearns
Spared from the sabre stroke
Shatter'd and sunder'd.
Then they rode back, but not
Not the seven hundred billion.


Subprime CDOs to right of them,
Subprime CDSs to left of them,
Fat Wall Street advisory fees behind them,
Volley'd and thunder'd;
Storm'd at with derivative losses, asset backed shot and shell,
While level 3 zeros fell,
They that had fought so well
Came thro' the jaws of Balance Sheet Death
Back from the mouth of subprime contagion Hell,
All that was left of it?
Nothing left of seven hundred billion!


When can its glory fade?
O the wild loss charges!
All the world wondered.
Honor the huge expenditures they made,
Honor the TARP Brigade,
Noble seven hundred billion taxpayer dollars.


(TARP--Troubled Asset Relief Plan of 2008)


williambanzai7.blogspo.../

2008 Sep 24 12:10 AM