Lawrence York

The U.S. Is Losing the Economic Cold War

Our first reactions are anger and denial. Its time to move to acceptance and resolution. SB was one of the first the call the Recession and foretold the Banking industries' insolvency and lack of capital to lend. Now, though we are not yet in a Depression, we are accelerating toward one because of the emotional hard coding that drives most to hang on to wishes instead of reality and take corrective action.
The truth of the matter is that we need lending and it is not necessary to save the too big to fail banks.The Fed and Treasury have already begun cirucumventing them with their 'quantitative easing' policies that have racked up $8.5 trillion in security purchases (note I don't use the words 'asset purchases'). My statement is that the US is likely to end up with a $15 trillion dollar deficit-or debt-but the choice of deficit is best because constantly rolling the debt, will have the burden on-going deficit spending as the debt must be serviced. My major point though is that policy makers must look a little futher down the road and think strategically instead of tactically--just fixing the problem of day. That would lead them to seeing that denial and tactical spending is aimless and will ultimately indenture the US beyond its capacity. SB argues instead for Growth, agreeing that foreclosure is not the answer. With policies consistently focused on tactical needs, policy makers have ingored the demand side of the equation exacerbating the problem causing job losses. Now handing out tax cuts, money to cities and spending on infrastructure, instead of empowering growth via small businesses that create jobs, is another example of a policy designed to keep what you had and it is a policy that will do more to run up deficits and debt than one to solve the problem.
US GDP was indeed goosed and balooned by the use of securitization iand leverage. The math of losses applies. The paradyme of chucking original research and credit analysis for statistical modeling is dead because most everyone outside the US will not soon be fooled again.
US GDP will slow massively then, because we will not be able to package and sell crap securities and leverage in any case will be curtailed. The risk of denial is the risk that others act and the US experiences a lost decade. Japan finally emerged from their ruins by exporting their electronics and auto expertise. Unfortunately the US has long ago sold its crown jewel exports. Now SB uses the word 'Growth' to convey new technologies and invention. SB argues that it is only by Growth and far-sighted policies empowering businesses that we can pay the enormous tab--a tab conservatively estimated to sum to $15 trillion. No Way. My friend, go through the arithmatic. We officially acknowledged the Recession at $10 trillion. The Government has nationalized Fannie Mae and Freddie Mac, bailed out the 'too big to fail' banks and AIG while keeping quiet on Ginnie Mae. The $12 trillion in mortgages held in these government entities have inflated principal values by and large and represent sub-prime and moderate income loans. The Fed has bought or holds as collateral, $8.5 trillion in securities, some percentage of which are not worth their principal value and no one but the government will buy them without a discount in their price. The Obama administration is fast at work getting a $820 billion stimulus program launched and has forecast that the US will run double or back to back (oct 2008-Oct-2010) trillion dollar deficits. Since the Treasury is outsourcing management (disposal) of the securities it is purchasing via TARP and TALF for a fee and these are held at real, inflated values, since China, Russia, the UK, etc. are demanding being made whole on the fraudulent securities they bought, since it is not unreasonable to estimate that the Treasury will ultimately lose 15-20 percent in the final accounting (if we get one) when housing prices will average that or more, then settling out at the 7/15 GDP/Deficit ratio is not KOOK forecasting. Moreover, it will be the rate of change in recovery and the years to get back even that will punish the US. And that is why I reaffirm that 'Growth' is the only answer.