What part of "this bailout won't work" don't you get?
by bobswern, Thu Oct 02, 2008 at 02:10:06 PM EDT
The thought that, somehow, $700 billion is going to solve much, if anything, in terms of righting what's wrong within our economy is probably the biggest myth that's been perpetuated by the Bush Administration upon the American public since we were hoodwinked into thinking that venturing into Iraq in 2003 was, in some nebulous way, linked to defeating Al Qaeda.
From today's news; "U.S. Stocks Drop on Economic Data, Rising Bank Rates; GE Falls."
"...people shouldn't be under any illusions about what's going to happen [if we implement the bailout],'' Charles Bobrinskoy, who helps manage about $13 billion as vice chairman of Ariel Investments in Chicago, told Bloomberg Television.
I attempted to address some of these myths in a previous diary, entitled: Bailout myths: what we all need to know. Much of what is said in that diary is discussed and reiterated/confirmed, in even greater detail, in today's headlines, just over the past few hours. (See paragraphs below.)
The financial services industry can play make believe with the valuations of their assets 'til the cows come home, but the bottom line is nobody is going to be able to force a consumer to spend money when consumers see their primary investment--their home--being worth less than what they still owe the bank for it. See today's story: "Metro U.S. Home Prices Fall on Higher Foreclosures (Update2)"
When many regular folks like you and me stop spending money--for whatever reason from unemployment to a realization that they owe tens or hundreds of thousands of dollars more on their residence than it's worth--you then end up in what's known as a deflationary spiral. People stop buying "stuff." Retailers go bust. People making goods for retailers, as well as those servicing retailers, along with the retailer's employees, lose their jobs. Communities then lose large sources of tax revenues. This becomes even more exacerbated when the effort to borrow money (see next paragraph) becomes next to impossible, too, in yet another story from just the past few hours: "U.S. Stocks Drop on Economic Data, Rising Bank Rates; GE Falls."
U.S. stocks dropped for a second day as a jump in borrowing costs and reports showing a worsening economy spurred concern that the government's $700 billion bank bailout plan won't be enough to stimulate growth.
"If banks aren't willing to lend money to a bank, are they going to be willing to lend to an average person? No, they're not,'' said Frank Ingarra, money manager at Hennessy Advisors Inc., which oversees $1.1 billion in Novato, California.
What's truly at the core of the world's financial services crisis--certainly in this particular instance--is the reality that lenders lose trust in other lenders. If a bank really doesn't know how worthless (how much of a markdown they're going to end up eating) their own portfolios are--i.e. mortgages, consumer loans, etc.--they sure as hell aren't going to trust what they see and hear about their competitors' portfolios. So, doubt and uncertainty rule the day, including today; and, credit dries up between banks: "Libor Soars, Commercial Paper Slumps as Credit Freeze Deepens."
Injecting a few logical words into Mr. Ingarra's quote, above, 'If banks aren't willing to lend money to a bank, are they going to be willing to lend money to corporations or to lend to an average person? No, they're not.' And, that's also happening in the markets now.
What part of the reality that banks don't even trust other banks right now--so they're sure as hell not going to trust consumers--don't our elected representatives and their constituents understand? This is self-evident in the record levels being set with LIBOR right now (today)? ("LIBOR" is the London Interbank Offered Rate, which is the interest rate at which banks loan other banks money.) Today, LIBOR is at its highest rate...EVER. (See link from today's news in previous paragraph.) It is the most basic indicator of the level at which one bank trusts another bank's ability to repay a loan. It's, perhaps, the single-most important indicator of how insiders view the state of the financial services sector, themselves.
If banks don't trust other banks, they aren't going to trust corporations or individual consumers, for that matter. So, why should WE, the taxpayers, trust them?
There's a very basic concept at play here--one which just about anybody can understand--which undermines the entire concept of the supposed intent behind a "bailout." That concept is this: If you give a bank money, do you really think they're going to give it back to you--at anything other than the most exorbitant of rates--rather than hold onto it to either cover other losses, or just (conservatively) otherwise (mis)use it to ride out the worst financial crisis in generations?
What part of our reality is it going to take for our nation's leaders and the public to understand that we've already poured more than $300 billion into the financial services industry this year, all to ease a liquidity crisis which just keeps getting worse and worse with every passing day? (Throughout most of 2008, banks have not been cooperative in easing the liquidity crunch, no matter how much cash they have.)
The bailout bill hasn't even come up for its second vote in the House (that's supposed to happen tomorrow), but all one has to do is click over to Bloomberg's website--or just about anywhere there's a collection of the day's national and international business news stories--and read a few articles from what's nothing less than one hell of an ominous list of news items, all of which more or less say the same thing: pissing away $700 billion is a waste of time. (Oh, and then there's that little reality that it is $700 billion of our money, of course! Truth is, when you add in the new government insurance fund/backstop for U.S. money market accounts, it's actually more than a trillion-dollar bailout.) Estimates of what it would actually take to address this matter start at around the five-trillion-dollar mark and escalate from there.
Why is it so difficult for many of us--let alone our elected officials--to understand this?
Look folks, I'm just one person. Perhaps a bit better-informed than many about this matter; but it's not like you can't go over to NYU Stern School of Business Professor Nouriel Roubini's website or to The Automatic Earth and read all about this for yourself.
I'm nobody special when it comes to this topic; it's all there for everyone to see in black and white. This is all about a lack of trust--a lack of trust within, and with regard to, the financial services sector particularly in the United States--and its gross and reckless behavior after ravaging through eight years of unbridled (and/or grossly unregulated) greed. It is this financial services sector which took advantage of basic human nature, fully enabled by its accomplice: a government which looked the other way while these folks pillaged our society, to optimize their revenues to levels of obscenity only matched by the world's oil industry in recent years.
So, what do we propose to do about it? Well, quick, before George Bush leaves office, let's give that same financial services sector everything else we have left, and then some, because when Barack Obama takes office on January 20th, this crap's no longer going to flush. He, simply, won't let them get away with it. We, simply, won't let them get away with it...then? That's the ticket!
There's one problem with this approach.
By then, it'll be too damn late. We're giving it all to them right now, aren't we? By, January 20th, if we go forward with the insanity as it's planned now, we'll have only two choices: print more money and risk turning our country into a 1930's style Weimar economy, or sink into even further despair because the resources we did have remaining were misallocated months and weeks earlier due to the sheer stupidity of walking off a cliff named "bailout," giving our last rationally available credit to the very criminals--that is what they are--that got us into this mess in the first place.
This isn't rocket science folks. It's black and white. And, at 11:59 on our clock of the economy, even the MSM is waking up and reporting about it now, too.
But, everything I'm reporting here--except for today's stories in the MSM--is not new information! It's been out there for at least a year. Some folks, like Nouriel Roubini, have been talking about this for many years.
Do you think a majority of our representatives in government will get a clue? They've got less than 24 hours to figure this out. And, if I've figured it out (and I'm really nobody special, except maybe to myself and my loved ones) maybe there's a chance they will, too.