The banking stocks recently suffered another mini-crash. So it’s no surprise Washington is responding with yet another “solution” to the crisis. Every few months, this happens. Some bank, broker, or subsector of the credit market blows up … policymakers try to think up a solution … that solution gets leaked to the press ahead of time … financial stocks rally … and then the whole sorry process repeats itself. It reminds me a lot of the Bill Murray movie Groundhog Day, where weatherman Phil Connors is forced to relive the same dreary day over and over again.
The latest news is that Washington will soon establish a “bad bank.” It will reportedly buy toxic assets from banks, more than likely at inflated prices. Government officials will justify doing so by claiming today’s asset and security prices are “artificially” depressed by forced selling and that its “mark to model,” hold-to-maturity prices are more accurate. This process will make bank balance sheets look better and supposedly resume the flow of credit to the economy.
Other possible plans are also on the table, according to the Washington Post …
“President Obama’s top advisers are in the final stages of debating several perilous options to right the financial system, all of which are likely to prove unpopular and in some cases carry a significant risk of failure, according to sources in contact with the officials.
“The rapid deterioration of the economy has accentuated these hard choices. The health of many banks is getting worse, not better, as the downturn makes it difficult for all kinds of consumers and businesses to pay back money they borrowed from these financial firms. Conservative estimates put bank losses yet to be declared at $1 trillion.
“Senior administration officials are likely to try a combination of initiatives rather than pin their hopes on a single, all-encompassing solution to help the financial system, the sources said. But their strategy may require trial and error, which could make them vulnerable to the same criticism that dogged the Bush administration’s fitful management of the $700 billion rescue program.
“On the table are several approaches, which officials have begun to experiment with on a smaller scale. One would give the firms a federal guarantee protecting them against losses on assets that are backed by failing mortgages and other troubled loans. Another would set up new government institutions to buy these toxic assets. A third would inject more money into financial firms in exchange for ownership stakes, perhaps ending with nationalization in all but name.”
I hate to sound so cynical. But haven’t we seen and heard this movie before? Haven’t we been promised several “solutions” to this crisis over the past 18 months? And hasn’t every single one ultimately proven to just medicate the patient, rather than cure the underlying disease? There’s a very simple reason for that, one the politicians simply won’t admit: There is no quote-unquote solution. Nothing … NOTHING … can prevent a painful adjustment process from unfolding.
I wish that weren’t the case. But the time to prevent this painful correction and deleveraging process was a few years ago when the bubble was inflating. If regulators, policymakers, borrowers, and lenders hadn’t acted so stupidly then, we wouldn’t be in this mess. But they did, we are, and no amount of talk out of Washington can change that fact.
Oh and by the way, the estimated cost of the credit crisis continues to rise. Just this morning, the International Monetary Fund (IMF) raised its estimate of the losses from the financial crisis to $2.2 trillion. Its October estimate was only $1.4 trillion. Just about the only certain thing associated with the latest bailout plan is that it will lead to billions and billions (and billions) more dollars worth of debt being piled on the back of U.S. citizens.
Related posts:
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- Nationalization chatter turned up a notch as banking bailout plans morph … again The bank nationalization chatter continues to increase in volume. Meanwhile, the government’s bank bailout plans continue to morph in form...
- More on the bank bailout plan So today is the big day. The Obama administration is putting a full-court press on for the bank bailout plan,...
{ 4 comments… read them below or add one }
Dear Mike
its always interesting to read your articles which provide a deep analysis of the Markets
When the effects of the credit cruch emerged in year 2007, many moved to commodities especially Oil which at that time was on a rally. Come 2008 we saw oil plummet from a high of $147 price per barrel to $37.00. Again investors started moving from commodities to bonds and treasuries. Today, bonds and treasuries are bleeding.
The only thing that has managed to remain somehow afloat is the price of gold and agricultural futures.
i have 2 questions for you:-
Which is the best avenue for investors to put their money currently in the midst of this crisis?
You have questioned recent attempts by the US Government to save the day which have unfortunately failed. Since the Federal Reserve & the government cannot just sit back and watch the markets fall, which is the best strategy do you think they should adopt to ease the effects of the financial crisis and also map out a recovery strategy into the future?
Simon
Nairobi
I agree wholeheartedly with your assessment. I think another reason the “bad bank” idea can’t work is that the U.S. government is just not big enough to buy all the toxic assets when you take into account the derivatives. I’ve heard figures of up to $50 trillion in credit default swaps and other “bad bets” these wreckless instituions acquired. Worldwide, this figure could be three times that. For the citizens of this country to be burdened with the enormous debt the politicians are forcing us into, this , in my opinion, borders on criminality. For generations to come, we will be suffering with a significantly lower standard of living. most likely much higher inflation, and certainly a tax burden that will suffocate every household in America. If only the Government was wise enough to let the market correct and obtain equilibrium on its own, the process would be swifter with less consequences and pain over the long run. As we know, however, for politicians to do nothing would be political suicide so John Doe will be paying for their follies all they way to the grave and beyond.
Dear Mike,
Eternally grateful for your bulletins. Tell Martin Weiss you deserve more pay.
The only real solution to the current U.S. crisis is to get rid of the so called Federal Reserve Banks control of any national financial matters. This should be a government dept but independent of political control as in Australia.
Quotable:
The significant problems we face cannot be solved at the same level of thinking we were at when we created them. - Albert Einstein