Banking Bailouts Will Prolong America’s Second Great Depression
According to White Paper by Leading Advocate for Investor Safety
Government underestimates debt crisis, overestimates ability to save troubled banks
Washington, D.C., March 19, 2009 – The banking bailouts will further the nation’s economic depression, according to a white paper released today by Martin D. Weiss, Ph.D., president of Weiss Research, Inc., an independent research firm. The white paper outlines three reasons the bailouts will fail and recommends a series of steps the government should take that will lead to a speedier recovery.
Titled “Dangerous Unintended Consequences: How Banking Bailouts, Buyouts and Nationalization Can Only Prolong America’s Second Great Depression and Weaken Any Subsequent Recovery,” the white paper lists America’s weak banks and uses that data to demonstrate that the U.S. government greatly underestimates the scope of the debt crisis while overestimating its ability to effectively save troubled institutions without adverse consequences.
The most dangerous consequence of federal bailouts is growing market anxiety about an eventual Treasury default, raising the specter of potentially fatal damage to the credit of the U.S. Treasury.
“Including the Fed’s commitment yesterday to buy $1.15 trillion in additional bonds, the U.S. government has now spent, loaned, guaranteed or committed an astronomical sum of $12.7 trillion in an all-out attempt to bail out failing companies, save Wall Street from a financial meltdown, and prevent an economic disaster,” said Dr. Weiss. “Yet, despite these Herculean efforts, American households have already lost $12.9 trillion in wealth, millions are losing their jobs, and, despite short-lived stock market rallies, the economy is sinking into a depression.”
The debt crisis is much greater than the government has reported, according to the white paper. The FDIC’s “Problem List” of troubled banks includes 252 institutions with assets of $159 billion. An analysis by Weiss Research, however, shows that a total of 1,568 banks and thrifts are at risk of failure with assets of $2.32 trillion due to weak capital, asset quality, earnings and other factors. In addition, four large U.S. banks have credit exposure related to their derivatives trading that exceeds their capital, with two in particular — Citigroup and JPMorgan Chase — taking especially large risks.
AIG is only one of many potential triggers to a global chain reaction of failures, the white paper reports, and financial institutions are vulnerable to the contagion of mass withdrawals despite expanded FDIC insurance coverage and other government guarantees.
Turning to recent anti-crisis measures, Dr. Weiss writes: “Forced mergers involving troubled financial institutions have accomplished little more than move toxic assets up the food chain from smaller to larger institutions, while government plans to buy up the toxic assets have backfired. The ‘too-big-to-fail’ doctrine has proven disastrous and in its place we recommend a series of steps that will bring our nation closer to a recovery.”
Dr. Weiss went on to outline seven action items that U.S. government should take now:
- Abandon the unrealistic goal of saving all failing financial institutions or preventing a depression, focusing instead on the goal of rebuilding the economy’s foundation in preparation for an eventual recovery.
- Switch priorities from the battles we can’t win to the war we can’t afford to lose, including emergency assistance for the millions most severely victimized by a depression.
- Pro-actively shut down the weakest institutions no matter how large they may be; provide opportunities for borderline institutions to rehabilitate themselves under a strict regulatory regime; and give the surviving well-capitalized, liquid and prudently-managed institutions better opportunities to gain market share.
- Seriously consider breaking up megabanks, following the model of the Ma Bell breakup in 1984.
- Build confidence in the banking system with better disclosure and transparency, including the public release of the confidential bank ratings called CAMELS (Capital adequacy, Asset quality, Management quality, Earnings, Liquidity and Sensitivity to Market Risk) on all banks.
- Promptly restore FDIC coverage limits to $100,000.
- Prepare the public for the worst, recognizing that a clear vision of dark clouds is healthier than wanton fear of the unknown.
Due to the nation’s solid infrastructure and knowledge base, Weiss is optimistic we can overcome this crisis, while warning: “My optimism comes with no guarantees, and ultimately, we’re going to have to choose: The wrong choice is to take the easy way out, try to save most big corporations, print money without bounds, debase our dollar, and ultimately allow inflation to destroy our society. The right choice is to step up, make shared sacrifices, take responsibility for future generations, let deflation do its work, and start regenerating the economic forces that have made the United States such a great country.”
For the full text of the white paper, click here.
About Weiss Research
Weiss Research, Inc., based in Jupiter, Florida, is a subsidiary of industry-leading Weiss Group, one of the largest, most reputable sources of global investment information. Martin D. Weiss, Ph.D., along with Weiss analyst Mike Larson, are the only analysts in the U.S. who have specifically named nearly all of the major institutions that have suffered a financial failure in this crisis, whether in the form of a forced buyout, a government bailout or outright bankruptcy. Moreover, Weiss’ failure warnings were issued without ambiguity and with months of advance lead time, giving the public ample time to escape the dangers.
Weiss predicted the demise of Bear Stearns 102 days prior to its failure, Lehman Brothers (182 days prior), Fannie Mae (eight years prior), and Citigroup (110 days prior). Similarly, the U.S. Government Accountability Office (GAO) reported that, in the 1990s, Weiss greatly outperformed Moody’s, Standard & Poor’s, A.M. Best and D&P (now Fitch) in warning of future insurance company failures. (See http://archive.gao.gov/t2pbat2/152669.pdf.)
{ 10 comments… read them below or add one }
Do you respond to comments?
I have left two questions, and do not see where to find either my question or any responses to my questions.
Thank you,
Lynne
Martin,
Would you consider a Q & A sidebar or similar solution, as Lynne stated, so we can follow everyone’s Q’s and see the answers as they may also shed light on our own questions and help to keep us from asking the same things over again.
Thank you,
Wendy
Seems to me there’s a much simpler solution than bailing out the banks directly. Paulson almost had it right with the original $700bln package to buy toxic assets, but dropped the ball with the whole reverse auction methodology of pricing them. In a mark-to-market world where the market is frozen, Uncle Sam’s role should be that of “Market Maker”. They could have temporarily nationalized WAMU, IndyMac & Wachovia, split the $700bln between them and given them a 10-1 line of credit with the Fed, for total buying power of $10 trillion, then announce they will pay .60 cents on the dollar for any and all “toxic assets”. Just the announcement would instantly reflate all financial institutions sub-prime and Alt-A assets to that level instead of the current 5-25% level. Then they could systematically recast all loans they purchase to 6.00% fixed rate terms, then repackage and resell them for 70 - 100 cents on the dollar. (The “toxic” aspects of these loans are the terms, which are designed to destroy the borrower.) Doing the above would limit losses of financial institutions to 40%, healing the financial system and allowing banks to lend again. Modifying the terms of all loans purchased would also put a floor under foreclosures. But what do I know?
This country is in trouble unless we start building wealth. We are doing nothing to do so. Zip, zero nada. The Chinese will eat our lunch since they are building things and their stimulus package is geared towards enabling them to build more things. Consuming things and buying things on credit just doesn’t build wealth. Taxes don’t build wealth, more governemnt doesn’t build wealth and a pork filled stimulus bill does not build wealth. We can fix all the bridges and roads but unless we are filling them up with things we make and commerce, why bother?
Please say something about the Medicare and Medicare Advangtage money that will be taken from us via the Health Plan. Doctors’ prescriptions for us will be criticised and changed by government staff people. Physicias will be forced to prescribe poor quality medications and medical procedures. Often none at all. In an LA Times article it was stated that the amount to be taken from Medicare and Medicare affiliated products will be about $316 billion. For many of us that will be euthanasia.
I am a disabled housebound (in Tucson) individual seeking further advise from Dr.Weiss. Specifically I am asking for an update to his 2/18/09 article ‘U.S. Credit Markets Collapsing’. I have no cash or assets with the exception of my residence which I am obliged to sell within 2 years to satisfy a 50/50 division of property with my ex-wife. I must decide whether to drop the price to sell immediately, or hold for values to 1st improve before selling. Reading the 2/18 article, it seems the advise would be to drop price and sell immediately as valuations are likely to continue to spiral downward for the foreseeable future.
hello martin
something we feel everyone has overlooked is that interest ratio to relative inflation (printing of money) wipes out any government or treasury debt as allows interest to rise relatively coz of activity and money floating around in specific economies as we will come out of the depression eventually as they have recessions every 10 years now on average this appears to be more volatile however we feel this partly due to privatisation of utilities is relatively less than 10 years old so the uncreative mathematical mind set of ppl who get a grip on the management of these utilities as they dont create or in fact retard new and different inventions to supercede the utilty technology employed and take CEO pay rates in 10,s of millions etc beyond comprehension since half of them wouldnt have a brain if they had to think Gm AIG and the rest are prime examples
I agree a big deal, that this recession is not over in long time for America. However, I do not believe that America will die. Many people think, that this is end of America. Not true.
When British lost control as world power, a lot of things happened, and same this time, when America loses control as world leader. Only we North Americans will not travel so much, and do not drive so much our cars, and so on. Live will continue here as before, but it is a lot different. I believe, that Euro will cost 2 American Dollars in next 2 years, maybe even more, and that is the thing, what make different in our life’s here.
Dr. Weiss, thanks for your expert advice during these unprecedented times. I am 71 yrs.,financially comfortable , not too worried about myself. I am deeply concerned about the younger generations. Many have no clue as to what is about to happen to the carefree lifestyle enjoyed most of their lives, my grandchildren included. I have “cashed out” many assets and now need honest and expert advice such as you and your father have given us over the years. Is Canada a safe haven for investing? Will the energy trusts , oil sands investments and the Canadian dollar be safe after the fall of the U S $ ?
should we have let so many banking companies fail ? or for that matter the car industry ? that sure would of made unemployment lines even longer .