Thursday, March 26, 2009
The toxic asset bailout will kill us all.
| THE TOXIC ASSET PROGRAM IS A HUGE FRAUD, AND THEY KNOW IT. The latest bailout of the "toxic" assets is the most ill conceived and most dangerous of all the bailouts to date. There is not an economist on the planet who believes that drastically increasing the money supply will not cause inflation. Increasing the supply of money, by definition, must cause inflation. What will happen to the price of these "toxic" assets, when all of this money cycles through the economy and we have inflation? The price of assets will rise. If the Obama administration is hell bent on spending money, they are spending in precisely the wrong location. You could not conceive of a worse plan if you tried. They would get the exact same result by simply removing or revising mark to market and save more than one trillion dollars. They know the prices of these assets will rise. There is no other logical outcome. This plan is custom designed to absolutely wreck the economy, and no honest economist can disagree. The logic is irrefutable. You cannot re-inflate an asset bubble. They are trying to re-inflate an asset bubble twice, with one fell swoop. This is the biggest issue confronting our economy and our future. The "experts" who say this is a good plan have money in the game. They know what the outcome will be. I need you to ponder this for just five minutes, and a light bulb will go off above your head. When you realize that inflation is a sure thing, and that this latest plan hits you with inflation, and takes your money to accelerate it at an even faster pace, you are going to be outraged. Mark to market is forcing valuations of good assets down, and rampant government spending and expansion of money, which will cause inflation, will drastically increase the price of these assets in the future. The very tool that the Obama administration is using to fix the problem, will actually, make the problem worse for the sound banks. This is simple to understand. The bankers are stuck in the old mindset that inflation kills banks. Yes, that is true, but it only kills sound banks. The banks that are teetering will be "saved", to screw things up again, and the sound banks will get the shaft as they will be paid back in dollars worth much less than what they originally lent. In short, these bailouts are corrupting the risk model not just at the equity level today, but for years to come. Those who get the bailout money and these assets at reduced prices that you, (and I mean you sitting there reading this) will help them pay for, will make out like bandits. They will buy highly discounted assets, just before the inflation strikes. The bad banks will no longer have these assets (or loans) on the books, so they will be in a stronger position. When the bailout money cycles through the economy, the sound banks will be losing money left and right as inflation eats away at the value of the dollar. It would be hard to conceive of a plan worse than this one. This private/government partnership is simply welfare for those who purchase the depressed assets. And the American citizens who pay for all of this, will really get stuck with it, because as the value of their dollar is falling, the government will be taxing them to pay back the money it borrowed for the bailouts. Let's look at this from a microeconomic point of view. Your local bank has three houses which are in foreclosure. The bank is going to lose money because the prices have fallen. You should be able to go upgrade and buy a bigger house now, because prices have fallen. This was and is the only solution, and it is in fact what is being done. The only difference is, you aren't being given a choice, you are being forced to buy the asset, and you don't actually get it. It's like buying a car, and giving it to a stranger in some other state. Oh and the stranger happens to be the bank that lent the money on the car in the first place. Bubbles must be allowed to burst. When it's done, it's done. You cannot create another bubble to replace the one that popped. Economists understand this clearly, and so do historians, and so will you if you think about it for a few minutes. If you could re-inflate the bubble, why did it pop in the first place? This is the sad truth. Instead of letting these bad assets be reckoned to the proper value, the President and Congress have decided to make all assets lose their value. This is done through inflation. Through the smoke and mirrors you will believe that this worked great, for awhile. The price of your house will go up. But when you realize that your wages haven't followed, and that the price of everything else has gone up, you'll start to see clearly what has happened to you. So what should have been done? Absolutely nothing in haste. Had the banks been allowed to fail, the assets would have been purchased at fire sale prices (just like they will be under Geitner's plan) but you the taxpayer would not have been stuck subsidizing the banks with the loss. The Fed and treasury under Bush, and then Obama should have approached this entire problem for a sound monetary policy point of view, and not as a re-inflationary exercise. Have you noticed that we never did experience any deflation? If this doesn't convince you that inflation is on the way, I don't know what will. If deflation and the money supply become a big issue, you can always let the taxpayers keep more of their money, and this will boost the economy, without causing all the undue inflationary pressure. AIG, Citibank and others could have even received small pockets of money (in the form of loans) after they had made an effort to unload some of the bad investments. And let's be clear, these assets are not "toxic" they are simply houses and buildings that banks lent money on, and they are no longer worth what they once were. Nothing to see here, this happens all the time. But this time it happened on a bigger scale. Washington D.C. went in to panic mode, and started throwing money at the problem. But throwing money at a problem doesn't really address the underlying issue does it? Especially when you aren't really throwing money at it, so much as paper. Democrats and Republicans alike must come together on this and stop it now. This will cause an exponential rise in inflation and misery. This is not complicated. The government is hitting you on one side of the head with the tax, and the hitting you on the other side of the head by taking your money, purchasing these properties, and then selling it right back to you. There is only one logical reason for this program. It is custom designed to cause the good banks to fail. Dick Morris and Rush Limbaugh are aware that this program has been designed to fail, but they have missed the obvious mechanism for the failure. Inflation will kill the sound banks, putting the rest of them in the same boat as Citi, AIG, and other financial institutions. This latest "rescue" package will accelerate the process, and pull the rug of financial stability (all that is left) out from under you. Author: Eric Gurr egurr@intralinkinc.com |
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