You see by now the spin, the hype, and the fallacy of the “don’t worry, be happy, we’ve got it covered” song and dance should be old hat. Since a year ago this past August (when the powers that be were finally forced to acknowledge a crisis of debt was “rumbling” in the wings), we have witnessed the unraveling of our “debt only” driven economy. Growth in consumption and spending came not from the value added numbers of domestic production. It came from the largesse of foreign benefactor/ lenders (to keep US/us buying their stuff), it came from additional “paper appreciation” of assets (which were more than likely already 100% financed), and it came from the “windfalls” of additionally minted “money” via the government’s printing presses and fresh lines of credit on newly issued credit cards. “Growth” was not that of wealth and prosperity, but growth of liabilities and obligations.
We were warned that if pre-emptive action were not taken, we might lapse into some recession contraction in 2008. This was a major fallacy because the real growth for most Americans in past decades was in net liabilities not in growth of net assets. In one of my earliest economic classes I read that a 3rd world country was defined as a nation where 10% of the population owned or controlled 90% of the wealth/ assets. In the alternative the 90% had the 10% share. With what we have witnessed of late, I’m not so sure that it is even the wealthiest 10% of our own citizenry which now owns or controls 90% of this nation’s wealth or assets. Just where does that sorry state leave US/ us going forward?
The solution to every economic downturn in the past has been to open the floodgates of credit. The problem is this economic mess is mired in too much debt already. You don’t rescue a drowning person by giving them a drink. You don’t help a drug addict by providing cheaper heroin or crack. So... how could more debt be the solution to a debt problem? Well, that’s the only solution the US Treasury and the FED know how to do - mainly because that is ALL they CAN do. Liquidity rocks, just ask them!
Since last Fall, the FED began buying back on a “Repurchase Agreement Basis” (REPO) financial institutions’ worth-less (or even worthless) mortgage paper to delay the write offs/ write downs that would result in insolvency. These rolled over (and over) temporary transfers from institutions’ balance sheets to Uncle $ugar’s accounts now are pushing a record $480 BILLION. The Bear Stearn’s event involved a $29 BILLION guarantee. The IndyMac intervention cost us about $9 BILLION.
The Fannie and Freddie debacle comes in at conservatively $200 BILLION. Bank of America picked up the tab (for now) for the resolution of the Merrill Lynch situation by issuing $44 BILLION of their own stock. Lehman Brothers was left without a bailout and it (and its prior “merged with investment banking behemoths” – Shearson, Kuhn, Loeb, Rhodes, and Hutton) simply ceased to exist. Meanwhile... insurance giant AIG was “saved” by some $85 BILLION in Uncle $ugar’s guarantees.
Now it appears ALL these “one time fixes” were for naught as the really big (as in expensive) bailout intervention was required (again) this past weekend. A government buy-out of some $700 BILLION in distressed investments is now on the table. The rushing around the corridors in DC would be reminiscent of a keystone cops comedy, were it not so tragic. Not to worry - mission accomplished – until next weekend, that is!
I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.
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This story was published on September 22, 2008.