Mr. Timothy Geithner was the man who was on watch when the ship ran aground. His job, as head of the Federal Reserve Bank of New York, was to keep an eye on Wall Street. Now, he's come forward with a new $1 trillion plan to get the boat back on the water. He should have left it to the ship-breakers.
We almost feel sorry for him; Sisyphus had it easier. But Sisyphus was doing honest work. Besides, when Geithner's tour of duty is finished, the public will pay for his jackass bamboozles for decades, while he moves on to a cushy job at Goldman Sachs...or maybe AIG itself, if it is still in business.
Of course, we are out of harmony with mainstream opinion; but we are always out of harmony. When the USS Bubble was steaming along we fretted and warned: it was too heavily laden with debt; it was off course; the captain and his mates were all morons. Then, when it washed up, we switched to a more cheerful song, with the sound of blowtorches cutting her up...and the furnaces melting her down...as background music. Finally, capitalism was doing its job and happily whistling our tune.
But now that we are jolly, the rest of the world is full of doom and gloom. Thomas L. Friedman, writing in the New York Times, tells us that we have a "once in a century financial crisis on our hands..." We can't let capitalism do her work, he says; we have to get this wreck out of the mud and back on the cruise circuit!
So far, America's efforts to borrow its way out of debt have not gone well. The scum gets dredged up from the bottom on Wall Street. But when it is dumped onto the ship, the whole thing just sinks lower. Henry Paulson began the digging with his TARP program in September of last year. Then came TALF. Not to mention various trillion-dollar salvage operations from the Fed. How much do all these rescue efforts cost? The last number we saw - in Barron's - was $14 trillion.
Last week, Mr. Ben Bernanke announced to the whole world that he was doing the sort of thing that people used to be ashamed of. Instead of dredging out the mud, he was going to blow hot air into the rusty hull. And on Wednesday, he began following in the footsteps of pioneers at the Bank of England, the Bank of Japan, and most importantly, the Bank of Zimbabwe. Buying U.S. Treasury debt directly, he will add trillions to the U.S. money supply. Last year, before Lehman Brothers dove in the water and never came up; the entire monetary base of the United States of America measured $850 billion. With so much gas being pumped, it will soon rise to 5 times that amount - or more than $4 trillion.
Daily Reckoning readers may be having as hard a time keeping up with the bailouts as we are. Here, we attempt a simplification:
America still sinks under the weight of more than twice as much debt as usual. The collateral behind that debt has lost about 20% of its value - or about $10 trillion. Normally, those losses should be born by the capitalists - the reckless lenders and investors who extended loans to people who couldn't pay them back. But all of the bailouts have one thing in common: they aim to shift the losses from the people who deserve them to the people who don't...from the culpable to the gullible. Which is why they are so popular. After such a remarkable excursion, many are those who deserve to lose money - from those who bought doublewide trailers they couldn't afford...to those who lent them the money...to those who securitized the debt and passed it out all over town. That's why the biggest problem confronting the salvage workers has been to find some other group of innocents dumb enough and rich enough to pay the bills.
Mr. Bernanke's focused on shifting the burden onto dollar holders worldwide - notably the Chinese - by inflating the currency. But the Bank of China is also America's biggest creditor and has threatened to get upset if the dollar loses too much value. Besides, inflation is no sure thing. As James Ferguson points out, Japan has been trying to incite inflation for many years - with no success.
Until now, Geithner and his boss targeted the taxpayers. Private losses became public losses...as toxic assets were bought up, or backed up, by the government. But when the public got a look at what the bailouts actually paid for - million dollar bonuses, for example - it was outraged. The mob called for Geithner's head; the stingers themselves got stung. This latest plan has a fairer sound to it, but it is a bigger fraud. "The solution depends on getting private money funds to team up with the government to buy up toxic assets" wrote Mr. Friedman, anticipating the Geithner plan by only a few hours and the truth by an eternity. "The president's comprehensive plan to remove the toxic assets from our ailing banks...is the key to our economic recovery..." he continued.
Geithner has invited investors up to the trough. His plan leaves the government with 90% of the risk; investors will quickly figure out how to get 100% of the profits. The latest estimate tells us that all this salvage work will add $9.5 trillion to the U.S. national debt over the next 10 years. At the current rate, it would still take 20 years to pay it off, even if every dime of savings of every American were applied to the task. Necessarily, the debt sludge will be dumped on the next generation - who don't vote...and won't notice the smell for years.
Bill Bonner
for The Daily Reckoning Australia
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Ned S on 30 March 2009:
Hmmm ... I agree that all this is very naughty. Huff, Puff, Pontificate! And someone will obviously pay.
But it is the good ole US of A we are talking about here. Namely the BIG child in the school playground. And when the BIG guy screws up, my take on history is that it is typically someone else who wears the very greatest bulk of the grief - Eventually anyway.
That ain't fair!!! (Some more Huffing, Puffing and Pontificating.) But it is how the world seems to work.
So a valid question might be, who's going to be the fall guy this time?
I read an analysis recently that said it would most likely be Europe. Basic logic was that China Inc and Uncle Sam are joined at the hip via their close currency tie. So as the USD drops (and the Yuan drops with it - barring a bit of hedging on the Chinese part I'd guess?) the Euro will go up until Europe can't compete globally - While China continues to grow and the US rebuilds. (Based on that logic I'd expect Japan to get munched as well.)
Could take a few years to play out of course - Just about on cue for when Mr Obama has to face the voters again a TRUE cynic might suspect?
My personal knowledge of economics is limitted to the point of being LESS than non-existent. But my suspicion is that sort of a scenario beginning to play out would push Europe as a bloc to go protectionist??? Providing they have the political will to hang together as a bloc. (I happily await any input from anyone who does know a few basics re economics.)
Comment by dsylexic on 30 March 2009:
i come from the racial-bias school of empire. there is no way mongoloid china and white america are ganging up against white europe(sans turkey). whitey boys will gang up -like they have since centuries to rape and pillage other coloreds.they will definitely try,but success is not guaranteed -because of demographic disadvantages. but hey, if the billy gates and ted turners of the world succeed, whiteys might be able to neuter all those fertile asians in the name of population 'control'
Comment by Phil R on 30 March 2009:
I reckon the good ole USA Is getting ready to cancel the greenback.
They seem to have no qualms about racking up ever more debt,so I figure they must have a plan..
Goes like this I reckon...
Just cancel the dollar and issue a new one (probably linked to some hard currency like gold that they will have to steal from someone else) then make the old one redeemable for the new one at a ratio fixed by the USA..
Pretty simple really..Trigger for ww3? Certainly, but who could really take them on and have a chance of winning?
Didnt Dick Cheyney tell the sec of the treasury prior to Paulson to stop worrying about defecits? Didnt he say "we dont need to worry about defecits"
Comment by Ned S on 30 March 2009:
Another aspect of this that I find interesting is that the US is actually in a pretty good position to rebuild mid-term. Some debt aside; But nothing THAT far over the top from a historical perspective - Especially if a fall guy should fortuitiously appear.
In the Great Depression the fall guy was Europe at War and really really desperately wanting lots of American made bullets to shoot at each other - Now THAT'S a Stimulus package for you - Replete with Highly Motivated Consumers (HMC perhaps?) - Rather than ones saying please boss, I just don't WANT no more debt. Messers Obama, Bernanke and Geithner eat ya hearts out!
My case (re America being OK):
The US has a population that is growing (unlike Japan and China and Europe [and Russia - Not that Russia seems to count for much but I like to keep an eye on them anyway for sentimental reasons.])
The US has a handy quarry up north called Canada where the natives are both marginally civilised and exceptionally compliant - They know what side their bread is buttered on them Kanuks!
Plus America still has a few natural resources of it's own in the ground - If it can get past the concept of thinking it's way better for the rest of the world to pollute itself cranking out resources for Uncle Sam rather than for Uncle Sam to pollute himself producing his own.
And lots of decent land to grow crops on.
And has a bit of spare factory capacity to be redirected to cost effective activities providing someone can think some up and the exchange rate is right.
With still the odd innovator and entrepeneur floating around who has the time (and the motivation - As in belief in the American dream) to do innovative and/or entrepenurial type things because he isn't committed 18 hours a day to growing rice or farming chickens to keep his family's body and soul together.
I'm taking the piss - Partly. With America it's difficult not to take the piss??? (Unless you are an American and your thought processes are all suitably conditioned perhaps?)
Geez, if those Russkies had only learned how to condition their people's thought processes like America they'd still be a super power - Not true of course - Russia gave its people free housing and health and education - But minimal opportunity (or compelling need) to rise above the pack - And it's economy crashed catastrophically.
I don't take the piss out of Russia - Their situation is too genuinely tragic. But I do take the piss out of America - There is still very genuine hope for the US. Not that the US actually deserves it for any particular reason. But that's just how it happens to be.
Pingback by Australia’s Economic Calm Before the Storm « The Firing Squid on 31 March 2009:
[...] over the next year or two. The shear enormity of money being thrown about in North America (expansion of the money supply from $850 billion to $4 trillion) cannot go unnoticed. It is inconceivable that this kind of desperate money-printing won’t [...]