Yesterday, we didn’t know where to begin our reckoning; we were spoiled for choice. Today, we have no choice at all.
“Insurance Giant AIG to get $85 billion Loan from Fed,” is the headline story.
Ah yes, dear reader…the land of free markets and free men has become the land of the free lunch. Wall Street hustlers can make billions in bonuses – when the sun shines. As soon as it begins to rain, the losses are handed out to the general public. What kind of capitalism is this?
Oh, but you will say…AIG is “too big to fail”…that if it were to collapse, it might take the whole financial structure down with it.
You might be right. AIG is a major financial player…and, specifically, a major player in the Credit Default Swaps market…said to be worth about $60 trillion. No one knows – the CDS market is not regulated or monitored. And no one knows what would happen if it went kafooey. But no one wants to find out, either.
Yes, again, dear reader…we’ve come a long way from when Andrew Mellon was Secretary of the U.S. Treasury in the late ’20s. When Wall Street cracked in ’29, Mellon had the solution: let it happen!
“Liquidate the banks, liquidate the farmers, liquidate Wall Street…” Mellon was ready to let the chips fall wherever they might.
But four score years later, the chips are held up…cushioned…and caught by public nets by officials pretending to labour in the name of the public. Whether it is good or bad, we have no opinion. But it is certainly different. And it recalls to us that we were right about a number of things.
Ten years ago, we began to see a certain parallel between the United States and Japan. The latter was in a terrific slump…and American economists thought they knew why: the Japanese refused to let their big banks fail. Instead, they were propped up…causing the correction to happen in slow motion. Even today – 18 years after the Nikkei Dow collapsed – Japan has still not recovered. You can still buy stocks at 50% – 80% off!
We thought we saw the handwriting on the wall (in Japanese no less! We couldn’t actually read it, but we thought we knew what it said…): This shall be your fate too.
And here we are. Rather than allow the correction to take its natural course – and get it over with – the feds are doing all they can to prevent it. The risk of “systemic failure,” is too great, they say.
They must have stolen those words directly from the Japanese. That’s what they always said. And so the Japanese hunkered down and stretched out their recovery so long that people gave up on it altogether.
What will be the result of this big bailout of AIG? We don’t have to guess. We just have to look across the broad Pacific – at Japan.
If the Japanese model is what we think it is, the bailout – along with all the other props and cushions provided by the feds – will simply delay the inevitable. Stocks will sink. Smaller companies will go broke. Property prices will fall. Consumers will stop spending so much and begin saving.
That is what we expect for the United States too. But there is a major wrinkle; the U.S. can’t afford a Japan-style slump.
for The Daily Reckoning Australia