July 12, 2024

Markets Plunging On Geithner’s Remarks

bearGeithner Does It Again

The Treasury Secretary said Sunday that some banks will need large amounts of financial aid.  Geithner’s comments seemed to imply that his recently announced rescue plan for the banking industry is only a first step and that additional government funds will be needed.  Markets responded with a massive selloff in Asia and the Dow futures are down heading into Monday morning.

Bloomberg: “Some banks are going to need some large amounts of assistance,” Geithner said yesterday on the ABC News program “This Week.” The terms of a $500 billion public-private program to aid banks “cannot change” for investors or they’ll lose confidence in the plan, he said on NBC’s “Meet the Press.”

The Obama administration is pursuing the most costly rescue of the U.S. financial system in history while facing taxpayer concerns the aid is bailing out Wall Street firms that took excessive risks. After allocating about 80 percent of $700 billion in aid approved by Congress, administration officials want to keep open the option of seeking more.

Geithner said the Treasury has about $135 billion left in a financial-stability fund while declining to say whether he will request additional money.

“If we get to that point, we’ll go to the Congress and make the strongest case possible and help them understand why this will be cheaper over the long run to move aggressively,” he told ABC News.

Most members of Congress probably wouldn’t support a request for new bailout funds because they aren’t clear about how the government used the $700 billion authorized in the first legislation, McCain said.

“We still don’t have the transparency and oversight,” McCain said on “Meet the Press.” He said his biggest concern is that the cost of stemming the financial crisis will worsen annual deficits projected to exceed $1 trillion for many years.

“What I am most worried about is laying the debt on future generations of Americans,” he said.

Private Investor Participation Is A Sham

It seems clear that there is dwindling public support for further massive bailouts of Wall Street and the banking industry.  Geithner’s plan of bailing out the banking industry with a “public/private” partnership is an attempt to deceive the public about the true extent of the cost of the bank bailout.

Taxpayer backed loans will be used to fund most of the asset purchases under the so called Public-Private Investment Program (PPIP).  Private investors can lose no more than their initial investment but can potentially earn huge returns if the assets purchased recover in value.  Geithner is offering these generous returns to lure in potential private investors who will be deceptively portrayed as the risk takers in the bank bailout, when in fact, the taxpayers are the ones at risk.

“We’re all mad here” – Lewis Carroll, Alice in Wonderland

Geithner’s solutions to solving the banking and financial crisis is increasing being viewed by many as something straight out of Alice In Wonderland.

Banks need to show more willingness to take risks and restore lending to businesses in order for the U.S. economy to recover from the recession, Geithner said.

“To get out of this we need banks to take a chance on businesses, to take risks again,” he said.

Banks did not become insolvent because they made too few loans or took too few risks.  The banking crisis was caused by too much lending to unqualified borrowers who are now defaulting.  Proposing to lend more to those already carrying an intolerable debt burden is sheer madness.   The President of the European Union, Czech prime minister Topolanek, called the bailouts and stimulus plans “a way to hell”.  The Emperor has no clothes and people are starting to notice.

The United States has been pushing other nations to imitate our borrowing and spending rampage with little success.  In fact, opposition to the American “solution” has become so vocal that this topic has been taken off the table by the Obama administration for the upcoming Group of 20 economic summit.

WASHINGTON — U.S. officials preparing for the Group of 20 economic summit on Thursday in London are playing down fiscal-stimulus targets and focusing on objectives such as new rules for tax havens and coordination of financial regulation.

European opposition to additional spending to stimulate economies has grown sharper over the past weeks. Obama administration officials have opted to back off the public spat.

Avoid All Pain At All Costs

A recession is the solution to curing economic excesses.  Recessions bring economic pain but lay the groundwork for a fundamental economic recovery by reallocating capital to healthy enterprises.  Attempting to paper over inevitable economic corrections with oceans of debt and spending only serves to further destabilize any recovery.   Economic policy makers did not see this financial disaster coming and their “solutions” have made the problem worse.

Rolfe Winkler, Option ARMageddon, makes a clear assessment of the current crisis.

The problem isn’t falling asset prices, it’s not rising foreclosures, it’s too much debt.

And yet American policy-makers appear convinced that more debt can rescue an economy already drowning in it. If we can just keep the leverage party going, all will be well. $787 billion to fund “stimulus,” another $9 trillion committed to guarantee bad debts, 0% interest rates and quantitative easing to drive more lending, new off balance sheet vehicles to hide from the public the toxic assets they’ve absorbed. All of it to be funded with debt, most of it the responsibility of taxpayers.

If I may offer just one reason this will all fail: rising interest rates. Interest rates need only revert to their historical median in order to hammer asset values, and balance sheets, into oblivion.

Picture it if you will: the economy stabilizes, money flows out of Treasurys, which drives interest rates back to normal. Asset values that had appeared to stabilize fall again. More writedowns ensue, more balance sheets turn up insolvent. The debt deflation conflagration ignites again, burning up what’s left of the economy.

If our experience to date has taught us anything it should be that kicking losses up to bigger balance sheets solves nothing. Losses have to be taken. The balance sheets on which they reside will end up insolvent. Why compound our problems by piling up more debt and concentrating all of it on the public’s balance sheet? Is American arrogance so great that we believe our Treasury and our currency will survive the trillions of $ worth of losses and stimulus we’ve already agreed to fund?

At the end of the day, flushing more debt through the system is the only lever policy-makers know how to pull. Lower interest rates, quantitative easing, deficit spending, it’s all the same. It’s all borrowing against future income. Each time we bump up against recession, we borrow a bit more to keep the economy going. With garden variety recessions, this can work. Everyone wants the good times to continue, so no one demands debts be paid back. Creditors accept more IOUs and economic “growth” continues apace. If it sounds like Bernie Madoff’s Ponzi scheme, that’s because it is.

But at a certain point, Ponzis get too big. There simply aren’t enough new investors to pay off older ones. In the aggregate, the same is true for Western economies. Their debt loads are now so huge, they are simply unpayable.

Economic Summit

The Group of 20 economic summit will accomplish nothing.  They have decided in advance to eliminate debate on the major issue – whether more debt will solve our debt problems.   The Czech prime minister should be the main speaker at this summit and our Treasury Secretary should be put in the front row.  It is a time for fiscal austerity – not more reckless borrowing.