Everything is happening just as it should – alas!
Now the Europeans are getting into the act – albeit only in a minor, supporting role. Fortis – a huge Belgian/Dutch financial company – is going bust, says today’s paper. And public officials of at least three countries are trying to rescue it. According to the Financial Times, the firm is likely to be nationalized by Luxembourg, Belgium and the Netherlands all at once.
This will be a first – a company taken over by politicians who speak at least three different languages. We’d call it an “internationalization.”
Meanwhile, over on this foggy island, the government is preparing to nationalize another major bank – Bradford and Bingley. Nervous savers are taking their money out of B&B, leaving the firm dangerously short of cash, says the FT.
But it didn’t take a genius to see that there would be Hell to pay. That’s what always happens when you reach the top of a credit bubble. People may spend more than they earn for years; eventually they reach the point where they can’t go on. And lenders and investors inevitably go overboard too. They’re so eager to earn a fee, they stop worrying about whether the loan will ever be repaid.
But the geniuses didn’t see it coming. They were too impressed by their own theories and their own financial models…and their own multi-million dollar bonuses.
It fell to us here at Markets and Money – poor, neglected, lonely as we are – to fly the “Crash Alert” flag day after day…and to say the obvious to anyone who would listen: “this too shall pass.”
And now, according to the New York Times, it is passing:
“The End of Euphoria,” the Times puts it. “Bill comes due for excesses of past 15 years.”
But where’s the surprise? Mr. Market always has a surprise in store. And he always brings it out when you least expect it.
So far, the surprise is that the financial sector has been hit harder than expected. Each time an institution goes bust, the feds react with more money and more credit. Each time, stocks rally and word goes out that the crisis is over.
Then, another institution goes belly up. And now Warren Buffett is apparently on the phone – according to our sources at the Financial Times – warning Congress that if they don’t take action on the bailout plan things could get a lot worse.
Yes, that is all part of the program too. When people get the bill for their own mistakes they naturally want to pass it off to someone else. Who better than that chump of last resort – the taxpayer? The bill for the Paulson bailout plan could come to $1 trillion. At least, that’s the estimate of Ken Rogoff, a Harvard economist. Let’s see, that’s about $12,000 for every family in the country. Yet, who complains? Where are the riots? Who’s got a spare $12,000 to send to the feds so they can pass it along to Wall Street?
It doesn’t seem to matter to anyone…people figure it’s all “funny money” anyway. And they worry that if it’s not forthcoming, well…maybe Warren Buffett is right. And maybe Paulson and Larry Summers (opining today in the Financial Times ) are right too – maybe the bureaucrats will do such a good job of managing this program that it will make a profit. Which gives us an idea: why not take TARP – as the program is called – public? Give public officials an opportunity to make some money for a change…let them put their own money into the rescue plan, along with the taxpayers’ money.
Let’s see what the prospectus will say: ‘Firm will buy up Wall Street’s mistakes at above-market prices; later, when all this blows over, these ‘assets’ will be sold back to Wall Street.’
Let’s see how much of his own money Hank Paulson would bet on this business model!
No, they’re not likely to take TARP public. Too bad. We’d love to sell it short. Too bad also because it would nice to give Mr. Market a chance to sort this out himself. He’d probably mark down stocks, derivative financial assets, bonds and houses – fast. But so what? “Liquidate the farmers…liquidate labor…liquidate the railroads…liquidate investors…” – in 1929, that was US Treasury Secretary Andrew Mellon’s idea of how to let Mr. Market handle a financial crisis. Let it be! Let Mr. Market do his savage cleaning work. Then, the economy can begin to grow again – on a healthier base.
But that’s not going to happen. Once again, the fix is in. This one bigger than any before…
“We must regulate,” says Dominique Strauss-Kahn, director of the IMF (perhaps forgetting that Fortis was regulated by hundreds of bureaucrats in dozens of different countries….).
“The time has come to save capitalism from the capitalists,” writes Luigi Zingales of the University of Chicago.
Thank God for the bureaucrats. The economists. The Wall Street pros. Now, they’re going to “rescue” us…
But wait a minute…
…wasn’t it the US government that set up Fannie and Freddie with an implied guarantee?
…wasn’t it the SEC that was set up to regulate Wall Street and prohibit the sale of slimy “investments?”
…weren’t these same economists the ones who thought the U.S. financial system was the best in the world…because it was so “dynamic…inventive…and flexible?”
…isn’t it the Fed itself that has been lending money below the inflation rate since 2002? And wasn’t that the major source of “liquidity” that created such a huge credit bubble?
…and wasn’t Hank Paulson the head man at Wall Street’s most go-go firm when all this stuff was going on? Do you remember hearing him warn investors or lawmakers that the whole Vesuvius of hyper-credit was going to blow up? We don’t…
Yes, dear reader, as predicted in these pages…we are witnessing an epochal shift – from capitalism to socialism…from markets to politics…from subtle swindle to naked larceny…from white collar grifters to stick-up men…from slick fraud to brute force.
And then…who will rescue us from the rescuers?
*** This morning, Americans awoke to President Bush, “urging” Congress to pass the bailout. The bailout will “keep the crisis in our financial industry from spreading,” he said from the White House. “We will make clear that the U.S. is serious about restoring our confidence and stability in our financial system.”
Obviously, Congress is going to pass the bailout…but what does it mean long-term? Our intrepid correspondent, Byron King, offers his insight:
“[The bailout is] $700 billion that the nation does not have and cannot afford. The money will go to bail out banks that were run into the dirt by greedy idiots. It’s bad for the dollar.
“And if Congress does not approve the bailout? I guess the economy will just crash and burn. Or maybe not. It’s still bad for the dollar. It’s a good thing we all have gold bars buried out in the backyard, eh?
“One way or another, the dollar is on the verge of a rapid and sharp loss of purchasing power. So precious metals should do well. And energy is going to get more expensive, because oil will not stay in the $110 range if the dollar tanks. So the good side of the dollar decline is that domestic sources of energy ought to do well. That’s good for the geothermal companies in the ESI portfolio.”
*** Here’s a sobering detail: For the last 15 years, the U.S. money supply has grown about twice as fast as GDP. Federal government liabilities, meanwhile, have grown three times as fast. It now has more financial obligations than assets. It is, effectively, broke.
And here is another cup of strong coffee: U.S. debts are now compounding negatively like a Neg Am mortgage, that delightfully fatal confection invented at height of the housing bubble. Some house buyers didn’t even pay enough to cover the interest on their mortgage; the missed interest payments were added to the mortgage itself, causing it to grow automatically. Exponentially.
We don’t know what Professor Chris Martenson is a professor of. But he has done the world a favor with his description of what happens when things grow exponentially, rather than arithmetically.
Imagine you could make a football stadium watertight, he writes. Then, imagine that you put a magic drop of water in the center…a drop of water that doubles every minute…so that after six minutes or so, you’d have about enough water to fill a thimble. Now how long would it take before the stadium filled, he asks?
We’re not going to leave you in suspense. For the first 45 minutes, you can walk around the stadium and barely get your feet wet. But in the next 4 minutes the stadium fills and you drown.
*** Clive Crook in the Financial Times: