Why the Bailouts Will Not Work
Posted: Sunday, March 29, 2009
by Joseph Jagde
The economic problems generated by the current crises are for the most part unfixable by the current approach of massive governmental bailouts both here and abroad.
The bailouts will give only some short term relief and as time goes on will not work and the economic consequences will have to be felt worldwide. The reality is that the majority of the major financial institutions have utterly collapsed.
Some eras will be quickly over, as for example the large multimillion dollar baseball contracts as the ballparks will be relatively empty this year.
The only thing that could begin to stem the tide is a full government takeover of these failed institutions and an orderly dismantling and sell off of their varied operations which will take years. While this doesn't have the quick fix appeal, it is the only thing that could possibly begin to work in the current context and environment of what is happening.
A large majority of these assets in these institutions are cannot be priced.
The securitization of debt has failed simply because it is being found out that on the downside these assets are cannot be priced and therefore in the large part illiquid and lacking an alternate market. The theory that these securitized assets contained risk and disseminated risks was completely wrong.
It is not just that the potential default rates are unmanageable, but they are also unknowable and no computer models even into the far future could make them knowable. There are too many human elements involved, and there are too many twists and turns and human variables in these pools of debt to be repaid from such classes as mortgages and even the best intentioned people are swept out to sea by swift and dramatic changes in real estate prices and then can't meet their mortgages.
Banks are over their heads in this, as these giant assets now cannot find a clear value to trade or sell on and the downward spiral of the crises feeds on itself just as the boom fed on itself..
Yes, they have tanked but to where and what prices? Why would people want to buy something that they cannot price and there is simply not a large enough alternative market for these securitized assets.
Derivatives also were done in the shadow economy of the financial superstars who got wild and crazy for the maximum exploitation of others peoples money.
These tangled multi trillion dollar bets cannot be now untangled as the money usurps the value of the world economy in dollar terms.
It is too late in the game to intervene to an effective bailout as the market grew way to large. It would be impossible to make do even on a smaller scale or a smaller segment of these derivatives contracts even with the maximum bailout money.
A foretaste of this was given ten years ago in the case of the Long Term capital hedge fund, that put derivatives into multi variable formats that were backed by Nobel Prize winning mathematicians and this funds collapse still nearly affected the worldwide economy to a near collapse but this warning was certainly not looked at by the financial geniuses that are and were only concerned with the ramifications to their own pockets and continued on to bring derivatives to the forefront well and far beyond the small size of the hedge fund that caused so much damage so quickly so early..
Many catch 22 aspects were involved as well to this current crises from the beginning. Should Lehman with its near trillion dollars of assets been allowed to go bankrupt? Probably not but hindsight also shows that last minute maneuverings by Lehman insiders to the tally of billions kept assets from being returned by Lehman on mega collateral deals and published reports are of billions having disappeared and employees leaving with a mint under the guise of a last bonus. The lawsuits will bring these stories into further light. So the question is, if this company had been bailed out, the largess of the unquestioned dishonesty would have been also part of the issue as the continued operation of this company would have been under obviously corrupt management and this may have been know by those close in the decision making process as the reason not to bail and also by the Korean group who choose in retrospect smartly not to by in. It appears at the end, no other value or rule was adhered to other than the lining of their own pocketbooks led by CEO Dick Fuld who is now hiding his assets under his wife's name from pending lawsuits. So the question at the moment with Lehman was do you bailout what turned out to be a very corruptly managed company and as a outside large investor do you invest in such a company? An employee punched out Dick Fuld at the company gym and this is also symbolic of how the rank and file in Lehman were also exploited out of a job by the corrupt higher ups.
The whole system of the 401k is now broken. One of the moral is that the people never got to enjoy the money that has subsequently evaporated and will not be a pot at the end of the rainbow as it will keep on raining. They should have taken at least something from the pot earlier and not waited to that long off retirement day, a day that apparently will never come for many.
Massive amounts of mid tier financial professionals will have to hit the unemployment line or accept jobs outside that sphere because the crash has already happened and not to many people will buy in now on financial advice. This will further aggravate the unemployment problem and upset the status quo and many of these office types aren't geared towards picking up the shovel on the coming public works projects.
While if a contractor building houses did a bad job, they would be found out soon enough and wouldn't get more work but the financial bigwigs got found out too late and too many bad houses were built to tear them all down at once. But they are still getting more work and more money too work badly with.
A giant wave of credit card defaults and revocations will occur. That system could only work in boom times as the repayment rates are too high with the exorbitant interest rates. People will be charging at hotels and get stuck. Already American Express is cutting off cards quickly even on good customers.
Massive health problems of the populace will further collapse the economy. The food has too much sugar and unnatural products and this generates high obesity rates. But even more so are addictions to bizarre drugs cocktails like crystal meth, the increasing plague of AIDs especially in cities, something that wasn't there in the great depression and this will add to the weight of difficulties with the economy. You can't have a large portion of the population sick without further bankrupting the system.
A big part of the economy is based on the car and the vast road system and now the credit is not as easy to get for a new car, and the domestic car makers are nearing bankruptcy even with the windfall of much lower gas prices and that might not last either as the world wide supply of oil could face disruptions from any number of reasons including terror but also from dwindling reserves and the re up on the search for new wells cannot happen to the point of bringing in new reserves to market for years on end and China and India are gobbling up more of the world supply in their increasingly industrialized societies.
Major professional groups, such as doctors and lawyers have too many thieves in their ranks but they will also be victims of theft themselves beginning but not ending from people like Mr. Madoff.to more commonplace swindlers and thieves who will steal the money right back.
Jobs in all fields will continue to contract and become scarcer. People used to being rich, will soon find themselves poor and how will they react, will there be unrest, increased theft and violence? This society is not used to being poor as a whole so the question will be how will this increasing poverty play out?
There will be increasing imbalances as to what a given work skill can get in the job market due to increasing competition from overseas workers who can compete for the same jobs due to the real time aspect of the web and too many people doing the same thing and just following marching orders without creating and thereby losing their mojo for the next thing.
The massive drumbeat of bad economic news will help further constrict consumption as people are constantly watching the equivalent of a bad movie and beginning to believe it is all that there is out there and not looking for the good nooks and crannies that indeed may be available. . It was always a hybrid economy with elements of speculations that could easily go into outright gambling. But now way to high a percentage of the economy was put in the aspect of a bet and the bets are losing, have lost and the money isn't recoverable..
The bailout money will mostly spill away.
The bankers operated in the dark shadows, with the cooperation of greedy individuals doing things like flipping houses, and only put some light on their deals for the bailout dough. People will be even more shocked by what went on as more light goes on these dealings, and even the bailouts have been conducted in those same secret shadows or the shadow banking community.
Much more money should be diverted away to research on future hopes whether it be in science. Technology, film, literature and the like rather then given to casinos for more losses and no hope for gain.
And who are the economic teachers and the finance teachers in American and how much did they charge for their courses as they did a lousy job and their part in disseminating the crises through their teachings? Teachings which focuses on cash flow, mortgage back securities as gospel. and an unquestioned ethic towards wealth maximization without consequence to most anything else.
Rougher waves are coming yet and the best thing to do is get ready to take it, and refocus on whatever you can enjoy and exhilarates you, get a good novel, see a good movie, enjoy the sunrise as the rain of a bad economy is here to stay and there is no reason to constantly focus on in for weeks and months on end. And don't expect a new administration to be able to do much, as it is much to late to fix it and the consequences are here to stay. Any bail is coming too little and late and the giant iceberg has been hit and the Titanic will in fact sink, just find some romance on the way down as it was a good movie and find a lifeboat that can salvage at least a warm blanket.
The icebergs created however will not sink. The derivatives will stay, the bad assets will stay, the thievery will only get worse, and a new lower view will be gotten from the lower decks and upper decks of the sinking ship of the Titanic economy and the realization will be that if this iceberg hadn't done it the dangerous seas had more in store. Rich and poor alike will be going down to this swan song.
The final question is though, are even the lifeboats going to be stolen?
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