Another Trillion Dollars for toxics

Are all these trillions really paving the road to recovery or after all leading to ruin?

Yesterday I mentioned former Treasurer Hank Paulson, today a look at the current treasurer Tim Geithner to see whether he is doing a better job.
About the former I wrote:
“In fighting the economic correction the United States so far paid about $14 trillion. That includes not only the amounts actually spent, but includes the Fed’s guarantees for purchasing toxic asset, etc. Mr. Paulson treasurer in the Bush administration, argued at the time, that buying the banks' toxic assets would actually make money for the taxpayer by the time the world comes back to its senses, it would then realize that these assets are worth MORE than the going price.”

Today is another day, another bailout and likely another signpost on the road to ruin, but now under the Geithner Plan.

The idea of this Plan is that the government will create a public-private fund to buy up to $1 trillion in the banks’ mistakes. These assets will be auctioned off in a market sustained and supported by public money. This is a “win – win –win” situation, which is advertised as follow:
•    It’s a win for the banks because they get to clean out their rubbish.
•    It’s a win for investors because they get to buy the throwaways at huge discounts, with           government guarantees.
•    It’s a win for the government, because they finally get rid of that nasty smell coming from       the banks.

I don’t have the time and the need to investigate this even further, but I sense from a distance that all this is stinking.

Because there’s not much ‘win’ to share out. The assets are worth what they’re worth. By all accounts, they’re worth a lot less than the banks thought they were worth originally. In a better world, the bankers would have taken their losses, admitted their mistakes and likely changed their careers.

For sure there won’t be three winners from Mr. Geithner’s plan. There only will be one. Whatever the toxic assets are worth, they will be sold for either more or less than that amount. If they are sold for less, investors will realize a profit. The banks and their government backers will lose because they will have given up an asset for less than it was really worth. On the other hand, if the toxic assets are sold for more than they are worth, the investors will lose.

Investors’ objective is clear: they want to make money. And they won’t invest unless they think they’re getting the assets for less than they are worth. Bankers’ and the government’s motivations are more complex. Primarily they just want the problem to go away. So, the buyers of the toxic assets, are favoured and not the sellers. Most likely, those will be the only winners. They will buy the best pieces at good prices; and leave the most toxic pieces for the government. Consequently, the government will be an even bigger loser than it originally was before the deal.

Nonetheless the government will lose twice. First, it will lose money in the poker game with private investors. Then, it will lose again when its expensive gobbledygook fails to restart the economy.

The banks will be better off once they’ve cleaned out their cupboard. No doubt about it. They will be ready to lend again, but to whom?

The problem with the bank bailout is that it only fixes a piece of a much larger problem, which is not even the most essential one. Banks have already had plenty of money to lend, despite their own toxic assets. The Fed has been willing to give them the most elastic line of credit in history. The problem was not that they didn’t have the money to lend it was that they didn’t have a creditworthy borrower to lend to.

Do banks really want to take on more mortgage debt? Housing prices are still falling. And homeowners are still in trouble. Toxic assets are being marked down in anticipation of poor homeowners going broke. They still have to go broke, getting back on their feet again, before they become a good credit risk. And that logic applies to the entire business economy.

Industries, homeowners, and investors need to clean out their closets too, before the credit cycle can turn up again. And that looks like to be a very long process. Don’t expect it is all over by next year or the year thereafter.

Most economists agree with printing more money, because they see no alternative. However the real problem is not a lack of money for the banks to lend, they can borrow all they want from the Fed at near zero interest rates. The real problem still is too much debt. And printing money will not help easing the debt burden. On paper, people will owe as much as ever, but it will be a whole lot easier to pay your debt down with dollars that are going down by 10% or even 20% per year.
Subsequently print more money that is what the Fed is doing. Mr. Bernanke the Fed’s chairman said they’d keep doing it as long as necessary.

This worries the Chinese of course. They’ve got $1.4 trillion in dollar assets. They told the United States that they expected it to protect the value of these Chinese holdings.
But how can the feds do that?
Quantitative Easing is an increase in the QUANTITY of money consequently decreasing its QUALITY! That’s how it works, and that’s exactly what the feds has in mind. See also my yesterday’s article about Ponzi scheme. Subsequently the Chinese are going to foot this bill!

Conclusion: different treasurers same policy.