Who Will Rescue the Rescuers?
London, England
Monday, September 29, 2008
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*** The Europeans are getting in on the act...it doesn’t take a genius to see there was going to be Hell to pay...
*** The end of euphoria...if Warren Buffett’s warning Congress that they need to take action – you know we’re in trouble...
*** Bush urges Congress to take action...what’s bad for the dollar is good for gold...and more!
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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 The Daily Reckoning – 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.”
To have a look at Byron’s Energy & Scarcity Investor portfolio for yourself, see here .
*** 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 :
“If one idea caused the subprime meltdown and the subsequent financial emergency, it was the belief that house prices could not fall. Nationally, they had not dropped since the 1930s, it was often pointed out: it simply could not happen. A similar complacency now attends discussion of the fiscal outlook.
“It is assumed that the US can borrow without limit. In fact, the US has a budget constraint – less binding than that of other countries, to be sure, because of the dollar’s reserve currency status and other factors, but there nonetheless. This limit is about to be tested, and if the global capital markets decides enough is enough, the challenges confronting the Treasury and the Federal Reserve will make even last week’s exertions seem mild.
“The next administration’s fiscal options are vanishing before our eyes. Somebody should tell the candidates and the country.”
Until tomorrow,
Bill Bonner
The Daily Reckoning
P.S. That’s the Next Big Thing...the bankruptcy of the United States of America. Whether it is 6 months ahead...or 6 years, we don’t know. What we do know is – we, and our long-time DR sufferers, are going to be prepared. All the tools your need to survive this meltdown are here: Strategic Financial Survival Library .
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The Daily Reckoning PRESENTS: We all know that the U.S. dollar has been on a steady decline since it was removed from the gold standard. So what would happen if one of the world’s fastest moving countries suddenly used gold to back their money? The Mighty Mogambo investigates...
THE WORLD’S MOST POWERFUL CURRENCY?
by The Mogambo Guru
The economic slowdown has been characterized as “consumers are de-leveraging”, which is an interesting turn of phrase that means that people are not borrowing money to spend.
The importance is dependent on your perspective. Those people who are not borrowing money to spend are thus suffering the pangs of a lowering of their lifestyle, which depended on borrowing money to spend; and then they come around, whining about stupid things like, “Daddy, things have gone up so much in price that I need more money, which you would give me if you loved me. Don’t you love me? I love you! Won’t you please love me, daddy?”
And so I ask, “Can’t you love me if I don’t give you any money?” and they say, “No. You could borrow the money, and then we would love you”, and I reply, “I have been borrowing money and now I can’t pay them back” and so the kids say, “Then borrow some more!”
And, in a terrifying revelation, I realized that it is not only my children, but all the rest of the economy that is totally dependent on everybody else borrowing money to spend, too.
So now you see how Chaos Theory was right, and that all things are connected to all things? If not, then pay attention to how they will now commence to all drag each other down into the Nightmarish Hell Of Inflationary Insolvency (NHOII).
And it doesn’t take a real genius to see why, but the point is not that the American people were stupid enough to think they could get a perpetual free lunch by borrowing money to pay for it, or even that a smaller subset of those who are suffering the pangs of a lowering of their lifestyle is composed of those who also think that they can call me on the phone and either 1.) Ask to borrow some money from me, or 2.) Ask me to pay them back the money I borrowed from them.
My response is the same, in that I give neither one of them any money because I don’t have any money; so to one I laugh in scorn, and to the other I say that I have just put a check in the mail to them, and that they will get their money soon, and if it hasn’t arrived in a few months, call me back and I’ll write you a new check and get it right into the mail.
The point is that a much larger subset of those who are suffering the pangs of a lowering of their lifestyle is composed of those people who think that they can elect government representatives who legislate all problems out of existence, that will tax me and then give the money to them, or the Federal Reserve will create more money to loan to investors with which to buy government debt so that the government can spend, spend, spend us into blessed Utopia. Either way, it’s Bad, Bad News (BBN).
And, alas, one way or the other, they are right. Unfortunately. And that is one reason that I weep, alone, in the Mogambo Bunker Of Bunkers (MBOB), doors locked, radio blaring, machine guns cocked and loaded, mostly drunk or nearly so, soon to be blissfully comatose.
Another reason that I cry so piteously and drink so abusively is that all this new government borrowing will create so much new money that it will destroy the dollar’s buying power, taking my own country down with it.
The only reason that I stop bawling like a little crybaby is the knowledge that the people who own gold, silver and oil will get rich, rich, rich, and since I own gold, then people will want me to loan them a few bucks out of my huge stacks of money because they are starving, and their children are starving, and I will say “No!”, and it will be thin gruel indeed for them to hear my mocking voice again echoing in their heads, “Buy gold, silver and oil, you morons, because your stupid government is letting a private bank (that misleadingly calls itself the Federal Reserve when it is, in fact, neither) to create so damned much fiat money that it will produce catastrophic inflation in consumer prices that will destroy the country, just like it has done to every other stupid country in the last 4,000 years that let its stupid government increase a fiat money supply at its whim! Hahahaha! Now you see why I always said you were freaking doomed! Hahaha!”
But I feel terrible, as this constant infliction of inflationary pain by heedless expansion of the money supply is so unnecessary, and that is why I was pleasantly surprised to read in the Wall Street Journal the headline “Central Banks Consider Gold” in its Commodities Reports column.
The reason is easy to see if you read the article backwards, in that there was a question about central bank buying “last week, when gold saw a record single-day gain”, especially Chinese central bank buying of gold, which is already the ninth-largest holder of gold in the world but which holds only 1% of its foreign-exchange reserves in gold, although it actually said it would like to hold more. And Mark O’Byrne at Gold & Silver Investments says that he would “be surprised if the Chinese hadn’t been nibbling at the gold market,”, which leads to the news that Asian banks “are seen as keen buyers” of gold, which leads to the news that “other central banks are now far more likely to be holders of gold”, which leads us back to the second paragraph that “Turbulence in the financial markets and recent U.S. dollar weakness are helping the precious metal claw back its reputation as the central monetary anchor within the international monetary framework”, which leads to the opening paragraph of “Central banks may be starting to turn one of the few assets in which they can invest; gold.”
In short, those crafty Chinese, a fifth of the world’s population, may be getting ready to issue a gold-standard money, which will instantly make their currency the strongest in the world, which is just what a country needs if it wants to import a lot of things cheaply so as to respond to demand for internal economic growth without stoking inflation in prices!
And, fortunately for those of us who both love to have large profits handed to us and who also own gold, a Chinese gold-standard may soon make a dream come true as gold would skyrocket when priced in suddenly depreciated dollars.
Whee! This investing stuff is easy!
Until next time,
The Mogambo Guru
for The Daily Reckoning
Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.
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