ABCs of Paulson's bailout- Hudson

[don]

"The problem of “debt pollution” is being “solved” by creating yet more debt, not by reducing its volume. Neither the Treasury nor Congress is helping to resolve this problem. The working assumption is that giving newly created government debt to the banks and Wall Street will lead to more lending to re-inflate the real estate and stock markets. But who will lend more to the one-sixth of U.S. homes already said to have fallen into negative equity territory? As debt deflation eats into the domestic market for goods and services, corporate sales and earnings will shrink, dragging down stock prices. Wall Street is in control, but its policies are so shortsighted that they are eroding the underlying economy – which is passing from democracy to oligarchy, and indeed it seems to a bipartisan financial kleptocracy."

http://www.counterpunch.org/hudson10202008.html

[Tulpen]

Re: ABCs of Paulson's bailout- Hudson

"The working assumption is that giving newly created government debt to the banks and Wall Street will lead to more lending to re-inflate the real estate and stock markets."

I think that is incorrect, at least I never heared Paulson talk about that. Instead I think the assumption is that the government bailing out the banks will make them solvent again. An assumption that I think is not entirely unrealistic.

[c1ue]

Re: ABCs of Paulson's bailout- Hudson

Tulpen,

Actually, Hudson is spot on.

Banks - even should they be made liquid and/or solvent - are still f**ked because the securitization model is broken.

Something like half of the profits in the industry was due to securitization: of residential real estate, credit cards, corporate loans, commercial RE, etc.

No one is touching that crap anymore.

The money being given by the government may not have a fixed repayment date attached to it, but the macro effects of inflationary credit policies are a very mixed blessing for a bank.

On the one hand, bad debts are being reduced in value. On the other hand, the fundamental business model of a bank is loaning out money. If said money is reduced in value (both interest payments and original capital), then the bank is not going to do well.

What the government is hoping for is to restart the FIRE system. What Hudson is saying is that is impossible due to the debt support capability of the overall economy vs. the existing debt.

[phirang]

Re: ABCs of Paulson's bailout- Hudson

The world tried to walk away once from the US banking system...

that lasted for about a week.

I'm not that worried about getting the $$$ to recap: ti's going to be a dirty messy shitstorm, with tons of drity deals and oligarchs further entrenched than every before.

[vinoveri]

Re: ABCs of Paulson's bailout- Hudson

Banks - even should they be made liquid and/or solvent - are still f**ked because the securitization model is broken.

Something like half of the profits in the industry was due to securitization: of residential real estate, credit cards, corporate loans, commercial RE, etc.

No one is touching that crap anymore.

How about a new round of "financial innovation" to get things going again ...
Perhaps we can again have AAA rated CDOs and MBS (with other names of course) - rated and backed by the government. If foreign creditors will continue to take Treasuries, why could they not take "innovations" that could always be exchanged for Treasuries. The "innovators" need (read: will find) a way to keeping building (or rebuild) the pyramid of all these global gov guarantees.

It's all a game of "confidence" and if folks think they'll get paid, then the yield chasing resumes (i.e., when fear is allayed sufficiently for greed to take back over). Remember, the players and FIRE structure don't want the game to be over.

[goadam1]

Re: ABCs of Paulson's bailout- Hudson

I own a small business and cannot move money from my checking into a treasury money market. Not allowed. Closed. I suppose the idea is to force my money into the commercial market to keep the whole ball of paper rolling down hill.

[c1ue]

Re: ABCs of Paulson's bailout- Hudson

How about a new round of "financial innovation" to get things going again ...

Several problems:

1) Once burned, twice shy. Do you really think Europeans and Asians are going to fall for highly rated, securitized mortgage debt again?

2) Pyramid problem: It ain't enough to pay off the last pyramid. You got to have enough to build an even larger pyramid. And is that simply too big?

3) The converse of the age-worn saying: "if you owe the bank $1, it is your problem. If you owe the bank $100,000 it is the bank's problem"

What people aren't thinking about is that if you require so much debt that you absorb all the credit capacity in the system - or more specifically all the excess productive capacity in the world - then how is it possible to get even bigger?

In the original saying, there are assumptions made concerning the relative size of the bank and the person. In the present US case, the debt needed is simply too much for continued credit to be forthcoming unless outright serfdom/slavery is entered into.

We're talking $10T to $30T in order to reflate the FIRE economy.

I don't think so.

America is simply not big enough to occupy and/or take over the rest of the world - even discounting that a number of these other nations have nuclear weapons.