U.S. bailout package will spark inflation and shift the burden to foreign investors

[mRx 16]

I personally dont see inflation as a risk now, I'm much more worried about deflation.

I can see a scenario where assets (housing, stocks, commodities, wages ect.) may only be worth 10-30% of their value at their peak of the last few years. If they crash to those levels it could take a generstion to recover.

An equilibrium at those levels could very well cause massive civil unrest, and in such a scenario you can be sure immigration will all but be stopped...

How so? If housing, stocks, commodities, wages, and prices drop 70-90% as you think, why would this be a problem?

If all these prices were allowed to fall by government (which they're not), then who cares if you are only getting 2 dollars an hour, when the price of, say, a loaf of bread is one half of a cent. Granted that's a bit extreme, but you get the point.

Plus, such a drop in prices stimulates exports, and American business, because for the recession period, the dollar drops to a level that is actually below it's real market rate, then works it's way up naturally to it's actual market value.

In reality, deflation is an important part of the recessionary healing process. Too bad natural deflation has been prohibited by the Federal Government.

It's how all our recessions were handled pre-1928, and it worked just fine (See 1920-21 recession with President Harding).

[w¡n9Nµ7 §£@¥€r 123]

I personally dont see inflation as a risk now, I'm much more worried about deflation.

I can see a scenario where assets (housing, stocks, commodities, wages ect.) may only be worth 10-30% of their value at their peak of the last few years. If they crash to those levels it could take a generstion to recover.

An equilibrium at those levels could very well cause massive civil unrest, and in such a scenario you can be sure immigration will all but be stopped...

How so? If housing, stocks, commodities, wages, and prices drop 70-90% as you think, why would this be a problem?

imagine every mortgage note holder in the country "under water".

== civil unrest.

[mRx 16]

I personally dont see inflation as a risk now, I'm much more worried about deflation.

I can see a scenario where assets (housing, stocks, commodities, wages ect.) may only be worth 10-30% of their value at their peak of the last few years. If they crash to those levels it could take a generstion to recover.

An equilibrium at those levels could very well cause massive civil unrest, and in such a scenario you can be sure immigration will all but be stopped...

How so? If housing, stocks, commodities, wages, and prices drop 70-90% as you think, why would this be a problem?

imagine every mortgage note holder in the country "under water".

== civil unrest.

These mortgage investors are going to lose either way, and everyone is going to have to face these bad investments, liquidate assets, and possibly go under. The losses will go straight up the chain. This is the price that must be paid for bad business deals. Granted, the investments were provoked by the Fed's credit expansion, and the investors were making what they thought was, a good investment. But, those investors made those decisions, and the costs of their errors shouldn't be spread over the American people.

But my point is, that when all prices drop, which they are naturally trying to do, then losses are realized to be not as bad.

[w¡n9Nµ7 §£@¥€r 123]

I'm referring to "note holders" not investors.

*************************************

http://seekingalpha.com/article/116297-evi...ation-is-coming

Edited January 26, 2009 by A.J.

[mRx 16]

Still, the losses will be felt by all, the same with investors as with homeowners who have mortgages.

The point is, these losses are necessary, and in fact, are not really actual losses, since the credit stimulation was artificially pushing up prices, lending, and investments, the "felt" losses are actually the market naturally readjusting to it's market levels. This leads to the liquidation of, and repricing of the bad, inflated assets.

Sounds grim, but it seems to me to be a much sounder plan that trying to literally force these tumbling prices up, by reflating the bursted bubble, which will lead to far more suffering than necessary.

[luckytxn 2,265]

Optimism? Ok.

Optimism that people can study and know what is the best thing to do in this situation.

As I said before I dont think anybody really knows what is going on, how much of the world ecomony is at risk and what to do to fix it.

I personally dont see inflation as a risk now, I'm much more worried about deflation.

I can see a scenario where assets (housing, stocks, commodities, wages ect.) may only be worth 10-30% of their value at their peak of the last few years. If they crash to those levels it could take a generstion to recover.

An equilibrium at those levels could very well cause massive civil unrest, and in such a scenario you can be sure immigration will all but be stopped...

Geezer. Pretty much they know what is going on and how it happened. The whole world economy is at stake. There was a combination of factors that came into play. It was not just the housing bubble. It was huge but definately not the whole thing. Was it also the credit crunch? Also a factor.

About 7-8 years ago I saw the trucking market for things related to housing go from maybe 10 percent to much more. (At one time for a couple of years it went to almost 40 percent) Housing was huge and not just to build more housing but to fix up what people owned. It is now flat. During this time local taxes went up maybe 4 times what it was at the start. My local city went on a crash building program and put out bonds that are based on the tax rates in place. The auto industry was maybe a 5th of all trucking it is now maybe a fraction this past year. These are a lot of jobs that are now gone just like that in the past 2 years.

Also I noticed when fuel started going to 4 dollars a gallon that most could all of a sudden fuel up very seldom. All their discretionary spending was all spent on fuel. This left little to spend on toys that we all love. I noticed this past year that all the electronics we were delivering are nothing now.

These are a lot of jobs at stake. Also these companies are going bankrupt. I did notice and it is from my point of view because I haul products of many descriptions around the country that after fuel went sky high that the economy seemed to tank. Of course it is from my perspective. I am lucky that people still need to eat and I mostly haul foods all over now. Of course there is other consumables. It is like everything went to #######.

Since all these things happened and the economy went in the dumpster and the people are now in a holding pattern that fuel crashed as that market went flat but now people are still not wanting the other things that are discretionary buys. Of course it was other things in play here and the Government knows this. They are grasping at straws right now. They can pump all the money they want out but it will not fix the problem.

[luckytxn 2,265]

Must add that booze seems to still be a big product.

[geezer 1]

Yep they are definately grasping at straws.

But thinking that deflation is good and just letting banks fail is not the answer in my opinion.

If all the big banks fail the government will have no choice but to go in and nationalize everything. The quiskest way for them to fail is to have $200,000 mortgages outstanding on houses worth $40000. The so called 250,000 deposit insurance wont be worth anything because there is no way it could cope with those staggering losses soon you would have small individuals wiped out.

Can anyone imagine what would happen if people that were working could not get their money from an ATM anytime they wanted in the amount they wanted?

I know it sounds good to say just let the market work but as noted the markets are broken. I think the most we can do is grasp at straws and hope something works..

[luckytxn 2,265]

I happen to not agree. Not all banks would fail. Remember the government had some banks take over weaker ones. I say to let the die fall where they may. Why let the weak survive? All they had to do is let someone stronger take over the weak ones. After the shake out the underlying companies would start out strong. ATM's would continue working as they did a day after the failed banks were taken over. The banks that took over took over the deposits anyway. They did take over some of the bad loans but are supposed to absorb some hand over others and use any losses against taxes owed. We can't save everyone.

[w¡n9Nµ7 §£@¥€r 123]

Nationalization Gets a New, Serious Look

By DAVID E. SANGER

WASHINGTON — Only five days into the Obama presidency, members of the new administration and Democratic leaders in Congress are already dancing around one of the most politically delicate questions about the financial bailout: Is the president prepared to nationalize a huge swath of the nation’s banking system?

Privately, most members of the Obama economic team concede that the rapid deterioration of the country’s biggest banks, notably Bank of America and Citigroup, is bound to require far larger investments of taxpayer money, atop the more than $300 billion of taxpayer money already poured into those two financial institutions and hundreds of others.

But if hundreds of billions of dollars of new investment is needed to shore up those banks, and perhaps their competitors, what do taxpayers get in return? And how do the risks escalate as government’s role expands from a few bailouts to control over a vast portion of the financial sector of the world’s largest economy?

The Obama administration is making only glancing references to those questions. In an interview Sunday on “This Week” on ABC, the House speaker, Nancy Pelosi, alluded to internal debate when she was asked whether nationalization, or partial nationalization, of the largest banks was a good idea.

“Well, whatever you want to call it,” said Ms. Pelosi, Democrat of California. “If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization.

“I’m not talking about total ownership,” she quickly cautioned — stopping herself by posing a question: “Would we have ever thought we would see the day when we’d be using that terminology? ‘Nationalization of the banks?’ ”

So far, President Obama’s top aides have steered clear of the word entirely, and they are still actively discussing other alternatives, including creating a “bad bank” that would nationalize the worst nonperforming loans by taking them off the hands of financial institutions without actually taking ownership of the banks. Others talk of de facto nationalization, in which the government owns a sizeable chunk of the banks but not a majority, with all that connotes.

That has already happened; taxpayers are now the biggest shareholders in Bank of America, with about 6 percent of the stock, and in Citigroup, with 7.8 percent. But the government’s influence is far larger than those numbers suggest, because it has guaranteed to absorb the losses of some of the two banks’ most toxic assets, a figure that could run into the hundreds of billions of dollars.

Many believe this form of hybrid ownership — part government, part private, with the responsibilities of ownership unclear — will not prove workable.

“The case for full nationalization is far stronger now than it was a few months ago,” said Adam S. Posen, the deputy director of the Peterson Institute for International Economics. “If you don’t own the majority, you don’t get to fire the management, to wipe out the shareholders, to declare that you are just going to take the losses and start over. It’s the mistake the Japanese made in the ’90s.”

“I would guess that sometime in the next few weeks, President Obama and Tim Geithner,” he said, referring to the nominee for Treasury secretary, “will have to come out and say, ‘It’s much worse than we thought,’ and just bite the bullet.”

So far the Obama administration has signaled that it is trying to avoid that day, and members of its economic team — among them Mr. Geithner and the president’s top economic adviser, Lawrence H. Summers — made the case during the Asian financial crisis in the 1990s that governments make lousy bank managers.

Indeed, the risks of nationalization they warned about then apply equally to the United States now. The first is that nationalization can prove contagious. If the Obama administration took over Bank of America and Citigroup, two of the largest banks in the United States, private investors could decide to flee from the likes of JPMorgan Chase and Wells Fargo, or other major banks, fearing they could be next.

Moreover, Mr. Obama’s advisers say they are acutely aware that if the government is perceived as running the banks, the administration would come under enormous political pressure to halt foreclosures or lend money to ailing projects in cities or states with powerful constituencies, which could imperil the effort to steer the banks away from the cliff.

“The nightmare scenarios are endless,” one of the administration’s senior officials said.

The argument in favor of nationalization, even a brief nationalization of a few months or years, is straightforward: It might be the only way to pull America’s largest financial institutions out of the downward spiral that makes it enormously difficult to raise the capital they need to keep operating.

Right now, many banks are reluctant to write off their bad debts, and absorb huge losses, unless they can first raise enough capital to cushion the blow. But they cannot attract that capital without first purging their balance sheets of the toxic assets. Japan’s experience proved the dangers of that downward swirl; the economy stagnated, new lending ground to a halt and the country’s diplomatic clout shrank with its balance sheets.

Nationalization could pull the banks out of that dive, at least temporarily, as the government injected capital, hired new managers and ordered a restart to lending. But some Republicans who bit their tongues when President George W. Bush ordered huge interventions in the market would charge that Mr. Obama was steering America toward socialism.

Nationalization, said Charles Geisst, a financial historian at Manhattan College “is just not a term in the American vocabulary.”

“We think of it,” he continued, “as something foreigners do to us, not something we do.”

It is also something foreigners do to themselves: the British have recently taken a majority stake in the Royal Bank of Scotland.

Some of Mr. Obama’s advisers have asked who the government would get to run the banks. Many of the most experienced executives are tainted by the decisions they made during the age of excess. And how would the government attract the best talent if it demanded that they take minimal pay — a political reality in the current environment?

Another option is for the government to buy the banks’ most toxic assets either through a giant fund, or, more likely, a federally supported bad bank designed to buy up troubled investments. But in that case, taxpayers might well be the losers: They would have all of the banks’ worst assets and none of their performing loans. And unless a deal is worked out to take a larger share of the banks whose bad loans are shuffled off to the government, the taxpayers would not have the chance to benefit by selling the shares back to private investors.

Moreover, cleaning up the banks’ bad assets, without extracting a heavy price for the bank managers, shareholders and their lenders, is exactly what Mr. Summers and Mr. Geithner warned against during the Asian financial crisis.

“We told the Asians that they had to be willing to let banks and companies fail,” said Jeffrey Garten, a professor at the Yale School of Management and a top official in the Clinton administration. “We warned that there was great moral hazard if governments just bailed them out.”

“And now,” he said, “we are doing the polar opposite of our advice.”

[w¡n9Nµ7 §£@¥€r 123]

The spectre of nationalisation

IT IS generally easier to remove a kidney from a dead donor than a live one. When regulators in Scandinavia and America in the early 1990s started extracting the bad assets from their crisis-hit banking systems, it helped that the banks they dealt with were bust or in the government’s hands. Today, policymakers are trying to excise toxic assets from banks that are still, at least officially, private and viable. That is a much trickier proposition.

Last autumn, governments around the world poured new capital into private banks and guaranteed their debts to protect them from further losses and help them raise private capital. But continued losses have overwhelmed those initial efforts. Some banks have needed more capital, and a few have been nationalised outright. Moreover, the haphazard implementation of rescues has kept private capital on the sidelines, fearful of being diluted or wiped out. What is needed, the experts say, is a more systematic approach through the creation of a “bad bank” to assume the bad assets, leaving “good banks” to resume lending. (In an Orwellian attempt to hide the nastiness, it may be known in America as an “aggregator bank”.)

The good bank/bad bank terminology dates at least back to 1988 when America’s Mellon Bank spun off its bad energy and property loans into Grant Street National Bank, which was financed with junk bonds and private equity. Such purely private solutions are not feasible during crises that encompass the entire banking system: there is not enough private capital around. In the early 1990s the governments of Sweden and Finland each nationalised some of their largest banks and set up “bad banks” to dispose of their assets. Around the same time, America created the Resolution Trust Corporation to sell off the loans and underlying collateral of hundreds of failed savings banks, or thrifts. In each case, the assets taken over by the bad bank were equal to about 8% of GDP, according to a study by Daniela Klingebiel of the World Bank.

In this crisis policymakers have adopted piecemeal elements of the good bank/bad bank. In October UBS spun $60 billion of toxic assets into a fund backed by the Swiss central bank. America will absorb most of the losses on $306 billion of problem assets at Citigroup and $118 billion at Bank of America. It is also creating a facility, supported by the Federal Reserve, for asset-backed securities which could relieve banks of bad loans. Britain may insure banks against future losses. Like a bad bank, the aim is to isolate toxic assets, encourage private money to come in and discourage banks from hoarding their capital. But no market value has been put on them (although loss-sharing agreements in part serve that purpose). This spares banks from immediately recognising their losses, but it leaves a fog of uncertainty over the system. Banks will not boost lending if they fear that future loan losses will eat through the rest of their capital.

A bad bank could alleviate these concerns by convincing both banks and investors that the problem assets have either been removed from the banking system or will be as they surface. Paul Miller of Friedman Billings Ramsey, an investment bank, says a government bad bank can pay more for assets than a private investor because its cost of funds is irrelevant, it needs no capital and can hold the assets to maturity. It could also develop a professional and uniform approach to valuing and disposing of bad assets while leaving new lending decisions to the good banks.

But a bad bank faces different problems, the most serious of which is setting a price for assets that both it and the seller can agree on. This was less of an issue in the early 1990s, since the assets for the most part came from banks that had already failed or were under government control. Today, if the bad bank pays above the fair-market value, it would raise the cost to taxpayers, imperil its political legitimacy, and deprive the market of badly needed transparency. If it pays fair value or less, banks might be reluctant to participate. Those that did may have to recognise large, immediate losses, depleting their capital. As a result, setting up a bad bank would entail additional capital injections. To reassure itself that the recipient bank can survive, the government would invest only if the bank can simultaneously raise funds from private investors. Any bank unable to raise private capital, perhaps rendering it insolvent, would be taken over.

But such steps would be time-consuming and could be hit by a loss of market confidence at any moment. America abandoned its original plan to buy toxic assets last October in favour of extra capital because the crisis demanded faster action.

The nuclear option

An alternative (or perhaps prelude) to a bad bank would be nationalisation. This would at a stroke end the tension between the goals of private shareholders who want to hoard capital and lend less, and government overseers who want banks to lend more and modify mortgages of homeowners facing foreclosure.

But nationalisation carries huge costs of its own. With the world awash in unwanted bank assets, it could take years for the governments to privatise their banks. Meanwhile politicians would be tempted to turn banks into instruments of industrial policy, propping up politically powerful industries such as carmakers and scrimping on more deserving recipients. Politically motivated lending could result in even larger loan losses in the future, and private banks would be put at a disadvantage. At the other extreme, governments might be so fearful of taxpayer losses that they lend even less than their private counterparts.

Economists have long recognised that banks are special. Through decades-old relationships with millions of households and businesses, they normally (though, sadly, not recently) steer savings to productive and lucrative endeavours. Letting banks collapse would wipe out this critical mechanism; nationalising them could, eventually, do it similar damage.

[geezer 1]

I happen to not agree. Not all banks would fail. Remember the government had some banks take over weaker ones. I say to let the die fall where they may. Why let the weak survive? All they had to do is let someone stronger take over the weak ones. After the shake out the underlying companies would start out strong. ATM's would continue working as they did a day after the failed banks were taken over. The banks that took over took over the deposits anyway. They did take over some of the bad loans but are supposed to absorb some hand over others and use any losses against taxes owed. We can't save everyone.

Like I said before I'm not as optimistic as you. Hope you are right and not me...

[luckytxn 2,265]

Thanks AJ for not helping me be more of a optimist.

[mRx 16]

http://seekingalpha.com/article/116297-evi...ation-is-coming

AJ,

I agree with the article completely in regards to inflation/deflation being solely monetary phenomena, and I also agree that what is occuring now is not deflation. Which is precicely why I stated that historically deflation was a useful tool used by banks, but is outlawed now by the Federal government.

Deflation really isn't necessary to cure a depression though. But as I've said, banks have historically done so, especially while on the Gold Standard.

But the article is completely wrong in assuming that this housing bubble is a normal business fluctuation, because it is not. It is an effect of the ending of the inflationary business cycle. In a normal business fluctuation, once supply has surpassed demand, then the price will gradually decrease, not plummet. Such drastic changes can only occur by irresponsible inflation by the Fed and Treasury.

[Ban Hammer 14,571]

change we can believe in.