Re: CNN - Bush wants OK to spend $700B

Bush wants OK to spend $700B (http://money.cnn.com/2008/09/20/news/economy/bailout_proposal/?postversion=2008092012)

Aside from being generally disgusted all around by this plan, I wanted to address the fundamentals of the plan and give my reasoning for why it is a bad idea and will not work. Also, I'm sure I'm going to oversimplify this a bit. I feel that is what needs to happen so people can understand what is going on and form an opinion on the issue.

"President Bush has asked Congress for the authority to spend as much as $700 billion to purchase troubled mortgage assets and contain the financial crisis."

So, in idiot terms; our government wants to buy risky assets from risk taking institutions to "stabilize" those institutions which would allow them to get back to operating as normal (should they be?). The question is, how will this help you and the distressed home owners? I mean...surely your representatives are looking out for your best interests, right?

Well, the administration feels that by letting these banks get back to business as usual, we will avoid a recession or depression. This obviously ignores value of U.S. currency, and the formerly stated importance of the housing economy. What I mean is that, years ago, the "ownership society" created by easy credit was touted for much of the strength of the U.S. economy. That's all gone now, so where does that leave the U.S. economy? Hmmmmm. More obvious is the fact that creating $700B from thin air is going to cost someone. That someone is all of us living in the U.S.

Next, many of you who have been following this crisis-in-slow-motion may remember when folks first started talking about how the housing issue was "contained." One of my favorite financial analysts said at the time, "Yes, contained to earth." Since then three of the five largest U.S. investment banks have gone the way of the dinosaur. Thus, I'll have a hard time believing this master plan will be the one that seals the deal.

Lastly...$700B. That's a big number most people can't grasp. So I want to put it in perspective. First we should tack on the other billions for Bear Sterns, AIG, liquidity, etc. Just for fun, we'll skip that part. If we take $700B and divide it by the number of citizens in the U.S., we get $2293. So...that's your share. That's your wife or husband's share. That is your children's share. Share of what exactly? Troubled mortgages. Once again, this is a classic example of fighting the symptoms rather than the causes. The cause is that people cannot afford their homes, so...the government's solution to fix the visible symptom is to simply buy those un-payable mortgages so that banks can keep doing business as usual.

As an aside, I feel it would be better to let those risk taking banks fail - to cleanse the system of the risk takers. It would also be better to let those souls who can't afford their homes to leave them. This would allow the home values to reset to reasonable levels. The reason I advocate this painful serum is because that is what is going to happen anyway. Well, maybe not the banks part. The point is, our economy still sucks, those people who cannot afford their homes now will not suddenly be able to afford them after this plan is implemented. Simply, the at risk mortgages that the govt is buying will most likely fail. (Remember that is why these banks are failing!) Nevertheless, the home owners will most likely still lose their homes. The difference under this plan is that when the mortgages fail, the government will be the bag holder rather than the investment houses who took inappropriate risks. Hmmmmmm. I would much rather have seen $700B contributed towards infrastructure, jobs, or perhaps a program that would let people refinance their home loans at fixed rates or let them leave their homes and get a new loan - for a reasonably priced house - at a fixed rate. Surely that would be better than a blanket bank bailout.

"The legislative proposal - the centerpiece of what would be the most sweeping economic intervention by the government since the Great Depression"

Remember, the government keeps telling us everything is fine, that the economy is fine. Every emergency step they've taken thus far was supposed to fix the "isolated" problem. "most sweeping...intervention...since the Great Depression." Does that sound like everything is OK, or will be soon?

"officials have said in recent days that the lack of easy credit between banks and other financial institutions threatens to inflict serious damage on the economy if not addressed immediately."

Wait...I though easy credit created this problem? So...more easy credit will fix it? Hmmmmm.

"The aim is for the government to buy the securities at a discount, hold onto them and then sell them for a profit."

We're not talking about holding onto baseball cards here. Again, I reiterate that I'm not sure how this will happen if folks still can't pay their mortgages. If any of you have ever loaned money on a wide scale, you will know that it doesn't take too many defaults to start eating into the principal you originally loaned. The cause is the inability of the people to pay their mortgages, the symptom is failing banks. We are fighting symptoms.

"The administration's proposal also requests that Congress authorize an increase to the nation's debt ceiling. Currently, it's set to rise to $10.6 trillion for fiscal year 2009 - which runs from October 2008 through September 2009. But the proposal requests that limit be increased to $11.315 trillion to allow for the purchases of mortgage-backed assets."

Now this is something I can sink my teeth into. $11.315 TRILLION! Not 6 zeros, not 9 zeros, 12 zeros. Unfathomable huh? Well, your share is $37,072! That's is your current tab of the irresponsible spending of YOUR government. My question is, do you feel live you've gotten your #37K worth? Sure, we have paved streets, public schools, etc and I can't downplay our great society, but that is not your share of what they've spent....that is your share of how much they have OVERSPENT! So...if you or your government can't cut that $37K check...well....the meter is running, the interest is building, and you can bet your ass china will collect. Surely you can see how this is quickly becoming a national security issue.

Strong Dollar Jawbone

For as long as I've been watching the dollar slouch, I've never heard the Bush administration say peep. That is...until now. Today Mish wrote a great post "Paulson will not rule out stupidity" covering the AP article "Administration does not rule out currency intervention."

"As he left for Europe, the president said the U.S. is committed to keeping its currency strong, a point he clearly felt needed to be made after the dollar's long slide against the euro and other international currencies.

"A strong dollar is in our nation's interests. It is in the interests of the global economy," Bush said outside the White House."

Golly, that's not what Benny said under oath a while back (but has seen the light). Mish was quick to point out, and I agree, that goal would easily be met by balancing the budgets and bringing the military back to the U.S. Instead it has seemed the administration would rather Paulson and Bernanke try to fix our overspending problem with fancy math...until now.

"For seven years, the administration has refused to intervene in currency markets, even though the dollar has been sliding in value for most of the time Bush has been in office. The administration has insisted that currency levels should be set by free-market forces."

Why now though? Why after years of a falling dollar would Bush finally say something? Is this critical mass? Perhaps. Like I have said before Its about Solvency, not liquidity. So despite firing up the printing press, lowering to 0% and letting anyone pawn junk at the fed window...We're running out of options, Benny now knows and apparently so does Yahoo News.

"The government has limited options for propping up the greenback, especially in an election year with rising unemployment, slumping consumer confidence and the worst housing market in decades."

Paulson however has not caught George and Benny's reality bug yet because he's still acting like he has moves rather than just overtly jawboning.

"Paulson declined to rule out direct intervention — the buying by the government of dollars in currency markets — as a way to influence the currency's value."

HA HA HA HA HA HA BUY WITH WHAT YOU MORON! Borrowed Money? Gold? Petro reserves? Trade them for Goldman and Merrill? Sell out our children? Oooops. Check. The point is; Benny the academic now gets it. He was convinced he could turn on the monetary spigot and make magic...and it worked! What he didn't consider in his academia was an exit plan. So now here he is stuck still doling out cash - caught in Wall St's revolving door - because they refuse to acknowledge and write down their toxic pools. If you cut off their methadone, some will die and chaos may ensue. Think of the lengths we went to prevent that - (BSC). If we force their hand, some will die and chaos may ensue. However, you must consider that regulation forcing transparency is perhaps Benny's only move. Otherwise he'll be swatting flies from the window forever.

So let's review.

Goal:
To raise the value of the dollar.

Conditions:
1. Flat Economy
2. High Inflation
3. Falling Dollar
4. Raising unemployment
5. Low interest rates
6. Low consumer confidence
7. Low exports
8. High energy imports

Options:
1. Raise Rates
2. Borrow it from China
2. Print it

Here's to your "second half recovery" boys!