Economic Crisis Bailout or TEOTWAKI

TEOTWAWKI – Revisited

The End Of The World As We Know It was my favorite acronym in the build up to Y2K. TEOTWAKI has been resurrected and applied to the fate of the United States and perhaps the world if congress does not provide king like power to Treasury Secretary Henry M. Paulson to distribute wealth to selected major banks in order to rescue (formerly known as bailout) the citizens of the United States (formerly Wall Street).

To bankers and politicians who insist that the world will come to an end if the US Congress does not approve the proposed US$700 billion bailout package, I wish to say: "It is not the end of the world. It is just the end of you." Sadly, it won't be. America's financier caste will live to fleece another day. Thinking that the proposed $700 billion bailout package is flawed, but it is better to enact it than to do nothing is simply is not true.

The government does not "do nothing" when banks fail. WAMU and Wachovia were forcibly merged or taken over by the regulators without disruption to either depositors or borrowers. When a bank runs into trouble, it is taken over via the FDIC. The trouble is that the banking system is insolvent; that is, it lacks sufficient capital to hold its existing portfolio of assets, let alone to make new loans. Its capital is dissolving as loan losses mount. Elimination of the mark-to-market valuation requirement, for securities where there is no market, will help stem the erosion of capital which may be all that some banks need to survive. If its not, they should be preparing desk space for the FDIC to move into.

If I am insolvent, no one is going to come and bail me out by buying my assets above market value. I’m not going to get 20% or 30% more for my house than what its worth in the market just so I can buy another house and have somewhere to live. I have to live with my bad investment or perhaps just walk away. Why, therefore, are we bailing out the finance industry by buying up the bad assets?

To those who say we have to do this to save “the economy” (read here “jobs”) I say BS. Our jobs are gone and will continue to go because our government provides incentives to corporations who ship the jobs overseas. The jobs will go because US corporations are run without vision. There would be plenty of US automotive jobs if we were leading the world in electric car production and the generation of electricity through alternative means.

Why anyone believes that the Treasury plan will prevent widespread economic misery escapes me. Maybe I’m wrong. It wouldn’t be the first time. The plan may help the shareholders of a few big institutions, and that is about it. To be effective the government would have to buy and hold somewhere around $1.3 Trillion, in suspect assets. That could happen only if we stopped fighting wars and slashed the defense budget by 50% today. As much as I would be very happy supporting a bailout based on those economics, that won’t happen.

Its not TEOTWAKI but it is going to be tough for a while on a lot of people, maybe all of us. Bailout or not; we are going to see high unemployment, shrinking 401k value, uncertainty, and delayed retirement. We will reduce consumption and the economy will slow down. It may be slow for a long time. I see it as an opportunity to address my own excess and perhaps simplify a little … or a lot.