US set for ‘big bang’ financial clean-up

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castlewp's picture
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Joined: Oct 7 2008
Posts: 304
US set for ‘big bang’ financial clean-up

The Obama administration is gearing up for a “big bang” announcement next week that will combine a bank clean-up with measures to reduce home foreclosures and probably steps to kick-start credit markets.

Read artilcle here

machinehead's picture
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: US set for ‘big bang’ financial clean-up

Interesting timing for this fresh blast of 'throwing money at the problem.' Brian Keogh wrote in a Jan. 27th Bloomberg article,

About $245
billion of 90-day commercial paper that companies sold to the Federal Reserve
starting in October will mature this week and next, central bank data show.
As much as $50 billion to $70 billion of the debt may be rolled over and bought
by investors, according to Barclays Capital in New York.

Whoa ... $245 billion to be rolled over in two weeks? That's a big
wodge of chewing gum. Judging from financial stocks' headlong slide at
end-week, the CP market's attempt to cast off Mama Fed and pedal its
little bike without training wheels isn't going that well so far.

Meanwhile, check out this chart of Treasury debt held by the public:

Credible projections indicate at least another $1.5 trillion of
Treasury debt to be
added this fiscal year, bringing the total in the chart up to $8
trillion by October, and possibly $9 trillion by the end of calendar
year 2009. Any resemblance between the updated graph and a hockey
stick will be purely coincidental. At 4 percent yield, it will imply
$360 billion in annual interest charges. And each 1 percent increase in
yield, if rates begin to rise, will add another $90 billion to the
annual tab.

An old guideline held that to avoid excessive debt, individuals
shouldn't buy a house costing more than 2.5 times their annual income.
Usgov, with debt in public hands of $6.3 trillion and annual income of
$2.5 trillion, is right at that 2.5 times guideline. (And it doesn't
even hold a corresponding asset, a house. But's let's ignore that for
the moment.) At $9 trillion in debt a year from now, Usgov is going to
be approaching a
debt of 4 times its annual income -- way into the danger zone.

Even if economic recovery began tomorrow, the federal budget would
remain in structural deficit (excluding interest) for at least several
years. With huge and rising interest payments piled onto the structural
deficit, the mathematical possibility arises of 'going exponential' --
in which the deficit, debt and interest payments start to snowball uncontrollably,
overriding all other aspects of budgeting. A large part of the budget
-- entitlements -- is inflation indexed and will amplify this effect.

Bottom line: prepare for inflationary takeoff. Yell

bearing01's picture
Status: Silver Member (Offline)
Joined: Sep 7 2008
Posts: 153
Re: US set for ‘big bang’ financial clean-up

No new government market intervention surprises me anymore.

DrKrbyLuv's picture
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 1995
Re: US set for ‘big bang’ financial clean-up

machinehead - good dig. 

The most recent "big bang" hand-outs have accomplished little if anything and more importantly, the way in which it was handled was grotesque and inconsistent with a "republic" and our constitution.

The big bang is just another part of our national mugging.   

machinehead's picture
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: US set for ‘big bang’ financial clean-up

'Big Bang' (LooterFest III, by my reckoning) substitutes
government credit for busted private credit. It's worth thinking about
how and why this works.

CDOs, as an important example of busted
private credit, were collateralized by houses. Thanks to easy credit,
house prices were driven to levels far beyond what incomes could
support. When the price bubble crashed, CDOs defaulted.

contrast, government debt is effectively secured by a lien on the
entire national income. This is a far broader and more stable asset
than houses. Moreover government has the sovereign power, if it can't
raise the income to service the debt by taxation, to pay with IOUs --
that is, currency created by monetizing new debt at the central bank.

sovereign debt Bubbles develop? Why, sure. Look at all the previous
sovereign defaults, mainly among emerging economies. When their
external debt reached hundreds of percent of GDP, it was not plausible
that it could be serviced. The lenders merely thought they could bail
out before the music stopped.

Similarly, with a negative net
worth of some $60 trillion, it is not plausible that Usgov can meet its
long-term obligations either. But it is very realistic to think that it
can survive for the next couple of years. So there will be plenty of
willing lenders. Government's sovereign power to service debt with IOUs
(printed money) at will encourages this sort of speculative thinking
... because default is NEVER likely in the short term, even though
long-term we're surely doomed to either default or hyperinflation.

I assume that the U.S. is headed for a protacted borrowing spree, which
will drive up both interest rates and inflation. However, once you've
substituted excessive sovereign credit for excessive private credit,
there is no remaining well to drain dry. Usgov is the largest financial
entity on the planet, so there is no greater 'lender of last resort' to
in and save it. Nor are there any income earners that haven't already
been pledged and collateralized. As Neil Young used to sing ...

Tin soldiers and Geithner's coming

We're finally on our own

This winter I hear the drumming

Four tril we must borrow ... four tril we must borrow ... four tril we must borrow ...



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