Throwing Your Money After Bad

I’m still trying to recover from the shock of the market bail-out that U.S. Treasury Secretary Hank Paulson has proposed. The idea seems to be that American tax payers should throw $700 billion into the market so that the US Government can set up an unsupervised hedge fund with the power to buy sub-prime derivatives at any price it chooses.

To me it reads like this:

Not only will we bail out the banks, we’ll reward them. We’ll create one wondrous golden parachute.

P.S. Let’s not bother to regulate this parachute in any way.

No wonder the markets have recovered. Hey not just bread but free jam too!

And Paulson is doing the media rounds trying to bamboozle Congress into agreeing to it. Neither presidential candidate nor political party seems at all happy with this, although George Bush seems to think it’s fine. This has to count as the biggest political and financial mess of anyone’s lifetime with the exclusion of those who lived through the onset of the Great Depression. Whether it gets to outrank that in time is anyone’s guess.

The Bankrupting of America – Instant Credit Karma

It’s quite astonishing that America has moved so close to bankruptcy, given that it has such a vibrant economy. But the financial facts are sobering to say the least. Not only has the subprime crisis depressed property prices to the point where negative equity abounds, but the American consumer is highly indebted anyway. The prosperity of the last 8 years that was supposed to trickle down to Average Joe defied gravity and stayed stubbornly aloft, leaving Average Joe to buy his American dream by remortgaging his house and paying by credit card.

The upshot of this is that if house prices drop a further 20% (and they’ve dropped 20% in the last year) then Average Joe becomes Bankrupt Joe, with no assets to cover his expanding liabilities. This is a very real possibility – and this is what needs to be prevented, not just for America, but for the global economy.

What Paulson is proposing needs regulation for sure, but it also needs to be done to stop the severe dislocation of a credit collapse. If you’re wondering how America can afford it, by the way, given that it’s been running on deficits for 8 years and paying a premium price for a pointless war – it cannot. At least it cannot afford it directly. Both presidential candidates are promising not to expand the tax burden much – and that means the invisible tax scheme ploy will be put into play. The Fed will print dollars in large numbers and the value of the dollar will fall – to the extent that other economies fail to print money at a similar rate.

Broken hands on broken ploughs,
Broken treaties, broken vows,
Broken pipes, broken tools,
People bending broken rules.
Hound dog howling, bull frog croaking,
Everything is broken.