An in depth analysis of WHY YOU ARE WRONG

Tuesday, March 24, 2009

Geithner Toxic Asset Plan Built On Lies

Previous plans cooked up by both the Bush Obama administrations, were built on a foundation of opacity and deception, so it should surprise few that the latest trillion dollar plan gives us more of the same-- on steroids.

Suppose for example, a patient came in to a doctor after having extreme nausea, dizziness, fainting spells and other scary symptoms. Do they have a deadly or terminal disease, or perhaps they were poisoned? It's pretty clear that the patient wants to hear that it's nothing serious.

The collapse of the complex ABS markets was one of the most serious symptoms, the equivalent of a major heart attack since it clogged the financial system and made future lending almost impossible. Some said it was just a temporary "panic attack" by investors with little underlying basis. After all, most of these securities had been rated AAA. All that was needed was for the government to reassure the patient until their irrational fears passed and people realised there was no problem. Securities that had traded at or near 100 cents on the dollar and now had no buyers at 40, 30 or 25, couldn't really be suddenly worth so little. This is of course what the patient and the doctor want to think, because if they were, almost every major financial institution would be insolvent. The key thing is to keep depositors, shareholders and everyone calm. They don't need to know what's going on since really it's just temporary.

The darker view was that actual default rates on the underlying mortgage, auto and credit card loans that formed the ABS had risen sharply and that there had also been a huge fall in the value of the houses and other collateral that backed them. There were also indications of massive fraud. The lack of real household savings and high consumer and corporate debt levels scared many. This meant the patient was almost fatally ill. Trillions of dollars had likely been destroyed and the patient had to go on an extreme low debt diet to rebuild their health. This, needless to say is a much less popular viewpoint with both the patient and the doctor who had been giving drugs and advise to this patient for years. If they were this sick, a lot of tough questions might be asked about the FED, corporate executives, rating agencies and others. The required fall in consumer and government spending and borrowing was not likely to be popular at all.

Shockingly, the government doctor has chosen to tell the patient that nothing is really wrong and to construct a complex web of deception to keep the current system of government and financial relationships afloat. However, at this point few people with any real money left are willing to believe this as can be seen by the major stock indexes. They suspect the doctor is a quack and are not eager to lend or invest in the private economy. They want the government to take on the risk and debt with the hope that they can at least push the problem into the future. The result is a catastrophic burden to be paid by innocent savers and future generations through high taxes and soaring inflation.

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