Bailout Plan Talks Collapse Overnight as Congress Rebels
Politics / Credit Crisis Bailouts Sep 25, 2008 - 11:51 PM GMT
Hank Paulson, the ex-CEO of Goldman Sachs investment bank, eager to bailout his Wall Street buddies to the tune of an initial down payment of $700 billion as well as protecting his own estimated portfolio of $600 million aided by his good buddy at the US Fed Ben Bernanke has hit a major hitch as bailout talks disintegrate late Thursday.
George Bush played his role on Wednesday by reading the dire end of the world script handed to him by President Paulson, so as to frighten the US electorate and their representatives into complying with Paulson's requests. The scene was set for a relative easy ride until talks began to disintegrate as President Bush admitted in his own unscripted words “If money isn't loosened up, this sucker could go down,”.
Whilst the dynamics of the breakdown are not clear in these early hours, as splits on both sides emerged as the Democrats increasingly saw the Bush Bailout plan more of a Bailout of McCain's election chances that lacked any form of stick to beat those on Wall Street that were responsible for the creation of the financial crisis. Meanwhile rebellious republicans wept for the demise of the Free Market mechanisms and suggested an alternative more voter friendly plan of rescuing home owners.
It is clear that the rail roading of the US Congress into signing a whopping initial $700 billion blank check by means of "shock and awe tactics" is starting to crumble as Congress respond the widespread disgust and anger, not only amongst ordinary Americans but much of the financial industry and market participants who have witnessed corner stones of the free markets being stripped away month on month and lately day by day as the worlds Government react to what can only be considered as fraud on a colossal scale that inflated the value of collatorised debt packages so as to allow huge annual bonuses to be banked even up to the end of 2007. Whilst these false accounting and valuation practices resulted in what were seen as safe solid banks holding huge exposure to over inflated assets that have been gradually marked lower over the last 12 months towards there true value.
However given the liberal use of leverage of in many cases in excess of X30 the banks assets have left most of the big banks more or less bankrupt, which now that much of the capital has been destroyed seek capital injection from the state in the form of unlimited bailout cash in exchange for the illiquid overvalued debt packages.
Whilst during the next 24 hours the debate in Washington will be centred around the detail of the financial bailout plan, which will eventually pass as the consequences of doing nothing would imply a total loss of confidence in credit. You may wondering what does that mean "total loss of confidence in credit" ?
As an example of the the way a "loss of confidence in credit" could manifest itself in every day life could be if retailers start charging a penalty for transactions involving credit cards of perhaps as much as 10% against cash transactions. Or refusing to take credit cards at all due to the risk of default on the transaction.
Another manifestation could be withdrawal of savings in excess of the insured limits which are then kept as cash under the mattress, perhaps later we will witness a surge in the purchase of home safes as currency is increasingly converted into say gold as a concentrated store of long-term value.
Whilst we are still some way, away from a collapse of confidence in fiat currencies such as the US Dollar, British Pound, and the Euro, we are however leaping along the path towards the day when people start to lose confidence in the paper currencies as realisation takes place that the real rates of inflation are far above the government manipulated statistics such as the CPI.
Despite all of the noise of Congress's qualms that we will witness played out during the next 24 hours or so, the bailout plan will more or less pass. Despite the fact that it represents madness, an ultimate manifestation of the subprime contaigent spreading and infecting the US Treasury with all of the consequences of loss of confidence in ALL US paper as the value of US debt devalues in the eyes of all investors.
Instead the real question that the peoples representatives should be focusing themselves on is how do we bring those who benefited from the greatest fraud in history to account for their actions and the possible repatriation of wealth stolen in recent years to the tune of more than $1 trillion due to huge bonuses paid on the back of boosted fake asset valuations. That would probably increase confidence in US paper than signing a blank check.
Meanwhile the US election of 2008 experiences its own credit freeze as John McCain finds a convenient excuse to avoid being humiliated at Fridays Foreign Policy debate by Barrack Obama, who now faces a dilemma of having to adopt to a slowdown in the pace of the election which gives his opponent time to recover from near knockout political blows in the lead up to an inevitable November election defeat for McCain.
Stock markets are expected to take a hit on Friday on the news, I would not be surprised if we witness another 500 point drop on the Dow Jones by the close. But the truth of the matter is that stocks will eventually settle where the value is that takes into account the negative consequences of the bailout therefore this implies any rally should be temporary in the light of the overall negative impact of the financial crisis and loss of confidence in US paper which is what the Bailout plan heralds.
More recent analysis on the credit crisis:
- Bailout Crisis - What Happens Next
- Who to Blame for America's Financial Crisis ? -
- How to save the US Taxpayer $700 Billion and the Failure of "Mark to Market"
- Fascist Business System Breeds Corruption & Receivership
- Credit Crisis Breeding Fascism for the "Public Good"
- Paulson's Lies Keep Escalating: What YOU Can Do About It -
- Historic Week: US Government Avoids Financial Armageddon -
By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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