Financial Crisis Bailout or Not, Economic Depression is Upon Us

By: Mike_Stathis

Risks of the Proposed Bailout: Part I - McCain, along with Paulson, Bernanke, Bush and others are using scare tactics hoping to rush the approval of this historic banking bailout plan. Threats of a “disaster” and a “severe economic crisis” have been interpreted by the media as a “depression” if the bill is not passed immediately. Politicians continue to scare the public stating that without a bailout, pension and 401(k) plans will be threatened. Are the conditions very serious? Definitely. The point is that they are so serious that a bailout won't do much at this point other than waste taxpayer money with no real accountability. Finally, as far as I can tell, this bailout really doesn't do much if anything to help taxpayers.

Surely by now, Americans are on to this game. “Drill now or pay more later.” Sound familiar? Just another recent scare tactic to help push off-shore drilling bills through Washington . But the reality is that drilling more won't solve the energy problem. It's only a quick fix. “Bailout now or face a severe economic period.” Likewise, a bailout won't prevent a severe economic period. We certainly have a huge problem, but nothing will prevent the disaster.

Leveraging the Inevitable Collapse

Pension plans and 401(k)s are in trouble whether the bailout plan passes or not. Nothing will bail America out of the inevitable payback period. Anyone who does not realize this lacks a comprehensive understanding all of the issues. Perhaps you have been watching too much television. As I have stated many times in the past, the current real estate-driven credit crisis is just stage one of the depression. It's a payback period that must occur due to over two decades of mismanagement in Washington, reckless free trade polices, and a Federal Reserve banking system focused on helping Wall Street, leaving consumers to suffer the consequences of inflation.

America 's fundamental problems began long before the real estate bubble commenced so there will be no simple or quick fixes. If you eat more than you burn off, you'll gradually become obese over a period of years. Similar to a bloated credit bubble, obesity leads to many disease states. We are seeing just one of the disease states of an unsustainable credit bubble. Even a quick fix like liposuction has certain risks along with definite side affects. So to, will any bailout plan for the banking system.

The Real Problem: Poor Leadership

Our leaders have failed us once again – specifically those put in a position of authority – namely Alan Greenspan, President Bush and to a lesser extend Ben Bernanke, who inherited the impossible job of cleaning up Greenspan's mess. Mr. Greenspan, what were you thinking and exactly what data were you looking at? How is it possible for a man to have spent decades in high-level economic positions to have made such a huge blunder? If I was able to predict this crisis (and I did in a book released in late 2006) how can you ever be excused for missing it? When you accept the awesome responsibility of Chairman of the Federal Reserve, you had better be on the ball.

Washington never acts to preempt problems. Politicians act only to deal with the problems on their plate, rarely looking in the cupboard for signs of cockroaches. As a result, they have no idea what the fundamental problems are and they really don't care. All they care about is winning the next election. Rather than address other problems of larger and longer-term magnitude, they've positioned this bailout plan as the solution to America 's struggling credit-dependent economy – an economy fueled by excess consumption while relying on foreign financing for deficits – deficits created due to the transfer of good jobs overseas. Despite having experienced the dotcom debacle just a few years ago, still Washington only address the problems after the bleeding begins. But bleeding arteries are very difficult to contain. And sometimes the bleeding results in death.

Truth or Dare?

The consequences of the credit crisis are likely to be much worse if Paulson is given what would turn out to be a blank check. You cannot create money out of thin air and transfer trillions of dollars in bad debt from banks to taxpayers without severe consequences. The bailout issue brings back feelings of déjà vu . As you will recall, fantasy intelligence reports were circulated throughout Washington with strong warnings of the need to act quickly. Once again, this tactic was used in order to gain support for the invasion without proper due diligence. And Washington gave the green light, troops rushed in with no real plan.

As a result, U.S. forces were inadequately prepared to deal with the “reconstruction efforts.” Republicans used further scare tactics to increase funding, while Bush vetoed any bill championed by democrats until they approved additional funding for the “war against terror.” They kept stating that it would be a “wasted effort to leave now.” By the time Bush leaves office, the federal debt will have doubled in just eight years.

Much of the money for Iraq has been squandered or remains missing. Government contractors such as Halliburton and its subsidiary KBR charged insane prices for everything from Coca-Cola to vehicles, many of which didn't even work. Many other corporations jumped aboard the gravy train to Iraq , from ATT to Humana. If there was an ETF created based on U.S. firms in Iraq , it would have been a spectacular investment. Perhaps a good name for this fund would have been the “Taxpayer Fraud Fund.” Republicans might have named it the “Iraqi Freedom Fund.”

Once you give Washington the permission to enter a black hole with a blank check, you better believe it's going to cost much more than they say and take a lot longer than expected. We should always be suspicious of anyone who tries to get support using scare tactics. The proposed banking bailout plan has no detail or guidelines whatsoever. And it will most likely be executed similar to the Iraqi War, costing a large multiple of the initial figure, with profiteering by insiders and poor accountability of taxpayer funds.

Make no mistake, the financial crisis is in the midst of a domino effect and nothing can stop the fallout. Could the banking bailout reduce the impact? Certainly. But it could also end up being a complete waste of tax dollars. We know for certain it will create yet another moral hazard which will ensure a bigger charade down the road. A bailout that has no real rules, guidelines or strategy could actually make things worse in the long run. At what point do Americans learn the difficult lessons needed to make us change our poor habits? We got into this mess to begin with because of excess credit spending.

Allowing the banks to work through their own problems with minimal government loans might well be the best way to mitigate the affects of America 's financial apocalypse. Crises create opportunities for those willing to take risks. A bailout creates no real incentive to work through this mess in an efficient manner. And it officially makes the United States a socialist nation. But in America 's case, socialism only works for corporations while extorting money from the people.

Too Little, Too Late

You cannot prevent a depression or catastrophe by taking actions just before it's about to occur. The only way to prevent something of such pervasive reach and magnitude is to make the appropriate changes far in advance. It's common sense. A depression is coming bailout or not; so get ready. At best, a bailout will only delay this payback period. But it will also make the payback worse when it occurs. At some point Washington needs to stop cheating the system by printing money. As we have seen from history, reckless monetary policy creates the illusion of recovery, with more severe consequences at a later time.

Bailout or not, median wages will not grow appreciably for many years. As it stands today, wages have not grown since 1999 (adjusted for inflation). Bailout or not, job quality will continue to decline as it has for over a decade due to the toxic effects of America's free but unfair trade policies which encourage outsourcing. Bailout or not, the cost of basic necessities will remain high and rise higher due to the lack of real free market dynamics in the healthcare and energy industries. When combined with no price controls, healthcare will soon account for $1 out of every $5 of spending. Off-shore drilling or not, oil prices will remain high and reach new records. We need real solutions, not quick fixes. We need real leadership in Washington , not smoke and mirrors.

By Mike Stathis
mike@apexva.com

Copyright © 2008. All Rights Reserved. Mike Stathis.

Mike Stathis is the Managing Principal of Apex Venture Advisors , a business and investment intelligence firm serving the needs of venture firms, corporations and hedge funds on a variety of projects. Mike's work in the private markets includes valuation analysis, deal structuring, and business strategy. In the public markets he has assisted hedge funds with investment strategy, valuation analysis, market forecasting, risk management, and distressed securities analysis. Prior to Apex Advisors, Mike worked at UBS and Bear Stearns, focusing on asset management and merchant banking.

The accuracy of his predictions and insights detailed in the 2006 release of America's Financial Apocalypse and Cashing in on the Real Estate Bubble have positioned him as one of America's most insightful and creative financial minds. These books serve as proof that he remains well ahead of the curve, as he continues to position his clients with a unique competitive advantage. His first book, The Startup Company Bible for Entrepreneurs has become required reading for high-tech entrepreneurs, and is used in several business schools as a required text for completion of the MBA program.

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