Gecopol update - Oct 15th, 2008

The Syndrum Files Gecopol update
Oct 15th, 2008


I haven't written in a while so today's rant is a bit long and a bit emotional...
It is also focused mainly on the US.

Question of the day: Are the financial bailouts the right way to go?

First the numbers: According to many economists, the recession will last 18 to 24 months, driving unemployment to 9 percent, and already depressed home prices will fall another 15 percent. Economist Nouriel Roubini believes the U.S. government will need to double its purchase of bank stakes and force lenders to eliminate dividends to save them from bankruptcy.Treasury Secretary Henry Paulson said yesterday he plans to use $250 billion of taxpayer funds to purchase equity in thousands of financial firms to halt a credit freeze that threatened to drive companies into bankruptcy and eliminate jobs.

The U.S. unemployment rate stood at a five-year high of 6.1 percent last month. Home prices in 20 U.S. metropolitan areas fell 16 percent in July from a year earlier, the most since records began in 2001, according to the S&P/Case-Shiller home- price index. Bank seizures may push home prices down further, scaring away buyers in coming months, after U.S. foreclosures rose at the fastest rate in almost three decades in the second quarter, according to the Mortgage Bankers Association.

For those of you who have read my earlier posts, know that I have been against a bailout of the banking sector. Banks that knowingly put their institution at risk through predatory lending, over-leveraging, repackaging of risky assets as Grade A safe investments, must not be rewarded for their actions. Their greed induced monetary philosophy is what propelled our financial system to this point of collapse.

When the Tech bubble burst in 2001, the stock market needed another boost to keep its record levels of valuation. Too many bigwigs would be losing too much monopoly money if something was not done. It could not be allowed to crash. The Fed, led by Alan Greenspan, lowered interest rates to the point where people nearly felt stupid if they didn't get into debt. Mortgages were force fed, propelling further loans and an ever increasing level of liabilities. The bubble formed again, a much larger bubble, but this time in the housing market. The forced infusion of cash so we can consume more and more without consequence has now found its day of reckoning.

And what do we do again?

We throw more money at the banks and its executives. As if we have not had enough of this irresponsible fiscal behavior. They will will certainly blow new bubbles, which means incredible volatility in prices (ie. the incredible stock market swings this week alone) and exploding monetary inflation around the world. And finally we can wind up with a situation where the common man cannot afford a loaf of bread, people are rioting in the streets, and martial law is imposed upon the land. Complete and utter stupidity.

The system is attempting to perpetuate itself.

The greed of the bankers is feeding off the greed of the people.
I'm talking about Big Macs, SUVs, McMansions.
The average person in India or China eats less, needs less energy. They don't consume as much and their consumption is more renewable, cotton, food, against oil, metals.
Homo suburbianus is heading toward extinction

Savers are gonna be robbed blindly in coming years through inflation or hyperinflation. Sooner or later governments will default on their debt (many are now guaranteeing everything) and the result would be even more money printing. The cost will be billed to the middle class and working people in the form of more inflation, higher taxes, and lower benefits.

Small banks in the US who are not even in danger of defaults, are actualy being forced to take on money from the Federal government! This is unbelievable! Banks who have been responsible money brokers are in essence being punished, while others who are near collapse due to their predatory actions, are being rewarded. Other large investment banks are being systematically taken over by the federal government. Is it any surprise that our Treasury Secretary Henry Paulson was the CEO of Goldman Sachs, one of the largest recipients of the bailout money?

"Fascism should more properly be called corporatism because it is the merger of state and corporate power." (attributed to Mussolini)

Why are we undergoing an enormous correction now? Because Greenspan wouldn't allow a more serious recession in 2001-2002. At least ... many people believe that, and I'm one of them.
And now that the Fed is trying to pump the credit system again ... it just puts off the final day of reckoning a little longer. But it doesn't eliminate it.The current ones put the stage for new imbalances and unattended consequences without solving the underlying issues. This will only lead to hyperinflation, creeping social unrest, and the rise of totalitarian regimes. To me, it seems just a bit suspicious that they want to put out the fire by pouring more gasoline on it... (but I'll leave the conspiracy side of this for another post)

To sum it up: It's necessary to inject some money in the system to minimize the damage as much as possible for your average citizen. But this needs to be done with a lot more regulation to avoid the path of moral hazard we are one. What we are experiencing is nothing less than a real painful reordering of the international monetary system and no amount of printed money can stop it. Lets let the system crash, pull out the weeds and start anew!

Upcoming posts:

- What will happen in good ol' Hungary?

- Where is the value of the dollar, euro and other currencies heading? This ones a bit difficult to get a clear picture on, but with everyone wanting to know where to keep their money, its worth doing a bit of research.