An interesting perspective from John Hussman at Hussman Funds:
By Daniel at 2 May, 2009, 12:09 am
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“In order for U.S. financial institutions to earn their way out of the losses, they will have to accrue and retain an amount on the order of 25% to 35% of GDP. From where will they reallocate that amount? Well, prior to the recent earnings downturn, corporate profits were running at about 8% of GDP, a figure that was already based on unusually high profit margins (the sustainable norm is less than 6%). The personal savings rate was about zero, but has increased to about 4% as consumers have scaled back consumption. If banks were able to sustainably charge high interest rates on loans and pay low interest rates on deposits, the earnings of the banks would come at a cost to what would otherwise have been retained: corporate earnings and private savings. Essentially, savers will earn less, and corporate borrowers will pay more. To accrue 25-35% of GDP to cover the debt losses (which is a mainstream estimate, not a worst-case by any means), you would have to persistently depress non-financial corporate profits and personal savings by about 25% for well over a decade.
So yes, we can indeed abuse the U.S. public in order to make the bondholders of U.S. financial institutions whole and protect them from any losses. This was the policy of the Bush Administration, and has tragically become the policy of the Obama Administration as well. By doing so, we will commit our future production to foreign hands, or we will commit about a quarter of U.S. non-financial profits and personal savings to these bondholders for at least the next decade.”
-JOHN THAYER
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