We face 4 least worse options, there’s no get out of jail free card.
By Daniel at 14 March, 2009, 11:29 pm
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Allow the banks to go under will guarantee dislocation in the debt markets and a short, sharp depression. As long as protectionism doesn’t rear it’s head and social order doesn’t breakdown then we’ll recover fairly quickly, but those are some pretty big ifs.
Nationalization might be doable depending on the scale of losses in the banks which is still unknown despite all the media noise. If we destroy all equity in the banks and destroy the bondholders we’d still be facing an enormous bill but at least we’d have certainty and the markets could return to something approaching normalcy. We’d be left with an enormous debt overhang and an economy polluted with government interference in the credit markets. I imagine we’d have a bout of stagflation and/or a Japanese style lost decade.
The bad bank plan is just not realistic as it’s clearly unaffordable. Taking on that much in taxpayer backed liabilities would panic the bond market and we’d be unable to sell our debt to foreigners. That would spell the end of social security, medicare and maybe even the survival of a basic government.
Which brings us to what the government is doing presently, which is drip feeding capital to the banks to keep them alive at the cost of having a functional financial system. You may argue that this isn’t sustainable, that misallocation of capital is building up to such an extent that a crash is inevitable, you could argue that and you’d be right.
My guess is that we’re doomed to more of the same for a while yet. The government will seek to make cosmetic changes like suspending mark to market to further cover up losses and fraud, but eventually the banks are going to run into the brick wall of lack of cash flow and the economy will die.
First option is the best one, but very scary. Second option is the likeliest end game after the politicians and banksters have tried everything else. Third option is impossible. Fourth option is not a solution at all but delays the day of reckoning.
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
No comments yet.