While some people are breathing a sigh of relief, others aren’t too sanguine about the “stimulus.” Spenders have cut back, retailers have had their figurative necks chopped off in bankruptcies and closings, and the federal debt clock is ticking fast enough to create its own gravitational field. Welcome to Bailout 2.0.
Despite the fact that John and Jane Public are chomping at the bit for their bail out checks, the numbers paint a bleak picture, according to some analysts. According to Martin D. Weiss, who runs an investment blog:
The danger of a global debt collapse was not reduced; it has actually gotten far worse. The evidence:
· The nation's 25 largest banks have upped their bets on the single most dangerous form of derivatives — credit default swaps. (See OCC's latest report on derivatives, page 1, fourth bullet.)
· On average, the nation's five largest banks — JPMorgan Chase, Bank of America, Citibank, Wachovia and HSBC — have increased their exposure to defaults. At yearend 2007, their average credit exposure to derivatives was 264% of their capital, already extremely dangerous. Nine months later, it had risen to 317% of their capital. (OCC, pdf page 12, bottom line.)
· Similar risks are rising dramatically in Western Europe, Japan and emerging market economies. (Martin D. Weiss, PhD, The Obama Stimulus: Truth and Consequences
In other words, a global debt collapse is even more likely today than it was before the government began its massive interventions. (http://www.moneyandmarkets.com/)
The question of the day is simply this: Is the economy in more trouble than a bank bailout can solve? According to the New York Times:
Industry analysts estimate rising unemployment and business failures will lead to another $500 billion to $750 billion of losses in coming months. That could bring total losses from the credit crisis to $1.5 trillion to $1.8 trillion, twice as high as earlier estimates. (New York Times, “Banks in Need of Even More Bailout Money”, 1-13-09)
A Times interviewee also noted that the bailout is just a catch-up mechanism. The bailout has only provided a transfusion. It has not stopped the bleeding. “The capital raises finally caught up with the losses,” said Michael Zeltkevic, a partner at Oliver Wyman, a consulting firm specializing in the finance industry. “It doesn’t make the situation better, but at least we caught up.” (Ibid)
More business failures equal more loan defaults, write offs, write-downs and economic catastrophe. Simply put: the bail out cannot bail out Titanic-sized business failures, which will generate even more catastrophic bank losses.
According to the CIA Factbook, the total economic output of the entire nation annually is $14.58 trillion (2008 est.) Using this as a baseline, then, the Bush and Obama bailouts so far represents MORE THAN HALF OF THE ANNUAL DOMESTIC OF THE ENTIRE COUNTRY! See box below:
Beyond the $700 billion bailout known as TARP, which has been used to prop up banks and car companies, the government has created an array of other programs to provide support to the struggling financial system. Through Feb. 10, the government has made commitments of nearly $8.8 trillion and spent $2 trillion. Here is an overview, organized by the role the government has assumed in each case. (NYT, from US govt. statistics)
In other words, two administrations have committed the equivalent of more than half the nation’s gross domestic product to the Wall Street bailout. Critics have already questioned whether even this amount of money is enough to stop the backslide, given the fact that the value of the credit default swaps which compounded this mess is estimated to be more than the annual economic output of the entire world.
According to two industry analysts:
The total amount of derivatives is now estimated (2006 mid-year market survey), by the International Swaps and Derivatives Association (ISDA), to be over $283 trillion. That number is about 7 times the economic output of the entire world, at about $40 trillion. (Daniel Apple and Rick Baugnon, “Derivatives – A Potential Financial Tsunami?” Globalresearch.com )
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