Bill Bonner: Sink the gullible
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Bill Bonner Mar 27, 2009
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Timothy Geithner was the man on watch when the ship ran aground. His job, as head of the Federal Reserve Bank of New York, was to keep an eye on Wall Street. He must have blinked. Now, he's come forward with a new $1trn plan to get the boat back in the water. He should have left it to the ship-breakers. We almost feel sorry for him; Sisyphus had it easier. But Sisyphus was doing honest work. Besides, when Geithner's tour of duty is finished, the public will pay for his jackass bamboozles for decades, while he moves on to a cushy job at Goldman Sachs – or maybe AIG itself, if it is still in business.
Of course, we are out of harmony with mainstream opinion; but we are always out of harmony. When the USS Bubble was steaming along we fretted and warned: it was too heavily laden with debt; it was off course; the captain and his mates were all morons. Then, when it washed up, we switched to a more cheerful song, with the sound of blowtorches cutting her up as background music. Finally, capitalism was doing its job and whistling our tune. But now that we're jolly, the rest of the world is full of doom and gloom. Thomas L. Friedman, writing in the New York Times, tells us that we have a "once in a century financial crisis on our hands". We can't let capitalism do her work, he says; we have to get this wreck up out of the mud and back on the cruise circuit!
So far, America's efforts to borrow its way out of debt have not gone well. The scum gets dredged up from the bottom on Wall Street. But when it is dumped onto the ship, the whole thing just sinks lower. Henry Paulson began the digging with his Tarp programme last September; then came Talf - not to mention various trillion-dollar gurgles from the Fed. Last week, Ben Bernanke announced to the whole world that he was doing the sort of thing that people used to be ashamed of. Instead of dredging out the mud, he was going to blow hot air into the rusty hull. And on Wednesday, he began following in the footsteps of pioneers at the Bank of England, the Bank of Japan and, most importantly, the Bank of Zimbabwe. Buying US Treasury debt directly, he will add trillions to the US money supply.
Last year, before Lehman Brothers dived into the water and never came up, the entire monetary base of the United States of America measured $850bn. With so much gas being pumped, it will soon rise to five times that amount – or more than $4trn.
MoneyWeek readers may be having as hard a time keeping up with the bail-outs as we are. Here, we attempt a simplification. America still sinks under the weight of more than twice as much debt as usual. The collateral behind that debt has lost about 20% of its value – or about $10trn. Normally, those losses should be borne by the capitalists – the lenders and investors who extended loans to people who couldn't pay them back. But all of the bail-outs have one thing in common: they aim to shift the losses from the people who deserve them to those who don't, and from the culpable to the gullible. Which is why they're so popular. After such a remarkable excursion, many are those who deserve to lose money. From those who bought double-wide trailers they couldn't afford; to those who lent them the money; to those who securitised the debt and passed it out all over town. That's why the biggest problem confronting the salvage workers was to find some other group of innocents upon whom they could dump the debt sludge.
Bernanke's focused on shifting the burden onto dollar holders worldwide – notably the Chinese. But the Bank of China is also America's biggest creditor and has threatened to get upset if the dollar loses too much value. Besides, inflation is no sure thing. As James Ferguson pointed out in MoneyWeek last week, Japan has been trying to incite inflation for many years – with no success. Until now, Geithner and his boss targeted the taxpayers. Private losses became public losses as the toxic assets were bought up – or backed up – by the government. But when the public got a look at what the bail-outs actually paid for – million dollar bonuses, for example – the stingers themselves got stung.
This latest plan has a fairer sound to it, but it's a fraud too. "The solution depends on getting private money funds to team up with the government to buy up toxic assets," wrote Freidman, anticipating the Geithner plan by only a few hours and the truth by an eternity. "The president's comprehensive plan to remove the toxic assets from our ailing banks... is the key to our economic recovery." Since the losses are whatever they are, the only way investors can make money is by buying the toxic waste for less than it is really worth. Geithner's plan leaves the government with 90% of the risk; investors will quickly figure out how to game the new scheme, taking the profits and sticking the government with the losses. The latest estimate tells us this salvage work will add $9.5trn to the US national debt over the next ten years. At the current rate, it would still take 20 years to pay it off, even if every dime of savings of every American were applied to the task.
Politicians and investors have much in common. Both can be bought. And now both connive to shift the burden of losses from those who were born biddable to those who haven't been born at all.
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