Talk About Stress!

Treasury Secretary Geithner and company are subjecting the US economy to prolonged distress out of ideological purity.  Rather than kill off the zombie banks--Citigroup and Bank America are the two leading examples--with a coup de grace of nationalization, they are bleeding the national economy with the death of a thousand cuts.  Bank of America received $45 billion from the ineffective TARP program and a $118 billion guarantee for buying the defunct brokerage Merrill Lynch.  Its share price recently closed at $4.90 or 21% of book value.  The bank posted a fourth quarter loss of $1.55 billion while Merrill Lynch loss another $15.3 billion.   Citi has narrowly escaped bankruptcy before, but perhaps not this time.  Despite a $45 billion injection of TARP funds, its share price closed recently at $2.19. The Chicago Boys are simply wrong. The Bank of Japan spent a decade massively increasing public debt, but Japan's economy is till stagnant.[1]  There are socially more beneficial ways of deficit spending than buying worthless paper or propping up insolvent banks. If I were advising 44, I would tell him to forget the labels, the fat cat contributors, the half measures, and ignore your economic advisers that are partly to blame for this catastrophe. We can no longer afford to protect the denizens of the Street of Broken Dreams from their own "irrational exuberance"[2]. He must summon the audacity do what is right for the country.  And oh yeah, remove that bull statue from Wall Street--its bad for business.

Meanwhile across the waves, the financially imploding former Eastern bloc countries are threatening to take down the EU.  Eastern Europe has borrowed $1.7 trillion to finance its economic westernization, most of that from Austria, Sweden, Italy, Greece and Belgium.  The former Soviet bloc countries have to rollover more than $400 billion of that debt this year to stay current, an impossible task given that foreign credit windows are shuttered.  The European Bank for Reconstruction and Development has said default rates will top 10% and may reach 20%. Austria is so exposed to the European equivalent of "toxic assets"--it has lent the region an amount equal to 70% of its GDP--that a failure rate of 10% will collapse its own financial sector according to a Vienna newspaper.  Of course such a collapse will have a knock-on effect here as well.  Europe as a whole has entered a deeper recession than the US precipitated by the same contagion of unsustainable debt levels.

[1]http://www.imf.org/external/pubs/ft/wp/2003/wp0364.pdf.  If the US cannot pull off the hat trick of re-inflating its bubble economy, a preview of the real "new world order" to come was announced by President Putin at Davos, Switzerland (44 was notable for his absence):  a world financial order based on energy and natural resources.  China has entered into a long term barter agreement with Russia for twenty years of guaranteed energy supply in return for a $25 billion loan.  The Russians are also working towards a bilateral barter agreement with Germany.  The US may find itself out in the cold since these arrangements will bypass the corrupted international banking system dominated by the US and UK.  The G-20 already has a plan for a new monetary system to replace the US dollar as the world's reserve currency.

[2]Mohamed comes to the mountain. Alan Greenspan that foremost guru of laissez-faire told the Financial Times, "The US government may have to nationalize some banks on a temporary basis to fix the financial system and restore the flow of credit." http://ft.com/cms/s/0/e310cbf6-fd4e-11dd-a103-000077b07658.html

Update:  Changing the government's stake in the banks from preferred shares to common stock as suggested by Citigroup is just another PR move. A move which says more about the ideological rigidity of the elites in Washington than their willingness to protect the economy from capitalist excess.  The proposal allows Citi to dress up their balance sheets to meet analytical parameters ("stress tests") since preferred stock is considered debt, but forces the government to assume more risk as a common stockholder with less return and without obtaining control of sick bank management.   Could this proposal be because the regulators and management belong to the same oligarchy?  Billions for bankers, a dime for John Doe.  J'accuse!