Debt Solution Tips

Actually, I’ve been thinking about unfolding events, fallacies, the rule of 10:90 or 90:10, bailouts, mission(s) accomplished, rising tabs and the keystone cops.

As I write this column, we are looking down the gun barrel of our third weekend (in a row) “make it or break it” crisis for the U.S. financial system. At this point, there are few details as to what all will be added to Uncle $ugar’s growing list of guarantees. Future tax cash flows from taxpayers will be committed to cover the financial losses of the rich, the well-born and the powerful. There are even fewer guess-timates as to ultimate costs. But, once again smiling faces (botoxed to mask the true scowls of terror) will emerge. We will be told that “mission accomplished and crisis averted” again!

You see, by now the spin, the hype, and the fallacy of the “don’t worry, be happy, we’ve got it covered” song and dance should be old hat. Since a year ago this past August (when the powers that be were finally forced to acknowledge a crisis of debt was “rumbling” in the wings), we have witnessed the unraveling of our debt only driven economy. Growth in consumption and spending came not from the value added numbers of domestic production. It came from the largesse of foreign benefactor, it came from additional paper appreciation of assets and it came from the windfalls of additionally minted “money” via the government’s printing presses and fresh lines of credit on newly issued credit cards. Growth was not that of wealth and prosperity, but growth of liabilities and obligations.

We were warned that if pre-emptive action were not taken, we might lapse into some recession contraction in 2008. This was a major fallacy because the real growth for most Americans in past decades was in net liabilities not in growth of net assets. I read that a third world country was defined as a nation where 10 percent of the population owned or controlled 90 percent of the wealth and assets. In the alternative the 90 percent had the 10 percent share. With what we have witnessed of late, I’m not so sure that it is even the wealthiest 10 percent of our own citizenry which now owns or controls 90 percent of this nation’s wealth or assets. Just where does that sorry state leave the country going forward?

The solution to every economic downturn in the past has been to open the floodgates of credit. Problem is this economic mess is mired in too much debt already. You don’t rescue a drowning person by giving them a drink. You don’t help a drug addict by providing cheaper heroin or crack. So, how could more debt be the solution to a debt problem? Well, that’s the only solution the U.S. Treasury and the FED know how to do mainly because that is all they can do.

Since last fall, the FED began buying back on a “Repurchase Agreement Basis” (REPO) financial institutions’ worth-less (or even worthless) mortgage paper to delay the write-offs and write-downs that would result in insolvency. These rolled over temporary transfers from institutions’ balance sheets to Uncle $ugar’s accounts now are pushing a record $480 billion. The Bear Stearn’s event involved a $29 billion guarantee. The IndyMac intervention cost us about $9 billion.

The Fannie and Freddie debacle comes in at conservatively $200 billion. Bank of American picked up the tab (for now) for the resolution of the Merrill Lynch situation by issuing $44 billion of their own stock. Lehman Brothers was left without a bailout and it (and its prior “merged with investment banking behemoths” – Shearson, Kuhn, Loeb, Rhodes, and Hutton) simply ceased to exist. Meanwhile, insurance giant AIG was “saved” by some $85 billion in Uncle $ugar’s guarantees.

Now it appears all these one time fixes were for naught as the really big bailout intervention was required again this past weekend. A government buy-out of some $700 billion in distressed investments is now on the table. The rushing around the corridors in DC would be reminiscent of a keystone cops comedy, were it not so tragic. Not to worry, mission accomplished, until next weekend, that is. I’ve been thinking.