Saturday, September 27, 2008

The Plan: Unnecessary or Not Large Enough?

In a previous post, I asked the question: " Why have we put up any public funds whatever to financial firms?" In another post, I linked to Galbraith's op-ed, noting that there is not the investment banking industry left that the bailout plan was originally meant to rescue in the first place. Alas, many things have changed since then as described in this post on Naked Capitalism. The short and mid-term funding market has remained locked despite massive central bank liquidity injections. In fact, it has been well-argued that the massive injections may be having an opposite, or at least insufficient, effect.

Depository institutions are now experiencing serious problems and either failing, such as WaMu, or approaching a potentially deadly crisis, such as Wachovia. There are now concerns that with or without a bailout plan, especially the bailout plan being described, that the US auto manufacturers and other large corporations are being faced worldwide with a potentially lethal corporate funding market. In fact, the Financial Times, a journalistic source not generally prone to inflammatory language, is publishing an op-ed using the word 'Armageddon:'
Credit is the lubricant of a modern economy. A seizure now would probably lead to the bankruptcy of General Motors and Ford in short order, but it would not stop with the US car industry. Waves of job losses would set off a self-feeding spiral. Yet more people would default on their mortgages (and car loans), driving house prices down even further. That, in turn, would threaten the solvency of the best banks. That is the way to Armageddon.
Now, the question being faced may be a very different one than whether or not the bailout plan is necessary. The new question very well may be, is the bailout plan large enough? Or, are the proposed bailout plans aiming their guns at the right targets?

Roubini goes so far as to state:
Thus, the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown.
Is it possible that a coordinated international rescue plan to secure the world's 'reserve currency' will be necessary? The fact of the matter may be that the US will not actually be able to inflate its way out of an economic crisis of the size being described on its own. A massive multi-national effort may be necessary to avert a severe and prolonged world-wide economic failure that goes far beyond the credit markets.

The German finance minister has already claimed the death of the US as a financial superpower. Personally, I believe this claim to be wildly overstated, but it's not like it's coming from the Iraqi Minister of Information.

What would such an effort look like? Are the IMF or G7 capable of arranging such an effort? What concessions or demands would be required by the lenders? The largest IMF bailout yet so far has been the 1997 $78 billion bailout of South Korea. Such a sum is all but laughable in terms of what is being described. There were $85 put towards AIG alone. In fact, there are at least two well-noted and independent experts claiming $5 trillion will be necessary and HSBC, while not putting a number forward, definitely does not believe that $700 billion will be enough.

So, where now? What's next?

What are the outcome pathways with or without a bailout plan? How does a future with a bailout plan of any format, the international $5 trillion type or the $700 billion US Congress / Treasury type, or no plan at all look?


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