Wednesday, February 11, 2009
The Financial Sector and the 3rd Rail
The Financial Sector...
The crisis in finance is a crisis of confidence. It is clear we are still in meltdown and will be for the next year. Moderate projections assume we will see another million jobs vaporize before this year ends. But it remains a crisis of confidence because the only way to actually fix the problem would be to grab hold of a few third rails that Obama does not have the courage to get close to yet.
Take Citigroup for example. This is one of those banks that was deemed 'too big to fail'. But the bank still has several billion dollars of toxic and worthless assets on its balance sheet. The company has gotten billions in free money from the government. Yet they still shell out for private jets and naming rights to ball parks which on average run $400 million per park. But the company with those toxic assets on its books has more liabilities then it does assets. The bank itself does not have enough cash flow. Businessweek a few weeks ago had spoken about this idea of 'zombie companies'...these are companies that don't have cashflow but are still functioning. Newt Gingrich this weekend was correct that we are going to have to consider letting these institutions fail.
The trap in that logic however lies with the Fed and with a Bush decision to allow the Fed to extend its balance sheet of loans to banks. And this is the murky portion of bank bailouts that no one has talked about. Now you knew that there was a vote near the election for this $700 billion dollar TARP program and you saw how pissed off people were about that. But what has been under reported except in financial journals is that the Fed has quietly through 16 different loan programs loaned banks over $2 trillion dollars in interest free loans. Those banks fail and the loans go bust too. This is why Congress keeps throwing money at the problem. The TARP program has created a trap.
We are suffering here in this country. But the economic slowdown may have greater political implications overseas. China is the perfect example of this. A week and a half ago China celebrated the 'Year of the Ox'. You know what else happened during that celebration? 20 MILLION Chinese workers lost their jobs. These guys were factory workers who were told go celebrate the new year and don't come back. Most of them were not even paid or if they were paid by communist officials to calm an uprising. Over 30 million Chinese are unemployed right now. If the communist government doesn't create jobs or put them to work if they organized it could be torch and pitchfork time. It will start in the poor rural communities in the West of China and spread like fire...
Russia is another example of this. I have a friend in Russia who works in their financial sector. Credit agencies recently downgraded Russian debt to two levels below junk status. That one action and change of rating cost the Russian government over $50 billion dollars in cash. Now they still have cash but not much it's being burnt fast. Notice the change in tone recently? You don't see Vladimir Putin throwing public fits anymore. In fact you see him offering to help the US and build bridges. Know why? With the oil economy Putin's country goes. And oil prices are in the shitter currently. Putin can't afford to throw fits...
A lot of the decisions surrounding Obama with the economy do lie around third rails. If a company is not you can either throw money at it, fold the company or nationalize. Nationalization is a third rail because it deals with banks. You do remember how Fannie Mae and Freddic Mac were nationalized and where was the outrage. If Obama did it with banks...banks that even without cashflow still managed to dump over $25 million in campaign contributions upon lawmakers the screaming would never end. That is a third rail.
Because of our debt picture for the country and all the entitlements most economists were in agreement that taxes would have to go up. You can't pay for everything on credit and expect it not to bite you in the ass down the line. It just has to. Benefits either have to change or taxes have to go up. That is a third rail.
I mean you saw this with Obama thundering about executives and limiting their pay. If you really wanted to make a greater impact for solving the debt why didn't he make it easier: no pay limits. But if you make more then $500,000 dollars then your taxes go up to 60% or 75%. Hell even higher. If you are making that many millions and shareholders are dumb enough to pay you that much then the government can take a bigger bite. Why won't that happen? Because elections in 2010 would be plastered with 'Obama raised taxes'. That is a third rail no one wants to touch...
The crisis in finance is a crisis of confidence. It is clear we are still in meltdown and will be for the next year. Moderate projections assume we will see another million jobs vaporize before this year ends. But it remains a crisis of confidence because the only way to actually fix the problem would be to grab hold of a few third rails that Obama does not have the courage to get close to yet.
Take Citigroup for example. This is one of those banks that was deemed 'too big to fail'. But the bank still has several billion dollars of toxic and worthless assets on its balance sheet. The company has gotten billions in free money from the government. Yet they still shell out for private jets and naming rights to ball parks which on average run $400 million per park. But the company with those toxic assets on its books has more liabilities then it does assets. The bank itself does not have enough cash flow. Businessweek a few weeks ago had spoken about this idea of 'zombie companies'...these are companies that don't have cashflow but are still functioning. Newt Gingrich this weekend was correct that we are going to have to consider letting these institutions fail.
The trap in that logic however lies with the Fed and with a Bush decision to allow the Fed to extend its balance sheet of loans to banks. And this is the murky portion of bank bailouts that no one has talked about. Now you knew that there was a vote near the election for this $700 billion dollar TARP program and you saw how pissed off people were about that. But what has been under reported except in financial journals is that the Fed has quietly through 16 different loan programs loaned banks over $2 trillion dollars in interest free loans. Those banks fail and the loans go bust too. This is why Congress keeps throwing money at the problem. The TARP program has created a trap.
We are suffering here in this country. But the economic slowdown may have greater political implications overseas. China is the perfect example of this. A week and a half ago China celebrated the 'Year of the Ox'. You know what else happened during that celebration? 20 MILLION Chinese workers lost their jobs. These guys were factory workers who were told go celebrate the new year and don't come back. Most of them were not even paid or if they were paid by communist officials to calm an uprising. Over 30 million Chinese are unemployed right now. If the communist government doesn't create jobs or put them to work if they organized it could be torch and pitchfork time. It will start in the poor rural communities in the West of China and spread like fire...
Russia is another example of this. I have a friend in Russia who works in their financial sector. Credit agencies recently downgraded Russian debt to two levels below junk status. That one action and change of rating cost the Russian government over $50 billion dollars in cash. Now they still have cash but not much it's being burnt fast. Notice the change in tone recently? You don't see Vladimir Putin throwing public fits anymore. In fact you see him offering to help the US and build bridges. Know why? With the oil economy Putin's country goes. And oil prices are in the shitter currently. Putin can't afford to throw fits...
A lot of the decisions surrounding Obama with the economy do lie around third rails. If a company is not you can either throw money at it, fold the company or nationalize. Nationalization is a third rail because it deals with banks. You do remember how Fannie Mae and Freddic Mac were nationalized and where was the outrage. If Obama did it with banks...banks that even without cashflow still managed to dump over $25 million in campaign contributions upon lawmakers the screaming would never end. That is a third rail.
Because of our debt picture for the country and all the entitlements most economists were in agreement that taxes would have to go up. You can't pay for everything on credit and expect it not to bite you in the ass down the line. It just has to. Benefits either have to change or taxes have to go up. That is a third rail.
I mean you saw this with Obama thundering about executives and limiting their pay. If you really wanted to make a greater impact for solving the debt why didn't he make it easier: no pay limits. But if you make more then $500,000 dollars then your taxes go up to 60% or 75%. Hell even higher. If you are making that many millions and shareholders are dumb enough to pay you that much then the government can take a bigger bite. Why won't that happen? Because elections in 2010 would be plastered with 'Obama raised taxes'. That is a third rail no one wants to touch...
