Thursday, September 25, 2008

Why the bailout just may not work

The more I read and think about the $700,000,000,000.00 bailout, the less it seems to make sense.

  • The $700,000,000,000.00 bailout has a low probability of saving Wall Street banks because the size of the problem is much larger than the subject of this bailout : sub-prime mortgages (defaults from Alt-A's, option ARM's and second mortgage's have not even started).
  • The bailout will cause the dollar to drop. In fact the slide has already started. The only way we could raise $700,000,000,000.00 will be to issue debt in the form of Treasury bills. The bills will need to demonstrate higher yields to attract the dollars sitting in China and the Emirates. As Washington starts to print more dollars to repay the high yield Treasury payments, the value of the dollar will fall leading to inflation amidst the glut of dollars. At some point foreign investors will stop buying U.S. Treasuries entirely, potentially throwing our country into a debt crisis)
  • At home, the falling dollar will fuel inflation resulting in increases in the prices of everything we import (primarily gas and consumer products). In addition, a weak dollar naturally causes interest rates to shoot up, including those adjustable mortgages...

There are two other factors one needs to consider here:

  • Total debt: If Congress signs off on the $700-billion rescue plan, the debt ceiling will have to be raised to $11.3 trillion. That is 70% of our GDP.
  • Budget deficit: If Treasury spends the entire $700-billion next year, as some economists expect, it would drive next year's budget deficit, now projected to be around $500 billion, to $1 trillion or more.

Complied from here, here and here.

No way, No how, No bailout…

In other interesting news, the Protect Palin Plan is working just fine while the Free Palin! movement got a taste of what might be in store... It really does not taste too good...

2 comments:

mbuitron said...

My sentiments exactly:
http://imoralist.blogspot.com/2008/09/galbraith-said-it-better-than-me.html
After I wrote my representatives, I cam across the Op-Ed piece in the Post, and decided to post both.

Sunil said...

Thanks for pointing me to that piece by Mr. Galbraith. Spot on.

These are defining times we live in...