Sunday, July 12, 2009

A Challenge to the President of the United States

I would like issue a challenge to the President of the United States:

I have a better plan than the one President Obama's team is implementing and what I am wondering is:

How many bailouts will it take before you and the rest of the people who are trying to "rescue" the economy come to the realization that these bailouts are not going to work and start implementing my plan?

The Banks are on the hook for more than 11 Trillion dollars in losses. You can base this on their 10-30 times leverage in owning mortgages that vary from being worth cents on the dollar to being worth at best 60 cents on the dollar.

Their aggregate market cap is about 2 trillion dollars.

Implementing a PPIP plan of allowing privileged and wealthy institutions to use a public backstop to restart the Collateralize debt Mortgage market is wrong. It will spur more speculation and when you have speculation you end up having the few profiting from the misfortune of the multitude which is in a way against your socialist ideals provided that what your critics say about you is true and indeed you believe in socialism.

The only thing being socialized here is the risk and the losses. The potential profits far outweigh the risk when the US treasury is backstopping as much as 84% of possible losses and the private institutions only ending risking 7%.

This is 14 to 1 leverage using tax payer money. At least the banks went haywire and levered up their own balance sheets before destroying them with their 10-30 times leverage.

And now the banks paid back the TARP handouts which they did not use to recapitalize in order to lend and spur business growth and much needed help to families.

The banks used the money to speculate on their stock prices and the proof is in the pudding: one of the biggest short term rallies % wise in History.

Once banks paid back the TARP, the rally fizzled but they had already increased their stock prices enough to issue secondaries.

I believe this was the intent of the TARP even though it was not explicitly stated to the tax paying public.

If the TARP was actually used to lend money at the 10-1 fractional reserve rate then you would have seen business growth and jobs growth slow down or completely halt job losses.

The job losses have somewhat decelerated but are still piling on and will end up adding about 6 million additional lost jobs before it's all said and done, triggering a depression when using the prior to 1992 unemployment government labor statistic known as U6.

You want to save 4 million jobs and actually grow some jobs or do you want to recapitalize the banks so they can save their hide?

You cannot do both. You need more than 10 trillion to give to the banks so their worth can go from severely negative to zero. Then you will need another trillion given to them to start lending again.

You have been told if we let the banks fail, this will trigger a meltdown in the financial system that will end up in another Great depression or worse.

If you have 11 trillion to give to the banks, then I say go ahead and try this wrongheaded move and see where it takes us.

Before you even reach the 11 trillion needed by the banks, the treasury buying world will run out of money.

This will trigger a crisis and stop our ability of rolling over our debt which implies utter disaster since then you will truly be forced to monetize the debt Zimbabwe style and the dollar will lose most if not all its value.

The Federal Reserve is using the US Treasury to issue Treasury promissory notes. There are not enough buyers leaving Fed as the buyer of last resort of most of these notes.

This is absurd. It is akin to having a company "raise" money by issuing debt and turning around and being the majority buyer of its own debt.

We chastise banks for having created this mess by their use of leverage but do you realize that the Fed, based on their statement that their actual capitalization of 40 Billion dollars is true, is in fact currently levered at almost 50 to 1.

This is insanity. 50-1 leverage ratio is insolvency.

Therefore, Mr President. If you would like to actually prevent the eventual collapse without destroying the US dollar this is what must be done:

1) Create a National Bank and capitalize it with 1 Trillion dollars which turns into 10 Trillion of lending by this bank to consumers and businesses and when they take this money and deposit it in other banks that are not insolvent, the money is
lent out again and up to 74 trillion dollars is created to restart the economy.

If this is too much money supply then limit the amount created.

2) Let all insolvent banks fail and use their infrastructure as part of the new National Bank.

3) After the economy recovers, allow the bank to go public as multiple separate entities and pay back the tax paying public, therefor solving all our problems while averting both a Great Depression style deflation spiral and hyperinflation.

The only question left is: do you have what it takes to implement this plan knowing full well that most of the banks getting the bailout make up about 90% of the Federal Reserve's voting power and ownership?

No comments: