POSTED: 28 SEPTEMBER 2008 - 11:30am HST

Borrowing Time and Money

image above: People picking from trash in Jakarta in 2002

Ilargi on 28 Sept 2008 in

[Editor's Note: We have removed the first few paragraphs from this post because they appear relevent to a previous blogpost and not the subject of the article]

...The US may reach an accord on a plan to pour what will eventually be trillions of dollars into its economy. I think all involved in the talks understand that they need to come up with something by Sunday night. I do not think, however, that it will do anything but buy more than a few more days or weeks of borrowed time, and I mean that literally. If time is money, than borrowed money, in the end, can buy you nothing but borrowed time.

The credit markets are dead and gone. The plan being negotiated in Washington is aimed at reviving them. But it will do nothing to solve the problems that have started, indeed caused, the demise of credit. In order to accomplish that, it would have to force all funny casino paper, all securities and derivatives, to be put on the table in broad daylight, valued at current market prices, and sold at those prices. If a buyer could be found at all.

The reason they are so reluctant to do that is that it would be the end-all for most banks, pension- and money market funds etc. Not a pretty sight, for sure. It would, for one thing, wipe out most of those who are around those tables today. So they’re looking for an alternative. The problem with that is that there is, as far as I can see, no alternative. All there is is lipstick.

The credit market, in the last few days, has gotten much worse and was rushed into the emergency room, as evidenced by the violent surges in Libor and TED spreads, both of which mainly signal banks’ fear to lend to each other.

An adapted Paulson plan will try to address that issue by buying up frozen assets, and the idea is that that will make banks whole again, and take away the fear. But that can’t be done with $700 billion, it can’t even by done with $7 trillion. There is far too much of that funny frozen paper in the world, it’s more like $700 trillion, and it is indeed all over the world, which compounds the problem, for all intents and purpose, to infinity and beyond.

The plan inevitably will give a species of dictatorship the power to choose who shall live and who must die in the US banking community. And it will do so at a more than enormous cost to US citizens, who are already in dire financial straits. The people around the Wasington tables are first of all afraid for their own positions, but there are now a few who realize the gravity of the situation, and whose conscience tells them it would not be appropriate to use what little money their constituents have left, on a gamble that has virtually no chance of succeeding.

Republicans want 'protection' of troubled homeowners in the plan, but by now it has gotten through to them that such protection is useless if real estate values go down another 20%; there’s a limit beyond which no help does actually help. They also know that the probability of such an additional price drop is very high. Make that inevitable.

There are two kinds of people in those talks: the ones that are all set and ready to make a killing off the disaster, and the ones who only just now are starting to realize how bad that disaster is. And they will end up deciding to take that gamble with your money, because they see no other way out.

But the derivatives monster is about to be let loose on the planet, gaining strength with every single bank failure, like a virus feeding off weakened hosts. The UK government is about to nationalize another Northern Rock, in Bradford and Bingley, Belgian giant Fortis Bank is on life-support (its liabilities are three times the GDP of Belgium), and in the US Wachovia may have been sold as we speak.

We haven’t even started. And when the monster is done, we will have very few banks, if any at all, left. Not a lot of jobs either, for that matter. Retirement funds? You go to be kidding. By Christmas, you'll be lucky if you recognize the town you live in.

see also:
Island Breath: The US Debt Rattle 9/18/08
Island Breath: Desintegration of System 9/17/08
Island Breath: Last Ditch Effort 9/15/08
Island Breath: Peak Global Economy 7/29/08
Island Breath: Fannie Mae & Freddie Mac Mess 7/14/08
Island Breath: The Perfect $torm Approaches 6/28/08
Island Breath: Report from the Bank of Banks 6/28/08